Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
⌧
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
◻
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
Commission File Number: 001-33723
Main Street Capital Corporation
(Exact name of registrant as specified in its charter)
Maryland(State or other jurisdiction ofincorporation or organization)
41-2230745(I.R.S. EmployerIdentification No.)
1300 Post Oak Boulevard, 8th FloorHouston, TX(Address of principal executive offices)
77056(Zip Code)
(713) 350-6000
(Registrant’s telephone number including area code)
n/a
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on WhichRegistered
Common Stock, par value $0.01 per share
MAIN
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ◻ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ◻Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ⌧
The number of shares outstanding of the issuer’s common stock as of November 5, 2020 was 66,272,522.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets—September 30, 2020 (unaudited) and December 31, 2019
1
Consolidated Statements of Operations (unaudited)—Three and nine months ended September 30, 2020 and 2019
2
Consolidated Statements of Changes in Net Assets (unaudited)—Nine months ended September 30, 2020 and 2019
3
Consolidated Statements of Cash Flows (unaudited)—Nine months ended September 30, 2020 and 2019
4
Consolidated Schedule of Investments (unaudited)—September 30, 2020
5
Consolidated Schedule of Investments—December 31, 2019
28
Notes to Consolidated Financial Statements (unaudited)
51
Consolidated Schedules of Investments in and Advances to Affiliates (unaudited)—Nine months ended September 30, 2020 and 2019
85
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
95
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
115
Item 4.
Controls and Procedures
116
PART II
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
117
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
118
Signatures
119
MAIN STREET CAPITAL CORPORATION
Consolidated Balance Sheets
(dollars in thousands, except shares and per share amounts)
September 30,
December 31,
2020
2019
(Unaudited)
ASSETS
Investments at fair value:
Control investments (cost: $801,453 and $778,367 as of September 30, 2020 and December 31, 2019, respectively)
$
1,020,713
1,032,721
Affiliate investments (cost: $396,054 and $351,764 as of September 30, 2020 and December 31, 2019, respectively)
348,030
330,287
Non‑Control/Non‑Affiliate investments (cost: $1,330,738 and $1,297,587 as of September 30, 2020 and December 31, 2019, respectively)
1,215,902
1,239,316
Total investments (cost: $2,528,245 and $2,427,718 as of September 30, 2020 and December 31, 2019, respectively)
2,584,645
2,602,324
Cash and cash equivalents
27,121
55,246
Interest receivable and other assets
42,758
50,458
Deferred financing costs (net of accumulated amortization of $8,225 and $7,501 as of September 30, 2020 and December 31, 2019, respectively)
2,944
3,521
Total assets
2,657,468
2,711,549
LIABILITIES
Credit facility
253,000
300,000
SBIC debentures (par: $304,800 ($40,000 due within one year) and $311,800 as of September 30, 2020 and December 31, 2019, respectively)
298,835
306,188
5.20% Notes due 2024 (par: $450,000 and $325,000 as of September 30, 2020 and December 31, 2019, respectively)
451,953
324,595
4.50% Notes due 2022 (par: $185,000 as of both September 30, 2020 and December 31, 2019)
183,685
183,229
Accounts payable and other liabilities
19,136
24,532
Interest payable
13,392
7,292
Dividend payable
13,554
13,174
Deferred tax liability, net
731
16,149
Total liabilities
1,234,286
1,175,159
Commitments and contingencies (Note K)
NET ASSETS
Common stock, $0.01 par value per share (150,000,000 shares authorized; 66,135,837 and 64,241,341 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively)
661
643
Additional paid‑in capital
1,569,642
1,512,435
Total undistributed (overdistributed) earnings
(147,121)
23,312
Total net assets
1,423,182
1,536,390
Total liabilities and net assets
NET ASSET VALUE PER SHARE
21.52
23.91
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Operations
Three Months Ended
Nine Months Ended
INVESTMENT INCOME:
Interest, fee and dividend income:
Control investments
18,558
23,173
57,357
70,480
Affiliate investments
8,255
8,009
23,626
25,426
Non‑Control/Non‑Affiliate investments
25,141
28,886
79,126
86,818
Total investment income
51,954
60,068
160,109
182,724
EXPENSES:
Interest
(12,489)
(12,893)
(36,827)
(37,138)
Compensation
(4,980)
(4,322)
(12,280)
(15,907)
General and administrative
(3,354)
(2,920)
(9,827)
(9,282)
Share‑based compensation
(2,561)
(2,572)
(8,215)
(7,279)
Expenses allocated to the External Investment Manager
1,892
1,651
5,340
5,001
Total expenses
(21,492)
(21,056)
(61,809)
(64,605)
NET INVESTMENT INCOME
30,462
39,012
98,300
118,119
NET REALIZED GAIN (LOSS):
4,041
5,869
(15,825)
4,926
(172)
1,850
(407)
(602)
(17,743)
(13,595)
(28,091)
(18,487)
Realized loss on extinguishment of debt
—
(534)
(5,689)
Total net realized loss
(13,874)
(5,876)
(44,857)
(19,852)
NET UNREALIZED APPRECIATION (DEPRECIATION):
7,139
(8,797)
(35,096)
6,286
2,406
1,323
(26,883)
3,131
53,569
4,547
(56,051)
3,737
SBIC debentures
(319)
460
4,625
Total net unrealized appreciation (depreciation)
63,114
(3,246)
(117,570)
17,779
INCOME TAXES:
Federal and state income, excise and other taxes
(1,165)
(1,079)
(1,420)
(2,745)
Deferred taxes
(342)
5,091
15,673
254
Income tax benefit (provision)
(1,507)
4,012
14,253
(2,491)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
78,195
33,902
(49,874)
113,555
NET INVESTMENT INCOME PER SHARE—BASIC AND DILUTED
0.46
0.62
1.50
1.88
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE—BASIC AND DILUTED
1.18
0.54
(0.76)
1.81
WEIGHTED AVERAGE SHARES OUTSTANDING—BASIC AND DILUTED
66,110,555
63,297,943
65,319,784
62,686,139
Consolidated Statements of Changes in Net Assets
(dollars in thousands, except shares)
Total
Common Stock
Additional
Undistributed
Number of
Par
Paid‑In
(Overdistributed)
Total Net
Shares
Value
Capital
Earnings
Asset Value
Balances at December 31, 2018
61,264,861
613
1,409,945
65,491
1,476,049
Public offering of common stock, net of offering costs
960,684
9
35,376
35,385
2,329
Dividend reinvestment
96,189
3,595
3,596
Amortization of directors’ deferred compensation
216
Issuance of restricted stock
52,043
(1)
Dividends to stockholders
70
(36,549)
(36,479)
Net increase resulting from operations
41,401
Balances at March 31, 2019
62,373,777
624
1,451,530
70,343
1,522,497
245,989
9,416
9,418
2,378
Purchase of vested stock for employee payroll tax withholding
(90,404)
(3,364)
(3,365)
133,128
5,392
5,393
Issuance of restricted stock, net of forfeited shares
262,642
(3)
114
(53,823)
(53,709)
38,254
Balances at June 30, 2019
62,925,132
629
1,465,679
54,774
1,521,082
225,864
9,398
9,400
2,572
88,052
3,747
3,748
217
75,465
90
(38,956)
(38,866)
Balances at September 30, 2019
63,314,513
633
1,481,702
49,720
1,532,055
Balances at December 31, 2019
64,252,937
91,458
3,854
3,855
2,837
(851)
(29)
108,722
3,929
3,930
238
10,383
93
(39,706)
(39,613)
Net decrease resulting from operations
(171,438)
Balances at March 31, 2020
64,462,649
645
1,523,357
(187,832)
1,336,170
824,968
26,007
26,016
2,817
(84,094)
(1,730)
(1,731)
146,229
4,158
4,159
224
414,053
(4)
99
(40,179)
(40,080)
43,369
Balances at June 30, 2020
65,763,805
658
1,554,928
(184,642)
1,370,944
250,949
7,741
7,743
2,561
(1,998)
(7)
132,583
4,129
4,130
195
(6,899)
(40,674)
(40,579)
Balances at September 30, 2020
66,138,440
Consolidated Statements of Cash Flows
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase (decrease) in net assets resulting from operations
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Investments in portfolio companies
(414,574)
(477,257)
Proceeds from sales and repayments of debt investments in portfolio companies
255,147
331,204
Proceeds from sales and return of capital of equity investments in portfolio companies
21,210
32,380
Net unrealized (appreciation) depreciation
117,570
(17,779)
Net realized loss
44,857
19,852
Accretion of unearned income
(8,239)
(9,131)
Payment-in-kind interest
(3,816)
(3,482)
Cumulative dividends
(1,404)
(1,975)
Share-based compensation expense
8,215
7,279
Amortization of deferred financing costs
1,986
2,822
Deferred tax benefit
(15,673)
(254)
Changes in other assets and liabilities:
12,661
(9,073)
6,100
6,499
(4,739)
5,759
Deferred fees and other
2,296
1,495
Net cash provided by (used in) operating activities
(28,277)
1,894
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public offering of common stock, net of offering costs
37,614
54,203
Proceeds from public offering of 5.20% Notes due 2024
125,000
250,000
Dividends paid
(107,673)
(115,288)
Proceeds from issuance of SBIC debentures
35,000
-
Repayments of SBIC debentures
(42,000)
(34,000)
Proceeds from credit facility
292,000
310,000
Repayments on credit facility
(339,000)
(461,000)
Debt issuance premiums (costs), net
978
(4,344)
Purchases of vested stock for employee payroll tax withholding
(1,767)
Net cash provided by (used in) financing activities
152
(3,794)
Net decrease in cash and cash equivalents
(28,125)
(1,900)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
54,181
CASH AND CASH EQUIVALENTS AT END OF PERIOD
52,281
Supplemental cash flow disclosures:
Interest paid
28,646
27,725
Taxes paid
2,439
2,265
Operating non-cash activities:
Right-of-use assets obtained in exchange for operating lease liabilities
5,240
Non-cash financing activities:
Shares issued pursuant to the DRIP
12,219
12,737
Consolidated Schedule of Investments
September 30, 2020
Portfolio Company (1) (20)
Investment Date (26)
Business Description
Type of Investment (2) (3) (25)
Principal (4)
Cost (4)
Fair Value (18)
Control Investments (5)
Access Media Holdings, LLC (10)
July 22, 2015
Private Cable Operator
10.00% PIK Secured Debt (Maturity - July 22, 2020) (14) (17) (19)
23,828
3,937
Preferred Member Units (9,481,500 units) (24)
9,375
(284)
Member Units (45 units)
33,204
3,653
ASC Interests, LLC
August 1, 2013
Recreational and Educational Shooting Facility
13.00% Secured Debt (Maturity - July 31, 2022)
1,650
1,611
Member Units (1,500 units)
1,500
1,050
3,111
2,661
Analytical Systems Keco, LLC
August 16, 2019
Manufacturer of Liquid and Gas Analyzers
LIBOR Plus 10.00% (Floor 2.00%), Current Coupon 12.00%, Secured Debt (Maturity - August 16, 2024) (9)
5,225
4,925
Preferred Member Units (3,200 units)
3,200
Warrants (420 equivalent shares; Expiration - August 16, 2029; Strike price - $0.01 per share)
316
350
8,441
8,475
ATS Workholding, LLC (10)
March 10, 2014
Manufacturer of Machine Cutting Tools and Accessories
5% Secured Debt (Maturity - November 16, 2021)
4,940
4,781
3,407
Preferred Member Units (3,725,862 units)
3,726
8,507
Bond-Coat, Inc.
December 28, 2012
Casing and Tubing Coating Services
Common Stock (57,508 shares)
6,350
3,310
Brewer Crane Holdings, LLC
January 9, 2018
Provider of Crane Rental and Operating Services
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity - January 9, 2023) (9)
8,680
8,632
Preferred Member Units (2,950 units) (8)
4,280
5,610
12,912
14,242
Bridge Capital Solutions Corporation
April 18, 2012
Financial Services and Cash Flow Solutions Provider
13.00% Secured Debt (Maturity - December 11, 2024)
8,813
8,240
Warrants (82 equivalent shares; Expiration - July 25, 2026; Strike price - $0.01 per share)
2,132
3,000
13.00% Secured Debt (Mercury Service Group, LLC)(Maturity - December 11, 2024)
1,000
998
Preferred Member Units (Mercury Service Group, LLC)(17,742 units) (8)
12,370
13,238
Consolidated Schedule of Investments (Continued)
Café Brazil, LLC
April 20, 2004
Casual Restaurant Group
Member Units (1,233 units) (8)
1,742
2,030
California Splendor Holdings LLC
March 30, 2018
Processor of Frozen Fruits
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%,Secured Debt (Maturity - March 30, 2023) (9)
19,600
19,504
19,464
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%,Secured Debt (Maturity - March 30, 2023) (9)
28,000
27,840
27,775
Preferred Member Units (6,725 units) (8)
7,980
Preferred Member Units (6,157 units) (8)
10,775
6,241
66,099
61,460
CBT Nuggets, LLC ("CBT")
June 1, 2006
Produces and Sells IT Training Certification Videos
Member Units (416 units) (8)
1,300
45,730
Centre Technologies Holdings, LLC
January 4, 2019
Provider of IT Hardware Services and Software Solutions
LIBOR Plus 10.00% (Floor 2.00%), Current Coupon 12.00%,Secured Debt (Maturity - January 4, 2024) (9)
11,781
11,696
Preferred Member Units (12,696 units)
5,840
6,060
17,536
17,756
Chamberlin Holding LLC
February 26, 2018
Roofing and Waterproofing Specialty Contractor
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%,Secured Debt (Maturity - February 26, 2023) (9)
15,973
15,884
Member Units (4,347 units) (8)
11,440
Member Units (Chamberlin Langfield Real Estate, LLC)(1,047,146 units) (8)
1,047
920
28,371
44,893
Charps, LLC
February 3, 2017
Pipeline Maintenance and Construction
8.67% Current / 1.33% PIK, Current Coupon plus PIK 10.00% (Maturity - January 31, 2024) (19)
9,792
7,910
15.00% Secured Debt (Maturity - June 5, 2022)
1,846
Preferred Member Units (1,600 units) (8)
400
10,156
19,753
Clad-Rex Steel, LLC
December 20, 2016
Specialty Manufacturer of Vinyl-Clad Metal
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%,Secured Debt (Maturity - December 20, 2021) (9)
10,880
10,847
Member Units (717 units) (8)
7,280
8,610
10.00% Secured Debt (Clad-Rex Steel RE Investor, LLC)(Maturity - December 20, 2036)
1,117
1,107
Member Units (Clad-Rex Steel RE Investor, LLC)(800 units)
210
19,444
21,024
6
CMS Minerals Investments
January 30, 2015
Oil & Gas Exploration & Production
Member Units (CMS Minerals II, LLC) (100 units)
2,252
1,697
Cody Pools, Inc.
March 6, 2020
Designer of Residential and Commercial Pools
LIBOR Plus 10.50% (Floor 1.75%), Current Coupon 12.25%,Secured Debt (Maturity - March 6, 2025) (9)
15,600
15,457
Preferred Member Units (587 units)
8,317
11,840
23,774
27,440
CompareNetworks Topco, LLC
January 29, 2019
Internet Publishing and Web Search Portals
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.00%,Secured Debt (Maturity - January 29, 2024) (9)
9,454
9,397
Preferred Member Units (1,975 units)
1,975
5,360
11,372
14,757
Copper Trail Fund Investments (12) (13)
July 17, 2017
Investment Partnership
LP Interests (CTMH, LP) (Fully diluted 38.80%)
747
Datacom, LLC
May 30, 2014
Technology and Telecommunications Provider
8.00% Secured Debt (Maturity - May 31, 2021) (14)
1,800
1,615
10.50% PIK Secured Debt (Maturity - May 31, 2021) (14) (19)
12,507
12,475
10,142
Class A Preferred Member Units
1,294
Class B Preferred Member Units (6,453 units)
6,030
21,599
11,757
Digital Products Holdings LLC
April 1, 2018
Designer and Distributor of Consumer Electronics
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%,Secured Debt (Maturity - April 1, 2023) (9)
18,503
18,396
18,013
Preferred Member Units (3,857 shares) (8)
9,501
6,908
27,897
24,921
Direct Marketing Solutions, Inc.
February 13, 2018
Provider of Omni-Channel Direct Marketing Services
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.00%, Secured Debt (Maturity - February 13, 2023) (9)
15,090
14,998
Preferred Stock (8,400 shares)
8,400
20,060
23,398
35,150
Gamber-Johnson Holdings, LLC ("GJH")
June 24, 2016
Manufacturer of Ruggedized Computer Mounting Systems
LIBOR Plus 6.50% (Floor 2.00%), Current Coupon 8.50%,Secured Debt (Maturity - June 24, 2021) (9)
19,838
19,792
Member Units (8,619 units) (8)
14,844
53,240
34,636
73,078
7
Garreco, LLC
July 15, 2013
Manufacturer and Supplier of Dental Products
LIBOR Plus 8.00% (Floor 1.00%, Ceiling 1.50%), Current Coupon 9.00%, Secured Debt (Maturity - January 31, 2021) (9)
4,519
Member Units (1,200 units)
1,200
1,700
5,719
6,219
GRT Rubber Technologies LLC ("GRT")
December 19, 2014
Manufacturer of Engineered Rubber Products
LIBOR Plus 7.00%, Current Coupon 7.16%,Secured Debt (Maturity - December 31, 2023)
16,775
Member Units (5,879 units) (8)
13,065
45,430
29,840
62,205
Gulf Manufacturing, LLC
August 31, 2007
Manufacturer of Specialty Fabricated Industrial Piping Products
Member Units (438 units) (8)
2,980
4,400
Gulf Publishing Holdings, LLC
April 29, 2016
Energy Industry Focused Media and Publishing
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 5.25% / 5.25% PIK, Current Coupon Plus PIK 10.50%, Secured Debt (Maturity - September 30, 2020) (9) (17) (19)
247
6.25% Current / 6.25% PIK Secured Debt (Maturity - April 29, 2021) (19)
12,939
12,919
11,828
Member Units (3,681 units)
3,681
16,847
12,075
Harborside Holdings, LLC
March 20, 2017
Real Estate Holding Company
Member units (100 units)
6,606
5,020
Harris Preston Fund Investments (12) (13)
October 1, 2017
LP Interests (2717 MH, L.P.) (Fully diluted 49.30%)
2,735
3,277
Harrison Hydra-Gen, Ltd.
June 4, 2010
Manufacturer of Hydraulic Generators
Common Stock (107,456 shares) (8)
718
5,640
Jensen Jewelers of Idaho, LLC
November 14, 2006
Retail Jewelry Store
Prime Plus 6.75% (Floor 2.00%), Current Coupon 10.00%, Secured Debt (Maturity - November 14,2023) (9)
3,700
3,669
3,654
Member Units (627 units) (8)
811
7,270
4,480
10,924
J&J Services, Inc.
October 31, 2019
Provider of Dumpster and Portable Toilet Rental Services
11.50% Secured Debt (Maturity - October 31, 2024)
14,400
14,278
Preferred Stock (2,814 shares)
7,085
11,920
21,363
26,320
KBK Industries, LLC
January 23, 2006
Manufacturer of Specialty Oilfield and Industrial Products
Member Units (325 units) (8)
783
13,140
8
Kickhaefer Manufacturing Company, LLC
October 31, 2018
Precision Metal Parts Manufacturing
9.50% Current / 2.00% PIK Secured Debt (Maturity - October 31, 2023) (19)
23,615
23,449
Member Units (581 units)
12,240
12,150
9.00% Secured Debt (Maturity - October 31, 2048)
3,956
3,917
Member Units (KMC RE Investor, LLC) (800 units) (8)
992
1,160
40,598
40,676
Market Force Information, LLC
July 28, 2017
Provider of Customer Experience Management Services
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.00% Secured Debt (Maturity - July 28, 2023) (9) (14)
900
12.00% PIK Secured Debt (Maturity - July 28, 2023) (14) (19)
26,079
25,952
13,712
Member Units (743,921 units)
16,642
43,494
14,612
MH Corbin Holding LLC
August 31, 2015
Manufacturer and Distributor of Traffic Safety Products
13.00% Secured Debt (Maturity - March 31, 2022)
8,650
8,599
8,598
Preferred Member Units (66,000 shares)
2,960
Preferred Member Units (4,000 shares)
6,000
18,999
11,558
Mid-Columbia Lumber Products, LLC
December 18, 2006
Manufacturer of Finger-Jointed Lumber Products
Member Units (7,874 units)
4,239
Member Units (Mid-Columbia Real Estate, LLC)(500 units) (8)
1,499
1,390
5,738
MSC Adviser I, LLC (16)
November 22, 2013
Third Party InvestmentAdvisory Services
Member Units (Fully diluted 100.00%) (8)
71,080
Mystic Logistics Holdings, LLC
August 18, 2014
Logistics and Distribution Services Provider for Large Volume Mailers
12.00% Secured Debt (Maturity - January 17, 2022)
6,733
6,721
Common Stock (5,873 shares)
2,720
10,170
9,441
16,891
NAPCO Precast, LLC
January 31, 2008
Precast Concrete Manufacturing
Member Units (2,955 units) (8)
2,975
12,480
NexRev LLC
February 28, 2018
Provider of Energy Efficiency Products & Services
11.00% Secured Debt (Maturity - February 28, 2023)
17,315
17,224
16,628
Preferred Member Units (86,400,000 units)
6,880
950
24,104
17,578
NRI Clinical Research, LLC
September 8, 2011
Clinical Research Service Provider
10.50% Secured Debt (Maturity - June 8, 2022)
6,120
Warrants (251,723 equivalent units; Expiration - June 8, 2027; Strike price - $0.01 per unit)
252
Member Units (1,454,167 units) (8)
765
5,321
7,077
12,831
NRP Jones, LLC
December 22, 2011
Manufacturer of Hoses, Fittings and Assemblies
12.00% Secured Debt (Maturity - March 20, 2023)
6,376
Member Units (65,962 units) (8)
3,717
10,093
9,686
NuStep, LLC
January 31, 2017
Designer, Manufacturer and Distributor of Fitness Equipment
12.00% Secured Debt (Maturity - January 31, 2022)
19,640
19,575
Preferred Member Units (406 units)
10,200
29,775
OMi Holdings, Inc.
April 1, 2008
Manufacturer of Overhead Cranes
Common Stock (1,500 shares) (8)
1,080
19,430
Pearl Meyer Topco LLC
April 27, 2020
Provider of Executive Compensation Consulting Services
12.00% Secured Debt (Maturity - April 27, 2025)
34,676
Member Units (13,800 units) (8)
13,000
47,676
Pegasus Research Group, LLC
January 6, 2011
Provider of Telemarketing and Data Services
Member Units (460 units) (8)
1,290
9,700
PPL RVs, Inc.
June 10, 2010
Recreational Vehicle Dealer
LIBOR Plus 8.75% (Floor 0.50%), Current Coupon 9.25% Secured Debt (Maturity - November 15, 2022) (9)
11,855
11,768
Common Stock (1,962 shares)
2,150
11,140
13,918
22,908
Principle Environmental, LLC (d/b/a TruHorizon Environmental Solutions)
February 1, 2011
Noise Abatement Service Provider
13.00% Secured Debt (Maturity - April 30, 2023)
6,397
6,329
Preferred Member Units (19,631 units) (8)
4,600
11,230
Warrants (1,018 equivalent units; Expiration - January 31, 2021; Strike price - $0.01 per unit)
930
12,129
18,557
10
Quality Lease Service, LLC
June 8, 2015
Provider of Rigsite Accommodation Unit Rentals and Related Services
Member Units (1,000 units)
11,313
4,710
River Aggregates, LLC
March 30, 2011
Processor of Construction Aggregates
Member Units (RA Properties, LLC) (1,500 units)
369
3,390
Tedder Industries, LLC
August 31, 2018
Manufacturer of Firearm Holsters and Accessories
12.00% Secured Debt (Maturity - August 31, 2023)
17,040
16,934
Preferred Member Units (479 units)
8,136
25,070
Trantech Radiator Topco, LLC
May 31, 2019
Transformer Cooling Products and Services
12.00% Secured Debt (Maturity - May 31, 2024)
8,720
8,639
8,708
Common Stock (615 shares) (8)
4,655
7,769
13,294
16,477
UnionRock Energy Fund II, LP(12) (13)
June 15, 2020
LP Interests (Fully diluted 49.60%)
2,894
Vision Interests, Inc.
June 5, 2007
Manufacturer / Installer of Commercial Signage
13.00% Secured Debt (Maturity - September 30 2019) (17)
2,028
Series A Preferred Stock (3,000,000 shares)
3,459
5,028
5,487
Ziegler's NYPD, LLC
October 1, 2008
6.50% Secured Debt (Maturity - October 1, 2022)
979
12.00% Secured Debt (Maturity - October 1, 2022)
625
14.00% Secured Debt (Maturity - October 1, 2022)
2,750
2,715
Warrants (587 equivalent units; Expiration - October 1, 2025; Strike price - $0.01 per unit)
600
Preferred Member Units (10,072 units)
2,834
1,139
7,809
5,458
Subtotal Control Investments (71.6% of net assets at fair value)
801,453
Affiliate Investments (6)
AFG Capital Group, LLC
November 7, 2014
Provider of Rent-to-Own Financing Solutions and Services
10.00% Secured Debt (Maturity - May 25, 2022)
578
Preferred Member Units (186 units)
1,778
5,938
11
American Trailer Rental Group LLC
June 7, 2017
Provider of Short-term Trailer and Container Rental
Member Units (Milton Meisler Holdings LLC) (73,493 units)
8,596
13,550
BBB Tank Services, LLC
April 8, 2016
Maintenance, Repair and Construction Services to the Above-Ground Storage Tank Market
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.00%, (Maturity - April 8, 2021) (9)
4,800
4,753
4,702
Preferred Stock (non-voting, 15.00% cumulative) (8)
146
Member Units (800,000 units)
800
5,699
5,058
Boccella Precast Products LLC
June 30, 2017
Manufacturer of Precast Hollow Core Concrete
Member Units (2,160,000 units) (8)
2,256
5,600
Buca C, LLC
June 30, 2015
LIBOR Plus 9.25% (Floor 1.00%), Current Coupon10.25%, Secured Debt (Maturity - June 30, 2020) (9) (17)
19,004
17,491
Preferred Member Units (6 units; 6.00% cumulative) (8) (19)
4,770
18,256
CAI Software LLC
October 10, 2014
Provider of Specialized Enterprise Resource Planning Software
12.50% Secured Debt (Maturity - December 7, 2023)
26,607
26,439
Member Units (70,764 units) (8)
1,102
5,930
27,541
32,537
Chandler Signs Holdings, LLC (10)
January 4, 2016
Sign Manufacturer
Class A Units (1,500,000 units)
2,050
Charlotte Russe, Inc (11)
May 28, 2013
Fast-Fashion Retailer to Young Women
Common Stock (19,041 shares)
3,141
Classic H&G Holdings, LLC
March 12, 2020
Provider of Engineered Packaging Solutions
12.00% Secured Debt (Maturity - March 12, 2025)
24,800
24,573
Preferred Member Units (154 units) (8)
5,760
8,550
30,333
33,350
Congruent Credit Opportunities Funds (12) (13)
January 24, 2012
LP Interests (Congruent Credit Opportunities Fund II, LP) (Fully diluted 19.80%)
5,210
855
LP Interests (Congruent Credit Opportunities Fund III, LP) (Fully diluted 17.40%) (8)
12,181
12,096
17,391
12,951
12
LP Interests (Copper Trail Energy Fund I, LP) (Fully diluted 12.40%) (8)
2,161
1,854
Dos Rios Partners (12) (13)
April 25, 2013
LP Interests (Dos Rios Partners, LP) (Fully diluted20.20%)
6,605
7,033
LP Interests (Dos Rios Partners - A, LP) (Fully diluted6.40%)
2,097
2,233
8,702
9,266
East Teak Fine Hardwoods, Inc.
April 13, 2006
Distributor of Hardwood Products
Common Stock (6,250 shares)
480
300
EIG Fund Investments (12) (13)
November 6, 2015
LP Interests (EIG Global Private Debt Fund-A, L.P.)(Fully diluted 11.10%) (8)
739
526
Freeport Financial Funds (12) (13)
June 13, 2013
LP Interests (Freeport Financial SBIC Fund LP)(Fully diluted 9.30%)
5,974
5,081
LP Interests (Freeport First Lien Loan Fund III LP)(Fully diluted 6.00%) (8)
10,785
10,321
16,759
15,402
August 9, 2017
LP Interests (HPEP 3, L.P.) (Fully diluted 8.20%)
3,071
Hawk Ridge Systems, LLC (13)
December 2, 2016
Value-Added Reseller of Engineering Design and Manufacturing Solutions
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%,Secured Debt (Maturity - December 2, 2021) (9)
984
11.00% Secured Debt (Maturity - December 2, 2021)
16,400
16,358
Preferred Member Units (226 units) (8)
2,850
8,030
Preferred Member Units (HRS Services, ULC)(226 units)
150
420
20,342
25,834
Houston Plating and Coatings, LLC
January 8, 2003
Provider of Plating and Industrial Coating Services
8.00% Unsecured Convertible Debt (Maturity - May 1, 2022)
Member Units (322,297 units) (8)
2,352
5,352
9,060
I-45 SLF LLC (12) (13)
October 20, 2015
Member Units (Fully diluted 20.0%; 24.40% profitsinterest) (8)
20,200
15,392
L.F. Manufacturing Holdings, LLC (10)
December 23, 2013
Manufacturer of Fiberglass Products
Preferred Member Units (non-voting; 14% cumulative) (8) (19)
Member Units (2,179,001 units)
2,019
2,109
2,140
13
OnAsset Intelligence, Inc.
April 18, 2011
Provider of Transportation Monitoring / Tracking Products and Services
12.00% PIK Secured Debt (Maturity - June 30, 2021) (19)
7,084
10.00% PIK Unsecured Debt (Maturity - June 30, 2021) (19)
63
Preferred Stock (912 shares)
1,981
Warrants (5,333 equivalent shares; Expiration - April 18, 2021; Strike price - $0.01 per share)
1,919
11,047
7,147
PCI Holding Company, Inc.
December 18, 2012
Manufacturer of Industrial Gas Generating Systems
12.00% Secured Debt (Maturity - July 1, 2020) (17)
11,356
Preferred Stock (1,740,000 shares) (non-voting)
1,740
4,350
Preferred Stock (1,500,000 shares)
3,927
4,430
17,023
20,136
Rocaceia, LLC (Quality Lease and Rental Holdings, LLC)
January 8, 2013
12.00% Secured Debt (Maturity - January 8, 2018) (14) (15)
30,369
29,865
Preferred Member Units (250 units)
2,500
32,365
Salado Stone Holdings, LLC (10)
June 27, 2016
Limestone and Sandstone Dimension Cut Stone Mining Quarries
Class A Preferred Units (Salado Acquisition, LLC) (2,000,000 units)
2,000
770
Slick Innovations, LLC
September 13, 2018
Text Message Marketing Platform
14.00% Secured Debt (Maturity - September 13, 2023)
6,080
5,949
Common Stock (70,000 shares) (8)
700
1,250
Warrants (18,084 equivalent units; Expiration -September 13, 2028; Strike price - $0.01 per unit)
181
330
6,830
7,660
SI East, LLC
Rigid Industrial Packaging Manufacturing
9.50% Secured Debt (Maturity - August 31, 2023)
32,963
32,742
32,962
Preferred Member Units (157 units) (8)
9,720
38,742
42,682
Superior Rigging & Erecting Co.
August 31, 2020
Provider of Steel Erection, Crane Rental & Rigging Services
12.00% Secured Debt (Maturity - August 31, 2025)
21,500
21,290
Preferred Member Units (1,473 units)
4,500
25,790
14
UniTek Global Services, Inc. (11)
April 15, 2011
Provider of Outsourced Infrastructure Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - August 20, 2024) (9)
2,955
2,932
2,671
Preferred Stock (1,133,102 shares; 20% cumulative) (8) (19)
1,371
2,833
Preferred Stock (1,521,122 shares; 20% cumulative) (8) (19)
2,188
1,723
Preferred Stock (2,281,682 shares; 19% cumulative) (8) (19)
3,667
Preferred Stock (4,336,866 shares; 13.50% cumulative) (19)
7,924
Common Stock (945,507 shares)
18,082
7,227
Universal Wellhead Services Holdings, LLC (10)
October 30, 2014
Provider of Wellhead Equipment, Designs, and Personnel to the Oil & Gas Industry
Preferred Member Units (UWS Investments, LLC)(716,949 units; 14% cumulative) (19)
1,032
Member Units (UWS Investments, LLC) (4,000,000 units)
4,000
5,032
Volusion, LLC
January 26, 2015
Provider of Online Software-as-a-Service eCommerce Solutions
11.50% Secured Debt (Maturity - January 26, 2020) (17)
20,234
19,243
8.00% Unsecured Convertible Debt (Maturity - November 16, 2023)
409
290
Preferred Member Units (4,876,670 units)
14,000
4,950
Warrants (1,831,355 equivalent units; Expiration -January 26, 2025; Strike price - $0.01 per unit)
2,576
37,219
24,483
Subtotal Affiliate Investments (24.4% of net assets at fair value)
396,054
Non-Control/Non-Affiliate Investments (7)
AAC Holdings, Inc. (11)
Substance Abuse Treatment Service Provider
10.00% Current / 8.00% PIK Secured Debt (Maturity - March 24, 2021) (19)
5,646
5,551
Prime Plus 10.00% (Floor 1.00%), Current Coupon 13.25%, Secured Debt (Maturity - April 17, 2020) (9) (17)
3,121
2,961
2,887
Prime Plus 9.75% (Floor 1.00%), Current Coupon 13.00%,Secured Debt (Maturity - June 30, 2023) (9) (14)
14,396
14,030
6,430
22,542
14,868
Adams Publishing Group, LLC (10)
November 19, 2015
Local Newspaper Operator
LIBOR Plus 7.00% (Floor 1.75%), Current Coupon 8.75%, Secured Debt (Maturity - July 3, 2023) (9)
6,082
5,951
5,937
ADS Tactical, Inc. (10)
March 7, 2017
Value-Added Logistics and Supply Chain Provider to the Defense Industry
LIBOR Plus 6.25% (Floor 0.75%), Current Coupon 7.00%,Secured Debt (Maturity - July 26, 2023) (9)
19,685
19,572
15
Aethon United BR LP (10)
September 8, 2017
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - September 8, 2023) (9)
9,750
9,651
9,298
Affordable Care Holding Corp. (10)
May 9, 2019
Dental Support Organization
LIBOR Plus 4.75% (Floor 1.00%), Current Coupon 5.75%, Secured Debt (Maturity - October 22, 2022) (9)
14,284
14,081
13,212
ALKU, LLC. (11)
October 18, 2019
Specialty National Staffing Operator
LIBOR Plus 5.50%, Current Coupon 5.81%, Secured Debt (Maturity - July 29, 2026) (9)
9,950
9,861
9,900
American Nuts, LLC (10)
April 10, 2018
Roaster, Mixer and Packager of Bulk Nuts and Seeds
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - April 10, 2023) (9)
12,158
11,965
11,889
American Teleconferencing Services, Ltd. (11)
May 19, 2016
Provider of Audio Conferencing and Video Collaboration Solutions
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - June 8, 2023) (9)
17,374
16,590
11,597
APTIM Corp. (11)
August 17, 2018
Engineering, Construction & Procurement
7.75% Secured Debt (Maturity - June 15, 2025)
12,452
11,004
6,475
Arcus Hunting LLC (10)
January 6, 2015
Manufacturer of Bowhunting and Archery Products and Accessories
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity - March 31, 2021) (9)
13,659
ASC Ortho Management Company, LLC (10)
Provider of Orthopedic Services
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - August 31, 2023) (9)
5,235
5,171
5,051
13.25% PIK Secured Debt (Maturity - December 1, 2023) (19)
2,047
2,020
2,045
7,191
7,096
ATX Networks Corp. (11) (13) (21)
Provider of Radio Frequency Management Equipment
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25% / 1.50% PIK, Current Coupon Plus PIK 8.75%, Secured Debt (Maturity - December 31, 2023) (9) (19)
13,612
13,521
12,455
Barfly Ventures, LLC (10)
9.00% PIK Secured Debt (Maturity - March 23, 2021) (14) (19)
110
12.00% Secured Debt (Maturity - August 31, 2020) (14) (17)
10,185
10,073
1,111
Options (3 equivalent units)
607
Warrant (2 equivalent unit; Expiration - August 31,2025; Strike price - $1.00 per unit)
473
11,263
1,221
16
Berry Aviation, Inc. (10)
July 6, 2018
Charter Airline Services
10.50% Current / 1.5% PIK, Secured Debt (Maturity - January 6, 2024) (19)
4,606
4,575
Preferred Member Units (Berry Acquisition, LLC) (122,416 units; 16% cumulative) (8) (19)
140
Preferred Member Units (Berry Acquisition, LLC) (1,548,387 units; 8% cumulative) (19)
1,671
804
6,386
5,550
BigName Commerce, LLC (10)
May 11, 2017
Provider of Envelopes and Complimentary Stationery Products
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25% Secured Debt (Maturity - May 11, 2022) (9)
2,091
2,082
1,995
Binswanger Enterprises, LLC (10)
March 10, 2017
Glass Repair and Installation Service Provider
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%,Secured Debt (Maturity - March 9, 2022) (9)
13,345
13,152
Member Units (1,050,000 units)
670
14,202
14,015
BLST Operating Company, LLC. (11)
December 19, 2013
Multi-Channel Retailer of General Merchandise
LIBOR Plus 8.50% (Floor 1.50%), Current Coupon 10.00%,Secured Debt (Maturity - August 28, 2025) (9)
5,879
5,756
Common Stock (653 shares)
Warrants (70 equivalent shares; Expiration - August 28, 2030; Strike price - $0.01 per share)
Bojangles', Inc. (11)
February 5, 2019
Quick Service Restaurant Group
LIBOR Plus 4.75%, Current Coupon 4.91%, Secured Debt (Maturity - January 28, 2026)
7,704
7,579
7,691
LIBOR Plus 8.50%, Current Coupon 8.66%, Secured Debt (Maturity - January 28, 2027)
5,000
4,914
12,493
12,491
Brainworks Software, LLC (10)
August 12, 2014
Advertising Sales and Newspaper Circulation Software
Prime Plus 9.25% (Floor 3.25%), Current Coupon 12.50%,Secured Debt (Maturity - July 22, 2019) (9) (14) (17)
7,854
5,287
Brightwood Capital Fund Investments (12) (13)
July 21, 2014
LP Interests (Brightwood Capital Fund III, LP)(Fully diluted 1.60%) (8)
10,920
8,238
LP Interests (Brightwood Capital Fund IV, LP)(Fully diluted 0.60%) (8)
4,750
4,384
15,670
12,622
Cadence Aerospace LLC (10)
November 14, 2017
Aerostructure Manufacturing
LIBOR Plus 3.25% (Floor 1.00%), Current Coupon 4.25% / 5.25% PIK, Current Coupon Plus PIK 9.50%, Secured Debt (Maturity - November 14, 2023) (9) (19)
27,339
27,110
25,906
17
California Pizza Kitchen, Inc. (11)
August 29, 2016
LIBOR Plus 10.00% (Floor 1.50%), Current Coupon 11.50%, Secured Debt (Maturity - December 31, 2020) (9)
3,716
3,395
LIBOR Plus 10.00% (Floor 1.50%), Current Coupon 11.50%, Secured Debt (Maturity - August 23, 2022) (9)
5,107
5,035
5,056
LIBOR Plus 8.00% PIK (Floor 1.00%), Current Coupon 9.00% PIK, Secured Debt (Maturity - August 23, 2022) (9) (14) (19)
12,064
11,990
3,679
20,420
12,451
Central Security Group, Inc. (11)
December 4, 2017
Security Alarm Monitoring Service Provider
LIBOR Plus 5.63% (Floor 1.00%), Current Coupon 6.63%, Secured Debt (Maturity - October 6, 2021) (9) (14)
13,667
13,637
Cenveo Corporation (11)
September 4, 2015
Provider of Digital Marketing Agency Services
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%,Secured Debt (Maturity - June 7, 2023) (9)
5,445
5,308
5,159
Common Stock (177,130 shares)
5,309
2,635
10,617
7,794
Chisholm Energy Holdings, LLC (10)
May 15, 2019
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity - May 15, 2026) (9)
3,571
3,496
3,404
Clarius BIGS, LLC (10)
September 23, 2014
Prints & Advertising Film Financing
15.00% PIK Secured Debt (Maturity - January 5, 2015) (14) (17) (19)
2,832
31
Clickbooth.com, LLC (10)
December 5, 2017
Provider of Digital Advertising Performance Marketing Solutions
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - January 31, 2025) (9)
8,357
8,245
Coastal Television Broadcasting Holdings LLC (10)
June 4, 2020
Operator of Television Broadcasting Networks
LIBOR Plus 10.00% (Floor 2.00%), Current Coupon 12.00%, Secured Debt (Maturity - June 4, 2025) (9)
8,678
8,499
Construction Supply Investments, LLC (10)
December 29, 2016
Distribution Platform of Specialty Construction Materials to Professional Concrete and Masonry Contractors
Member Units (50,687 units)
5,637
8,130
Corel Corporation (11) (13) (21)
July 24, 2019
Publisher of Desktop and Cloud-based Software
LIBOR Plus 5.00%, Current Coupon 5.26%, Secured Debt (Maturity - July 2, 2026) (9)
19,527
18,669
19,064
CTVSH, PLLC (10)
August 3, 2017
Emergency Care and Specialty Service Animal Hospital
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - August 3, 2022) (9)
9,249
9,208
18
Darr Equipment LP (10)
April 15, 2014
Heavy Equipment Dealer
11.50% Current / 1.00% PIK Secured Debt (Maturity -June 22, 2023) (19)
5,944
Warrants (915,734 equivalent units; Expiration - December 23, 2023; Strike price - $1.50 per unit)
474
20
6,418
5,964
Digital River, Inc. (11)
February 24, 2015
Provider of Outsourced e-Commerce Solutions and Services
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - February 12, 2023) (9)
13,628
13,400
13,560
DTE Enterprises, LLC (10)
April 13, 2018
Industrial Powertrain Repair and Services
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.00%, Secured Debt (Maturity - April 13, 2023) (9)
10,992
10,860
10,984
Class AA Preferred Member Units (non-voting; 10% cumulative) (8) (19)
927
Class A Preferred Member Units (776,316 units)
776
1,260
12,563
13,171
Dynamic Communities, LLC (10)
July 17, 2018
Developer of Business Events and Online Community Groups
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - July 17, 2023) (9)
5,355
5,140
Echo US Holdings, LLC. (10)
November 12, 2019
Developer and Manufacturer of PVC and Polypropylene Materials
LIBOR Plus 6.25% (Floor 1.63%), Current Coupon 7.88%, Secured Debt (Maturity - October 25, 2024) (9)
22,302
22,196
21,929
Electronic Transaction Consultants, LLC (10)
July 24, 2020
Technology Service Provider for Toll Road and Infrastructure Operators
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - July 24, 2025) (9)
10,000
9,822
EnCap Energy Fund Investments (12) (13)
December 28, 2010
LP Interests (EnCap Energy Capital Fund VIII, L.P.)(Fully diluted 0.10%)
3,813
959
LP Interests (EnCap Energy Capital Fund VIII Co-Investors, L.P.) (Fully diluted 0.40%)
415
LP Interests (EnCap Energy Capital Fund IX, L.P.) (Fully diluted 0.10%) (8)
4,390
1,398
LP Interests (EnCap Energy Capital Fund X, L.P.)(Fully diluted 0.10%) (8)
8,607
6,313
LP Interests (EnCap Flatrock Midstream Fund II, L.P.)(Fully diluted 0.80%) (8)
7,390
3,976
LP Interests (EnCap Flatrock Midstream Fund III, L.P.)(Fully diluted 0.20%) (8)
6,982
5,994
33,279
19,055
19
Encino Acquisition Partners Holdings, Inc. (11)
November 16, 2018
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - October 29, 2025) (9)
9,000
8,929
7,234
EPIC Y-Grade Services, LP (11)
June 22, 2018
NGL Transportation & Storage
LIBOR Plus 6.00%, (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - June 30, 2027)
6,944
6,851
5,694
Fortna, Inc. (10)
July 23, 2019
Process, Physical Distribution and Logistics Consulting Services
LIBOR Plus 5.00%, Current Coupon 5.15%, Secured Debt (Maturity - April 8, 2025)
7,693
7,559
7,199
Fuse, LLC (11)
June 30, 2019
Cable Networks Operator
12% Secured Debt (Maturity - June 28, 2024)
1,939
1,601
Common Stock (10,429 shares)
256
2,195
GeoStabilization International (GSI) (11)
December 31, 2018
Geohazard Engineering Services & Maintenance
LIBOR Plus 5.25%, Current Coupon 5.40%, Secured Debt (Maturity - December 19, 2025)
16,253
16,122
15,765
GoWireless Holdings, Inc. (11)
December 31, 2017
Provider of Wireless Telecommunications Carrier Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 22, 2024) (9)
17,365
17,232
16,614
Grupo Hima San Pablo, Inc. (11)
March 7, 2013
Tertiary Care Hospitals
LIBOR Plus 7.00% (Floor 1.50%), Current Coupon 9.25%, Secured Debt (Maturity - April 30, 2019) (9) (17)
4,504
3,232
13.75% Secured Debt (Maturity - October 15, 2018) (17)
2,055
2,040
49
6,544
3,281
GS HVAM Intermediate, LLC (10)
Specialized Food Distributor
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - October 2, 2024) (9)
11,506
11,396
11,079
Gexpro Services (10)
February 24, 2020
Distributor of Industrial and Specialty Parts
LIBOR Plus 6.50% (Floor 1.50%), Current Coupon 8.00%, Secured Debt (Maturity - February 24, 2025) (9)
29,253
28,735
28,034
HDC/HW Intermediate Holdings (10)
December 21, 2018
Managed Services and Hosting Provider
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - December 21, 2023) (9)
3,478
3,429
3,262
Heartland Dental, LLC (10)
September 9, 2020
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - April 30, 2025) (9)
15,000
14,555
Hoover Group, Inc. (10) (13)
October 21, 2016
Provider of Storage Tanks and Related Products to the Energy and Petrochemical Markets
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - January 28, 2021) (9)
20,660
20,459
Hunter Defense Technologies, Inc. (10)
March 29, 2018
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%,Secured Debt (Maturity - March 29, 2023) (9)
30,701
30,335
HW Temps LLC
July 2, 2015
Temporary Staffing Solutions
12.00% Secured Debt (Maturity - March 29, 2023)
9,921
9,807
8,915
Hydrofarm Holdings LLC (10)
May 18, 2017
Wholesaler of Horticultural Products
LIBOR Plus 8.50%, Current Coupon 8.66% Secured Debt (Maturity - May 12, 2022)
6,865
6,793
5,813
Hyperion Materials & Technologies, Inc. (11) (13)
September 12, 2019
Manufacturer of Cutting and Machine Tools & Specialty Polishing Compounds
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - August 28, 2026) (9)
22,331
21,937
20,768
Ian, Evan & Alexander Corporation (EverWatch) (10)
July 31, 2020
Cybersecurity, Software and Data Analytics provider to the Intelligence Community
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%,Secured Debt (Maturity - July 31, 2025) (9)
16,529
16,141
iEnergizer Limited (10) (13) (21)
April 17, 2019
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%,Secured Debt (Maturity - April 17, 2024) (9)
10,675
10,589
Implus Footcare, LLC (10)
June 1, 2017
Provider of Footwear and Related Accessories
LIBOR Plus 2.50% (Floor 1.00%), Current Coupon 3.50% / PIK 5.25%, Current Coupon Plus PIK 8.75%, Secured Debt (Maturity - April 30, 2024) (9) (19)
18,936
18,597
17,341
Independent Pet Partners Intermediate Holdings, LLC (10)
November 20, 2018
Omnichannel Retailer of Specialty Pet Products
Prime Plus 2.75% (Floor 3.25%), Current Coupon 6.00%,Secured Debt (Maturity - December 22, 2022) (9)
6,111
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 12.00%, Secured Debt (Maturity - November 19, 2023) (9) (14)
19,514
19,071
14,471
Member Units (1,558,333 units)
1,558
26,740
20,582
Industrial Services Acquisition, LLC (10)
June 17, 2016
Industrial Cleaning Services
13% Unsecured Debt (Maturity - December 17, 2022)
5,428
5,377
Preferred Member Units (Industrial Services Investments, LLC)(144 units; 10% cumulative) (8) (19)
109
Preferred Member Units (Industrial Services Investments, LLC)(80 units; 20% cumulative) (8) (19)
68
Member Units (Industrial Services Investments, LLC)(900 units)
530
6,454
6,135
21
Inn of the Mountain Gods Resort and Casino (11)
October 30, 2013
Hotel & Casino Owner & Operator
9.25% Secured Debt (Maturity - November 30, 2020)
7,176
7,145
6,745
Interface Security Systems, L.L.C (10)
August 7, 2019
Commercial Security & Alarm Services
LIBOR Plus 7.00% (Floor 1.75%), Current Coupon 8.75% / 3.00% PIK, Secured Debt (Maturity - August 7, 2023) (9) (19)
7,615
7,501
Intermedia Holdings, Inc. (11)
August 3, 2018
Unified Communications as a Service
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - July 19, 2025) (9)
20,892
20,804
20,824
Invincible Boat Company, LLC. (10)
August 28, 2019
Manufacturer of Sport Fishing Boats
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - August 28, 2025) (9)
9,263
9,174
9,050
Isagenix International, LLC (11)
June 21, 2018
Direct Marketer of Health & Wellness Products
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - June 14, 2025) (9)
5,676
5,641
3,015
JAB Wireless, Inc. (10)
May 2, 2018
Fixed Wireless Broadband Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 8.17%, Secured Debt (Maturity - May 2, 2023) (9)
14,606
14,522
14,491
Jackmont Hospitality, Inc. (10)
May 26, 2015
Franchisee of Casual Dining Restaurants
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - May 26, 2021) (9)
4,007
4,004
3,345
Joerns Healthcare, LLC (11)
April 3, 2013
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%Secured Debt (Maturity - August 21, 2024) (9)
4,016
3,952
3,914
Common Stock (472,579 shares)
4,429
2,480
8,381
6,394
Kemp Technologies Inc. (10)
June 27, 2019
Provider of Application Delivery Controllers
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - March 29, 2024) (9)
7,406
7,291
7,352
Kore Wireless Group Inc. (11)
Mission Critical Software Platform
LIBOR Plus 5.50%, Current Coupon 5.72%, Secured Debt (Maturity - December 20, 2024)
19,139
19,047
18,182
Larchmont Resources, LLC (11)
August 13, 2013
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity - August 9, 2021) (9)
2,145
965
Member Units (Larchmont Intermediate Holdco, LLC)(2,828 units)
353
113
2,498
1,078
22
Laredo Energy VI, LP (10)
January 15, 2019
Member Units (1,155,952 units)
11,560
Lightbox Holdings, L.P. (11)
May 23, 2019
Provider of Commercial Real Estate Software
LIBOR Plus 5.00%, Current Coupon 5.15%, Secured Debt (Maturity - May 9, 2026)
14,813
14,618
14,146
LKCM Headwater Investments I, L.P. (12) (13)
January 25, 2013
LP Interests (Fully diluted 2.30%)
1,746
3,447
LL Management, Inc. (10)
May 2, 2019
Medical Transportation Service Provider
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - September 25, 2023) (9)
13,615
13,511
13,348
Logix Acquisition Company, LLC (10)
Competitive Local Exchange Carrier
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity - December 22, 2024) (9)
26,201
24,541
24,236
Looking Glass Investments, LLC (12) (13)
July 1, 2015
Specialty ConsumerFinance
Member Units (2.6 units)
125
25
LSF9 Atlantis Holdings, LLC (11)
May 17, 2017
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - May 1, 2023) (9)
9,275
9,036
Lulu's Fashion Lounge, LLC (10)
August 31, 2017
Fast Fashion E-Commerce Retailer
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00% / 2.50% PIK, Current Coupon Plus PIK 10.50%, Secured Debt (Maturity - August 28, 2022) (9) (19)
11,408
11,213
9,754
Lynx FBO Operating LLC (10)
September 30, 2019
Fixed Based Operator in the General Aviation Industry
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - September 30, 2024) (9)
13,613
13,355
13,069
Member Units (3,704 units)
500
335
13,855
13,404
Mac Lean-Fogg Company (10)
April 22, 2019
Manufacturer and Supplier for Auto and Power Markets
LIBOR Plus 5.00%, Current Coupon 5.15%, Secured Debt (Maturity - December 22, 2025)
16,522
16,415
15,664
Preferred Stock (1,516 shares; 4.50% Cash / 9.25% PIKcumulative) (8) (19)
1,828
1,743
18,243
17,407
MHVC Acquisition Corp. (11)
May 8, 2017
Provider of Differentiated Information Solutions, Systems Engineering, and Analytics
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - April 29, 2024) (9)
19,848
19,761
19,699
23
Mileage Plus Holdings, LLC (11) (13)
July 20, 2020
United Airlines Loyalty Program
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity - June 25, 2027) (9)
9,880
Mills Fleet Farm Group, LLC (10)
October 24, 2018
Omnichannel Retailer of Work, Farm and Lifestyle Merchandise
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%,Secured Debt (Maturity - October 24, 2024) (9)
13,860
13,581
13,270
NBG Acquisition Inc (11)
April 28, 2017
Wholesaler of Home Décor Products
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - April 26, 2024) (9)
4,098
4,059
1,788
NinjaTrader, LLC (10)
December 18, 2019
Operator of Futures Trading Platform
LIBOR Plus 6.00% (Floor 1.50%), Current Coupon 7.50%, Secured Debt (Maturity - December 18, 2024) (9)
9,125
8,963
9,122
NNE Partners, LLC (10)
March 2, 2017
LIBOR Plus 8.00%, Current Coupon 8.24%, Secured Debt(Maturity - March 2, 2022)
23,417
23,297
21,407
Project Eagle Holdings, LLC (10)
July 6, 2020
Provider of Secure Business Collaboration Software
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%,Secured Debt (Maturity - July 6, 2026) (9)
14,607
Novetta Solutions, LLC (11)
June 21, 2017
Provider of Advanced Analytics Solutions for Defense Agencies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity - October 17, 2022) (9)
23,032
22,712
22,629
NTM Acquisition Corp. (11)
July 12, 2016
Provider of B2B Travel Information Content
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - June 7, 2022) (9)
4,722
4,249
Ospemifene Royalty Sub LLC (QuatRx) (10)
July 8, 2013
Estrogen-Deficiency Drug Manufacturer and Distributor
11.50% Secured Debt (Maturity - November 15, 2026) (14)
4,786
142
PaySimple, Inc. (10)
September 9, 2019
Leading Technology Services Commerce Platform
LIBOR Plus 5.50%, Current Coupon 5.65%, Secured Debt (Maturity - August 23, 2025) (9)
24,448
24,212
23,593
PricewaterhouseCoopers Public Sector LLP (11)
May 24, 2018
Provider of Consulting Services to Governments
LIBOR Plus 8.00%, Current Coupon 8.15%, Secured Debt(Maturity - May 1, 2026)
8,968
8,685
PT Network, LLC (10)
November 1, 2013
Provider of Outpatient Physical Therapy and Sports Medicine Services
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.73% / 2.00% PIK, Current Coupon Plus PIK 8.73%, Secured Debt (Maturity - November 30, 2023) (9) (19)
8,380
24
Research Now Group, Inc. and Survey Sampling International, LLC (11)
Provider of Outsourced Online Surveying
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - December 20, 2024) (9)
17,977
17,520
17,114
RM Bidder, LLC (10)
November 12, 2015
Scripted and Unscripted TV and Digital Programming Provider
Warrants (327,532 equivalent units; Expiration - October 20, 2025; Strike price - $14.28 per unit)
425
Member Units (2,779 units)
46
471
RTIC Subsidiary Holdings, LLC (10)
September 1, 2020
Direct-To-Consumer eCommerce Provider of Outdoor Products
LIBOR Plus 7.75% (Floor 1.25%), Current Coupon 9.00%, Secured Debt (Maturity - September 1, 2025) (9)
17,260
17,014
SAFETY Investment Holdings, LLC
Provider of Intelligent Driver Record Monitoring Software and Services
Member Units (2,000,000 units)
2,060
Salient Partners L.P. (11)
June 25, 2015
Provider of Asset Management Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity - August 31, 2021) (9)
6,450
6,441
Staples Canada ULC (10) (13) (21)
September 14, 2017
Office Supplies Retailer
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - September 12, 2024) (9) (22)
13,482
13,331
12,009
TEAM Public Choices, LLC (10)
October 28, 2019
Home-Based Care Employment Service Provider
LIBOR Plus 5.50% (Floor 1.50%), Current Coupon 7.00%,Secured Debt (Maturity - September 20, 2024) (9)
17,328
17,178
16,821
Tectonic Financial, Inc.
May 15, 2017
Financial Services Organization
Common Stock (200,000 shares)
2,600
TGP Holdings III LLC (11)
September 30, 2017
Outdoor Cooking & Accessories
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity - September 25, 2025) (9)
5,500
5,446
5,094
The Pasha Group (11)
February 2, 2018
Diversified Logistics and Transportation Provided
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity - January 26, 2023) (9)
10,867
10,198
10,052
USA DeBusk LLC (10)
October 22, 2019
Provider of Industrial Cleaning Services
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%,Secured Debt (Maturity - October 22, 2024) (9)
25,011
24,600
23,821
U.S. TelePacific Corp. (11)
September 14, 2016
Provider of Communications and Managed Services
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity - May 2, 2023) (9)
17,088
16,896
14,833
Vida Capital, Inc (11)
October 10, 2019
Alternative Asset Manager
LIBOR Plus 6.00%, Current Coupon 6.15%, Secured Debt (Maturity - October 1, 2026)
18,176
17,939
Vistar Media, Inc. (10)
February 17, 2017
Operator of Digital Out-of-Home Advertising Platform
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 12.00%,Secured Debt (Maturity - April 3, 2023) (9)
4,596
4,464
4,594
Preferred Stock (70,207 shares)
767
1,070
Warrants (69,675 equivalent shares; Expiration - April 3, 2029; Strike price - $10.92 per share)
5,231
6,734
Wireless Vision Holdings, LLC (10)
September 29, 2017
LIBOR Plus 8.94% (Floor 1.00%), Current Coupon 9.84% / 1.00% PIK, Current Coupon Plus PIK 10.84%, Secured Debt (Maturity - September 29, 2022) (9) (19) (23)
6,710
6,616
LIBOR Plus 8.91% (Floor 1.00%), Current Coupon 9.91% / 1.00% PIK, Current Coupon Plus PIK 10.91%, Secured Debt (Maturity - September 29, 2022) (9) (19) (23)
5,830
5,772
5,829
12,388
12,539
YS Garments, LLC (11)
August 22, 2018
Designer and Provider of Branded Activewear
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00% Secured Debt (Maturity - August 9, 2024) (9)
14,091
13,990
12,811
Zilliant Incorporated
June 15, 2012
Price Optimization and Margin Management Solutions
Preferred Stock (186,777 shares)
154
260
Warrants (952,500 equivalent shares; Expiration - June 15, 2022; Strike price - $0.001 per share)
1,071
1,190
1,225
1,450
Subtotal Non-Control/Non-Affiliate Investments (85.3% of net assets at fair value)
1,330,738
Total Portfolio Investments, September 30, 2020
2,528,245
All investments are Lower Middle Market portfolio investments, unless otherwise noted. See Note B for a description of Lower Middle Market portfolio investments. All of the Company’s investments, unless otherwise noted, are encumbered either as security for the Company’s Credit Facility or in support of the SBA-guaranteed debentures issued by the Funds.
(2)
Debt investments are income producing, unless otherwise noted. Equity and warrants are non-income producing, unless otherwise noted.
See Note C and Schedule 12-14 for a summary of geographic location of portfolio companies.
Principal is net of repayments. Cost is net of repayments and accumulated unearned income.
(5)
Control investments are defined by the Investment Company Act of 1940, as amended ("1940 Act"), as investments in which more than 25% of the voting securities are owned or where the ability to nominate greater than 50% of the board representation is maintained.
(6)
Affiliate investments are defined by the 1940 Act as investments in which between 5% and 25% (inclusive) of the voting securities are owned and the investments are not classified as Control investments.
Non-Control/Non-Affiliate investments are defined by the 1940 Act as investments that are neither Control investments nor Affiliate investments.
(8)
Income producing through dividends or distributions.
(9)
Index based floating interest rate is subject to contractual minimum interest rate. A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted
26
average annual stated interest rate in effect at September 30, 2020. As noted in this schedule, 58% of the loans (based on the par amount) contain LIBOR floors which range between 0.50% and 2.00%, with a weighted-average LIBOR floor of approximately 1.09%.
(10)
Private Loan portfolio investment. See Note B for a description of Private Loan portfolio investments.
(11)
Middle Market portfolio investment. See Note B for a description of Middle Market portfolio investments.
(12)
Other Portfolio investment. See Note B for a description of Other Portfolio investments.
(13)
Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets.
(14)
Non-accrual and non-income producing investment.
(15)
Portfolio company is in a bankruptcy process and, as such, the maturity date of our debt investment in this portfolio company will not be finally determined until such process is complete. As noted in footnote (14), our debt investment in this portfolio company is on non-accrual status.
(16)
External Investment Manager. Investment is not encumbered as security for the Company's Credit Facility or in support of the SBA-guaranteed debentures issued by the Funds.
(17)
Maturity date is under on-going negotiations with the portfolio company and other lenders, if applicable.
(18)
Investment fair value was determined using significant unobservable inputs, unless otherwise noted. See Note C for further discussion.
(19)
PIK interest income and cumulative dividend income represent income not paid currently in cash.
(20)
All portfolio company headquarters are based in the United States, unless otherwise noted.
(21)
Portfolio company headquarters are located outside of the United States.
(22)
In connection with the Company's debt investment in Staples Canada ULC and in an attempt to mitigate any potential adverse change in foreign exchange rates during the term of the Company's investment, the Company maintains a forward foreign currency contract with Cadence Bank to lend $16.3 million Canadian Dollars and receive $12.4 million U.S. Dollars with a settlement date of September 14, 2021. The unrealized appreciation on the forward foreign currency contract is $0.2 million as of September 30, 2020.
(23)
The Company has entered into an intercreditor agreement that entitles the Company to the "last out" tranche of the first lien secured loans, whereby the "first out" tranche will receive priority as to the "last out" tranche with respect to payments of principal, interest, and any other amounts due thereunder. Therefore, the Company receives a higher interest rate than the contractual stated interest rate of LIBOR plus 8.50% (Floor 1.00%) per the credit agreement and the Consolidated Schedule of Investments above reflects such higher rate.
(24)
Investment has an unfunded commitment as of September 30, 2020 (see Note K). The fair value of the investment includes the impact of the fair value of any unfunded commitments.
(25)
All of the Company’s portfolio investments are generally subject to restrictions on resale as “restricted securities.”
(26)
Investment date represents the date of initial investment in the portfolio company.
27
December 31, 2019
Control Investments(5)
10% PIK Secured Debt (Maturity - July 22, 2020) (14) (19)
6,387
Preferred Member Units (9,481,500 units) (27)
6,103
Recreational andEducational ShootingFacility
11.00% Secured Debt (Maturity - July 31, 2020)
1,639
3,139
2,929
LIBOR Plus 10.00% (Floor 2.00%), Current Coupon 12.13%, Secured Debt (Maturity - August 16, 2024) (9)
5,565
8,726
Manufacturer of MachineCutting Tools andAccessories
4,919
4,666
4,521
939
8,392
5,460
Casing and TubingCoating Services
15.00% Secured Debt (Maturity - December 28, 2020)
11,596
11,473
8,300
17,823
19,773
Provider of Crane Rentaland Operating Services
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.71%, Secured Debt (Maturity - January 9, 2023) (9)
9,052
8,989
13,269
Financial Servicesand Cash FlowSolutions Provider
7,797
3,500
996
11,925
13,293
Casual RestaurantGroup
2,440
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 10.13%,Secured Debt (Maturity - March 30, 2023) (9)
7,229
7,104
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 12.13%,Secured Debt (Maturity - March 30, 2023) (9)
27,801
7,163
7,382
52,843
49,450
Produces and Sells ITTraining CertificationVideos
50,850
LIBOR Plus 9.00% (Floor 2.00%), Current Coupon 10.75%,Secured Debt (Maturity - January 4, 2024) (9)
12,136
17,976
Roofing and WaterproofingSpecialty Contractor
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 12.00%,Secured Debt (Maturity - February 26, 2023) (9)
17,773
17,649
24,040
30,136
43,263
Pipeline Maintenanceand Construction
6,920
2,400
8,920
Specialty Manufacturerof Vinyl-Clad Metal
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.71%,Secured Debt (Maturity - December 20, 2021) (9)
10,830
10,781
9,630
1,137
1,126
19,446
22,008
Member Units (CMS Minerals II, LLC) (100 units) (8)
2,386
1,900
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.75%,Secured Debt (Maturity - January 29, 2024) (9)
8,364
8,288
3,010
10,263
11,298
29
LP Interests (CTMH, LP) (Fully diluted 38.8%)
872
Technology andTelecommunicationsProvider
Designer and Distributorof Consumer Electronics
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.75%,Secured Debt (Maturity - April 1, 2023) (9)
19,620
19,478
18,452
5,174
28,979
Provider of Omni-ChannelDirect Marketing Services
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.75%, Secured Debt (Maturity - February 13, 2023) (9)
15,717
15,597
15,707
23,997
35,907
Manufacturer ofRuggedized ComputerMounting Systems
19,022
18,949
53,410
33,793
72,432
Manufacturer andSupplier of DentalProducts
LIBOR Plus 8.00% (Floor 1.00%, Ceiling 1.50%), Current Coupon 9.50%, Secured Debt (Maturity - March 31, 2020) (9)
4,515
2,560
5,715
7,075
Manufacturer of Engineered RubberProducts
LIBOR Plus 7.00%, Current Coupon 8.71%,Secured Debt (Maturity - December 31, 2023)
15,016
Member Units (5,879 units)
47,450
28,081
62,466
Guerdon Modular Holdings, Inc.
August 13, 2014
Multi-Family andCommercial ModularConstruction Company
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 10.60%,Secured Debt (Maturity - October 1, 2019) (9) (14) (17)
1,010
16.00% Secured Debt (Maturity - October 1, 2019) (14) (17)
12,588
Preferred Stock (404,998 shares)
1,140
Common Stock (212,033 shares)
2,983
Warrants (6,208,877 equivalent shares; Expiration - April 25, 2028; Strike price - $0.01 per share)
17,721
30
Manufacturer ofSpecialty FabricatedIndustrial PipingProducts
7,430
Energy Industry FocusedMedia and Publishing
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 11.21%,Secured Debt (Maturity - September 30, 2020) (9)
280
12.50% Secured Debt (Maturity - April 29, 2021)
12,535
2,420
16,454
15,193
Real Estate HoldingCompany
6,506
9,560
LP Interests (2717 MH, L.P.) (Fully diluted 49.3%)
3,157
Manufacturer ofHydraulic Generators
7,970
IDX Broker, LLC
November 15, 2013
Provider of Marketingand CRM Tools forthe Real EstateIndustry
11.50% Secured Debt (Maturity - November 15, 2020)
13,358
Preferred Member Units (5,607 units) (8)
5,952
15,040
19,310
28,440
Prime Plus 6.75% (Floor 2.00%), Current Coupon 11.50%, Secured Debt (Maturity - November 14,2023) (9)
3,960
8,270
4,771
12,270
17,600
17,430
7,160
24,590
Manufacturer of SpecialtyOilfield and IndustrialProducts
15,470
11.50% Secured Debt (Maturity - October 31, 2023)
25,200
24,982
3,978
3,939
42,153
42,321
Provider of Customer Experience ManagementServices
8.00% Secured Debt (Maturity - July 28, 2022)
2,786
2,695
6.00% Current / 6.00% PIK Secured Debt (Maturity - July 28, 2022) (19)
23,292
23,157
22,621
5,280
42,585
30,596
5.00% Current / 5.00% PIK Secured Debt (Maturity - March 31, 2022) (19)
8,890
8,815
19,215
13,680
Manufacturer ofFinger-JointedLumber Products
10.00% Secured Debt (Maturity - January 15, 2020)
1,750
1,602
12.00% Secured Debt (Maturity - January 15, 2020)
3,900
3,898
3,644
3,239
9.50% Secured Debt (Mid-Columbia Real Estate, LLC)(Maturity - May 13, 2025)
701
790
1,640
10,378
7,587
Member Units (Fully diluted 100.0%) (8)
74,520
Logistics and DistributionServices Provider forLarge Volume Mailers
12.00% Secured Debt (Maturity - August 15. 2019) (17)
6,253
Common Stock (5,873 shares) (8)
8,410
8,973
14,663
Precast ConcreteManufacturing
14,760
Provider of EnergyEfficiency Products &Services
17,586
17,469
Preferred Member Units (86,400,000 units) (8)
6,310
24,349
23,779
Clinical ResearchService Provider
14.00% Secured Debt (Maturity - June 8, 2022)
5,981
5,885
1,230
4,988
6,902
12,199
32
Manufacturer ofHoses, Fittings andAssemblies
11,086
Designer, Manufacturerand Distributor of FitnessEquipment
19,800
19,703
29,903
Manufacturer ofOverhead Cranes
16,950
Provider ofTelemarketingand Data Services
Member Units (460 units)
8,170
Recreational VehicleDealer
LIBOR Plus 8.75% (Floor 0.50%), Current Coupon 10.85%,Secured Debt (Maturity - November 15, 2022) (9)
12,245
12,118
9,930
14,268
22,048
Noise AbatementService Provider
13.00% Secured Debt (Maturity - April 30, 2020)
6,379
13,390
1,090
12,179
20,877
Provider of RigsiteAccommodation UnitRentals and RelatedServices
11,013
9,289
Processor of ConstructionAggregates
Zero Coupon Secured Debt (Maturity - June 30, 2018) (17)
750
722
Member Units (1,150 units)
1,150
4,990
3,169
2,269
8,881
12.00% Secured Debt (Maturity - August 31, 2020)
640
16,272
25,048
33
The MPI Group, LLC
October 2, 2007
Manufacturer ofCustom HollowMetal Doors, Framesand Accessories
9.00% Secured Debt (Maturity - December 31, 2019) (17)
2,924
Series A Preferred Units (2,500 units)
Warrants (1,424 equivalent units; Expiration - July 1, 2024; Strike price - $0.01 per unit)
1,096
Member Units (MPI Real Estate Holdings, LLC)(100 units) (8)
2,300
8,820
4,564
9,200
9,102
13,757
Manufacturer / Installerof Commercial Signage
13.00% Secured Debt (Maturity - September 30, 2019) (17)
4,089
Common Stock (1,126,242 shares)
3,706
8,734
6,526
6.50% Secured Debt (Maturity - October 1, 2020)
12.00% Secured Debt (Maturity - October 1, 2020)
14.00% Secured Debt (Maturity - October 1, 2020)
Warrants (587 equivalent units; Expiration - October 1, 2020; Strike price - $0.01 per unit)
1,269
5,644
Subtotal Control Investments (67.2% of net assets at fair value)
778,367
Provider of Rent-to-Own Financing Solutions andServices
838
5,180
2,038
6,018
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 9.34%,Secured Debt (Maturity - June 7, 2022) (9)
27,087
26,905
Member Units (Milton Meisler Holdings LLC) (48,555 units)
4,855
8,540
31,760
35,627
34
Maintenance, Repair andConstruction Services tothe Above-GroundStorage Tank Market
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 12.71%, (Maturity - April 8, 2021) (9)
4,698
Preferred Stock (non-voting) (8)
131
5,629
5,119
LIBOR Plus 12.00% (Floor 1.00%), Current Coupon 14.10%,Secured Debt (Maturity - June 30, 2022) (9)
13,244
13,106
6,270
15,362
LIBOR Plus 9.25% (Floor 1.00%), Current Coupon10.94%, Secured Debt (Maturity - June 30, 2020) (9)
18,981
18,794
Preferred Member Units (6 units; 6% cumulative) (8) (19)
4,701
23,682
23,495
Provider of SpecializedEnterprise ResourcePlanning Software
11.00% Secured Debt (Maturity - December 7, 2023)
9,160
9,077
Member Units (66,968 units) (8)
751
9,828
14,370
Class A Units (1,500,000 units) (8)
2,740
Congruent Credit OpportunitiesFunds (12) (13)
LP Interests (Congruent Credit Opportunities Fund II, LP) (Fully diluted 19.8%)
LP Interests (Congruent Credit Opportunities Fund III, LP) (Fully diluted 17.4%) (8)
13,601
13,915
18,811
14,770
LP Interests (Copper Trail Energy Fund I, LP) (Fully diluted 12.4%) (8)
1,997
2,362
LP Interests (Dos Rios Partners, LP) (Fully diluted20.2%)
5,846
LP Interests (Dos Rios Partners - A, LP) (Fully diluted6.4%)
1,856
7,702
Distributor ofHardwood Products
Common Stock (6,250 shares) (8)
35
LP Interests (EIG Global Private Debt Fund-A, L.P.)(Fully diluted 11.1%) (8)
768
720
LP Interests (Freeport Financial SBIC Fund LP)(Fully diluted 9.3%)
5,778
LP Interests (Freeport First Lien Loan Fund III LP)(Fully diluted 6.0%) (8)
9,956
9,696
15,930
15,474
LP Interests (HPEP 3, L.P.) (Fully diluted 8.2%)
2,474
Value-Added Reseller ofEngineering Design andManufacturing Solutions
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.71%,Secured Debt (Maturity - December 2, 2021) (9)
13,335
7,900
16,935
22,320
Provider of Plating andIndustrial CoatingServices
4,260
10,330
14,590
Member Units (Fully diluted 20.0%; 24.4% profitsinterest) (8)
17,000
14,407
L.F. Manufacturing Holdings,LLC (10)
Manufacturer ofFiberglass Products
81
2,100
2,131
Provider of TransportationMonitoring / TrackingProducts and Services
6,474
58
10,432
6,532
36
Manufacturer of IndustrialGas Generating Systems
12.00% Secured Debt (Maturity - March 31, 2020)
2,680
18,386
Limestone and SandstoneDimension Cut StoneMining Quarries
570
32,687
8,200
38,687
41,163
Slick Innovations, Inc.
6,360
6,197
7,078
7,567
Provider of OutsourcedInfrastructure Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.41%, Secured Debt (Maturity - August 20, 2024) (9)
2,963
2,940
2,962
Preferred Stock (755,401 shares; 20% cumulative) (8) (19)
809
1,889
Preferred Stock (1,521,122 shares; 19% cumulative) (8) (19)
1,976
2,282
Preferred Stock (4,336,866 shares; 13.50% cumulative) (8) (19)
2,684
17,316
13,484
Provider of WellheadEquipment, Designs,and Personnel to theOil & Gas Industry
Preferred Member Units (UWS Investments, LLC)(716,949 units; 14% cumulative) (8) (19)
37
11.50% Secured Debt (Maturity - January 26, 2020)
20,162
19,352
291
37,147
Subtotal Affiliate Investments (21.5% of net assets at fair value)
351,764
LIBOR Plus 11.00% (Floor 1.00%), Current Coupon 13.03%, Secured Debt (Maturity - April 15, 2020) (9) (14)
2,227
2,068
2,172
LIBOR Plus 12.75% (Floor 1.00%), Current Coupon 16.50%,Secured Debt (Maturity - June 30, 2023) (9) (14)
9,358
16,098
11,530
Local NewspaperOperator
Prime Plus 5.00% (Floor 1.50%), Current Coupon 8.75%, Secured Debt (Maturity - July 3, 2023) (9)
4,930
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.44%, Secured Debt (Maturity - July 3, 2023) (9)
6,158
6,058
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.50%, Secured Debt (Maturity - July 3, 2023) (9)
197
11,185
11,355
Value-Added Logisticsand Supply ChainProvider to the DefenseIndustry
LIBOR Plus 6.25% (Floor 0.75%), Current Coupon 8.03%,Secured Debt (Maturity - July 26, 2023) (9)
19,843
Oil & Gas Exploration &Production
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 8.46%, Secured Debt (Maturity - September 8, 2023) (9)
9,531
Dental Service Organization
LIBOR Plus 4.75% (Floor 1.00%), Current Coupon 6.59%, Secured Debt (Maturity - October 22, 2022) (9)
14,126
14,036
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 7.44%, Secured Debt (Maturity - July 29, 2026) (9)
9,902
9,883
Allen Media, LLC. (11)
September 18, 2018
Operator of Cable Television Networks
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.48%, Secured Debt (Maturity - August 30, 2023) (9)
16,270
15,894
15,863
Allen Media Broadcasting LLC (10)
July 3, 2019
Operator of TelevisionBroadcasting Networks
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 8.21%, Secured Debt (Maturity - July 3, 2024) (9)
14,906
14,565
38
Roaster, Mixer andPackager of Bulk Nutsand Seeds
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 11.60%, Secured Debt (Maturity - April 10, 2023) (9)
12,243
12,002
12,233
Provider of AudioConferencing and VideoCollaboration Solutions
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.36%, Secured Debt (Maturity - June 8, 2023) (9)
17,389
16,421
10,460
10,836
7,471
Manufacturer ofBowhunting and ArcheryProducts and Accessories
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 12.10%, Secured Debt (Maturity - January 13, 2020) (9)
13,857
13,856
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 9.60%, Secured Debt (Maturity - August 31, 2023) (9)
4,543
4,465
4,490
1,821
6,344
ATI Investment Sub, Inc. (11)
July 11, 2016
Manufacturer of SolarTracking Systems
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 9.01%, Secured Debt (Maturity - June 22, 2021) (9)
2,885
2,859
2,853
Provider of RadioFrequency ManagementEquipment
LIBOR Plus 6.00% (Floor 1.00%) Current Coupon 7.94% / 1.00% PIK, Current Coupon Plus PIK 8.94%Secured Debt (Maturity - June 11, 2021) (9) (19)
13,593
13,414
12,743
7,736
11,153
4,554
4,518
Preferred Member Units (Berry Acquisition, LLC) (1,548,387 units; 8% cumulative) (8) (19)
6,314
5,455
39
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 9.35%,Secured Debt (Maturity - May 11, 2022) (9)
2,218
Glass Repair andInstallation ServiceProvider
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 10.41%,Secured Debt (Maturity - March 9, 2022) (9)
13,731
13,443
14,493
14,681
Bluestem Brands, Inc. (11)
Multi-Channel Retailer ofGeneral Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 9.31%, Secured Debt (Maturity - November 6, 2020) (9)
10,622
10,571
7,973
LIBOR Plus 4.75%, Current Coupon 6.50%, Secured Debt (Maturity - January 28, 2026)
7,782
7,642
7,827
LIBOR Plus 8.50%, Current Coupon 10.25%, Secured Debt (Maturity - January 28, 2027)
4,907
5,012
12,549
12,839
Advertising Sales andNewspaper CirculationSoftware
4.00% Secured Debt (Maturity - July 22, 2019) (9) (17)
5,955
LP Interests (Brightwood Capital Fund III, LP)(Fully diluted 1.6%) (8)
11,160
9,005
LP Interests (Brightwood Capital Fund IV, LP)(Fully diluted 0.6%) (8)
15,660
13,509
AerostructureManufacturing
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.40%, Secured Debt (Maturity - November 14, 2023) (9)
25,287
25,089
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.91%, Secured Debt (Maturity - August 23, 2022) (9)
14,599
14,501
12,739
Security Alarm MonitoringService Provider
LIBOR Plus 5.63% (Floor 1.00%), Current Coupon 7.38%, Secured Debt (Maturity - October 6, 2021) (9)
13,776
13,734
11,985
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 11.45%,Secured Debt (Maturity - June 7, 2023) (9)
5,674
5,498
2,923
10,807
8,597
40
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 8.16%, Secured Debt (Maturity - May 15, 2026) (9)
3,488
Prints & AdvertisingFilm Financing
15% PIK Secured Debt (Maturity - January 5, 2015) (14) (17)
2,846
Provider of DigitalAdvertising PerformanceMarketing Solutions
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 10.59%, Secured Debt (Maturity - December 5, 2022) (9)
2,663
2,625
Distribution Platform ofSpecialty ConstructionMaterials toProfessional Concreteand Masonry Contractors
Member Units (46,152 units)
4,866
7,667
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.91%, Secured Debt (Maturity - July 2, 2026) (9)
14,293
14,531
Emergency Care andSpecialty Service AnimalHospital
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.91%, Secured Debt (Maturity - August 3, 2022) (9)
10,099
10,039
11.5% Current / 1% PIK Secured Debt (Maturity -June 22, 2023) (19)
5,899
6,373
6,199
Provider of Outsourced e-Commerce Solutionsand Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.90%, Secured Debt (Maturity - February 12, 2021) (9)
15,876
15,771
15,837
Industrial PowertrainRepair and Services
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.24%, Secured Debt (Maturity - April 13, 2023) (9)
10,827
10,982
860
1,490
12,463
13,332
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.75%, Secured Debt (Maturity - July 17, 2023) (9)
5,375
LIBOR Plus 6.25% (Floor 1.63%), Current Coupon 7.96%, Secured Debt (Maturity - October 25, 2024) (9)
22,414
22,292
41
LP Interests (EnCap Energy Capital Fund VIII, L.P.)(Fully diluted 0.1%) (8)
3,617
1,354
LP Interests (EnCap Energy Capital Fund VIII Co-Investors, L.P.) (Fully diluted 0.4%)
703
LP Interests (EnCap Energy Capital Fund IX, L.P.) (Fully diluted 0.1%) (8)
4,360
2,780
LP Interests (EnCap Energy Capital Fund X, L.P.)(Fully diluted 0.1%) (8)
8,427
8,822
LP Interests (EnCap Flatrock Midstream Fund II, L.P.)(Fully diluted 0.8%) (8)
7,337
5,669
LP Interests (EnCap Flatrock Midstream Fund III, L.P.)(Fully diluted 0.2%) (8)
6,674
6,677
32,512
26,005
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity - October 29, 2025) (9)
8,921
6,795
NGL Transportation &Storage
LIBOR Plus 6.00%, Current Coupon 8.04%, Secured Debt(Maturity - June 13, 2024)
10,275
10,116
10,050
Evergreen Skills Lux S.á r.l.(d/b/a Skillsoft) (11) (13)
May 5, 2014
Technology-basedPerformance SupportSolutions
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 10.45%, Secured Debt (Maturity - April 28, 2022) (9)
6,999
6,928
1,965
Felix Investments Holdings II (10)
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.40%, Secured Debt (Maturity - August 9, 2022) (9)
4,944
Flavors Holdings Inc. (11)
October 15, 2014
Global Provider ofFlavoring andSweetening Products
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.77%, Secured Debt (Maturity - April 3, 2020) (9)
11,297
11,247
10,619
LIBOR Plus 5.00%, Current Coupon 6.75%, Secured Debt (Maturity - April 8, 2025)
7,751
7,577
LIBOR Plus 5.25%, Current Coupon 7.05%, Secured Debt (Maturity - December 19, 2025)
16,376
16,230
16,335
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity - December 22, 2024) (9)
18,120
17,964
17,471
LIBOR Plus 7.00% (Floor 1.50%), Current Coupon 8.91%, Secured Debt (Maturity - April 30, 2019) (9) (17)
3,343
167
3,510
42
Specialized FoodDistributor
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.51%, Secured Debt (Maturity - October 2, 2024) (9)
11,364
11,233
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 9.53%, Secured Debt (Maturity - December 21, 2023) (9)
3,498
3,440
3,493
Provider of StorageTanks and RelatedProducts to the Energyand PetrochemicalMarkets
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 9.26%, Secured Debt (Maturity - January 28, 2021) (9)
20,764
20,119
19,206
Provider of Militaryand Commercial Sheltersand Systems
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 9.02%,Secured Debt (Maturity - March 29, 2023) (9)
29,097
28,659
Temporary StaffingSolutions
8.00% Secured Debt (Maturity - March 29, 2023)
10,181
10,025
8,913
LIBOR Plus 10.00%, Current Coupon 3.54% / 8.26% PIK, Current Coupon Plus PIK 11.80% Secured Debt (Maturity - May 12, 2022) (19)
7,547
6,414
Manufacturer of Cutting and Machine Tools & Speciality Polishing Compounds
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity - August 28, 2026) (9)
22,500
22,066
22,275
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.79%,Secured Debt (Maturity - April 17, 2024) (9)
12,963
12,848
12,962
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 8.27%, Secured Debt (Maturity - April 30, 2024) (9)
18,577
18,178
18,217
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 11.28%, Secured Debt (Maturity - November 19, 2023) (9)
18,799
18,487
20,045
20,059
Industrial CleaningServices
6% Current / 7% PIK Unsecured Debt (Maturity - December 17, 2022) (19)
5,242
103
60
510
6,237
5,915
43
Inn of the Mountain Gods Resortand Casino (11)
Hotel & Casino Owner &Operator
7,762
7,584
7,684
LIBOR Plus 7.00% (Floor 1.75%), Current Coupon 8.77%, Secured Debt (Maturity - August 7, 2023) (9)
7,500
7,363
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity - July 19, 2025) (9)
20,130
20,033
20,180
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.53%, Secured Debt (Maturity - August 28, 2025) (9)
9,872
9,773
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.77%, Secured Debt (Maturity - June 14, 2025) (9)
5,943
5,893
4,273
Fixed WirelessBroadband Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.74%, Secured Debt (Maturity - May 2, 2023) (9)
14,775
14,669
Franchisee of CasualDining Restaurants
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 8.45%, Secured Debt (Maturity - May 26, 2021) (9)
4,055
Manufacturer andDistributor of HealthCare Equipment &Supplies
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.91%Secured Debt (Maturity - August 21, 2024) (9)
3,942
8,371
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - March 29, 2024) (9)
7,462
7,326
7,463
LIBOR Plus 5.50%, Current Coupon 7.52%, Secured Debt (Maturity - December 20, 2024)
19,285
19,189
19,164
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.89%, Secured Debt (Maturity - August 7, 2020) (9)
1,990
707
2,697
44
LIBOR Plus 9.63% (Floor 2.00%), Current Coupon 5.38% / 6.26% PIK, Current Coupon Plus PIK 11.64%, Secured Debt (Maturity - November 19, 2021) (9) (19)
11,312
11,166
10,638
LIBOR Plus 5.00%, Current Coupon 6.74%, Secured Debt (Maturity - May 9, 2026)
14,925
14,713
14,738
LP Interests (Fully diluted 2.3%) (8)
3,682
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 8.56%, Secured Debt (Maturity - September 25, 2023) (9)
13,754
13,625
13,751
Competitive LocalExchange Carrier
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity - December 22, 2024) (9)
18,381
18,199
18,197
Member Units (2.5 units)
Member Units (LGI Predictive Analytics LLC)(190,712 units)
174
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.74%, Secured Debt (Maturity - May 1, 2023) (9)
9,458
8,761
Fast Fashion E-CommerceRetailer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.75%, Secured Debt (Maturity - August 28, 2022) (9)
11,335
11,070
11,109
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.86%, Secured Debt (Maturity - September 30, 2024) (9)
13,750
13,451
13,951
LIBOR Plus 5.00%, Current Coupon 6.75%, Secured Debt (Maturity - December 22, 2025)
16,648
16,528
16,643
1,775
18,303
18,418
45
Provider of differentiated information solutions, systems engineering, and analytics
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 7.01%, Secured Debt (Maturity - April 29, 2024) (9)
19,950
19,855
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 8.29% / 0.75% PIK, Current Coupon Plus PIK 9.04%, Secured Debt (Maturity - October 24, 2024) (9) (19)
14,879
14,556
14,187
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 7.52%, Secured Debt (Maturity - April 26, 2024) (9)
4,181
4,134
3,247
LIBOR Plus 6.00% (Floor 1.50%), Current Coupon 7.90%, Secured Debt (Maturity - December 18, 2024) (9)
9,675
9,490
Oil & Gas Exploration& Production
LIBOR Plus 8.00%, Current Coupon 9.91%, Secured Debt(Maturity - March 2, 2022)
23,268
23,147
North American Lifting Holdings, Inc. (11)
February 26, 2015
Crane Service Provider
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 6.52%, Secured Debt (Maturity - November 27, 2020) (9)
7,300
6,417
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.76%, Secured Debt (Maturity - October 17, 2022) (9)
21,060
20,673
20,749
Provider of B2B TravelInformation Content
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity - June 7, 2022) (9)
4,879
4,874
11.5% Secured Debt (Maturity - November 15, 2026) (14)
4,868
463
Leading technology services commerce platform
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 7.28%, Secured Debt (Maturity - August 23, 2025) (9)
15,845
15,586
15,766
Permian Holdco 2, Inc. (11)
February 12, 2013
Storage Tank Manufacturer
14.00% PIK Unsecured Debt (Maturity - October 15, 2021) (19)
456
341
18.00% PIK Unsecured Debt (Maturity - June 30, 2022) (19)
319
Preferred Stock (Permian Holdco 1, Inc.) (154,558 units)
799
100
1,574
760
Point.360 (10)
July 8, 2015
Fully Integrated Providerof Digital Media Services
Warrants (65,463 equivalent shares; Expiration - July 7, 2020; Strike price - $0.75 per share)
69
Common Stock (163,658 shares)
273
342
Provider of ConsultingServices to Governments
LIBOR Plus 8.00%, Current Coupon 9.75%, Secured Debt(Maturity - May 1, 2026)
8,965
8,865
Provider of OutpatientPhysical Therapy andSports Medicine Services
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 7.44% / 2.00% PIK, Current Coupon Plus PIK 9.44%, Secured Debt (Maturity - November 30, 2023) (9) (19)
8,491
8,414
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 7.41%, Secured Debt (Maturity - December 20, 2024) (9)
18,115
17,590
18,140
Scripted and UnscriptedTV and DigitalProgramming Provider
Provider of IntelligentDriver RecordMonitoring Softwareand Services
2,380
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.69%, Secured Debt (Maturity - June 9, 2021) (9)
6,675
6,657
SMART Modular Technologies, Inc. (10) (13)
August 18, 2017
Provider of SpecialtyMemory Solutions
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 8.16%, Secured Debt (Maturity - August 9, 2022) (9)
18,484
18,332
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.98%, Secured Debt (Maturity - September 12, 2024) (9) (22)
14,546
14,348
13,530
TE Holdings, LLC (11)
December 5, 2013
Member Units (97,048 units)
970
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.75%,Secured Debt (Maturity - September 20, 2024) (9)
16,844
16,680
47
Common Stock (400,000 shares) (8)
2,620
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 10.25%, Secured Debt (Maturity - September 25, 2025) (9)
5,440
5,143
Diversified Logistics andTransportation Provided
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 9.31%, Secured Debt (Maturity - January 26, 2023) (9)
8,984
8,793
9,074
TMC Merger Sub Corp. (11)
December 22, 2016
Refractory & MaintenanceServices Provider
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 8.53%, Secured Debt (Maturity - October 31, 2022) (9) (24)
15,527
15,394
TOMS Shoes, LLC (11)
November 13, 2014
Global Designer, Distributor, and Retailer of CasualFootwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 7.46%, Secured Debt (Maturity - September 30, 2025) (9)
571
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.96%, Secured Debt (Maturity - December 31, 2025) (9)
1,637
Member Units (16,321 units)
245
2,453
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 7.54%,Secured Debt (Maturity - October 22, 2024) (9)
30,000
29,423
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 7.02%, Secured Debt (Maturity - May 2, 2023) (9)
16,887
16,447
LIBOR Plus 6.00%, Current Coupon 7.93%, Secured Debt (Maturity - October 1, 2026)
18,500
18,232
18,315
VIP Cinema Holdings, Inc. (11)
March 9, 2017
Supplier of LuxurySeating to the CinemaIndustry
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.91%, Secured Debt (Maturity - March 1, 2023) (9) (14)
10,063
10,030
5,301
Operator of DigitalOut-of-HomeAdvertising Platform
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 10.00%,Secured Debt (Maturity - April 3, 2023) (9)
4,963
4,784
4,939
1,610
1,630
8,179
48
Provider of WirelessTelecommunicationsCarrier Services
LIBOR Plus 9.65% (Floor 1.00%), Current Coupon 11.57% / 1.00% PIK, Current Coupon Plus PIK 12.57%, Secured Debt (Maturity - September 29, 2022) (9) (19) (23)
7,136
7,022
7,129
LIBOR Plus 8.91% (Floor 1.00%), Current Coupon 10.67% / 1.00% PIK, Current Coupon Plus PIK 11.67%, Secured Debt (Maturity - September 29, 2022) (9) (19) (23)
6,201
6,132
6,200
13,154
13,329
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.60% Secured Debt (Maturity - August 9, 2024) (9)
14,412
14,404
Price Optimization and Margin ManagementSolutions
Subtotal Non-Control/Non-Affiliate Investments (80.7% of net assets at fair value)
1,297,587
Total Portfolio Investments, December 31, 2019
2,427,718
Index based floating interest rate is subject to contractual minimum interest rate. A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2019. As noted in this schedule, 64% of the loans (based on the par amount) contain LIBOR floors which range between 0.50% and 2.00%, with a weighted-average LIBOR floor of approximately 1.06%.
In connection with the Company's debt investment in Staples Canada ULC and in an attempt to mitigate any potential adverse change in foreign exchange rates during the term of the Company's investment, the Company maintains a forward foreign currency contract with Cadence Bank to lend $17.6 million Canadian Dollars and receive $13.4 million U.S. Dollars with a settlement date of September 14, 2020. The unrealized depreciation on the forward foreign currency contract is $0.2 million as of December 31, 2019.
The Company has entered into an intercreditor agreement that entitles the Company to the "first out" tranche of the first lien secured loans, whereby the "first out" tranche will receive priority as to the "last out" tranche with respect to payments of principal, interest, and any other amounts due thereunder. Therefore, the Company receives a lower interest rate than the contractual stated interest rate of LIBOR plus 7.14% (Floor 1.00%) per the credit agreement and the Consolidated Schedule of Investments above reflects such lower rate.
(27)
Investment has an unfunded commitment as of December 31, 2019 (see Note K). The fair value of the investment includes the impact of the fair value of any unfunded commitments.
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Notes to Consolidated Financial Statements
NOTE A—ORGANIZATION AND BASIS OF PRESENTATION
1. Organization
Main Street Capital Corporation (“MSCC”) is a principal investment firm primarily focused on providing customized debt and equity financing to lower middle market (“LMM”) companies and debt capital to middle market (“Middle Market”) companies. The portfolio investments of MSCC and its consolidated subsidiaries are typically made to support management buyouts, recapitalizations, growth financings, refinancings and acquisitions of companies that operate in a variety of industry sectors. MSCC seeks to partner with entrepreneurs, business owners and management teams and generally provides “one stop” financing alternatives within its LMM portfolio. MSCC and its consolidated subsidiaries invest primarily in secured debt investments, equity investments, warrants and other securities of LMM companies based in the United States and in secured debt investments of Middle Market companies generally headquartered in the United States.
MSCC was formed in March 2007 to operate as an internally managed business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). MSCC wholly owns several investment funds, including Main Street Mezzanine Fund, LP (“MSMF”), Main Street Capital II, LP (“MSC II”) and Main Street Capital III, LP (“MSC III” and, collectively with MSMF and MSC II, the “Funds”), and each of their general partners. The Funds are each licensed as a Small Business Investment Company (“SBIC”) by the United States Small Business Administration (“SBA”). Because MSCC is internally managed, all of the executive officers and other employees are employed by MSCC. Therefore, MSCC does not pay any external investment advisory fees, but instead directly incurs the operating costs associated with employing investment and portfolio management professionals.
MSC Adviser I, LLC (the “External Investment Manager”) was formed in November 2013 as a wholly owned subsidiary of MSCC to provide investment management and other services to parties other than MSCC and its subsidiaries or their portfolio companies (“External Parties”) and receives fee income for such services. MSCC has been granted no-action relief by the Securities and Exchange Commission (“SEC”) to allow the External Investment Manager to register as a registered investment adviser under the Investment Advisers Act of 1940, as amended. Since the External Investment Manager conducts all of its investment management activities for External Parties, it is accounted for as a portfolio investment of MSCC and is not included as a consolidated subsidiary of MSCC in MSCC’s consolidated financial statements.
MSCC has elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As a result, MSCC generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that it distributes to its stockholders.
MSCC has certain direct and indirect wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The primary purpose of the Taxable Subsidiaries is to permit MSCC to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes.
Unless otherwise noted or the context otherwise indicates, the terms “we,” “us,” “our,” the “Company” and “Main Street” refer to MSCC and its consolidated subsidiaries, which include the Funds and the Taxable Subsidiaries.
2. Basis of Presentation
Main Street’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The Company is an investment company following accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services—Investment Companies (“ASC 946”). For each of the periods presented
herein, Main Street’s consolidated financial statements include the accounts of MSCC and its consolidated subsidiaries. The Investment Portfolio, as used herein, refers to all of Main Street’s investments in LMM portfolio companies, investments in Middle Market portfolio companies, private loan (“Private Loan”) portfolio investments, other portfolio (“Other Portfolio”) investments and the investment in the External Investment Manager (see “Note C—Fair Value Hierarchy for Investments and Debentures—Portfolio Composition—Investment Portfolio Composition” for additional discussion of Main Street’s Investment Portfolio). Main Street’s results of operations for the three and nine months ended September 30, 2020 and 2019, cash flows for the nine months ended September 30, 2020 and 2019, and financial position as of September 30, 2020 and December 31, 2019, are presented on a consolidated basis. The effects of all intercompany transactions between Main Street and its consolidated subsidiaries have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements of Main Street are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. The results of operations for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
Principles of Consolidation
Under ASC 946, Main Street is precluded from consolidating other entities in which Main Street has equity investments, including those in which it has a controlling interest, unless the other entity is another investment company. An exception to this general principle in ASC 946 occurs if Main Street holds a controlling interest in an operating company that provides all or substantially all of its services directly to Main Street or to its portfolio companies. Accordingly, as noted above, MSCC’s consolidated financial statements include the financial position and operating results for the Funds and the Taxable Subsidiaries. Main Street has determined that none of its portfolio investments qualify for this exception, including the investment in the External Investment Manager. Therefore, Main Street’s Investment Portfolio is carried on the consolidated balance sheet at fair value, as discussed further in Note B.1., with any adjustments to fair value recognized as “Net Unrealized Appreciation (Depreciation)” on the consolidated statements of operations until the investment is realized, usually upon exit, resulting in any gain or loss being recognized as a “Net Realized Gain (Loss).”
Portfolio Investment Classification
Main Street classifies its Investment Portfolio in accordance with the requirements of the 1940 Act. Under the 1940 Act, (a) “Control Investments” are defined as investments in which Main Street owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which Main Street owns between 5% and 25% (inclusive) of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-Control/Non-Affiliate Investments” are defined as investments that are neither Control Investments nor Affiliate Investments.
NOTE B—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Valuation of the Investment Portfolio
Main Street accounts for its Investment Portfolio at fair value. As a result, Main Street follows the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires Main Street to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a
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hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable and willing and able to transact.
Main Street’s portfolio strategy calls for it to invest primarily in illiquid debt and equity securities issued by privately held, LMM companies and more liquid debt securities issued by Middle Market companies that are generally larger in size than the LMM companies. Main Street categorizes some of its investments in LMM companies and Middle Market companies as Private Loan portfolio investments, which are primarily debt securities in privately held companies that have been originated through strategic relationships with other investment funds on a collaborative basis, and are often referred to in the debt markets as “club deals.” Private Loan investments are typically similar in size, structure, terms and conditions to investments Main Street holds in its LMM portfolio and Middle Market portfolio. Main Street’s portfolio also includes Other Portfolio investments which primarily consist of investments that are not consistent with the typical profiles for its LMM portfolio investments, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties. Main Street’s portfolio investments may be subject to restrictions on resale.
LMM investments and Other Portfolio investments generally have no established trading market while Middle Market securities generally have established markets that are not active. Private Loan investments may include investments which have no established trading market or have established markets that are not active. Main Street determines in good faith the fair value of its Investment Portfolio pursuant to a valuation policy in accordance with ASC 820 and a valuation process approved by its Board of Directors and in accordance with the 1940 Act. Main Street’s valuation policies and processes are intended to provide a consistent basis for determining the fair value of Main Street’s Investment Portfolio.
For LMM portfolio investments, Main Street generally reviews external events, including private mergers, sales and acquisitions involving comparable companies, and includes these events in the valuation process by using an enterprise value waterfall methodology (“Waterfall”) for its LMM equity investments and an income approach using a yield-to-maturity model (“Yield-to-Maturity”) for its LMM debt investments. For Middle Market portfolio investments, Main Street primarily uses quoted prices in the valuation process. Main Street determines the appropriateness of the use of third-party broker quotes, if any, in determining fair value based on its understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer, the depth and consistency of broker quotes and the correlation of changes in broker quotes with underlying performance of the portfolio company and other market indices. For Middle Market and Private Loan portfolio investments in debt securities for which it has determined that third-party quotes or other independent pricing are not available or appropriate, Main Street generally estimates the fair value based on the assumptions that it believes hypothetical market participants would use to value the investment in a current hypothetical sale using the Yield-to-Maturity valuation method. For its Other Portfolio equity investments, Main Street generally calculates the fair value of the investment primarily based on the net asset value (“NAV”) of the fund and adjusts the fair value for other factors deemed relevant that would affect the fair value of the investment. All of the valuation approaches for Main Street’s portfolio investments estimate the value of the investment as if Main Street were to sell, or exit, the investment as of the measurement date.
These valuation approaches consider the value associated with Main Street’s ability to control the capital structure of the portfolio company, as well as the timing of a potential exit. For valuation purposes, “control” portfolio investments are composed of debt and equity securities in companies for which Main Street has a controlling interest in the equity ownership of the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors. For valuation purposes, “non-control” portfolio investments are generally composed of debt and equity securities in companies for which Main Street does not have a controlling interest in the equity ownership of the portfolio company or the ability to nominate a majority of the portfolio company’s board of directors.
Under the Waterfall valuation method, Main Street estimates the enterprise value of a portfolio company using a combination of market and income approaches or other appropriate valuation methods, such as considering recent transactions in the equity securities of the portfolio company or third-party valuations of the portfolio company, and then performs a waterfall calculation by allocating the enterprise value over the portfolio company’s securities in order of their preference relative to one another. The enterprise value is the fair value at which an enterprise could be sold in a transaction between two willing parties, other than through a forced or liquidation sale. Typically, privately held companies are bought and sold based on multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for
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estimating enterprise value. For any one portfolio company, enterprise value is generally described as a range of values from which a single estimate of enterprise value is derived. In estimating the enterprise value of a portfolio company, Main Street analyzes various factors including the portfolio company’s historical and projected financial results. Due to SEC deadlines for Main Street’s quarterly and annual financial reporting, the operating results of a portfolio company used in the current period valuation are generally the results from the period ended three months prior to such valuation date and may include unaudited, projected, budgeted or pro forma financial information and may require adjustments for non-recurring items or to normalize the operating results that may require significant judgment in determining. In addition, projecting future financial results requires significant judgment regarding future growth assumptions. In evaluating the operating results, Main Street also analyzes the impact of exposure to litigation, loss of customers or other contingencies. After determining the appropriate enterprise value, Main Street allocates the enterprise value to investments in order of the legal priority of the various components of the portfolio company’s capital structure. In applying the Waterfall valuation method, Main Street assumes the loans are paid off at the principal amount in a change in control transaction and are not assumed by the buyer, which Main Street believes is consistent with its past transaction history and standard industry practices.
Under the Yield-to-Maturity valuation method, Main Street also uses the income approach to determine the fair value of debt securities based on projections of the discounted future free cash flows that the debt security will likely generate, including analyzing the discounted cash flows of interest and principal amounts for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of the portfolio company. Main Street’s estimate of the expected repayment date of its debt securities is generally the maturity date of the instrument, as Main Street generally intends to hold its loans and debt securities to maturity. The Yield-to-Maturity analysis also considers changes in leverage levels, credit quality, portfolio company performance and other factors. Main Street will generally use the value determined by the Yield-to-Maturity analysis as the fair value for that security; however, because of Main Street’s general intent to hold its loans to maturity, the fair value will not exceed the principal amount of the debt security valued using the Yield-to-Maturity valuation method. A change in the assumptions that Main Street uses to estimate the fair value of its debt securities using the Yield-to-Maturity valuation method could have a material impact on the determination of fair value. If there is deterioration in credit quality or if a debt security is in workout status, Main Street may consider other factors in determining the fair value of the debt security, including the value attributable to the debt security from the enterprise value of the portfolio company or the proceeds that would most likely be received in a liquidation analysis.
Under the NAV valuation method, for an investment in an investment fund that does not have a readily determinable fair value, Main Street measures the fair value of the investment predominately based on the NAV of the investment fund as of the measurement date and adjusts the investment’s fair value for factors known to Main Street that would affect that fund’s NAV, including, but not limited to, fair values for individual investments held by the fund if Main Street holds the same investment or for a publicly traded investment. In addition, in determining the fair value of the investment, Main Street considers whether adjustments to the NAV are necessary in certain circumstances, based on the analysis of any restrictions on redemption of Main Street’s investment as of the measurement date, recent actual sales or redemptions of interests in the investment fund, and expected future cash flows available to equity holders, including the rate of return on those cash flows compared to an implied market return on equity required by market participants, or other uncertainties surrounding Main Street’s ability to realize the full NAV of its interests in the investment fund.
Pursuant to its internal valuation process and the requirements under the 1940 Act, Main Street performs valuation procedures on each of its portfolio investments quarterly. In addition to its internal valuation process, in arriving at estimates of fair value for its investments in its LMM portfolio companies, Main Street, among other things, consults with a nationally recognized independent financial advisory services firm. The nationally recognized independent financial advisory services firm analyzes and provides observations, recommendations and an assurance certification regarding the Company’s determinations of the fair value of its LMM portfolio company investments. The nationally recognized independent financial advisory services firm is generally consulted relative to Main Street’s investments in each LMM portfolio company at least once every calendar year, and for Main Street’s investments in new LMM portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, Main Street may determine that it is not cost-effective, and as a result is not in its stockholders’ best interest, to consult with the nationally recognized independent financial advisory services firm on its investments in one or more LMM portfolio companies. Such instances include, but are not limited to, situations where the fair value of Main Street’s investment in a LMM portfolio company is determined to be insignificant relative to the total Investment Portfolio. Main Street consulted with and received an assurance certification from its independent financial advisory services firm in arriving at Main Street’s determination of fair value on its investments in a total of 40 LMM portfolio companies for the
54
nine months ended September 30, 2020, representing approximately 64% of the total LMM portfolio at fair value as of September 30, 2020, and on a total of 40 LMM portfolio companies for the nine months ended September 30, 2019, representing approximately 66% of the total LMM portfolio at fair value as of September 30, 2019. Excluding its investments in LMM portfolio companies that, as of September 30, 2020 and 2019, as applicable, had not been in the Investment Portfolio for at least twelve months subsequent to the initial investment or whose primary purpose is to own real estate for which a third-party appraisal is obtained on at least an annual basis, the percentage of the LMM portfolio reviewed and certified by its independent financial advisory services firm for the nine months ended September 30, 2020 and 2019 was 69% of the total LMM portfolio at fair value as of both September 30, 2020 and 2019.
For valuation purposes, all of Main Street’s Middle Market portfolio investments are non-control investments. To the extent sufficient observable inputs are available to determine fair value, Main Street uses observable inputs to determine the fair value of these investments through obtaining third-party quotes or other independent pricing. For Middle Market portfolio investments for which it has determined that third-party quotes or other independent pricing are not available or appropriate, Main Street generally estimates the fair value based on the assumptions that it believes hypothetical market participants would use to value such Middle Market debt investments in a current hypothetical sale using the Yield-to-Maturity valuation method and such Middle Market equity investments in a current hypothetical sale using the Waterfall valuation method. Because the vast majority of the Middle Market portfolio investments are typically valued using third-party quotes or other independent pricing services (including 92% and 91% of the Middle Market portfolio investments as of September 30, 2020 and December 31, 2019, respectively), Main Street generally does not consult with any financial advisory services firms in connection with determining the fair value of its Middle Market investments.
For valuation purposes, all of Main Street’s Private Loan portfolio investments are non-control investments. For Private Loan portfolio investments for which it has determined that third-party quotes or other independent pricing are not available or appropriate, Main Street generally estimates the fair value based on the assumptions that it believes hypothetical market participants would use to value such Private Loan debt investments in a current hypothetical sale using the Yield-to-Maturity valuation method and such Private Loan equity investments in a current hypothetical sale using the Waterfall valuation method.
In addition to its internal valuation process, in arriving at estimates of fair value for its investments in its Private Loan portfolio companies, Main Street, among other things, consults with a nationally recognized independent financial advisory services firm. The nationally recognized independent financial advisory services firm analyzes and provides observations and recommendations and an assurance certification regarding the Company’s determinations of the fair value of its Private Loan portfolio company investments. The nationally recognized independent financial advisory services firm is generally consulted relative to Main Street’s investments in each Private Loan portfolio company at least once every calendar year, and for Main Street’s investments in new Private Loan portfolio companies, at least once in the twelve-month period subsequent to the initial investment. In certain instances, Main Street may determine that it is not cost-effective, and as a result is not in its stockholders’ best interest, to consult with the nationally recognized independent financial advisory services firm on its investments in one or more Private Loan portfolio companies. Such instances include, but are not limited to, situations where the fair value of Main Street’s investment in a Private Loan portfolio company is determined to be insignificant relative to the total Investment Portfolio. Main Street consulted with and received an assurance certification from its independent financial advisory services firm in arriving at its determination of fair value on its investments in a total of 31 Private Loan portfolio companies for the nine months ended September 30, 2020, representing approximately 53% of the total Private Loan portfolio at fair value as of September 30, 2020, and on a total of 27 Private Loan portfolio companies for the nine months ended September 30, 2019, representing approximately 51% of the total Private Loan portfolio at fair value as of September 30, 2019. Excluding its investments in Private Loan portfolio companies that, as of September 30, 2020 and 2019, as applicable, had not been in the Investment Portfolio for at least twelve months subsequent to the initial investment and its investments in Private Loan portfolio companies that were not reviewed because the investment is valued based upon third-party quotes or other independent pricing, the percentage of the Private Loan portfolio reviewed and certified by its independent financial advisory services firm for the nine months ended September 30, 2020 and 2019 was 71% and 78% of the total Private Loan portfolio at fair value as of September 30, 2020 and 2019, respectively.
For valuation purposes, all of Main Street’s Other Portfolio investments are non-control investments. Main Street’s Other Portfolio investments comprised 3.9% and 4.1% of Main Street’s Investment Portfolio at fair value as of September 30, 2020 and December 31, 2019, respectively. Similar to the LMM investment portfolio, market quotations
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for Other Portfolio equity investments are generally not readily available. For its Other Portfolio equity investments, Main Street generally determines the fair value of these investments using the NAV valuation method.
For valuation purposes, Main Street’s investment in the External Investment Manager is a control investment. Market quotations are not readily available for this investment, and as a result, Main Street determines the fair value of the External Investment Manager using the Waterfall valuation method under the market approach. In estimating the enterprise value, Main Street analyzes various factors, including the entity’s historical and projected financial results, as well as its size, marketability and performance relative to the population of market comparables. This valuation approach estimates the value of the investment as if Main Street were to sell, or exit, the investment. In addition, Main Street considers its ability to control the capital structure of the company, as well as the timing of a potential exit, in connection with determining the fair value of the External Investment Manager.
Due to the inherent uncertainty in the valuation process, Main Street’s determination of fair value for its Investment Portfolio may differ materially from the values that would have been determined had a ready market for the securities existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. Main Street determines the fair value of each individual investment and records changes in fair value as unrealized appreciation or depreciation.
Main Street uses an internally developed portfolio investment rating system in connection with its investment oversight, portfolio management and analysis and investment valuation procedures for its LMM portfolio companies. This system takes into account both quantitative and qualitative factors of the LMM portfolio company and the investments held therein.
The Board of Directors of Main Street has the final responsibility for overseeing, reviewing and approving, in good faith, Main Street’s determination of the fair value for its Investment Portfolio, as well as its valuation procedures, consistent with 1940 Act requirements. Main Street believes its Investment Portfolio as of September 30, 2020 and December 31, 2019 approximates fair value as of those dates based on the markets in which Main Street operates and other conditions in existence on those reporting dates.
2. Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the period. Actual results may differ from these estimates under different conditions or assumptions. Additionally, as explained in Note B.1., the consolidated financial statements include investments in the Investment Portfolio whose values have been estimated by Main Street with the oversight, review and approval by Main Street’s Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of the Investment Portfolio valuations, those estimated values may differ materially from the values that would have been determined had a ready market for the securities existed.
The COVID-19 pandemic, and the related effect on the U.S. and global economies, has impacted, and threatens to continue to impact, the businesses and operating results of certain of Main Street’s portfolio companies, as well as market interest spreads. As a result of these and other current effects of the COVID-19 pandemic, as well as the uncertainty regarding the extent and duration of its impact, the valuation of Main Street’s Investment Portfolio is volatile.
3. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with an original maturity of three months or less at the date of purchase. Cash and cash equivalents are carried at cost, which approximates fair value.
At September 30, 2020, cash balances totaling $24.1 million exceeded Federal Deposit Insurance Corporation insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash
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deposits are held at large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote.
4. Interest, Dividend and Fee Income
Main Street records interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. In accordance with Main Street’s valuation policies, Main Street evaluates accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if Main Street otherwise does not expect the debtor to be able to service all of its debt or other obligations, Main Street will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, Main Street removes it from non-accrual status.
As of September 30, 2020, Main Street’s total Investment Portfolio had twelve investments on non-accrual status, which comprised approximately 2.6% of its fair value and 7.1% of its cost. As of December 31, 2019, Main Street’s total Investment Portfolio had eight investments on non-accrual status, which comprised approximately 1.4% of its fair value and 4.8% of its cost.
Main Street holds certain debt and preferred equity instruments in its Investment Portfolio that contain payment-in-kind (“PIK”) interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed or sold. To maintain RIC tax treatment (as discussed in Note B.9. below), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though Main Street may not have collected the PIK interest and cumulative dividends in cash. For the three months ended September 30, 2020 and 2019, (i) approximately 3.7% and 1.6%, respectively, of Main Street’s total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.7% and 1.0%, respectively, of Main Street’s total investment income was attributable to cumulative dividend income not paid currently in cash. For the nine months ended September 30, 2020 and 2019, (i) approximately 2.4% and 1.9%, respectively, of Main Street’s total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.9% and 1.1%, respectively, of Main Street’s total investment income was attributable to cumulative dividend income not paid currently in cash. Main Street stops accruing PIK interest and cumulative dividends and writes off any accrued and uncollected interest and dividends in arrears when it determines that such PIK interest and dividends in arrears are no longer collectible.
Main Street may periodically provide services, including structuring and advisory services, to its portfolio companies or other third parties. For services that are separately identifiable and evidence exists to substantiate fair value, fee income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into income over the life of the financing.
A presentation of total investment income Main Street received from its Investment Portfolio in each of the periods presented is as follows:
Interest income
42,138
46,192
128,587
140,732
Dividend income
8,106
12,492
23,942
37,751
Fee income
1,710
1,384
7,580
4,241
Total interest, fee and dividend income
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5. Deferred Financing Costs
Deferred financing costs include commitment fees and other costs related to Main Street’s multi-year revolving credit facility (the “Credit Facility”) and its unsecured notes, as well as the commitment fees and leverage fees (approximately 3.4% of the total commitment and draw amounts, as applicable) on the SBIC debentures, which are not accounted for under the fair value option under ASC 825 (as discussed further in Note B.11.). See further discussion of Main Street’s debt in Note E. Deferred financing costs in connection with the Credit Facility are capitalized as an asset. Deferred financing costs in connection with all other debt arrangements not using the fair value option are a direct deduction from the related debt liability.
6. Equity Offering Costs
The Company’s offering costs are charged against the proceeds from equity offerings when the proceeds are received.
7. Unearned Income—Debt Origination Fees and Original Issue Discount and Discounts / Premiums to Par Value
Main Street capitalizes debt origination fees received in connection with financings and reflects such fees as unearned income netted against the applicable debt investments. The unearned income from the fees is accreted into income based on the effective interest method over the life of the financing.
In connection with its portfolio debt investments, Main Street sometimes receives nominal cost warrants or warrants with an exercise price below the fair value of the underlying equity (together, “nominal cost equity”) that are valued as part of the negotiation process with the particular portfolio company. When Main Street receives nominal cost equity, Main Street allocates its cost basis in its investment between its debt security and its nominal cost equity at the time of origination based on amounts negotiated with the particular portfolio company. The allocated amounts are based upon the fair value of the nominal cost equity, which is then used to determine the allocation of cost to the debt security. Any discount recorded on a debt investment resulting from this allocation is reflected as unearned income, which is netted against the applicable debt investment, and accreted into interest income based on the effective interest method over the life of the debt investment. The actual collection of this interest is deferred until the time of debt principal repayment.
Main Street may also purchase debt securities at a discount or at a premium to the par value of the debt security. In the case of a purchase at a discount, Main Street records the investment at the par value of the debt security net of the discount, and the discount is accreted into interest income based on the effective interest method over the life of the debt investment. In the case of a purchase at a premium, Main Street records the investment at the par value of the debt security plus the premium, and the premium is amortized as a reduction to interest income based on the effective interest method over the life of the debt investment.
To maintain RIC tax treatment (as discussed in Note B.9. below), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though Main Street may not have collected the interest income. For the three months ended September 30, 2020 and 2019, approximately 3.3% and 2.6%, respectively, of Main Street’s total investment income was attributable to interest income from the accretion of discounts associated with debt investments, net of any premium reduction. For the nine months ended September 30, 2020 and 2019, approximately 2.8% and 2.6%, respectively, of Main Street’s total investment income was attributable to interest income from the accretion of discounts associated with debt investments, net of any premium reduction.
8. Share-Based Compensation
Main Street accounts for its share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards, Main Street measures the grant date fair value based upon the market price of its common stock on the date of the grant and amortizes the fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term.
Main Street has also adopted Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) be recognized as income tax expense or benefit in the income statement and not delay recognition of a tax benefit until the tax benefit is realized through a reduction to taxes payable. Accordingly, the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. Additionally, Main Street has elected to account for forfeitures as they occur.
9. Income Taxes
MSCC has elected to be treated for U.S. federal income tax purposes as a RIC. MSCC’s taxable income includes the taxable income generated by MSCC and certain of its subsidiaries, including the Funds, which are treated as disregarded entities for tax purposes. As a RIC, MSCC generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that MSCC distributes to its stockholders. MSCC must generally distribute at least 90% of its “investment company taxable income” (which is generally its net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status (pass-through tax treatment for amounts distributed). As part of maintaining RIC status, undistributed taxable income (subject to a 4% non-deductible U.S. federal excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (i) the filing of the U.S. federal income tax return for the applicable fiscal year or (ii) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
The Taxable Subsidiaries primarily hold certain portfolio investments for Main Street. The Taxable Subsidiaries permit Main Street to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes and to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with Main Street for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in Main Street’s consolidated financial statements as portfolio investments and recorded at fair value. The Taxable Subsidiaries are not consolidated with MSCC for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities, as a result of their ownership of certain portfolio investments. The taxable income, or loss, of the Taxable Subsidiaries may differ from their book income, or loss, due to temporary book and tax timing differences and permanent differences. The Taxable Subsidiaries are each taxed at their normal corporate tax rates based on their taxable income. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the Taxable Subsidiaries are reflected in Main Street’s consolidated financial statements.
The External Investment Manager is an indirect wholly owned subsidiary of MSCC owned through a Taxable Subsidiary and is a disregarded entity for tax purposes. The External Investment Manager has entered into a tax sharing agreement with its Taxable Subsidiary owner. Since the External Investment Manager is accounted for as a portfolio investment of MSCC and is not included as a consolidated subsidiary of MSCC in MSCC’s consolidated financial statements, and as a result of the tax sharing agreement with its Taxable Subsidiary owner, for its stand-alone financial reporting purposes the External Investment Manager is treated as if it is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the External Investment Manager are reflected in the External Investment Manager’s separate financial statements.
The Taxable Subsidiaries and the External Investment Manager use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided, if necessary, against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. Taxable income generally excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
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10. Net Realized Gains or Losses and Net Unrealized Appreciation or Depreciation
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of an investment or a financial instrument and the cost basis of the investment or financial instrument, without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period net of recoveries and realized gains or losses from in-kind redemptions. Net unrealized appreciation or depreciation reflects the net change in the fair value of the Investment Portfolio and financial instruments and the reclassification of any prior period unrealized appreciation or depreciation on exited investments and financial instruments to realized gains or losses.
11. Fair Value of Financial Instruments
Fair value estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Main Street believes that the carrying amounts of its financial instruments, consisting of cash and cash equivalents, receivables, payables and other liabilities approximate the fair values of such items due to the short-term nature of these instruments.
As part of Main Street’s acquisition of the majority of the equity interests of MSC II in January 2010 (the “MSC II Acquisition”), Main Street elected the fair value option under ASC 825, Financial Instruments (“ASC 825”), relating to accounting for debt obligations at their fair value, for the MSC II SBIC debentures acquired as part of the acquisition accounting related to the MSC II Acquisition and valued those obligations as discussed further in Note C. In order to provide for a more consistent basis of presentation, Main Street elected the fair value option for SBIC debentures issued by MSC II subsequent to the MSC II Acquisition. When the fair value option is elected for a given SBIC debenture, the deferred loan costs associated with the debenture are fully expensed in the current period to “Net Unrealized Appreciation (Depreciation)—SBIC debentures” as part of the fair value adjustment. Interest incurred in connection with SBIC debentures which are valued at fair value is included in interest expense.
12. Earnings per Share
Basic and diluted per share calculations are computed utilizing the weighted-average number of shares of common stock outstanding for the period. In accordance with ASC 260, Earnings Per Share, the unvested shares of restricted stock awarded pursuant to Main Street’s equity compensation plans are participating securities and, therefore, are included in the basic earnings per share calculation. As a result, for all periods presented, there is no difference between diluted earnings per share and basic earnings per share amounts.
13. Recently Issued or Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting.” The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and also with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The Company adopted this amendment in March 2020 and plans to apply the amendments in this update to account for contract modifications due to changes in reference rates. The Company continues to evaluate the impact that the amendments in this update will have on its consolidated financial statements and disclosures when applied.
In May 2020, the SEC published Release No. 33-10786 (the “Release”), Amendments to Financial Disclosures about Acquired and Disposed Businesses, announcing its adoption of rules amending Rule 1-02(w)(2) used in the determination of a significant subsidiary specific to investment companies, including BDCs. In part, the rules adopted pursuant to the Release eliminated the use of the asset test, and amended the income and investment tests for determining whether an unconsolidated subsidiary requires additional disclosure in the footnotes of the financial
statements. Main Street adopted the rules adopted pursuant to the Release during the quarter ended June 30, 2020. The impact of the adoption of these rules on Main Street’s consolidated financial statements was not material.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by Main Street as of the specified effective date. Main Street believes that the impact of recently issued standards and any that are not yet effective will not have a material impact on its consolidated financial statements upon adoption.
NOTE C—FAIR VALUE HIERARCHY FOR INVESTMENTS AND DEBENTURES—PORTFOLIO COMPOSITION
ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements. Main Street accounts for its investments at fair value.
Fair Value Hierarchy
In accordance with ASC 820, Main Street has categorized its investments based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical investments (Level 1) and the lowest priority to unobservable inputs (Level 3).
Investments recorded on Main Street’s balance sheet are categorized based on the inputs to the valuation techniques as follows:
Level 1—Investments whose values are based on unadjusted quoted prices for identical assets in an active market that Main Street has the ability to access (examples include investments in active exchange-traded equity securities and investments in most U.S. government and agency securities).
Level 2—Investments whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the investment. Level 2 inputs include the following:
Level 3—Investments whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (for example, investments in illiquid securities issued by privately held companies). These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the investment.
As required by ASC 820, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, unrealized appreciation and depreciation related to such investments categorized within the Level 3 tables below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
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As of September 30, 2020 and December 31, 2019, all of Main Street’s LMM portfolio investments consisted of illiquid securities issued by privately held companies and the fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of Main Street’s LMM portfolio investments were categorized as Level 3 as of September 30, 2020 and December 31, 2019.
As of September 30, 2020 and December 31, 2019, Main Street’s Middle Market portfolio investments consisted primarily of investments in secured and unsecured debt investments and independently rated debt investments. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of Main Street’s Middle Market portfolio investments were categorized as Level 3 as of September 30, 2020 and December 31, 2019.
As of September 30, 2020 and December 31, 2019, Main Street’s Private Loan portfolio investments primarily consisted of investments in interest-bearing secured debt investments. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of Main Street’s Private Loan portfolio investments were categorized as Level 3 as of September 30, 2020 and December 31, 2019.
As of September 30, 2020 and December 31, 2019, Main Street’s Other Portfolio investments consisted of illiquid securities issued by privately held companies and the fair value determination for these investments primarily consisted of unobservable inputs. As a result, all of Main Street’s Other Portfolio investments were categorized as Level 3 as of September 30, 2020 and December 31, 2019.
The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
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The use of significant unobservable inputs creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement of Main Street’s LMM equity securities, which are generally valued through an average of the discounted cash flow technique and the market comparable/enterprise value technique (unless one of these approaches is determined to not be appropriate), are (i) EBITDA multiples and (ii) the weighted-average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. On the contrary, significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of Main Street’s LMM, Middle Market and Private Loan securities are (i) risk adjusted discount rates used in the Yield-to-Maturity valuation technique (see “Note B.1.—Valuation of the Investment Portfolio”) and (ii) the percentage of expected principal recovery. Significant increases (decreases) in any of these discount rates in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of these expected principal recovery percentages in isolation would result in a significantly higher (lower) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the tables below.
The following tables provide a summary of the significant unobservable inputs used to fair value Main Street’s Level 3 portfolio investments as of September 30, 2020 and December 31, 2019:
Fair Value as of
Type of
Significant
Weighted
Investment
(in thousands)
Valuation Technique
Unobservable Inputs
Range(3)
Average(3)
Median(3)
Equity investments
785,433
Discounted cash flow
WACC
9.5% - 20.8%
14.0
%
15.0
Market comparable / Enterprise Value
EBITDA multiple (1)
4.5x - 8.5x(2)
7.0x
6.4x
Debt investments
1,304,901
Risk adjusted discount factor
7.6% - 16.3%(2)
11.3
11.2
Expected principal recovery percentage
0.0% - 100.0%
99.2
100.0
494,311
Market approach
Third‑party quote
30.5 - 101.9
91.8
95.0
Total Level 3 investments
819,749
9.6% - 20.3%
13.6
14.2
4.9x - 8.5x(2)
7.2x
1,212,741
5.9% - 16.5%(2)
10.4
10.0
1.4% - 100.0%
99.3
569,834
28.1 - 101.0
94.7
98.0
The following tables provide a summary of changes in fair value of Main Street’s Level 3 portfolio investments for the nine-month periods ended September 30, 2020 and 2019 (amounts in thousands):
Net
Fair Value
Transfers
Changes
as of
Into
from
Unrealized
Level 3
Redemptions/
New
Appreciation
Hierarchy
Repayments
Investments
to Realized
(Depreciation)
Other(1)
Debt
1,782,575
(299,726)
367,944
49,393
(88,706)
(12,268)
1,799,212
Equity
809,538
(25,304)
50,535
(4,047)
(65,837)
12,268
777,153
Equity Warrant
10,211
1,165
(1,931)
8,280
(326,195)
418,479
46,511
(156,474)
2018
1,686,753
(360,335)
426,068
31,019
(19,559)
(20,289)
1,743,657
755,710
(20,338)
33,705
(13,834)
25,899
22,096
803,238
11,446
1,217
(1,090)
219
(1,807)
10,301
2,453,909
(379,456)
460,089
16,095
6,559
2,557,196
As of December 31, 2019, the fair value determination for the SBIC debentures recorded at fair value primarily consisted of unobservable inputs. As a result, the SBIC debentures which were recorded at fair value were categorized as Level 3. Main Street determined the fair value of these instruments primarily using a Yield-to-Maturity approach that analyzed the discounted cash flows of interest and principal for each SBIC debenture recorded at fair value based on estimated market interest rates for debt instruments of similar structure, terms, and maturity. Main Street’s estimate of the expected repayment date of principal for each SBIC debenture recorded at fair value was the legal maturity date of the instrument. The significant unobservable inputs used in the fair value measurement of Main Street’s SBIC debentures recorded at fair value were the estimated market interest rates used to fair value each debenture using the
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yield valuation technique described above. As of September 30, 2020, all of the SBIC debentures previously accounted for on a fair value basis have been repaid.
The following tables provide a summary of changes for the Level 3 SBIC debentures recorded at fair value for the nine months ended September 30, 2020 and 2019 (amounts in thousands):
Net Realized
New SBIC
(Appreciation)
Loss
Debentures
Depreciation
SBIC debentures at fair value
21,927
(22,000)
533
(460)
44,688
(24,000)
5,689
(4,625)
21,752
The following tables provide a summary of the significant unobservable inputs used to fair value Main Street’s Level 3 SBIC debentures as of December 31, 2019 (amounts in thousands):
Range
Average
Estimated market interest rates
3.2% - 3.5%
3.2
At September 30, 2020 and December 31, 2019, Main Street’s investments and SBIC debentures at fair value were categorized as follows in the fair value hierarchy for ASC 820 purposes:
Fair Value Measurements
Quoted Prices in
Active Markets for
Significant Other
Unobservable
Identical Assets
Observable Inputs
Inputs
At September 30, 2020
(Level 1)
(Level 2)
(Level 3)
LMM portfolio investments
1,228,061
Middle Market portfolio investments
441,293
Private Loan portfolio investments
743,683
Other Portfolio investments
100,528
External Investment Manager
Total investments
At December 31, 2019
1,206,865
522,083
692,117
106,739
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Investment Portfolio Composition
Main Street’s LMM portfolio investments primarily consist of secured debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. Main Street’s LMM portfolio companies generally have annual revenues between $10 million and $150 million, and its LMM investments generally range in size from $5 million to $50 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, can include either fixed or floating rate terms and generally have a term of between five and seven years from the original investment date. In most LMM portfolio investments, Main Street receives nominally priced equity warrants and/or makes direct equity investments in connection with a debt investment.
Main Street’s Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the companies included in Main Street’s LMM portfolio. Main Street’s Middle Market portfolio companies generally have annual revenues between $150 million and $1.5 billion, and its Middle Market investments generally range in size from $3 million to $20 million. Main Street’s Middle Market portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
Main Street’s Private Loan portfolio investments are primarily debt securities in privately held companies that have been originated through strategic relationships with other investment funds on a collaborative basis, and are often referred to in the debt markets as “club deals.” Private Loan investments are typically similar in size, structure, terms and conditions to investments Main Street holds in its LMM portfolio and Middle Market portfolio. Main Street’s Private Loan portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
Main Street’s Other Portfolio investments primarily consist of investments that are not consistent with the typical profiles for its LMM, Middle Market or Private Loan portfolio investments, including investments which may be managed by third parties. In the Other Portfolio, Main Street may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds. For Other Portfolio investments, Main Street generally receives distributions related to the assets held by the portfolio company. Those assets are typically expected to be liquidated over a five to ten-year period.
Main Street’s external asset management business is conducted through its External Investment Manager. The External Investment Manager earns management fees based on the assets of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds managed. Main Street entered into an agreement with the External Investment Manager to share employees in connection with its asset management business generally, and specifically for its relationship with HMS Income Fund, Inc. (“HMS Income”). Through this agreement, Main Street shares employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities. Main Street allocates the related expenses to the External Investment Manager pursuant to the sharing agreement. Main Street’s total expenses for the three months ended September 30, 2020 and 2019 are net of expenses allocated to the External Investment Manager of $1.9 million and $1.7 million, respectively. Main Street’s total expenses for the nine months ended September 30, 2020 and 2019 are net of expenses allocated to the External Investment Manager of $5.3 million and $5.0 million, respectively.
Investment income, consisting of interest, dividends and fees, can fluctuate dramatically due to various factors, including the level of new investment activity, repayments of debt investments or sales of equity interests. Investment income in any given year could also be highly concentrated among several portfolio companies. For the three and nine months ended September 30, 2020 and 2019, Main Street did not record investment income from any single portfolio company in excess of 10% of total investment income.
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The following tables provide a summary of Main Street’s investments in the LMM, Middle Market and Private Loan portfolios as of September 30, 2020 and December 31, 2019 (this information excludes the Other Portfolio investments and the External Investment Manager which are discussed further below):
As of September 30, 2020
LMM (a)
Middle Market
Private Loan
(dollars in millions)
Number of portfolio companies
Fair value
1,228.1
441.3
743.7
Cost
1,063.6
515.5
823.0
% of portfolio at cost - debt
66.2
94.4
93.8
% of portfolio at cost - equity
33.8
5.6
6.2
% of debt investments at cost secured by first priority lien
97.1
92.3
95.8
Weighted-average annual effective yield (b)
11.6
7.9
8.6
Average EBITDA (c)
5.0
110.5
54.2
As of December 31, 2019
1,206.9
522.1
692.1
1,002.2
572.3
734.8
65.9
94.8
94.6
34.1
5.2
5.4
98.1
91.3
95.4
11.8
9.5
5.1
85.0
57.8
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As of September 30, 2020, Main Street had Other Portfolio investments in twelve companies, collectively totaling approximately $100.5 million in fair value and approximately $126.2 million in cost basis and which comprised approximately 3.9% of Main Street’s Investment Portfolio at fair value. As of December 31, 2019, Main Street had Other Portfolio investments in eleven companies, collectively totaling approximately $106.7 million in fair value and approximately $118.4 million in cost basis and which comprised approximately 4.1% of Main Street’s Investment Portfolio at fair value.
As discussed further in Note A.1., Main Street holds an investment in the External Investment Manager, a wholly owned subsidiary that is treated as a portfolio investment. As of September 30, 2020, there was no cost basis in this investment and the investment had a fair value of approximately $71.1 million, which comprised approximately 2.8% of Main Street’s Investment Portfolio at fair value. As of December 31, 2019, there was no cost basis in this investment and the investment had a fair value of approximately $74.5 million, which comprised approximately 2.9% of Main Street’s Investment Portfolio at fair value.
The following tables summarize the composition of Main Street’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of September 30, 2020 and December 31, 2019 (this information excludes the Other Portfolio investments and the External Investment Manager).
Cost:
First lien debt
77.9
78.2
17.8
17.2
Second lien debt
3.0
3.5
Equity warrants
0.5
0.6
Other
0.8
Fair Value:
71.0
70.1
25.1
26.0
2.8
0.3
0.4
The following tables summarize the composition of Main Street’s total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments by geographic region of the United States and other countries at cost and fair value as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of September 30, 2020 and December 31, 2019
(this information excludes the Other Portfolio investments and the External Investment Manager). The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
Southwest
25.0
West
21.0
24.6
Midwest
19.4
20.6
Northeast
18.8
14.8
Southeast
13.3
13.2
Canada
1.1
1.2
Other Non-United States
26.6
26.7
21.5
19.7
18.5
14.4
12.3
1.0
Main Street’s LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments are in companies conducting business in a variety of industries. The following tables summarize the composition of Main Street’s total combined LMM portfolio investments, Middle Market portfolio investments and
Private Loan portfolio investments by industry at cost and fair value as of September 30, 2020 and December 31, 2019 (this information excludes the Other Portfolio investments and the External Investment Manager).
Machinery
7.1
7.7
Construction & Engineering
5.8
Aerospace & Defense
4.9
Health Care Providers & Services
5.3
4.5
Internet Software & Services
4.1
Commercial Services & Supplies
6.1
Professional Services
4.8
2.9
Energy Equipment & Services
4.7
Media
3.9
IT Services
4.6
Leisure Equipment & Products
3.8
Hotels, Restaurants & Leisure
3.7
Diversified Telecommunication Services
Software
3.4
2.4
Electronic Equipment, Instruments & Components
Communications Equipment
3.1
Oil, Gas & Consumable Fuels
3.6
Specialty Retail
Food Products
Distributors
2.3
Diversified Financial Services
2.2
1.9
Containers & Packaging
1.6
1.7
Computers & Peripherals
1.4
Trading Companies & Distributors
0.0
Diversified Consumer Services
Transportation Infrastructure
Food & Staples Retailing
Chemicals
0.9
Building Products
1.3
Road & Rail
Construction Materials
Other (1)
4.3
9.2
9.9
6.5
5.5
2.7
3.3
2.6
2.5
2.1
1.8
0.7
1.5
At September 30, 2020 and December 31, 2019, Main Street had no portfolio investment that was greater than 10% of the Investment Portfolio at fair value.
Unconsolidated Significant Subsidiaries
In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, Main Street must determine which of its unconsolidated controlled portfolio companies, if any, are considered “significant subsidiaries.” On May 20, 2020, the SEC published in Release No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, amendments to Rule 1-02(w)(2) of Regulation S-X used in the determination of a significant subsidiary specific to investment companies, including BDCs. The amendments become effective on January 1, 2021, but the SEC allowed for early application. Main Street elected to apply these revisions effective June 30, 2020. In evaluating its unconsolidated controlled portfolio companies in accordance with the revised rules, there are two tests that Main Street must utilize to determine if any of Main Street’s Control Investments (as defined in Note A, including those unconsolidated portfolio companies defined as Control Investments in which Main Street does not own greater than 50% of the voting securities or maintain greater than 50% of the board representation) are considered significant subsidiaries: the investment test and the income test. The investment test is generally measured by dividing Main Street’s investment in the Control Investment by the value of Main Street’s total assets. The income test is measured by dividing the absolute value of the combined total of total investment income, net realized gain (loss) and net unrealized appreciation (depreciation) from the relevant Control Investment for the period being tested by the absolute value of Main Street’s
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change in net assets resulting from operations for the same period. Rules 3-09 and 4-08(g) of Regulation S-X, as interpreted by the SEC, require Main Street to include (1) separate audited financial statements of an unconsolidated majority-owned subsidiary (Control Investments in which Main Street owns greater than 50% of the voting securities) in an annual report and (2) summarized financial information of a Control Investment in a quarterly report, respectively, if certain thresholds of the investment or income tests are exceeded and the unconsolidated portfolio company qualifies as a significant subsidiary.
As of September 30, 2020 and December 31, 2019, Main Street had no single investment that qualified as a significant subsidiary under either the investment or income tests.
NOTE D—EXTERNAL INVESTMENT MANAGER
As discussed further in Note A.1., the External Investment Manager provides investment management and other services to External Parties. The External Investment Manager is accounted for as a portfolio investment of MSCC since the External Investment Manager conducts all of its investment management activities for External Parties.
During May 2012, Main Street entered into an investment sub-advisory agreement with HMS Adviser, LP (“HMS Adviser”), which is the investment advisor to HMS Income, a non-listed BDC, to provide certain investment advisory services to HMS Adviser. In December 2013, after obtaining required no-action relief from the SEC to allow it to own a registered investment adviser, Main Street assigned the sub-advisory agreement to the External Investment Manager since the fees received from such arrangement could otherwise have negative consequences on MSCC’s ability to meet the source-of-income requirement necessary for it to maintain its RIC tax treatment. Under the investment sub-advisory agreement, the External Investment Manager is entitled to 50% of the base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with HMS Income. During the three months ended September 30, 2020 and 2019, the External Investment Manager earned $2.3 million and $2.7 million, respectively, in base management fee income. No incentive fee income was earned in the three months ended September 30, 2020 compared to $0.2 million earned in the three months ended September 30, 2019. During the nine months ended September 30, 2020, the External Investment Manager earned $7.2 million in base management fee income and no incentive fees compared to $8.4 million of base management fees and $1.6 million in incentive fees for the comparable period in 2019 under the sub-advisory agreement with HMS Adviser.
The investment in the External Investment Manager is accounted for using fair value accounting, with the fair value determined by Main Street and approved, in good faith, by Main Street’s Board of Directors. Main Street determines the fair value of the External Investment Manager using the Waterfall valuation method under the market approach (see further discussion in Note B.1.). Any change in fair value of the investment in the External Investment Manager is recognized on Main Street’s consolidated statements of operations in “Net Unrealized Appreciation (Depreciation)—Control investments.”
The External Investment Manager is an indirect wholly owned subsidiary of MSCC owned through a Taxable Subsidiary and is a disregarded entity for tax purposes. The External Investment Manager has entered into a tax sharing agreement with its Taxable Subsidiary owner. Since the External Investment Manager is accounted for as a portfolio investment of MSCC and is not included as a consolidated subsidiary of MSCC in MSCC’s consolidated financial statements, and as a result of the tax sharing agreement with its Taxable Subsidiary owner, for financial reporting purposes the External Investment Manager is treated as if it is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit. Main Street owns the External Investment Manager through the Taxable Subsidiary to allow MSCC to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The taxable income, or loss, of the External Investment Manager may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. As a result of the above described financial reporting and tax treatment, the External Investment Manager provides for any income tax expense, or benefit, and any tax assets or liabilities in its separate financial statements.
Main Street shares employees with the External Investment Manager and allocates costs related to such shared employees to the External Investment Manager generally based on a combination of the direct time spent, new investment origination activity and assets under management, depending on the nature of the expense. For the three months ended September 30, 2020 and 2019, Main Street allocated $1.9 million and $1.7 million of total expenses, respectively, to the External Investment Manager. For each of the nine months ended September 30, 2020 and 2019,
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Main Street allocated $5.3 million and $5.0 million of total expenses, respectively, to the External Investment Manager. The total contribution of the External Investment Manager to Main Street’s net investment income consists of the combination of the expenses allocated to the External Investment Manager and the dividend income earned from the External Investment Manager. For the three months ended September 30, 2020 and 2019, the total contribution to Main Street’s net investment income was $2.2 million and $2.6 million, respectively. For the nine months ended September 30, 2020 and 2019, the total contribution to Main Street’s net investment income was $6.7 million and $8.9 million, respectively.
Summarized financial information from the separate financial statements of the External Investment Manager as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 is as follows:
As of
Cash
Accounts receivable—HMS Income
2,361
2,708
Accounts payable to MSCC and its subsidiaries
2,023
1,592
Dividend payable to MSCC and its subsidiaries
338
1,116
Total liabilities and equity
Management fee income
2,338
Incentive fees
178
1,552
Total revenues
2,928
9,979
Expenses allocated from MSCC or its subsidiaries:
Salaries, share‑based compensation and other personnel costs
(1,206)
(1,118)
(3,393)
(3,294)
Other G&A expenses
(686)
(533)
(1,947)
(1,707)
Total allocated expenses
(1,892)
(1,651)
(5,340)
(5,001)
Pre‑tax income
446
1,277
1,820
4,978
Tax expense
(108)
(286)
(426)
(1,106)
Net income
991
1,394
3,872
NOTE E—DEBT
SBIC Debentures
Under existing SBIC regulations, SBA-approved SBICs under common control have the ability to issue debentures guaranteed by the SBA up to a regulatory maximum amount of $350.0 million. Main Street’s SBIC debentures payable, under existing SBA-approved commitments, were $304.8 million and $311.8 million at September 30, 2020 and December 31, 2019, respectively. SBIC debentures provide for interest to be paid semiannually, with principal due at the applicable 10-year maturity date of each debenture. During the nine months ended September 30, 2020, Main Street issued $35.0 million of SBIC debentures and opportunistically prepaid the remaining $42.0 million of existing MSC II SBIC debentures. As a result of this prepayment, Main Street recognized a realized loss of $0.5 million, due primarily to the write-off of the related unamortized deferred financing costs. Main Street expects to issue new SBIC debentures under the SBIC program in the future in an amount up to the regulatory maximum amount for affiliated SBIC funds. The weighted-average annual interest rate on the SBIC debentures was 3.4% and 3.6% as of September 30, 2020 and December 31, 2019, respectively. The first principal maturity due under the existing SBIC debentures is in 2021, and the weighted-average remaining duration as of September 30, 2020 was approximately 5.5 years. For the three months ended September 30, 2020 and 2019, Main Street recognized interest expense, including the amortization of upfront leverage and other miscellaneous fees, attributable to the SBIC debentures of $3.0 million and $3.2 million,
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respectively. For the nine months ended September 30, 2020 and 2019, Main Street recognized interest expense, including the amortization of upfront leverage and other miscellaneous fees, attributable to the SBIC debentures of $9.0 million and $9.7 million, respectively. In accordance with SBIC regulations, the Funds are precluded from incurring additional non-SBIC debt without the prior approval of the SBA.
As of September 30, 2020, the recorded value of the SBIC debentures was $298.8 million, which consisted of (i) $129.8 million par value of SBIC debentures outstanding issued by MSMF, with a recorded value of $128.3 million that was net of unamortized debt issuance costs of $1.5 million and (ii) $175.0 million par value of SBIC debentures issued by MSC III with a recorded value of $170.6 million that was net of unamortized debt issuance costs of $4.4 million. As of September 30, 2020, if Main Street had adopted the fair value option under ASC 825 for its SBIC debentures, Main Street estimates the fair value of its SBIC debentures would be approximately $289.3 million, or $15.5 million less than the $304.8 million face value of the SBIC debentures.
Credit Facility
Main Street maintains the Credit Facility to provide additional liquidity to support its investment and operational activities. The Credit Facility includes total commitments of $740.0 million from a diversified group of 18 lenders. The Credit Facility matures in September 2023 and contains an accordion feature which allows Main Street to increase the total commitments under the facility to up to $800.0 million from new and existing lenders on the same terms and conditions as the existing commitments. See Note M for discussion of the increase in total commitments under the Credit Facility subsequent to September 30, 2020.
Borrowings under the Credit Facility bear interest, subject to Main Street’s election and resetting on a monthly basis on the first of each month, on a per annum basis at a rate equal to the applicable LIBOR rate (0.1% as of September 30, 2020) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.25% as of September 30, 2020) plus 0.875%) as long as Main Street meets certain agreed upon excess collateral and maximum leverage requirements or (ii) 2.0% (or the applicable base rate plus 1.0%) otherwise. Main Street pays unused commitment fees of 0.25% per annum on the unused lender commitments under the Credit Facility. The Credit Facility is secured by a first lien on the assets of MSCC and its subsidiaries, excluding the equity ownership or assets of the Funds and the External Investment Manager. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum availability of at least 10% of the borrowing base, (ii) maintaining an interest coverage ratio of at least 2.0 to 1.0, (iii) maintaining an asset coverage ratio (tangible net worth to Credit Facility borrowings) of at least 1.5 to 1.0 and (iv) maintaining a minimum tangible net worth. The Credit Facility is provided on a revolving basis through its final maturity date in September 2023, and contains two, one-year extension options which could extend the final maturity by up to two years, subject to certain conditions, including lender approval.
At September 30, 2020, Main Street had $253.0 million in borrowings outstanding under the Credit Facility. As of September 30, 2020, if Main Street had adopted the fair value option under ASC 825 for its Credit Facility, Main Street estimates its fair value would approximate its recorded value. Main Street recognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferred issuance costs, of $1.9 million for each of the three months ended September 30, 2020 and 2019, and $7.3 million and $8.3 million for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, the interest rate on the Credit Facility was 2.0% (based on the LIBOR rate of 0.2% as of the most recent reset date plus 1.875%). The average interest rate for borrowings under the Credit Facility was 2.0% and 4.1% for the three months ended September 30, 2020 and 2019, respectively, and 2.7% and 4.3%, for the nine months ended September, 2020 and 2019, respectively. As of September 30, 2020, Main Street was in compliance with all financial covenants of the Credit Facility.
4.50% Notes due 2019
In November 2014, Main Street issued $175.0 million in aggregate principal amount of 4.50% unsecured notes due 2019 (the “4.50% Notes due 2019”) at an issue price of 99.53%. The 4.50% Notes due 2019 bore interest at a rate of 4.50% per year payable semiannually on June 1 and December 1 of each year. On December 2, 2019, Main Street repaid the entire principal amount of the issued and outstanding 4.50% Notes due 2019, effective December 1, 2019 (the “Maturity Date”), at par value plus the accrued and unpaid interest thereon from June 1, 2019 through the Maturity Date. Main Street recognized no interest expense related to the 4.50% Notes due 2019, including amortization of unamortized
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deferred issuance costs, for the three and nine months ended September 30, 2020 and $2.1 million and $6.4 million for the three and nine months ended September 30, 2019, respectively.
4.50% Notes due 2022
In November 2017, Main Street issued $185.0 million in aggregate principal amount of 4.50% unsecured notes due December 1, 2022 (the “4.50% Notes due 2022”) at an issue price of 99.16%. The 4.50% Notes due 2022 are unsecured obligations and rank pari passu with Main Street’s current and future unsecured indebtedness; senior to any of its future indebtedness that expressly provides it is subordinated to the 4.50% Notes due 2022; effectively subordinated to all of its existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including borrowings under its Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any of its subsidiaries, including without limitation, the indebtedness of the Funds. The 4.50% Notes due 2022 may be redeemed in whole or in part at any time at Main Street’s option subject to certain make-whole provisions. The 4.50% Notes due 2022 bear interest at a rate of 4.50% per year payable semiannually on June 1 and December 1 of each year. The total net proceeds from the 4.50% Notes due 2022, resulting from the issue price and after underwriting discounts and estimated offering expenses payable, were approximately $182.2 million. Main Street may from time to time repurchase the 4.50% Notes due 2022 in accordance with the 1940 Act and the rules promulgated thereunder. As of September 30, 2020, the outstanding balance of the 4.50% Notes due 2022 was $185.0 million and the recorded value of $183.7 million was net of unamortized debt issuance costs of $1.3 million. As of September 30, 2020, if Main Street had adopted the fair value option under ASC 825 for the 4.50% Notes due 2022, Main Street estimates its fair value would be approximately $192.1 million. Main Street recognized interest expense related to the 4.50% Notes due 2022, including amortization of unamortized deferred issuance costs, of $2.2 million for each of the three months ended September 30, 2020 and 2019 and $6.7 million for each of the nine months ended September 30, 2020 and 2019.
The indenture governing the 4.50% Notes due 2022 (the “4.50% Notes Indenture”) contains certain covenants, including covenants requiring Main Street’s compliance with (regardless of whether Main Street is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring Main Street to provide financial information to the holders of the 4.50% Notes due 2022 and the Trustee if Main Street ceases to be subject to the reporting requirements of the Exchange Act. These covenants are subject to limitations and exceptions that are described in the 4.50% Notes Indenture. As of September 30, 2020, Main Street was in compliance with these covenants.
5.20% Notes
In April 2019, Main Street issued $250.0 million in aggregate principal amount of 5.20% unsecured notes due May 1, 2024 (the “5.20% Notes”) at an issue price of 99.125%. Subsequently, in December 2019, Main Street issued an additional $75.0 million of the 5.20% Notes at an issue price of 105.0% and, in July 2020, Main Street issued an additional $125.0 million aggregate principal amount at an issue price of 102.674%. The 5.20% Notes issued in December 2019 and July 2020 have identical terms as, and are a part of a single series with, the 5.20% Notes issued in April 2019. The 5.20% Notes are unsecured obligations and rank pari passu with Main Street’s current and future unsecured indebtedness; senior to any of its future indebtedness that expressly provides it is subordinated to the 5.20% Notes; effectively subordinated to all of its existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including borrowings under its Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any of its subsidiaries, including without limitation, the indebtedness of the Funds. The 5.20% Notes may be redeemed in whole or in part at any time at Main Street’s option subject to certain make-whole provisions. The 5.20% Notes bear interest at a rate of 5.20% per year payable semiannually on May 1 and November 1 of each year. The total net proceeds from the 5.20% Notes, resulting from the issue price and after net underwriting premiums and estimated offering expenses payable, were approximately $451.4 million. Main Street may from time to time repurchase the 5.20% Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of September 30, 2020, the outstanding balance of the 5.20% Notes was $450.0 million and the recorded value of $452.0 million was net of unamortized debt issuance premium of $2.0 million. As of September 30, 2020, if Main Street had adopted the fair value option under ASC 825 for the 5.20% Notes, Main Street estimates its fair value would be approximately $474.2 million. Main Street recognized interest expense related to the 5.20% Notes, including amortization of unamortized deferred issuance costs, of $5.3 million and $3.5 million for the
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three months ended September 30, 2020 and 2019, respectively, and $13.8 million and $6.1 million for the nine months ended September 30, 2020 and 2019, respectively.
The indenture governing the 5.20% Notes (the “5.20% Notes Indenture”) contains certain covenants, including covenants requiring Main Street’s compliance with (regardless of whether Main Street is subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring Main Street to provide financial information to the holders of the 5.20% Notes and the Trustee if Main Street ceases to be subject to the reporting requirements of the Exchange Act. These covenants are subject to limitations and exceptions that are described in the 5.20% Notes Indenture. As of September 30, 2020, Main Street was in compliance with these covenants.
NOTE F—FINANCIAL HIGHLIGHTS
Nine Months Ended September 30,
Per Share Data:
NAV at the beginning of the period
24.09
Net investment income(1)
Net realized loss(1)(2)
(0.69)
(0.32)
Net unrealized appreciation (depreciation)(1)(2)
(1.80)
0.28
Income tax benefit (provision)(1)(2)
0.23
(0.03)
Net increase (decrease) in net assets resulting from operations(1)
(1.85)
(2.05)
Impact of the net change in monthly dividends declared prior to the end of the period and paid in the subsequent period
(0.01)
Accretive effect of stock offerings (issuing shares above NAV per share)
0.21
0.31
Accretive effect of DRIP issuance (issuing shares above NAV per share)
0.07
0.08
Other(3)
(0.06)
NAV at the end of the period
24.20
Market value at the end of the period
29.57
43.21
Shares outstanding at the end of the period
NAV at end of period
Average NAV
1,416,672
1,512,921
Average outstanding debt
1,136,300
1,033,400
Ratio of total expenses, including income tax expense, to average NAV(1)(2)
3.36
4.43
Ratio of operating expenses to average NAV(2)(3)
4.36
4.27
Ratio of operating expenses, excluding interest expense, to average NAV(2)(3)
1.76
1.82
Ratio of net investment income to average NAV(2)
6.94
7.81
Portfolio turnover ratio(2)
10.96
14.44
Total investment return(2)(4)
(27.31)
34.48
Total return based on change in NAV(2)(5)
(3.25)
7.69
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NOTE G—DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
Main Street paid regular monthly dividends of $0.205 per share for each month of January through September 2020, totaling $40.6 million, or $0.615 per share, for the three months ended September 30, 2020, and $120.2 million, or $1.845 per share, for the nine months ended September 30, 2020 compared to regular monthly dividends of approximately $38.9 million, or $0.615 per share, for the three months ended September 30, 2019, and $112.5 million, or $1.800 per share, for the nine months ended September 30, 2019. Additionally, Main Street paid a $0.250 per share semi-annual supplemental dividend, totaling $15.8 million, in June 2019. Total dividends paid for the nine months ended September 30, 2020 and 2019 equaled $1.845 and $2.050 per share, respectively.
MSCC has elected to be treated for U.S. federal income tax purposes as a RIC. MSCC’s taxable income includes the taxable income generated by MSCC and certain of its subsidiaries, including the Funds, which are treated as disregarded entities for tax purposes. As a RIC, MSCC generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that MSCC distributes to its stockholders. MSCC must generally distribute at least 90% of its “investment company taxable income” (which is generally its net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status (pass-through tax treatment for amounts distributed). As part of maintaining RIC status, undistributed taxable income (subject to a 4% non-deductible U.S. federal excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (i) filing of the U.S. federal income tax return for the applicable fiscal year or (ii) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
The determination of the tax attributes for Main Street’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Therefore, a determination made on an interim basis may not be representative of the actual tax attributes of distributions for a full year. Ordinary dividend distributions from a RIC do not qualify for the 20% maximum tax rate (plus a 3.8% Medicare surtax, if applicable) on dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income and qualified dividends, but may also include either one or both of capital gains and return of capital.
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Listed below is a reconciliation of “Net increase (decrease) in net assets resulting from operations” to taxable income and to total distributions declared to common stockholders for the nine months ended September 30, 2020 and 2019.
Nine months ended
(estimated, dollars in thousands)
Book‑tax difference from share‑based compensation expense
2,710
(1,690)
Income tax provision (benefit)
(14,253)
2,491
Pre-tax book (income) loss not consolidated for tax purposes
2,413
(21,117)
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates
53,521
47,866
Estimated taxable income(1)
112,087
123,326
Taxable income earned in prior year and carried forward for distribution in current year
29,107
41,489
Taxable income earned prior to period end and carried forward for distribution next period
(34,189)
(48,462)
Dividend payable as of period end and paid in the following period
12,975
Total distributions accrued or paid to common stockholders
120,559
129,328
The income tax provision (benefit) for Main Street is generally composed of (i) deferred tax expense (benefit), which is primarily the result of the net activity relating to the portfolio investments held in the Taxable Subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation or depreciation and other temporary book tax differences, and (ii) current tax expense, which is primarily the result of current U.S. federal income and state taxes and excise taxes on Main Street’s estimated undistributed taxable income. For the three months ended September 30, 2020, Main Street recognized a net income tax provision of $1.5 million, principally consisting of a $1.2 million current tax provision, which is primarily related to a $0.8 million provision for current U.S. federal income and state taxes and a $0.4 million provision for excise taxes, as well as a deferred tax provision of $0.3 million. For the nine months ended September 30, 2020, Main Street recognized a net income tax benefit of $14.3 million, principally consisting of a deferred tax benefit of $15.7 million, partially offset by a $1.4 million current tax expense, which is primarily related to a $1.1 million provision for excise taxes and $0.3 million provision for current U.S. federal income and state taxes. For the three months ended September 30, 2019, Main Street recognized a net income tax benefit of $4.0 million, principally consisting of a deferred tax benefit of $5.1 million partially offset by a $1.1 million current tax expense, which is primarily related to current U.S. federal income and state taxes and excise taxes. For the nine months ended September 30, 2019, Main Street recognized a net income tax provision of $2.5 million, principally consisting of a $2.7 million current tax expense primarily related to a $2.0 million provision for current U.S. federal income and state taxes and a $0.7 million accrual for excise taxes, partially offset by a deferred tax benefit of $0.3 million.
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The net deferred tax liability at September 30, 2020 was $0.7 million compared to $16.1 million at December 31, 2019, primarily related to changes in net unrealized appreciation or depreciation, changes in loss carryforwards, and other temporary book-tax differences relating to portfolio investments held by the Taxable Subsidiaries. At September 30, 2020, for U.S. federal income tax purposes, the Taxable Subsidiaries had a net operating loss carryforward from prior years which, if unused, will expire in various taxable years from 2030 through 2037. Any net operating losses generated in 2019 and future periods are not subject to expiration and will carryforward indefinitely until utilized. The timing and manner in which Main Street will utilize any loss carryforwards generated before December 31, 2019 may be limited in the future under the provisions of the Code. Additionally, the Taxable Subsidiaries have interest expense limitation carryforwards which have an indefinite carryforward.
NOTE H—COMMON STOCK
Main Street maintains a program with certain selling agents through which it can sell shares of its common stock by means of at-the-market offerings from time to time (the “ATM Program”). During the nine months ended September 30, 2020, Main Street sold 1,154,937 shares of its common stock at a weighted-average price of $32.67 per share and raised $37.7 million of gross proceeds under the ATM Program. Net proceeds were $37.2 million after commissions to the selling agents on shares sold and offering costs. As of September 30, 2020, sales transactions representing 2,603 shares had not settled and are not included in shares issued and outstanding on the face of the consolidated balance sheet, but are included in the weighted-average shares outstanding in the consolidated statement of operations and in the shares used to calculate net asset value per share. As of September 30, 2020, 7,204,213 shares remained available for sale under the ATM Program.
During the year ended December 31, 2019, Main Street sold 2,247,187 shares of its common stock at a weighted-average price of $40.05 per share and raised $90.0 million of gross proceeds under the ATM Program. Net proceeds were $88.8 million after commissions to the selling agents on shares sold and offering costs.
NOTE I—DIVIDEND REINVESTMENT PLAN (“DRIP”)
Main Street’s DRIP provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if Main Street declares a cash dividend, its stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividend automatically reinvested into additional shares of MSCC common stock. The share requirements of the DRIP may be satisfied through the issuance of shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares will be valued based upon the final closing price of MSCC’s common stock on the valuation date determined for each dividend by Main Street’s Board of Directors. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased, before any associated brokerage or other costs. Main Street’s DRIP is administered by its transfer agent on behalf of Main Street’s record holders and participating brokerage firms. Brokerage firms and other financial intermediaries may decide not to participate in Main Street’s DRIP but may provide a similar dividend reinvestment plan for their clients.
For the nine months ended September 30, 2020, $12.2 million of the total $120.2 million in dividends paid to stockholders represented DRIP participation. During this period, the DRIP participation requirements were satisfied with the issuance of 387,534 newly issued shares. For the nine months ended September 30, 2019, $12.7 million of the total $128.3 million in dividends paid to stockholders represented DRIP participation. During this period, the DRIP participation requirements were satisfied with the issuance of 317,369 newly issued shares. The shares disclosed above relate only to Main Street’s DRIP and exclude any activity related to broker-managed dividend reinvestment plans.
NOTE J—SHARE-BASED COMPENSATION
Main Street accounts for its share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards, Main Street measured the grant date fair value based upon the market price of its common stock on the date of the grant and amortizes the fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term.
79
Main Street’s Board of Directors approves the issuance of shares of restricted stock to Main Street employees pursuant to the Main Street Capital Corporation 2015 Equity and Incentive Plan (the “Equity and Incentive Plan”). These shares generally vest over a three-year period from the grant date. The fair value is expensed over the service period, starting on the grant date. The following table summarizes the restricted stock issuances approved by Main Street’s Board of Directors under the Equity and Incentive Plan, net of shares forfeited, if any, and the remaining shares of restricted stock available for issuance as of September 30, 2020.
Restricted stock authorized under the plan
3,000,000
Less net restricted stock granted during:
Year ended December 31, 2015
(900)
Year ended December 31, 2016
(260,514)
Year ended December 31, 2017
(223,812)
Year ended December 31, 2018
(243,779)
Year ended December 31, 2019
(384,049)
Nine months ended September 30, 2020
(369,840)
Restricted stock available for issuance as of September 30, 2020
1,517,106
As of September 30, 2020, the following table summarizes the restricted stock issued to Main Street’s non-employee directors and the remaining shares of restricted stock available for issuance pursuant to the Main Street Capital Corporation 2015 Non-Employee Director Restricted Stock Plan. These shares are granted upon appointment or election to the board and vest on the day immediately preceding the annual meeting of stockholders following the respective grant date and are expensed over such service period.
(6,806)
(6,748)
(5,948)
(6,376)
(6,008)
(11,463)
256,651
For each of the three months ended September 30, 2020 and 2019, Main Street recognized total share-based compensation expense of $2.6 million related to the restricted stock issued to Main Street employees and non-employee directors. For the nine months ended September 30, 2020 and 2019, Main Street recognized total share-based compensation expense of $8.2 million and $7.3 million, respectively, related to the restricted stock issued to Main Street employees and non-employee directors.
As of September 30, 2020, there was $14.7 million of total unrecognized compensation expense related to Main Street’s non-vested restricted shares. This compensation expense is expected to be recognized over a remaining weighted-average period of approximately 2.0 years as of September 30, 2020.
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NOTE K—COMMITMENTS AND CONTINGENCIES
At September 30, 2020, Main Street had the following outstanding commitments (in thousands):
Investments with equity capital commitments that have not yet funded:
Amount
Congruent Credit Opportunities Funds
Congruent Credit Opportunities Fund II, LP
8,488
Congruent Credit Opportunities Fund III, LP
8,117
16,605
Encap Energy Fund Investments
EnCap Energy Capital Fund VIII, L.P.
EnCap Energy Capital Fund IX, L.P.
250
EnCap Energy Capital Fund X, L.P.
1,437
EnCap Flatrock Midstream Fund II, L.P.
4,592
EnCap Flatrock Midstream Fund III, L.P.
402
6,705
EIG Fund Investments
3,735
Brightwood Capital Fund Investments
Brightwood Capital Fund III, LP
Brightwood Capital Fund IV, LP
3,250
Freeport Fund Investments
Freeport Financial SBIC Fund LP
1,375
Freeport First Lien Loan Fund III LP
1,715
3,090
LKCM Headwater Investments I, L.P.
UnionRock Energy Fund II, LP
2,248
Harris Preston Fund Investments
HPEP 3, L.P.
1,929
Dos Rios Partners
Dos Rios Partners, LP
835
Dos Rios Partners - A, LP
265
1,100
Access Media Holdings, LLC
284
Total equity commitments
41,446
Investments with commitments to fund revolving loans that have not been fully drawn or term loans with additional commitments not yet funded:
Adams Publishing Group, LLC
Fortna, Inc.
4,730
4,100
Classic H&G Holdco, LLC
Electronic Transaction Consultants, LLC
3,704
Bluestem Brands, Inc.
GS HVAM Intermediate, LLC
3,409
Ian, Evan & Alexander Corporation (EverWatch)
3,333
Hunter Defense Technologies, Inc.
3,230
RTIC Subsidiary Holdings, LLC
Echo US Holdings, LLC.
2,586
Lynx FBO Operating LLC
1,875
1,600
GRT Rubber Technologies LLC
1,340
Project Eagle Holdings, LLC
Gamber-Johnson Holdings, LLC
LL Management, Inc.(Lab Logistics)
1,182
Invincible Boat Company, LLC.
Hawk Ridge Systems, LLC
1,016
CTVSH, PLLC
DTE Enterprises RLOC
NinjaTrader, LLC
Mac Lean-Fogg Company
735
PT Network, LLC
Wireless Vision Holdings, LLC
592
560
Coastal Television Broadcasting Holdings LLC
American Nuts, LLC
281
Dynamic Communities, LLC
Arcus Hunting LLC
241
Total loan commitments
83,592
Total commitments
125,038
Main Street will fund its unfunded commitments from the same sources it uses to fund its investment commitments that are funded at the time they are made (which are typically through existing cash and cash equivalents and borrowings under the Credit Facility). Main Street follows a process to manage its liquidity and ensure that it has
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available capital to fund its unfunded commitments as necessary. The Company had total unrealized depreciation of $0.5 million on the outstanding unfunded commitments as of September 30, 2020.
Effective January 1, 2019, ASC 842 required that a lessee evaluate its leases to determine whether they should be classified as operating or financing leases. Main Street identified one operating lease for its office space. The lease commenced May 15, 2017 and expires January 31, 2028. It contains two five-year extension options for a final expiration date of January 31, 2038.
As Main Street classified this lease as an operating lease prior to implementation, ASC 842-10-65-1 indicates that a right-of-use asset and lease liability should be recorded based on the effective date. Main Street adopted ASC 842 effective January 1, 2019 and recorded a right-of-use asset and a lease liability as of that date. After this date, Main Street has recorded lease expense on a straight-line basis, consistent with the accounting treatment for lease expense prior to the adoption of ASC 842.
Total operating lease cost incurred by Main Street for each of the three months ended September 30, 2020 and 2019 was $0.2 million. Total operating lease cost incurred by Main Street for each of the nine months ended September 30, 2020 and 2019 was $0.5 million. As of September 30, 2020, the asset related to the operating lease was $4.4 million and is included in the interest receivable and other assets balance on the consolidated balance sheet. The lease liability was $5.1 million and is included in the accounts payable and other liabilities balance on the consolidated balance sheet. As of September 30, 2020, the remaining lease term was 7.3 years and the discount rate was 4.2%.
The following table shows future minimum payments under Main Street’s operating lease as of September 30, 2020 (in thousands):
For the Years Ended December 31,
191
2021
2022
2023
2024
818
Thereafter
2,610
5,989
Main Street may, from time to time, be involved in litigation arising out of its operations in the normal course of business or otherwise. Furthermore, third parties may try to impose liability on Main Street in connection with the activities of its portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, Main Street does not expect any current matters will materially affect its financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on Main Street’s financial condition or results of operations in any future reporting period.
NOTE L—RELATED PARTY TRANSACTIONS
As discussed further in Note D, the External Investment Manager is treated as a wholly owned portfolio company of MSCC and is included as part of Main Street’s Investment Portfolio. At September 30, 2020, Main Street had a receivable of approximately $2.4 million due from the External Investment Manager, which included (i) approximately $2.0 million related primarily to operating expenses incurred by MSCC or its subsidiaries as required to support the External Investment Manager’s business and amounts due from the External Investment Manager to Main Street under a tax sharing agreement (see further discussion in Note D) and (ii) approximately $0.3 million of dividends declared but not paid by the External Investment Manager.
In November 2015, Main Street’s Board of Directors approved and adopted the Main Street Capital Corporation Deferred Compensation Plan (the “2015 Deferred Compensation Plan”). The 2015 Deferred Compensation Plan became effective on January 1, 2016 and replaced the Deferred Compensation Plan for Non-Employee Directors previously adopted by the Board of Directors in June 2013 (the “2013 Deferred Compensation Plan”). Under the 2015 Deferred Compensation Plan, non-employee directors and certain key employees may defer receipt of some or all of their cash compensation and directors’ fees, subject to certain limitations. Individuals participating in the 2015 Deferred
83
Compensation Plan receive distributions of their respective balances based on predetermined payout schedules or other events as defined by the plan and are also able to direct investments made on their behalf among investment alternatives permitted from time to time under the plan, including phantom Main Street stock units. As of September 30, 2020, $10.0 million of compensation and directors’ fees had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). Of this amount, $5.0 million was deferred into phantom Main Street stock units, representing 152,633 shares of Main Street’s common stock. Including phantom stock units issued through dividend reinvestment and net of any shares distributed, the phantom stock units outstanding as of September 30, 2020 represented 157,201 shares of Main Street’s common stock. Any amounts deferred under the plan represented by phantom Main Street stock units will not be issued or included as outstanding on the consolidated statements of changes in net assets until such shares are actually distributed to the participant in accordance with the plan, but the related phantom stock units are included in weighted-average shares outstanding with the related dollar amount of the deferral included in total expenses in Main Street’s consolidated statements of operations as earned. The dividend amounts related to additional phantom stock units are included in the statements of changes in net assets as an increase to dividends to stockholders offset by a corresponding increase to additional paid-in capital.
NOTE M—SUBSEQUENT EVENTS
After successfully receiving the required approval of HMS Income’s stockholders, effective October 30, 2020, the External Investment Manager and HMS Adviser consummated the transactions contemplated by that certain asset purchase agreement by and among the External Investment Manager, HMS Adviser and the other parties thereto (the “Closing”) whereby the External Investment Manager became the sole investment adviser and administrator to HMS Income pursuant to an Investment Advisory and Administrative Services Agreement entered into between the External Investment Manager and HMS Income (the “Advisory Agreement”) and HMS Income changed its name to MSC Income Fund, Inc. The Advisory Agreement includes a 1.75% management fee, reduced from 2.00%, and the same incentive fee as under HMS Income’s prior advisory agreement with HMS Adviser, with the External Investment Manager receiving 100% of such fee income (increased from 50% previously).
During November 2020, Main Street declared regular monthly dividends of $0.205 per share for each month of January, February and March of 2021. These regular monthly dividends equal a total of $0.615 per share for the first quarter of 2021, unchanged from the regular monthly dividends paid in the first quarter of 2020. Including the regular monthly dividends declared for the fourth quarter of 2020 and first quarter of 2021, Main Street will have paid $30.215 per share in cumulative dividends since its October 2007 initial public offering.
Also, during November 2020, Main Street expanded its total commitments under the Credit Facility from $740.0 million to $780.0 million. The $40.0 million net increase in total commitments was the result of the addition of a new lender relationship, which further diversifies the Main Street lending group under the Credit Facility to a total of 19 participants. The recent increase in total commitments was executed under the accordion feature of the Credit Facility, which allows for an increase up to $800.0 million in total commitments under the facility from new and existing lenders on the same terms and conditions as the existing commitments.
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Schedule 12-14
Consolidated Schedule of Investments In and Advances to Affiliates
(unaudited)
Amount of
Interest,
Fees or
Dividends
Realized
Credited to
Gross
Company
Investment(1)(10)(11)
Geography
Gain/(Loss)
Income(2)
Additions(3)
Reductions(4)
Majority‑owned investments
Member Units
(410)
410
LIBOR Plus 8.00% (Floor 1.00%)
(40)
826
18,200
LIBOR Plus 10.00% (Floor 1.00%)
(65)
2,490
Preferred Member Units
(1,141)
188
1,141
LIBOR Plus 9.50% (Floor 1.00%)
897
(1,020)
317
1,020
10% Secured Debt
(69)
203
LIBOR Plus 10.50% (Floor 1.75%)
143
1,320
16,000
3,523
LIBOR Plus 11.00% (Floor 1.00%)
910
2,350
1,464
653
Preferred Stock
(140)
LIBOR Plus 6.50% (Floor 2.00%)
1,303
1,626
810
(170)
3,054
170
LIBOR Plus 7.00%
988
1,759
(2,020)
2,593
16.00% Secured Debt
(12,776)
12,776
LIBOR Plus 8.50% (Floor 1.00%)
(993)
993
(1,140)
(2,849)
2,849
Warrants
(4,640)
4,640
11.00% Secured Debt
(42)
711
13,442
9,337
(9,088)
1,193
Prime Plus 6.75% (Floor 2.00%)
(56)
324
356
(1,000)
236
9.50% Current/2.00% PIK Secured Debt
2,247
1,414
2,947
(90)
9.00% Secured Debt
268
12.00% PIK Secured Debt
(11,612)
242
2,795
11,704
1,091
2,886
(5,280)
13.00% Secured Debt
(76)
888
(1,810)
1,810
10.00% Secured Debt
148
12.00% Secured Debt
101
9.50% Secured Debt
(959)
709
MSC Adviser I, LLC
(3,440)
605
520
1,760
543
2,243
269
13,800
LIBOR Plus 8.75% PIK (Floor 0.50%)
964
149
11,767
1,210
(2,160)
2,160
(160)
160
(4,880)
301
4,880
832
86
3,115
87
201
Series A Preferred Stock
(630)
630
(3,586)
3,296
3,705
Ziegler’s NYPD, LLC
6.50% Secured Debt
14.00% Secured Debt
(35)
293
(130)
130
Other controlled investments
10.00% PIK Secured Debt
(2,449)
2,449
3,938
LIBOR Plus 10.00% (Floor 2.00%)
546
340
176
(240)
240
ATS Workholding, LLC
5.00% Secured Debt
(1,230)
282
136
(939)
15.00% Secured Debt
1,399
123
(4,990)
372
1,330
1,316
443
(500)
CBT Nuggets, LLC
(5,120)
954
5,120
1,114
459
220
1,551
1,835
2,915
(530)
223
8.67% Current / 1.33% PIK
596
186
455
Copper Trail Fund Investments
LP Interests (CTMH, LP)
8.00% Secured Debt
10.50% PIK Secured Debt
Class B Preferred Member Units
1,655
678
1,734
LIBOR Plus 8.00% (Floor 1.00%, Ceiling 1.50%)
(860)
(3,030)
135
3,030
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 5.25% / 5.25% PIK
6.25% Current / 6.25% PIK
(1,091)
1,226
1,295
(2,420)
LP Interests (2717 MH, L.P.)
120
172
(2,330)
104
2,330
11.50% Secured Debt
122
1,508
4,835
(2,280)
2,280
11.00% PIK Secured Debt
(596)
1,483
(5,360)
(55)
10.50% Secured Debt
598
1,554
1,415
333
377
710
582
(1,400)
1,400
1,832
1,530
491
Zero Coupon Secured Debt
4,015
(3,840)
187
221
1,582
16,912
LP Interests
Amounts related to investments transferred to or from other 1940 Act classification during the period
(7,832)
4,252
Total Control investments
174,015
181,459
Affiliate Investments
180
LIBOR Plus 7.25% (Floor 1.00%)
(182)
1,119
182
27,269
5,010
(51)
501
(80)
(138)
982
138
13,382
(670)
424
LIBOR Plus 9.25% (Floor 1.00%)
(1,326)
1,534
1,326
(4,005)
4,005
12.50% Secured Debt
1,897
19,500
2,053
Chandler Signs Holdings, LLC
Class A Units
(690)
(91)
690
Charlotte Russe, Inc
227
26,000
2,790
259
LP Interests (Fund II)
LP Interests (Fund III)
(399)
576
1,819
LP Interests (Copper Trail Energy Fund I, LP)
(672)
597
508
LP Interests (Dos Rios Partners, LP)
(759)
759
LP Interests (Dos Rios Partners - A, LP)
(241)
(100)
LP Interests (EIG Global Private Debt fund-A, L.P.)
(165)
304
Freeport Financial Funds
LP Interests (Freeport Financial SBIC Fund LP)
(697)
697
LP Interests (Freeport First Lien Loan Fund III LP)
(204)
631
989
364
LP Interests (HPEP 3, L.P.)
LIBOR Plus 6.00% (Floor 1.00%)
384
3,023
8.00% Unsecured Convertible Debt
(1,260)
183
(4,270)
163
4,270
I-45 SLF LLC
(2,215)
1,803
2,215
L.F. Manufacturing Holdings, LLC
609
12.00% Current Secured Debt
1,037
(413)
413
Salado Stone Holdings, LLC
Class A Preferred Units
200
9.50% Current, Secured Debt
2,459
1,520
1,292
14.00% Current, Secured Debt
12.00% Current, Secured Debt
UniTek Global Services, Inc.
LIBOR Plus 6.50% (Floor 1.00%)
(283)
306
(2,684)
(771)
212
771
382
185
945
(3,667)
Universal Wellhead Services Holdings, LLC
(800)
(181)
1,843
(9,050)
(150)
Amounts related to investments transferred to or from other1940 Act classification during the period
(337)
Total Affiliate investments
101,944
82,006
88
89
Consolidated Schedule of Investments in and Advances to Affiliates
5,229
(970)
193
4,780
3,810
922
10,928
15,667
11,751
27,755
27,789
7,178
(2,363)
9,745
2,363
LIBOR Plus 9.00% (Floor 1.00%)
1,049
12,080
821
11,280
(590)
10,610
590
10,020
1,161
1,143
(359)
2,580
634
1,946
8,916
8,666
1,035
1,834
17,848
158
1,185
14,900
17,880
LIBOR Plus 7.00% (Floor 2.00%)
(46)
1,553
21,486
2,510
2,666
45,460
46,510
881
9,740
5,293
6,910
8,728
39,060
45,970
16% Secured Debt
(3,711)
3,711
8,307
464
9,500
11.5% Secured Debt
1,259
14,350
685
13,700
990
276
13,520
14,510
302
3,355
465
2,905
1,930
5,090
7,020
2,460
28,775
1,864
26,953
9.0% Secured Debt
267
3,970
3,946
94
Lamb Ventures, LLC
LIBOR Plus 5.75%
11% Secured Debt
(32)
608
8,339
3,532
11,871
Preferred Equity
6,007
(2,167)
394
7,440
9.5% Secured Debt
432
436
(139)
LIBOR Plus 7.00% (Floor 1.00%)
2,765
2,365
22,624
22,654
(6,050)
13,100
6,050
7,050
5% Current / 5% PIK Secured Debt
470
1,213
11,733
1,444
8,777
(980)
980
370
1,749
12% Secured Debt
3,880
3,893
(3,568)
3,860
3,568
746
712
1,470
4,580
65,748
70,328
681
7,506
1,136
6,400
124
4,810
LIBOR Plus 7.00% (Floor 0.50%)
(94)
1,094
15,100
1,349
13,779
(1,500)
10,380
8,880
13% Secured Debt
(48)
7,477
1,129
6,396
(350)
1,878
13,090
12,740
230
780
(741)
891
7,341
3,809
6,771
10,580
9% Secured Debt
2,582
2,736
Series A Preferred Units
(430)
440
438
98
2,479
680
10,294
9,494
204
2,153
3,740
4,090
129
6.5% Secured Debt
14% Secured Debt
292
161
1,249
1,410
10% PIK Secured Debt
(955)
8,558
955
7,603
1,622
1,635
1,370
5% Secured Debt
270
194
4,491
(1,891)
1,891
15% Secured Debt
(229)
1,343
229
11,445
(1,070)
9,370
889
9,467
9,108
1,043
6,221
303
6,524
(470)
4,020
3,550
(4,140)
61,610
4,140
57,470
LIBOR Plus 9.00% (Floor 2.00%)
1,222
12,131
1,898
20,028
1,327
18,875
4,650
1,449
18,940
23,590
732
315
(83)
675
11,888
1,695
13,583
461
2,270
5,470
8% Secured Debt
(137)
1,690
278
9,786
10,064
91
(433)
2,335
25,511
6,223
19,364
(1,831)
8,466
1,831
7,670
358
5,099
603
4,511
2,590
(1,940)
671
11,690
1,940
320
12.5% Secured Debt
1,212
12,594
12,485
(270)
4,120
3,850
1,133
1,386
8,070
1,344
13,320
LIBOR Plus 8.50%
11,475
11,486
1,590
2,657
15,580
1,462
17,288
16,878
(1,010)
175
7,890
LIBOR Plus 6.50% (Floor 1.50%)
733
6,685
202
6,510
390
660
2,478
4,218
580
(440)
173
5,960
5,520
1,908
20,458
20,488
1,440
16,020
(490)
7,680
490
7,190
721
4,610
2,930
3,040
12%, Secured Debt
1,040
1,511
16,246
16,265
7,476
(187)
(133)
5,809
1,004,993
155,211
129,829
1,024,566
781
(691)
924
1,060
3,980
5,040
199
20,312
1,852
27,188
5,780
LIBOR Plus 11% (Floor 1.00%)
507
3,833
848
4,681
127
(110)
LIBOR Plus 12% (Floor 1.00%)
(63)
1,696
15,724
2,943
724
215
5,080
820
5,900
Boss Industries, LLC
3,771
(3,930)
611
6,176
1,711
19,038
287
18,783
4,431
4,631
(30)
969
2,223
2,717
444
4,546
4,569
2,120
2,130
8.50% Secured Debt
(7,012)
4,003
7,933
Condit Exhibits, LLC
(1,850)
132
1,950
949
17,468
931
16,618
92
4,170
1,911
2,273
(217)
7,153
6,936
2,271
2,202
505
253
506
5,399
5,905
(85)
10,980
1,484
10,295
Fuse, LLC
1,733
741
10.0% Secured Debt
1,076
14,300
262
7,260
380
8% Unsecured Convertible Debt
540
3,720
2,010
8,330
10,340
(953)
2,515
15,627
953
12% PIK Secured Debt
537
5,743
539
6,282
12% Current Secured Debt
11,908
650
1,550
870
3,480
(310)
310
730
10.25% Current, Secured Debt
2,800
34,885
365
2,287
7,340
14% Current, Secured Debt
6,959
1,280
5,745
2,969
2,968
(3,550)
512
7,413
511
4,374
398
1,118
3,038
3,497
1,420
(60)
1,085
(1,340)
(418)
18,407
1,546
418
19,535
(118)
297
112
(1,320)
1,890
(415)
1,030
19,439
359,890
41,784
43,488
338,747
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements regarding the plans and objectives of management for future operations and which relate to future events or our future performance or financial condition. Any such forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and we cannot assure you that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors, including, without limitation: changes in laws and regulations and adverse changes in the economy generally or in the industries in which our portfolio companies operate, including with respect to changes from the impact of the COVID-19 pandemic, and the resulting impacts on our and our portfolio companies’ business and operations, liquidity and access to capital; and such other factors referenced in Item 1A entitled “Risk Factors” below in Part 2 of this Quarterly Report on Form 10-Q, if any, and discussed in Item 1A entitled “Risk Factors” in Part 2 of each of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, filed with the Securities and Exchange Commission (the “SEC”) on May 8, 2020 and August 7, 2020, respectively, and in Item 1A entitled “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 28, 2020 and elsewhere in this Quarterly Report on Form 10-Q and our other SEC filings.
We have based the forward-looking statements included in this Quarterly Report on Form 10-Q on information available to us on the date of this Quarterly Report on Form 10-Q, and we assume no obligation to update any such forward-looking statements, unless we are required to do so by applicable law. However, you are advised to refer to any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including subsequent periodic and current reports.
ORGANIZATION
MSC Adviser I, LLC (the “External Investment Manager”) was formed in November 2013 as a wholly owned subsidiary of MSCC to provide investment management and other services to parties other than MSCC and its subsidiaries or their portfolio companies (“External Parties”) and receives fee income for such services. MSCC has been granted no-action relief by the SEC to allow the External Investment Manager to register as a registered investment adviser under the Investment Advisers Act of 1940, as amended. Since the External Investment Manager conducts all of
its investment management activities for External Parties, it is accounted for as a portfolio investment of MSCC and is not included as a consolidated subsidiary of MSCC in MSCC’s consolidated financial statements.
COVID-19 UPDATE
The COVID-19 pandemic, and the related effect on the U.S. and global economies, has had, and threatens to continue to have, adverse consequences for our business and operating results, and the businesses and operating results of our portfolio companies. During the quarter ended September 30, 2020, we continued to work collectively with our employees and portfolio companies to navigate the significant challenges created by the COVID-19 pandemic. We remain focused on ensuring the safety of our employees and the employees of our portfolio companies, while also managing our ongoing business activities. In this regard, we remain heavily engaged with our portfolio companies. As discussed below under “Discussion and Analysis of Results of Operations,” our investment income, principally our interest and dividend income, has been negatively impacted by the economic effects of COVID-19 through the first nine months of 2020. In addition, our net asset value as of September 30, 2020 decreased as compared to our net asset value as of December 31, 2019, primarily due to the unrealized depreciation of our Investment Portfolio caused by the immediate adverse economic effects of the COVID-19 pandemic and uncertainty regarding the extent and duration of its impact, as well as the negative impact of the pandemic on our net investment income and net realized losses in 2020. We continue to maintain access to multiple sources of liquidity, including cash, unused capacity under our Credit Facility and remaining SBIC debenture capacity, and from December 31, 2019 to September 30, 2020, our total liquidity improved from $495.5 million to $559.3 million. As of September 30, 2020, we were in compliance with all debt covenants and do not anticipate any issues with our ability to comply with all covenants in the future. Refer to “—Liquidity and Capital Resources” below for further discussion as of September 30, 2020.
Neither our management nor our Board of Directors is able to predict the full impact of the COVID-19 pandemic, including its duration and the magnitude of its economic and societal impact. As such, while we will continue to monitor the rapidly evolving situation and guidance from U.S. and international authorities, including federal, state and local public health authorities, we are unable to predict with any certainty the extent to which the outbreak will negatively affect our portfolio companies’ operating results and financial condition or the impact that such disruptions may have on our results of operations and financial condition in the future.
OVERVIEW
Our principal investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and capital appreciation from our equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. Our LMM companies generally have annual revenues between $10 million and $150 million, and our LMM portfolio investments generally range in size from $5 million to $50 million. Our Middle Market investments are made in businesses that are generally larger in size than our LMM portfolio companies, with annual revenues typically between $150 million and $1.5 billion, and our Middle Market investments generally range in size from $3 million to $20 million. Our private loan (“Private Loan”) portfolio investments are primarily debt securities in privately held companies that have been originated through strategic relationships with other investment funds on a collaborative basis. Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio.
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We seek to fill the financing gap for LMM businesses, which, historically, have had limited access to financing from commercial banks and other traditional sources. The underserved nature of the LMM creates the opportunity for us to meet the financing needs of LMM companies while also negotiating favorable transaction terms and equity participations. Our ability to invest across a company’s capital structure, from secured loans to equity securities, allows us to offer portfolio companies a comprehensive suite of financing options, or a “one stop” financing solution. Providing customized, “one stop” financing solutions is important to LMM portfolio companies. We generally seek to partner directly with entrepreneurs, management teams and business owners in making our investments. Our LMM portfolio debt investments are generally secured by a first lien on the assets of the portfolio company and typically have a term of between five and seven years from the original investment date.
Our Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the companies included in our LMM portfolio. Our Middle Market portfolio companies generally have annual revenues between $150 million and $1.5 billion, and our Middle Market investments generally range in size from $3 million to $20 million. Our Middle Market portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have an expected duration of between three and seven years from the original investment date.
Our Private Loan portfolio investments are primarily debt securities in privately held companies that have been originated through strategic relationships with other investment funds on a collaborative basis and are often referred to in the debt markets as “club deals.” Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio. Our Private Loan portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
Our other portfolio (“Other Portfolio”) investments primarily consist of investments that are not consistent with the typical profiles for our LMM, Middle Market or Private Loan portfolio investments, including investments which may be managed by third parties. In our Other Portfolio, we may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds.
Our external asset management business is conducted through the External Investment Manager. The External Investment Manager earns management fees based on the assets of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds managed. We have entered into an agreement with the External Investment Manager to share employees in connection with its asset management business generally, and specifically for its relationship with HMS Income Fund, Inc. (“HMS Income”). Through this agreement, we share employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities.
The following tables provide a summary of our investments in the LMM, Middle Market and Private Loan portfolios as of September 30, 2020 and December 31, 2019 (this information excludes the Other Portfolio investments and the External Investment Manager which are discussed further below):
LMM(a)
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As of September 30, 2020, we had Other Portfolio investments in twelve companies, collectively totaling approximately $100.5 million in fair value and approximately $126.2 million in cost basis and which comprised approximately 3.9% of our Investment Portfolio (as defined in “Critical Accounting Policies—Basis of Presentation” below) at fair value. As of December 31, 2019, we had Other Portfolio investments in eleven companies, collectively totaling approximately $106.7 million in fair value and approximately $118.4 million in cost basis and which comprised approximately 4.1% of our Investment Portfolio at fair value.
As previously discussed, the External Investment Manager is a wholly owned subsidiary that is treated as a portfolio investment. As of September 30, 2020, there was no cost basis in this investment and the investment had a fair value of approximately $71.1 million, which comprised approximately 2.8% of our Investment Portfolio at fair value. As of December 31, 2019, there was no cost basis in this investment and the investment had a fair value of approximately $74.5 million, which comprised approximately 2.9% of our Investment Portfolio at fair value.
Our portfolio investments are generally made through MSCC and the Funds. MSCC and the Funds share the same investment strategies and criteria, although they are subject to different regulatory regimes. An investor’s return in MSCC will depend, in part, on the Funds’ investment returns as they are wholly owned subsidiaries of MSCC.
The level of new portfolio investment activity will fluctuate from period to period based upon our view of the current economic fundamentals, our ability to identify new investment opportunities that meet our investment criteria, and our ability to consummate the identified opportunities. The level of new investment activity, and associated interest and fee income, will directly impact future investment income. In addition, the level of dividends paid by portfolio companies and the portion of our portfolio debt investments on non-accrual status will directly impact future investment income. While we intend to grow our portfolio and our investment income over the long term, our growth and our operating results may be more limited during depressed economic periods. However, we intend to appropriately manage our cost structure and liquidity position based on applicable economic conditions and our investment outlook. The level of realized gains or losses and unrealized appreciation or depreciation on our investments will also fluctuate depending upon portfolio activity, economic conditions and the performance of our individual portfolio companies. The changes in realized gains and losses and unrealized appreciation or depreciation could have a material impact on our operating results.
Because we are internally managed, we do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing investment and portfolio management professionals. We believe that our internally managed structure provides us with a beneficial operating expense structure when compared to other publicly traded and privately held investment firms which are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our Investment Portfolio. The ratio of our total operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was 1.3% for each of the trailing twelve months ended September 30, 2020 and 2019, and 1.4% for the year ended December 31, 2019.
During May 2012, we entered into an investment sub-advisory agreement with HMS Adviser, LP (“HMS Adviser”), which is the investment advisor to HMS Income, a non-listed BDC, to provide certain investment advisory services to HMS Adviser. In December 2013, after obtaining required no-action relief from the SEC to allow us to own a registered investment adviser, we assigned the sub-advisory agreement to the External Investment Manager since the fees received from such arrangement could otherwise have negative consequences on our ability to meet the source-of-income requirement necessary for us to maintain our RIC tax treatment. Under the investment sub-advisory agreement, the External Investment Manager is entitled to 50% of the base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with HMS Income. During the three months ended September 30, 2020 and 2019, the External Investment Manager earned $2.3 million and $2.7 million, respectively, in base management fee income. No incentive fee income was earned in the three months ended September 30, 2020, compared to $0.2 million earned in the three months ended September 30, 2019. During the nine months ended September 30, 2020, the External Investment Manager earned $7.2 million in base management fee income and no incentive fees compared to $8.4 million of base management fees and $1.6 million in incentive fees for the comparable period in 2019 under the sub-advisory agreement with HMS Adviser.
During April 2014, we received an exemptive order from the SEC permitting co-investments by us and HMS Income in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act. We have made, and in the future intend to continue to make, such co-investments with HMS Income in accordance with the conditions of the order. The order requires, among other things, that we and the External Investment Manager consider whether each such investment opportunity is appropriate for HMS Income and, if it is appropriate, to propose an allocation of the investment opportunity between us and HMS Income. Because the External Investment Manager may receive performance-based fee compensation from HMS Income, this may provide it an incentive to allocate opportunities to HMS Income instead of us. However, both we and the External Investment Manager have policies and procedures in place to manage this conflict. We have filed a new application for co-investment exemptive relief with the SEC that would provide greater flexibility in structuring and effectuating co-investment transactions between us, HMS Income and certain other funds managed by us as described in the application. Our new application for co-investment exemptive relief has not yet been granted, and there is no assurance that such relief will be granted on the terms and conditions in the application or at all. Pending the receipt of such new co-investment relief, we intend to continue to rely on our current co-investment relief.
CRITICAL ACCOUNTING POLICIES
Basis of Presentation
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). For each of the periods presented herein, our consolidated financial statements include the accounts of MSCC and its consolidated subsidiaries. The Investment Portfolio, as used herein, refers to all of our investments in LMM portfolio companies, investments in Middle Market portfolio companies, Private Loan portfolio investments, Other Portfolio investments, and the investment in the External Investment Manager. Our results of operations for the three and nine months ended September 30, 2020 and 2019, cash flows for the nine months ended September 30, 2020 and 2019, and financial position as of September 30, 2020 and December 31, 2019, are presented on a consolidated basis. The effects of all intercompany transactions between us and our consolidated subsidiaries have been eliminated in consolidation.
Our accompanying unaudited consolidated financial statements are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. In the opinion of management, the unaudited consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. The results of operations for the three and nine months ended September 30, 2020 and 2019 are not necessarily indicative of the operating results to be expected for the full year. Also, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2019. Financial statements prepared on a U.S. GAAP basis require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.
We are an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services—Investment Companies (“ASC 946”). Under ASC 946, we are precluded from consolidating other entities in which we have equity investments, including those in which we have a controlling interest, unless the other entity is another investment company. An exception to this general principle in ASC 946 occurs if we hold a controlling interest in an operating company that provides all or substantially all of its services directly to us or to any of our portfolio companies. Accordingly, as noted above, our consolidated financial statements include the financial position and operating results for the Funds and the Taxable Subsidiaries. We have determined that none of our portfolio investments qualify for this exception, including the investment in the External Investment Manager. Therefore, our Investment Portfolio is carried on the consolidated balance sheet at fair value with any adjustments to fair value recognized as “Net Unrealized Appreciation (Depreciation)” on the consolidated statements of operations until the investment is realized, usually upon exit, resulting in any gain or loss being recognized as a “Net Realized Gain (Loss).”
Investment Portfolio Valuation
The most significant determination inherent in the preparation of our consolidated financial statements is the valuation of our Investment Portfolio and the related amounts of unrealized appreciation and depreciation. As of September 30, 2020 and December 31, 2019, our Investment Portfolio valued at fair value represented approximately 97% and 96% of our total assets, respectively. We are required to report our investments at fair value. We follow the provisions of FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. ASC 820 requires us to assume that the portfolio investment is to be sold in the principal market to independent market participants, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal market that are independent, knowledgeable and willing and able to transact. See “Note B.1.—Valuation of the Investment Portfolio” in the notes to consolidated financial statements for a detailed discussion of our investment portfolio valuation process and procedures.
Due to the inherent uncertainty in the valuation process, our determination of fair value for our Investment Portfolio may differ materially from the values that would have been determined had a ready market for the securities
existed. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned. We determine the fair value of each individual investment and record changes in fair value as unrealized appreciation or depreciation.
Our Board of Directors has the final responsibility for overseeing, reviewing and approving, in good faith, our determination of the fair value for our Investment Portfolio and our valuation procedures, consistent with 1940 Act requirements. We believe our Investment Portfolio as of September 30, 2020 and December 31, 2019 approximates fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.
Revenue Recognition
Interest and Dividend Income
We record interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. In accordance with our valuation policies, we evaluate accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, we remove it from non-accrual status.
Fee Income
We may periodically provide services, including structuring and advisory services, to our portfolio companies or other third parties. For services that are separately identifiable and evidence exists to substantiate fair value, fee income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into income over the life of the financing.
Payment-in-Kind (“PIK”) Interest and Cumulative Dividends
We hold certain debt and preferred equity instruments in our Investment Portfolio that contain PIK interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed or sold. To maintain RIC tax treatment (as discussed below), these non-cash sources of income may need to be paid out to stockholders in the form of distributions, even though we may not have collected the PIK interest and cumulative dividends in cash. We stop accruing PIK interest and cumulative dividends and write off any accrued and uncollected interest and dividends in arrears when we determine that such PIK interest and dividends in arrears are no longer collectible. For the three months ended September 30, 2020 and 2019, (i) approximately 3.7% and 1.6%, respectively, of our total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.7% and 1.0%, respectively, of our total investment income was attributable to cumulative dividend income not paid currently in cash. For the nine months ended September 30, 2020 and 2019, (i) approximately 2.4% and 1.9%, respectively, of our total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.9% and 1.1%, respectively, of our total investment income was attributable to cumulative dividend income not paid currently in cash.
Share-Based Compensation
We account for our share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards, we measure the grant date fair value
based upon the market price of our common stock on the date of the grant and amortize the fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term.
We have also adopted Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) be recognized as income tax expense or benefit in the income statement and not delay recognition of a tax benefit until the tax benefit is realized through a reduction to taxes payable. Accordingly, the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. Additionally, we have elected to account for forfeitures as they occur.
Income Taxes
The Taxable Subsidiaries primarily hold certain portfolio investments for us. The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes and to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with us for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in our consolidated financial statements as portfolio investments and recorded at fair value. The Taxable Subsidiaries are not consolidated with MSCC for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities, as a result of their ownership of certain portfolio investments. The taxable income, or loss, of the Taxable Subsidiaries may differ from their book income, or loss, due to temporary book and tax timing differences and permanent differences. The Taxable Subsidiaries are each taxed at their normal corporate tax rates based on their taxable income. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the Taxable Subsidiaries are reflected in our consolidated financial statements.
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INVESTMENT PORTFOLIO COMPOSITION
Our LMM portfolio investments primarily consist of secured debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. Our LMM portfolio companies generally have annual revenues between $10 million and $150 million, and our LMM investments generally range in size from $5 million to $50 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, can include either fixed or floating rate terms and generally have a term of between five and seven years from the original investment date. In most LMM portfolio investments, we receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment.
Our Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest-bearing debt securities in privately held companies based in the United States that are generally larger in size than the companies included in our LMM portfolio. Our Middle Market portfolio companies generally have annual revenues between $150 million and $1.5 billion, and our Middle Market investments generally range in size from $3 million to $20 million. Our Middle Market portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
Our Private Loan portfolio investments are primarily debt securities in privately held companies which have been originated through strategic relationships with other investment funds on a collaborative basis and are often referred to in the debt markets as “club deals.” Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio. Our Private Loan portfolio debt investments are generally secured by either a first or second priority lien on the assets of the portfolio company and typically have a term of between three and seven years from the original investment date.
Our Other Portfolio investments primarily consist of investments which are not consistent with the typical profiles for LMM, Middle Market and Private Loan portfolio investments, including investments which may be managed by third parties. In the Other Portfolio, we may incur indirect fees and expenses in connection with investments managed by third parties, such as investments in other investment companies or private funds.
Our external asset management business is conducted through the External Investment Manager. The External Investment Manager earns management fees based on the assets of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds managed. We have entered into an agreement with the External Investment Manager to share employees in connection with its asset management business generally, and specifically for its relationship with HMS Income. Through this agreement, we share employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities, and we allocate the related expenses to the External Investment Manager pursuant to the sharing agreement. Our total expenses for the three months ended September 30, 2020 and 2019 are net of expenses allocated to the External Investment Manager of $1.9 million and $1.7 million, respectively. Our total expenses for the nine months ended September 30, 2020 and 2019 are net of expenses allocated to the External Investment Manager of $5.3 and $5.0 million, respectively. The External Investment Manager earns management fees based on the assets of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds managed. The total contribution of the External Investment Manager to our net investment income consists of the combination of the expenses allocated to the External Investment Manager and the dividend income earned from the External Investment Manager. For the three months ended September 30, 2020 and 2019, the total contribution to our net investment income was $2.2 million and $2.6 million, respectively. For the nine months ended September 30, 2020 and 2019, the total contribution to our net investment income was $6.7 million and $8.9 million, respectively.
The following tables summarize the composition of our total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments as of September 30, 2020 and December 31, 2019 (this information excludes the Other Portfolio investments and the External Investment Manager).
Our LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments carry a number of risks including: (1) investing in companies which may have limited operating histories and financial resources; (2) holding investments that generally are not publicly traded and which may be subject to legal and other restrictions on resale; and (3) other risks common to investing in below investment grade debt and equity investments in our Investment Portfolio. Please see “Risk Factors—Risks Related to Our Investments” contained in our Form 10-K for the fiscal year ended December 31, 2019 and “Risk Factors” below in this Quarterly Report on Form 10-Q and in each of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 for a more complete discussion of the risks involved with investing in our Investment Portfolio.
PORTFOLIO ASSET QUALITY
We utilize an internally developed investment rating system to rate the performance of each LMM portfolio company and to monitor our expected level of returns on each of our LMM investments in relation to our expectations for the portfolio company. The investment rating system takes into consideration various factors, including each investment’s expected level of returns, the collectability of our debt investments and the ability to receive a return of the invested capital in our equity investments, comparisons to competitors and other industry participants, the portfolio company’s future outlook and other factors that are deemed to be significant to the portfolio company.
As of September 30, 2020, our total Investment Portfolio had twelve investments on non-accrual status, which comprised approximately 2.6% of its fair value and 7.1% of its cost. As of December 31, 2019, our total Investment Portfolio had eight investments on non-accrual status, which comprised approximately 1.4% of its fair value and 4.8% of its cost.
The operating results of our portfolio companies are impacted by changes in the broader fundamentals of the United States economy. In periods during which the United States economy contracts, as it has due to the impact of COVID-19, it is likely that the financial results of small to mid-sized companies, like those in which we invest, could experience deterioration or limited growth from current levels, which could ultimately lead to difficulty in meeting their debt service requirements, to an increase in defaults on our debt investments or in realized losses on our investments and to difficulty in maintaining historical dividend payment rates and unrealized appreciation on our equity investments. Consequently, we can provide no assurance that the performance of certain portfolio companies will not be negatively impacted by future economic cycles or other conditions, which could also have a negative impact on our future results.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 2020 and September 30, 2019
Net Change
(8,114)
(436)
Net investment income
(8,550)
Net realized loss from investments
(7,998)
Net unrealized appreciation (depreciation) from:
Portfolio investments
(2,927)
66,041
NM
Total net unrealized appreciation
66,360
(5,519)
Net increase in net assets resulting from operations
44,293
(dollars in thousands, except per share amounts)
Share‑based compensation expense
Distributable net investment income(a)
33,023
41,584
(8,561)
Net investment income per share—Basic and diluted
(0.16)
Distributable net investment income per share—Basic and diluted(a)
0.50
0.66
Not Meaningful
Investment Income
Total investment income for the three months ended September 30, 2020 was $52.0 million, a 14% decrease from the $60.1 million of total investment income for the corresponding period of 2019. This comparable period decrease was principally attributable to (i) a $4.4 million decrease in dividend income from Investment Portfolio equity investments, primarily resulting from the negative impacts of the COVID-19 pandemic and, specifically, on certain of our portfolio companies’ operating results, financial condition and liquidity, as well as the uncertainty relative to the duration of the pandemic’s effects and (ii) a $4.1 million decrease in interest income, which was primarily due to lower floating interest rates on investment portfolio debt investments based upon the decline in the London Interbank Offered Rate (“LIBOR”). These decreases were partially offset by a $0.3 million increase in fee income. The $8.1 million decrease in total investment income in the three months ended September 30, 2020 includes the impact of a $1.3 million decrease from accelerated prepayment, repricing and other income activity considered less consistent or non-recurring.
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Expenses
Total expenses for the three months ended September 30, 2020 increased to $21.5 million from $21.1 million for the corresponding period of 2019. This increase in operating expenses was principally attributable to (i) a $0.7 million increase in compensation expense and (ii) a $0.4 million increase in general and administrative expense, partially offset by (i) a $0.4 million decrease in interest expense and (ii) a $0.2 million increase in expenses allocated to the External Investment Manager. The increase in compensation expense is primarily related to a $0.4 million increase in expense as a result of the change in the fair value of our deferred compensation plan assets.
Net Investment Income
Net investment income for the three months ended September 30, 2020 decreased 22% to $30.5 million, or $0.46 per share, compared to net investment income of $39.0 million, or $0.62 per share, for the corresponding period of 2019. The decrease in net investment income was principally attributable to the decrease in total investment income, as discussed above. The decline in net investment income per share is primarily attributable to the decrease in total investment income, as well as, the 4.5% increase in weighted average shares outstanding to 66.1 million for the three months ended September 30, 2020, primarily due to shares issued through the ATM Program (as defined in “—Liquidity and Capital Resources—Capital Resources” below), shares issued pursuant to our equity incentive plans and shares issued pursuant to our dividend reinvestment plan. The decline in net investment income per share includes the impacts of (i) a decrease of $0.02 per share due to the decrease in investment income from accelerated prepayment, repricing and other income activity considered non-recurring, as discussed above, and (ii) a decrease of $0.01 per share due to the increase in compensation expense as a result of the increase in the fair value of the deferred compensation plan assets during the third quarter of 2020.
Distributable Net Investment Income
Distributable net investment income for the three months ended September 30, 2020 decreased 21% to $33.0 million, or $0.50 per share, compared with $41.6 million, or $0.66 per share, in the corresponding period of 2019. The decline in distributable net investment income was primarily due to the decreased level of total investment income, as discussed above. The decline in distributable net investment income per share is primarily attributable to the decrease in total investment income, as well as, a greater number of average shares outstanding compared to the corresponding period in 2019, also as described above. The decline in distributable net investment income per share includes the impacts of (i) the decrease in investment income from accelerated prepayment, repricing and other income activity considered non-recurring and (ii) the increase in compensation expense as a result of the increase in the fair value of the deferred compensation plan assets during the third quarter of 2020, as discussed above.
Net Increase in Net Assets Resulting from Operations
The net increase in net assets resulting from operations for the three months ended September 30, 2020 was $78.2 million, or $1.18 per share, compared with $33.9 million, or $0.54 per share, during the three months ended September 30, 2019. This $44.3 million increase from the prior year’s comparable period was primarily the result of a $66.0 million improvement in net unrealized appreciation (depreciation) from portfolio investments, including the impact of accounting reversals relating to realized gains/income (losses), with these increases partially offset by (i) an $8.6 million decrease in net investment income, as discussed above, (ii) an $8.0 million increase in net realized loss from investments and (iii) a $5.5 million increase in income tax provision. The $13.9 million net realized loss on investments for the three months ended September 30, 2020 was primarily the result of (i) a $12.6 million realized loss resulting from the full exit of three Middle Market investments and (ii) a $4.7 million realized loss resulting from the restructure of one Middle Market investment, partially offset by a $4.0 million realized gain from the partial exit of one LMM investment.
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The following table provides a summary of the total net unrealized appreciation of $63.1 million for the three months ended September 30, 2020:
Three Months Ended September 30, 2020
Middle
Private
Market (b)
Loan (c)
Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods due to net realized (gains / income) losses recognized during the current period
(5.1)
Net unrealized appreciation relating to portfolio investments
13.9
13.0
16.9
(b)
48.7
Total net unrealized appreciation relating to portfolio investments
8.8
31.8
17.6
63.1
The income tax provision for the three months ended September 30, 2020 of $1.5 million principally consisted of a current tax provision of $1.2 million, related to a $0.8 million provision for current U.S. federal and state income taxes, as well as a $0.4 million provision for excise tax on our estimated undistributed taxable income and a deferred tax provision of $0.3 million, which is primarily the result of the net activity relating to our portfolio investments held in our Taxable Subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation/depreciation and other temporary book-tax differences.
Comparison of the nine months ended September 30, 2020 and September 30, 2019
(22,615)
2,796
(19,819)
(44,323)
(14,163)
(30,160)
Net realized loss on extinguishment of debt
5,155
(118,030)
(131,184)
(4,165)
(135,349)
16,744
(163,429)
107
936
106,515
125,398
(18,883)
(0.38)
1.63
2.00
(0.37)
Total investment income for the nine months ended September 30, 2020 was $160.1 million, a 12% decrease from the $182.7 million of total investment income for the corresponding period of 2019. This comparable period decrease was principally attributable to (i) a $13.8 million decrease in dividend income from Investment Portfolio equity investments, partially attributable to the current negative impacts of the COVID-19 pandemic on certain of our portfolio companies’ operating results, financial condition and liquidity, as well as the uncertainty relative to the duration of the pandemic’s effects and (ii) a $12.1 million decrease in interest income, primarily due to a decline in floating interest rates on investment portfolio debt investments due to a decline in LIBOR. These decreases were partially offset by a $3.3 million increase in fee income. The $22.6 million decrease in total investment income in the nine months ended September 30, 2020 includes the positive impact of a $1.3 million increase from accelerated prepayment, repricing and other income activity considered less consistent or non-recurring.
Total expenses for the nine months ended September 30, 2020 decreased to $61.8 million from $64.6 million in the corresponding period of 2019. This decrease in operating expenses was principally attributable to a $3.6 million decrease in compensation expense, partially offset by a $0.9 million increase in share-based compensation expense. The decrease in compensation expense is primarily related to a $4.1 million decrease in cash incentive compensation accruals.
Net investment income for the nine months ended September 30, 2020 decreased 17% to $98.3 million, or $1.50 per share, compared to net investment income of $118.1 million, or $1.88 per share, for the corresponding period of 2019. The decrease in net investment income was principally attributable to the decrease in total investment income, partially offset by lower operating expenses, both as discussed above. The decrease in net investment income per share reflects these changes, as well as the 4.2% increase in weighted average shares outstanding to 65.3 million for the nine months ended September 30, 2020, primarily due to shares issued through the ATM Program (as defined in “—Liquidity and Capital Resources—Capital Resources” below), shares issued pursuant to our equity incentive plans and shares
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issued pursuant to our dividend reinvestment plan. The decline in net investment income on a per share basis includes the impacts of (i) an increase of $0.02 per share due to the increase in investment income from accelerated prepayment, repricing and other income activity considered non-recurring, as discussed above, and (ii) an increase of $0.01 per share due to the decrease in compensation expense as a result of the decrease in the fair value of the deferred compensation plan assets.
Distributable net investment income for the nine months ended September 30, 2020 decreased 15% to $106.5 million, or $1.63 per share, compared with $125.4 million, or $2.00 per share, in the corresponding period of 2019. The decline in distributable net investment income was primarily due to the decreased level of total investment income, partially offset by lower operating expenses, both as discussed above. The decline in distributable net investment income on a per share basis for the nine months ended September 30, 2020 also reflects a greater number of average shares outstanding compared to the corresponding period in 2019, as described above. The decline in distributable net investment income on a per share basis includes the impacts of (i) the increase in investment income from accelerated prepayment, repricing and other income activity considered non-recurring and (ii) the decrease in compensation expense as a result of the decrease in the fair value of the deferred compensation plan assets, as discussed above.
Net Increase (Decrease) in Net Assets Resulting from Operations
The net increase (decrease) in net assets resulting from operations for the nine months ended September 30, 2020 was $(49.9) million, or $(0.76) per share, compared with $113.6 million, or $1.81 per share, during the nine months ended September 30, 2019. This $163.4 million decrease from the prior year’s comparable period was primarily the result of (i) a $131.2 million decrease in net unrealized appreciation (depreciation) from portfolio investments, primarily caused by the adverse economic effects of the COVID-19 pandemic, (ii) a $30.2 million increase in net realized loss from investments and (iii) a $19.8 million decrease in net investment income, as discussed above. These decreases were partially offset by (i) a $16.7 million benefit from the change in income tax benefit (provision) and (ii) a $1.0 million improvement in the net impact from the extinguishment of debt. The $44.3 million net realized loss on investments for the nine months ended September 30, 2020 was primarily the result of (i) the $15.8 million net realized loss from the full exit of three and partial exit of three LMM investments, (ii) the $22.5 million realized loss from the exit of six Middle Market investment, and (iii) the $4.7 million realized loss from the restructure of one Middle Market investment.
The following table provides a summary of the total net unrealized depreciation of $117.6 million for the nine months ended September 30, 2020:
Nine Months Ended September 30, 2020
Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods
27.0
38.2
due to net realized (gains / income) losses recognized during the current period
(48.0)
(51.1)
(39.8)
(17.4)
(d)
(156.3)
Net unrealized depreciation relating to portfolio investments
(40.1)
(24.1)
(36.5)
(118.1)
Unrealized appreciation relating to SBIC debentures (e)
Total net unrealized depreciation
(117.6)
The income tax benefit for the nine months ended September 30, 2020 of $14.3 million principally consisted of a deferred tax benefit of $15.7 million, which is primarily the result of the net activity relating to our portfolio investments held in our Taxable Subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation/depreciation and other temporary book-tax differences, partially offset by a current tax provision of $1.4 million related to a $1.1 million provision for excise tax on our estimated undistributed taxable income and a $0.3 million provision for current U.S. federal and state income taxes.
Liquidity and Capital Resources
This “Liquidity and Capital Resources” section should be read in conjunction with the “COVID-19 Update” section above.
Cash Flows
For the nine months ended September 30, 2020, we experienced a net decrease in cash and cash equivalents in the amount of $28.1 million, which is the net result of $28.3 million of cash used in our operating activities and $0.2 million of cash provided by our financing activities.
The $28.3 million of cash used in our operating activities resulted primarily from cash uses totaling $414.6 million for the funding of new portfolio company investments and settlement of accruals for portfolio investments existing as of December 31, 2019, partially offset by (i) cash proceeds totaling $276.3 million from the sales and repayments of debt investments and sales of and return on capital of equity investments, (ii) cash flows we generated from the operating profits earned totaling $95.1 million, which is our distributable net investment income, excluding the non-cash effects of the accretion of unearned income, payment-in-kind interest income, cumulative dividends and the amortization expense for deferred financing costs, and (iii) cash proceeds of $14.9 million related to changes in other assets and liabilities.
The $0.2 million of cash provided by our financing activities principally consisted of (i) $125.0 million in proceeds from the follow-on issuance of the 5.20% Notes in July 2020, (ii) $37.6 million in net cash proceeds from our ATM Program (described below) and direct stock purchase plan, (iii) $35.0 million in cash proceeds from the issuance of SBIC debentures and (iv) $1.0 million for debt issuance premiums, net of payments of deferred debt issuance costs, SBIC debenture fees and other costs, partially offset by (i) $107.7 million in cash dividends paid to stockholders, (ii) $47.0 million in net repayments from the Credit Facility, (iii) $42.0 million in repayment of SBIC debentures, and (iv) $1.8 million for purchases of vested restricted stock from employees to satisfy their tax withholding requirements upon the vesting of such restricted stock.
Capital Resources
As of September 30, 2020, we had $27.1 million in cash and cash equivalents and $487.0 million of unused capacity under the Credit Facility, which we maintain to support our investment and operating activities. As of September 30, 2020, our net asset value totaled $1,423.2 million, or $21.52 per share.
The Credit Facility, which provides additional liquidity to support our investment and operational activities, includes total commitments of $740.0 million from a diversified group of 18 lenders. The Credit Facility matures in September 2023 and contains an accordion feature which allows us to increase the total commitments under the facility to up to $800.0 million from new and existing lenders on the same terms and conditions as the existing commitments. Borrowings under the Credit Facility bear interest, subject to our election and resetting on a monthly basis on the first of
each month, on a per annum basis at a rate equal to the applicable LIBOR rate (0.1% as of September 30, 2020) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.25% as of September 30, 2020) plus 0.875%) as long as we meet certain agreed upon excess collateral and maximum leverage requirements or (ii) 2.0% (or the applicable base rate plus 1.0%) otherwise. We pay unused commitment fees of 0.25% per annum on the unused lender commitments under the Credit Facility. The Credit Facility is secured by a first lien on the assets of MSCC and its subsidiaries, excluding the equity ownership or assets of the Funds and the External Investment Manager. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum availability of at least 10% of the borrowing base, (ii) maintaining an interest coverage ratio of at least 2.0 to 1.0, (iii) maintaining an asset coverage ratio (tangible net worth to Credit Facility borrowings) of at least 1.5 to 1.0 and (iv) maintaining a minimum tangible net worth. The Credit Facility is provided on a revolving basis through its final maturity date in September 2023, and contains two, one-year extension options which could extend the final maturity by up to two years, subject to certain conditions, including lender approval. As of September 30, 2020, we had $253.0 million in borrowings outstanding under the Credit Facility, the interest rate on the Credit Facility was 2.0% (based on the LIBOR rate of 0.2% as of the most recent reset date of September 1, 2020 plus 1.875%) and we were in compliance with all financial covenants of the Credit Facility.
Through the Funds, we have the ability to issue SBIC debentures guaranteed by the SBA at favorable interest rates and favorable terms and conditions. Under existing SBIC regulations, SBA-approved SBICs under common control have the ability to issue debentures guaranteed by the SBA up to a regulatory maximum amount of $350.0 million. Under existing SBA-approved commitments, we had $304.8 million of outstanding SBIC debentures guaranteed by the SBA as of September 30, 2020 through our wholly owned SBICs, which bear a weighted-average annual fixed interest rate of approximately 3.4%, paid semiannually, and mature ten years from issuance. The first maturity related to our SBIC debentures occurs in 2020, and the weighted-average remaining duration is approximately 5.5 years as of September 30, 2020. During the nine months ended September 30, 2020, Main Street issued $35.0 million of SBIC debentures and opportunistically prepaid $42.0 million of existing SBIC debentures that were scheduled to mature over the next year as part of an effort to manage the maturity dates of the oldest SBIC debentures. Debentures guaranteed by the SBA have fixed interest rates that equal prevailing 10-year Treasury Note rates plus a market spread and have a maturity of ten years with interest payable semiannually. The principal amount of the debentures is not required to be paid before maturity, but may be pre-paid at any time with no prepayment penalty. We expect to issue new SBIC debentures under the SBIC program in the future in an amount up to the regulatory maximum amount for affiliated SBIC funds.
In November 2014, we issued $175.0 million in aggregate principal amount of 4.50% unsecured notes due 2019 (the “4.50% Notes due 2019”) at an issue price of 99.53%. The 4.50% Notes due 2019 bore interest at a rate of 4.50% per year payable semiannually on June 1 and December 1 of each year. On December 2, 2019, we repaid the entire principal amount of the issued and outstanding 4.50% Notes due 2019, effective December 1, 2019 (the “Maturity Date”), at par value plus the accrued and unpaid interest thereon from June 1, 2019 through the Maturity Date.
In November 2017, we issued $185.0 million in aggregate principal amount of 4.50% unsecured notes due December 1, 2022 (the “4.50% Notes due 2022”) at an issue price of 99.16%. The 4.50% Notes due 2022 are unsecured obligations and rank pari passu with our current and future unsecured indebtedness; senior to any of our future indebtedness that expressly provides it is subordinated to the 4.50% Notes due 2022; effectively subordinated to all of our existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including borrowings under our Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of the Funds. The 4.50% Notes due 2022 may be redeemed in whole or in part at any time at our option subject to certain make-whole provisions. The 4.50% Notes due 2022 bear interest at a rate of 4.50% per year payable semiannually on June 1 and December 1 of each year. We may from time to time repurchase the 4.50% Notes due 2022 in accordance with the 1940 Act and the rules promulgated thereunder. As of September 30, 2020, the outstanding balance of the 4.50% Notes due 2022 was $185.0 million.
The indenture governing the 4.50% Notes due 2022 (the “4.50% Notes Indenture”) contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 4.50% Notes due 2022 and the Trustee if we cease to
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be subject to the reporting requirements of the Exchange Act. These covenants are subject to limitations and exceptions that are described in the 4.50% Notes Indenture.
In April 2019, we issued $250.0 million in aggregate principal amount of 5.20% unsecured Notes due May 1, 2024 (the “5.20% Notes”) at an issue price of 99.125%. Subsequently, in December 2019, we issued an additional $75.0 million of the 5.20% Notes at an issue price of 105.0%. Also in July 2020, we issued an additional $125.0 million aggregate principal amount of the 5.20% Notes at an issue price of 102.674%, for total net proceeds to us, resulting from the issue price and after underwriting discounts and estimated offering expenses payable by us, of approximately $127.3 million. The 5.20% Notes issued in December 2019 and July 2020 have identical terms as, and are a part of a single series with, the 5.20% Notes issued in April 2019. The aggregate net proceeds from the 5.20% Notes issuances were used to repay a portion of the borrowings outstanding under the Credit Facility. The 5.20% Notes are unsecured obligations and rank pari passu with our current and future unsecured indebtedness; senior to any of our future indebtedness that expressly provides it is subordinated to the 5.20% Notes; effectively subordinated to all of our existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness, including borrowings under our Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, including without limitation, the indebtedness of the Funds. The 5.20% Notes may be redeemed in whole or in part at any time at our option subject to certain make-whole provisions. The 5.20% Notes bear interest at a rate of 5.20% per year payable semiannually on May 1 and November 1 of each year. We may from time to time repurchase the 5.20% Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of September 30, 2020, the outstanding balance of the 5.20% Notes was $450.0 million.
The indenture governing the 5.20% Notes (the “5.20% Notes Indenture”) contains certain covenants, including covenants requiring our compliance with (regardless of whether we are subject to) the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, as well as covenants requiring us to provide financial information to the holders of the 5.20% Notes and the Trustee if we cease to be subject to the reporting requirements of the Exchange Act. These covenants are subject to limitations and exceptions that are described in the 5.20% Notes Indenture.
We maintain a program with certain selling agents through which we can sell shares of our common stock by means of at-the-market offerings from time to time (the “ATM Program”). During the nine months ended September 30, 2020, we sold 1,154,937 shares of our common stock at a weighted-average price of $32.67 per share and raised $37.7 million of gross proceeds under the ATM Program. Net proceeds were $37.2 million after commissions to the selling agents on shares sold and offering costs. As of September 30, 2020, sales transactions representing 2,603 shares had not settled and are not included in shares issued and outstanding on the face of the consolidated balance sheet but are included in the weighted-average shares outstanding in the consolidated statement of operations and in the shares used to calculate net asset value per share. As of September 30, 2020, 7,204,213 shares remained available for sale under the ATM Program.
During the year ended December 31, 2019, we sold 2,247,187 shares of our common stock at a weighted-average price of $40.05 per share and raised $90.0 million of gross proceeds under the ATM Program. Net proceeds were $88.8 million after commissions to the selling agents on shares sold and offering costs.
We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, cash flows generated through our ongoing operating activities, utilization of available borrowings under our Credit Facility, and a combination of future issuances of debt and equity capital. Our primary uses of funds will be investments in portfolio companies, operating expenses and cash distributions to holders of our common stock.
We periodically invest excess cash balances into marketable securities and idle funds investments. The primary investment objective of marketable securities and idle funds investments is to generate incremental cash returns on excess cash balances prior to utilizing those funds for investment in our LMM, Middle Market and Private Loan portfolio investments. Marketable securities and idle funds investments generally consist of debt investments, independently rated debt investments, certificates of deposit with financial institutions, diversified bond funds and publicly traded debt and equity investments.
If our common stock trades below our net asset value per share, we will generally not be able to issue additional common stock at the market price, unless our stockholders approve such a sale and our Board of Directors makes certain
determinations. We did not seek stockholder authorization to sell shares of our common stock below the then current net asset value per share of our common stock at our 2020 annual meeting of stockholders because our common stock price per share has generally traded significantly above the net asset value per share of our common stock since 2011. We would therefore need future approval from our stockholders to issue shares below the then current net asset value per share.
In order to satisfy the Code requirements applicable to a RIC, we intend to distribute to our stockholders, after consideration and application of our ability under the Code to carry forward certain excess undistributed taxable income from one tax year into the next tax year, substantially all of our taxable income. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if certain requirements are met). This requirement limits the amount that we may borrow. In January 2008, we received an exemptive order from the SEC to exclude SBA-guaranteed debt securities issued by MSMF and any other wholly owned subsidiaries of ours which operate as SBICs from the asset coverage requirements of the 1940 Act as applicable to us, which, in turn, enables us to fund more investments with debt capital.
Although we have been able to secure access to additional liquidity, including through the Credit Facility, public debt issuances, leverage available through the SBIC program and equity offerings, there is no assurance that debt or equity capital will be available to us in the future on favorable terms, or at all.
Recently Issued or Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting.” The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. We have agreements that have LIBOR as a reference rate with certain portfolio companies and also with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. We adopted this amendment in March 2020 and plan to apply the amendments in this update to account for contract modifications due to changes in reference rates. We continue to evaluate the impact that the amendments in this update will have on our consolidated financial statements and disclosures when applied.
In May 2020, the SEC published Release No. 33-10786 (the “Release”), Amendments to Financial Disclosures about Acquired and Disposed Businesses, announcing its adoption of rules amending Rule 1-02(w)(2) used in the determination of a significant subsidiary specific to investment companies, including BDCs. In part, the rules adopted pursuant to the Release eliminated the use of the asset test, and amended the income and investment tests for determining whether an unconsolidated subsidiary requires additional disclosure in the footnotes of the financial statements. We adopted the rules adopted pursuant to the Release during the quarter ended June 30, 2020. The impact of the adoption of these rules on our consolidated financial statements was not material.
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by us as of the specified effective date. We believe that the impact of recently issued standards and any that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Inflation
Inflation has not had a significant effect on our results of operations in any of the reporting periods presented herein. However, our portfolio companies have experienced, and may in the future experience, the impacts of inflation on their operating results, including periodic escalations in their costs for labor, raw materials and third-party services and required energy consumption.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments include commitments to extend credit and fund equity capital and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. At September 30, 2020, we had a total of $125.0 million in outstanding commitments comprised of (i) forty-three investments with commitments to fund revolving loans that had not been fully drawn or term loans with additional commitments not yet funded and (ii) ten investments with equity capital commitments that had not been fully called.
Contractual Obligations
As of September 30, 2020, the future fixed commitments for cash payments in connection with our SBIC debentures, the 4.50% Notes due 2022, the 5.20% Notes and rent obligations under our office lease for each of the next five years and thereafter are as follows:
40,000
63,800
185,000
304,800
Interest due on SBIC debentures
9,726
8,719
8,464
7,016
20,303
54,228
Interest due on 4.50% Notes due 2022
4,163
8,325
20,813
5.20% Notes due 2024
450,000
Interest due on 5.20% Notes due 2024
11,700
23,400
93,600
Operating Lease Obligation (1)
16,054
82,227
226,234
48,668
533,334
207,913
1,114,430
As of September 30, 2020, we had $253.0 million in borrowings outstanding under our Credit Facility, and the Credit Facility is currently scheduled to mature in September 2023. The Credit Facility contains two, one-year extension options which could extend the maturity to September 2025, subject to lender approval. See further discussion of the Credit Facility terms in “—Liquidity and Capital Resources—Capital Resources.”
Related Party Transactions
As discussed further above, the External Investment Manager is treated as a wholly owned portfolio company of MSCC and is included as part of our Investment Portfolio. At September 30, 2020, we had a receivable of approximately $2.4 million due from the External Investment Manager, which included approximately $2.0 million related primarily to operating expenses incurred by us as required to support the External Investment Manager’s business and amounts due from the External Investment Manager to Main Street under a tax sharing agreement (see further discussion above in “—Critical Accounting Policies—Income Taxes”) and approximately $0.3 million of dividends declared but not paid by the External Investment Manager.
In November 2015, our Board of Directors approved and adopted the Main Street Capital Corporation Deferred Compensation Plan (the “2015 Deferred Compensation Plan”). The 2015 Deferred Compensation Plan became effective on January 1, 2016 and replaced the Deferred Compensation Plan for Non-Employee Directors previously adopted by the Board of Directors in June 2013 (the “2013 Deferred Compensation Plan”). Under the 2015 Deferred Compensation Plan, non-employee directors and certain key employees may defer receipt of some or all of their cash compensation and directors’ fees, subject to certain limitations. Individuals participating in the 2015 Deferred Compensation Plan receive distributions of their respective balances based on predetermined payout schedules or other events as defined by the plan and are also able to direct investments made on their behalf among investment alternatives permitted from time to time under the plan, including phantom Main Street stock units. As of September 30, 2020, $10.0 million of compensation and directors’ fees had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). Of this amount, $5.0 million was deferred into phantom Main Street stock units, representing 152,633 shares of our common stock. Including phantom stock units issued through dividend reinvestment and net of any shares distributed, the phantom stock units outstanding as of September 30, 2020
represented 157,201 shares of our common stock. Any amounts deferred under the plan represented by phantom Main Street stock units will not be issued or included as outstanding on the consolidated statements of changes in net assets until such shares are actually distributed to the participant in accordance with the plan, but the related phantom stock units are included in weighted-average shares outstanding with the related dollar amount of the deferral included in total expenses in Main Street’s consolidated statements of operations as earned. The dividend amounts related to additional phantom stock units are included in the statements of changes in net assets as an increase to dividends to stockholders offset by a corresponding increase to additional paid-in capital.
Recent Developments
During November 2020, we declared regular monthly dividends of $0.205 per share for each month of January, February and March of 2021. These regular monthly dividends equal a total of $0.615 per share for the first quarter of 2021, unchanged from the regular monthly dividends paid in the first quarter of 2020. Including the regular monthly dividends declared for the fourth quarter of 2020 and first quarter of 2021, we will have paid $30.215 per share in cumulative dividends since our October 2007 initial public offering.
Also, during November 2020, we expanded the total commitments under the Credit Facility from $740.0 million to $780.0 million. The $40.0 million net increase in total commitments was the result of the addition of a new lender relationship, which further diversifies our lending group under the Credit Facility to a total of 19 participants. The recent increase in total commitments was executed under the accordion feature of the Credit Facility, which allows for an increase up to $800.0 million in total commitments under the facility from new and existing lenders on the same terms and conditions as the existing commitments.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates, and changes in interest rates may affect both our interest expense on the debt outstanding under our Credit Facility and our interest income from portfolio investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent that any debt investments include floating interest rates. See “Risk Factors—Risks Relating to Our Business and Structure -The interest rates of our floating-rate loans to our portfolio companies and for any of our borrowings that extend beyond 2021 might be subject to change based on recent regulatory changes” included in our Form 10-K for the fiscal year ended December 31, 2019 for more information regarding risks associated with our debt investments and borrowings that utilize LIBOR as a reference rate.
The majority of our debt investments are made with either fixed interest rates or floating rates that are subject to contractual minimum interest rates for the term of the investment. As of September 30, 2020, approximately 72% of our debt investment portfolio (at cost) bore interest at floating rates, 84% of which were subject to contractual minimum interest rates. Our interest expense will be affected by changes in the published LIBOR rate in connection with our Credit Facility; however, the interest rates on our outstanding SBIC debentures, 4.50% Notes due 2022 and 5.20% Notes, which collectively comprise the majority of our outstanding debt, are fixed for the life of such debt. As of September 30, 2020, we had not entered into any interest rate hedging arrangements. Due to our limited use of
derivatives, we have claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act and, therefore, are not subject to registration or regulation as a pool operator under such Act. The following table shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of September 30, 2020.
Increase
(Increase)
(Decrease)
Decrease
(Decrease) in Net
in Interest
Basis Point Change
Income
Expense
Income per Share
(974)
392
(582)
(125)
(883)
(491)
(783)
(391)
(75)
(683)
(291)
(50)
(583)
(191)
(483)
626
(633)
(1,265)
(1,898)
4,581
(2,530)
2,051
0.03
7,712
(3,163)
4,549
11,029
(3,795)
0.11
The hypothetical results assume that all LIBOR and prime rate changes would be effective on the first day of the period. However, the contractual LIBOR and prime rate reset dates would vary throughout the period, on either a monthly or quarterly basis, for both our investments and our Credit Facility. The hypothetical results would also be impacted by the changes in the amount of debt outstanding under our Credit Facility (with an increase (decrease) in the debt outstanding under the Credit Facility resulting in an (increase) decrease in the hypothetical interest expense).
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, President, Chief Financial Officer, Chief Compliance Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 of the Exchange Act). Based on that evaluation, our Chief Executive Officer, President, Chief Financial Officer, Chief Compliance Officer and Chief Accounting Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them of material information relating to us that is required to be disclosed in the reports we file or submit under the Exchange Act. There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that many of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise. Furthermore, third parties may seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of any current legal proceedings cannot at this time be predicted with certainty, we do not expect any current matters will materially affect our financial condition or results of operations; however, there can be no assurance whether any pending legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.
Item 1A. Risk Factors
You should carefully consider the risks described below and all other information contained in this Quarterly Report on Form 10-Q, including our interim financial statements and the related notes thereto, before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and/or operating results, as well as the market price of our securities.
In addition to the other information set forth in this report, you should carefully consider the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 that we filed with the SEC on February 28, 2020 and in each of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 that we filed with the SEC on May 8, 2020 and August 7, 2020, respectively, which could materially affect our business, financial condition or operating results.
There are no material changes to the risk factors as previously disclosed in these reports.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2020, we issued 132,583 shares of our common stock under our dividend reinvestment plan. These issuances were not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate value of the shares of common stock issued during the three months ended September 30, 2020 under the dividend reinvestment plan was approximately $4.1 million.
Upon vesting of restricted stock awarded pursuant to our employee equity compensation plan, shares may be withheld to meet applicable tax withholding requirements. Any withheld shares are treated as common stock purchases by the Company in our consolidated financial statements as they reduce the number of shares received by employees upon vesting (see “Purchase of vested stock for employee payroll tax withholding” in the consolidated statements of changes in net assets for share amounts withheld).
Item 5. Other Information
On November 4, 2020, Main Street Capital Corporation (“Main Street”) entered into that certain Supplement Agreement (the “Supplement”) to the Third Amended and Restated Credit Agreement, dated June 5, 2018, (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Main Street, as borrower, Main Street Capital Partners, LLC, Main Street Equity Interests, Inc., Main Street CA Lending, LLC and MS International Holdings, Inc., as guarantors, Truist Bank (“Truist”) (f/k/a Branch Banking and Trust Company), Frost Bank, Royal Bank of Canada, Hancock Whitney Bank, ZB, N.A. dba Amegy Bank, Texas Capital Bank, N.A., Cadence Bank, N.A., Trustmark National Bank, BancorpSouth Bank, Comerica Bank, Raymond James Bank, N.A., BOKF, NA dba Bank of Texas, Woodforest National Bank, City National Bank, Veritex Community Bank, First National Bank of Pennsylvania, Mutual of Omaha Bank and First Financial Bank, N.A., collectively as lenders, and Truist, as administrative agent, to add Sumitomo Mitsui Banking Corporation as a lender and increase the total commitments under the Credit Agreement from $740.0 million to $780.0 million.
Truist, Royal Bank of Canada, Comerica Bank, Raymond James Bank, N.A. and the other lenders under the Credit Agreement, and their respective affiliates, may from time to time receive customary fees and expenses in the performance of investment banking, financial advisory or other services for Main Street.
The above summary is not complete and is qualified in its entirety to the full text of the Credit Agreement as amended by the Supplement and related documents.
Item 6. Exhibits
Listed below are the exhibits which are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
ExhibitNumber
Description of Exhibit
10.1
Investment Advisory and Administrative Services Agreement dated October 30, 2020 by and between MSC Income Fund, Inc. and MSC Adviser I, LLC (previously filed as Exhibit 10.1 to Main Street Capital Corporation’s Current Report on Form 8-K filed on November 3, 2020 (File No. 41-33723)).
10.2
Supplement Agreement dated November 4, 2020.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ DWAYNE L. HYZAK
Date: November 6, 2020
Dwayne L. Hyzak
Chief Executive Officer
(principal executive officer)
/s/ BRENT D. SMITH
Brent D. Smith
Chief Financial Officer and Treasurer
(principal financial officer)
/s/ LANCE A. PARKER
Lance A. Parker
Vice President and Chief Accounting Officer
(principal accounting officer)