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, 2021
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 4, 2021 was 69,583,191.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets—September 30, 2021 (unaudited) and December 31, 2020
1
Consolidated Statements of Operations (unaudited)—Three and nine months ended September 30, 2021 and 2020
2
Consolidated Statements of Changes in Net Assets (unaudited)—Nine months ended September 30, 2021 and 2020
3
Consolidated Statements of Cash Flows (unaudited)—Nine months ended September 30, 2021 and 2020
4
Consolidated Schedule of Investments (unaudited)—September 30, 2021
5
Consolidated Schedule of Investments—December 31, 2020
30
Notes to Consolidated Financial Statements (unaudited)
54
Consolidated Schedules of Investments in and Advances to Affiliates (unaudited)—Nine months ended September 30, 2021 and 2020
90
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
102
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
122
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
123
Item 6.
Exhibits
124
Signatures
125
MAIN STREET CAPITAL CORPORATION
Consolidated Balance Sheets
(dollars in thousands, except shares and per share amounts)
September 30,
December 31,
2021
2020
(Unaudited)
ASSETS
Investments at fair value:
Control investments (cost: $988,222 and $831,490 as of September 30, 2021 and December 31, 2020, respectively)
$
1,336,218
1,113,725
Affiliate investments (cost: $505,935 and $416,479 as of September 30, 2021 and December 31, 2020, respectively)
485,139
366,301
Non‑Control/Non‑Affiliate investments (cost: $1,338,405 and $1,268,740 as of September 30, 2021 and December 31, 2020, respectively)
1,295,747
1,204,840
Total investments (cost: $2,832,562 and $2,516,709 as of September 30, 2021 and December 31, 2020, respectively)
3,117,104
2,684,866
Cash and cash equivalents
59,569
31,919
Interest receivable and other assets
51,172
49,761
Receivable for securities sold
11,467
—
Deferred financing costs (net of accumulated amortization of $9,219 and $8,477 as of September 30, 2021 and December 31, 2020, respectively)
4,460
2,818
Total assets
3,243,772
2,769,364
LIABILITIES
Credit facility
200,000
269,000
SBIC debentures (par: $350,000 and $309,800 as of September 30, 2021 and December 31, 2020, respectively)
342,435
303,972
5.20% Notes due 2024 (par: $450,000 as of both September 30, 2021 and December 31, 2020)
451,408
451,817
4.50% Notes due 2022 (par: $185,000 as of both September 30, 2021 and December 31, 2020)
184,292
183,836
3.00% Notes due 2026 (par: $300,000 as of September 30, 2021)
295,445
Accounts payable and other liabilities
27,904
20,833
Payable for securities purchased
5,084
Interest payable
15,303
8,658
Dividend payable
14,553
13,889
Deferred tax liability, net
23,041
2,592
Total liabilities
1,559,465
1,254,597
Commitments and contingencies (Note K)
NET ASSETS
Common stock, $0.01 par value per share (150,000,000 shares authorized; 69,346,340 and 67,674,853 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively)
694
677
Additional paid‑in capital
1,675,917
1,615,940
Total undistributed (overdistributed) earnings
7,696
(101,850)
Total net assets
1,684,307
1,514,767
Total liabilities and net assets
NET ASSET VALUE PER SHARE
24.27
22.35
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
34,852
18,558
85,904
57,357
Affiliate investments
12,274
8,255
34,785
23,626
Non‑Control/Non‑Affiliate investments
29,653
25,141
86,192
79,126
Total investment income
76,779
51,954
206,881
160,109
EXPENSES:
Interest
(14,711)
(12,489)
(42,914)
(36,827)
Compensation
(9,576)
(4,980)
(22,790)
(12,280)
General and administrative
(3,047)
(3,354)
(9,439)
(9,827)
Share‑based compensation
(2,869)
(2,561)
(7,961)
(8,215)
Expenses allocated to the External Investment Manager
2,728
1,892
7,680
5,340
Total expenses
(27,475)
(21,492)
(75,424)
(61,809)
NET INVESTMENT INCOME
49,304
30,462
131,457
98,300
NET REALIZED GAIN (LOSS):
8,786
4,041
(4,459)
(15,825)
(5,147)
(172)
3,962
(407)
4,666
(17,743)
11,072
(28,091)
Realized loss on extinguishment of debt
(534)
Total net realized gain (loss)
8,305
(13,874)
10,575
(44,857)
NET UNREALIZED APPRECIATION (DEPRECIATION):
20,671
7,139
65,756
(35,096)
14,285
2,406
30,518
(26,883)
3,675
53,569
20,798
(56,051)
SBIC debentures
460
Total net unrealized appreciation (depreciation)
38,631
63,114
117,072
(117,570)
INCOME TAXES:
Federal and state income, excise and other taxes
(953)
(1,165)
(2,242)
(1,420)
Deferred taxes
(11,331)
(342)
(20,449)
15,673
Income tax benefit (provision)
(12,284)
(1,507)
(22,691)
14,253
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
83,956
78,195
236,413
(49,874)
NET INVESTMENT INCOME PER SHARE—BASIC AND DILUTED
0.71
0.46
1.92
1.50
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE—BASIC AND DILUTED
1.22
1.18
3.45
(0.76)
WEIGHTED AVERAGE SHARES OUTSTANDING—BASIC AND DILUTED
69,021,826
66,110,555
68,557,362
65,319,784
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, 2019
64,252,937
643
1,512,435
23,312
1,536,390
Public offering of common stock, net of offering costs
91,458
3,854
3,855
2,837
Purchase of vested stock for employee payroll tax withholding
(851)
(29)
Dividend reinvestment
108,722
3,929
3,930
Amortization of directors’ deferred compensation
238
Issuance of restricted stock
10,383
Dividends to stockholders
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
9
26,007
26,016
2,817
(84,094)
(1)
(1,730)
(1,731)
146,229
4,158
4,159
224
Issuance of restricted stock, net of forfeited shares
414,053
(4)
99
(40,179)
(40,080)
Net increase resulting from operations
43,369
Balances at June 30, 2020
65,763,805
658
1,554,928
(184,642)
1,370,944
205,949
7,741
7,743
2,561
(1,998)
(7)
132,583
4,129
4,130
195
(6,899)
95
(40,674)
(40,579)
Balances at September 30, 2020
66,093,440
661
1,569,642
(147,121)
1,423,182
Balances at December 31, 2020
67,762,032
117,388
3,626
3,628
2,333
(180)
106,651
3,698
3,699
15,007
96
(41,893)
(41,797)
-
57,346
Balances at March 31, 2021
68,000,898
680
1,625,881
(86,397)
1,540,164
231,795
9,396
9,398
2,759
(114,357)
(4,464)
(4,465)
91,632
3,755
3,756
163
321,821
(3)
(42,140)
(42,044)
95,110
Balances at June 30, 2021
68,531,789
685
1,637,583
(33,427)
1,604,841
772,274
8
31,812
31,820
2,869
(13,818)
(575)
95,364
3,984
3,985
147
23,036
97
(42,833)
(42,736)
Balances at September 30, 2021
69,408,645
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
(911,095)
(414,574)
Proceeds from sales and repayments of debt investments in portfolio companies
530,964
255,147
Proceeds from sales and return of capital of equity investments in portfolio companies
83,376
21,210
Net unrealized (appreciation) depreciation
(117,072)
117,570
Net realized (gain) loss
(10,575)
44,857
Accretion of unearned income
(10,972)
(8,239)
Payment-in-kind interest
(6,280)
(3,816)
Cumulative dividends
(1,296)
(1,404)
Share-based compensation expense
7,961
8,215
Amortization of deferred financing costs
2,277
1,986
Deferred tax (benefit) provision
20,449
(15,673)
Changes in other assets and liabilities:
(669)
12,661
6,645
6,100
7,576
(4,739)
Deferred fees and other
3,586
2,296
Net cash used in operating activities
(158,712)
(28,277)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public offering of common stock, net of offering costs
44,846
37,614
Proceeds from public offering of 5.20% Notes due 2024
125,000
Proceeds from public offering of 3.00% Notes due 2026
300,000
Dividends paid
(114,471)
(107,673)
Proceeds from issuance of SBIC debentures
80,200
35,000
Repayments of SBIC debentures
(40,000)
(42,000)
Proceeds from credit facility
645,000
292,000
Repayments on credit facility
(714,000)
(339,000)
Debt issuance premiums (costs), net
(10,166)
978
Purchases of vested stock for employee payroll tax withholding
(5,047)
(1,767)
Net cash provided by financing activities
186,362
152
Net increase (decrease) in cash and cash equivalents
27,650
(28,125)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
55,246
CASH AND CASH EQUIVALENTS AT END OF PERIOD
27,121
Supplemental cash flow disclosures:
Interest paid
33,898
28,646
Taxes paid
2,046
2,439
Operating non-cash activities:
Value of shares issued pursuant to the DRIP
11,440
12,219
Consolidated Schedule of Investments
September 30, 2021
Portfolio Company (1) (20)
Investment Date (24)
Business Description
Type of Investment (2) (3) (15)
Shares/Units
Rate
Maturity Date
Principal (4)
Cost (4)
Fair Value (18)
Control Investments (5)
Analytical Systems Keco Holdings, LLC
August 16, 2019
Manufacturer of Liquid and Gas Analyzers
Secured Debt
(9)
12.00% (L+10.00%, Floor 2.00%)
8/16/2024
5,015
4,787
Preferred Member Units
3,200
2,427
2,427.00
4,783
Warrants
(27)
420
8/16/2029
316
10,730
9,570
ASC Interests, LLC
August 1, 2013
Recreational and Educational Shooting Facility
13.00%
7/31/2022
1,850
1,831
Member Units
1,500
720
3,331
2,551
ATS Workholding, LLC
(10)
March 10, 2014
Manufacturer of Machine Cutting Tools and Accessories
(14)
5.00%
8/16/2023
4,814
4,655
2,875
3,725,862
3,726
8,381
Barfly Ventures, LLC
August 31, 2015
Casual Restaurant Group
7.00%
10/31/2024
711
37
1,584
1,929
2,295
2,640
Bolder Panther Group, LLC
December 31, 2020
Consumer Goods and Fuel Retailer
10.50% (L+9.00%, Floor 1.50%)
12/31/2025
39,000
38,671
Class A Preferred Member Units
(8)
14.00%
10,194
Class B Preferred Member Units
140,000
8.00%
14,000
20,310
62,865
69,504
Brewer Crane Holdings, LLC
January 9, 2018
Provider of Crane Rental and Operating Services
11.00% (L+10.00%, Floor 1.00%)
1/9/2023
8,184
8,156
2,950
4,280
12,436
Bridge Capital Solutions Corporation
April 18, 2012
Financial Services and Cash Flow Solutions Provider
12/11/2024
8,813
82
7/25/2026
2,132
4,060
(30)
1,000
Consolidated Schedule of Investments (Continued)
(8) (30)
17,742
12,945
14,873
Café Brazil, LLC
April 20, 2004
1,233
1,742
2,570
California Splendor Holdings LLC
March 30, 2018
Processor of Frozen Fruits
3/30/2023
28,000
27,899
(8) (19)
6,725
15.00% PIK
9,194
6,157
10,775
10,805
47,868
47,898
CBT Nuggets, LLC
June 1, 2006
Produces and Sells IT Training Certification Videos
416
1,300
52,620
Centre Technologies Holdings, LLC
January 4, 2019
Provider of IT Hardware Services and Software Solutions
1/4/2024
9,569
9,518
12,696
5,840
15,358
Chamberlin Holding LLC
February 26, 2018
Roofing and Waterproofing Specialty Contractor
9.00% (L+8.00%, Floor 1.00%)
2/26/2023
17,817
17,722
4,347
24,140
1,047,146
1,322
1,430
30,484
43,387
Charps, LLC
February 3, 2017
Pipeline Maintenance and Construction
Unsecured Debt
10.00%
1/31/2024
5,694
4,582
5,034
1,600
400
14,240
4,982
19,274
Clad-Rex Steel, LLC
December 20, 2016
Specialty Manufacturer of Vinyl-Clad Metal
10.50% (L+9.50%, Floor 1.00%)
1/15/2024
10,480
10,393
717
7,280
10,250
12/20/2036
1,089
1,078
800
210
530
18,961
22,251
CMS Minerals Investments
January 30, 2015
Oil & Gas Exploration & Production
100
1,985
1,883
6
Cody Pools, Inc.
March 6, 2020
Designer of Residential and Commercial Pools
12.25% (L+10.50%, Floor 1.75%)
3/6/2025
18,047
17,916
587
8,317
30,390
26,233
48,437
Colonial Electric Company LLC
March 31, 2021
Provider of Electrical Contracting Services
12.00%
3/31/2026
24,885
24,654
17,280
8,460
32,334
33,114
CompareNetworks Topco, LLC
January 29, 2019
Internet Publishing and Web Search Portals
10.00% (L+9.00%, Floor 1.00%)
1/29/2024
6,477
6,450
1,975
12,000
8,425
18,477
Copper Trail Fund Investments
(12) (13)
July 17, 2017
Investment Partnership
LP Interests (CTMH, LP)
(31)
38.8%
710
Datacom, LLC
May 30, 2014
Technology and Telecommunications Provider
8,919
8,207
9,000
2,610
10,817
Digital Products Holdings LLC
April 1, 2018
Designer and Distributor of Consumer Electronics
4/1/2023
17,183
17,120
3,857
9,501
9,835
26,621
26,955
Direct Marketing Solutions, Inc.
February 13, 2018
Provider of Omni-Channel Direct Marketing Services
12.00% (L+11.00%, Floor 1.00%)
2/13/2023
14,855
14,799
Preferred Stock
8,400
17,150
23,199
31,949
Gamber-Johnson Holdings, LLC
June 24, 2016
Manufacturer of Ruggedized Computer Mounting Systems
(9) (17)
9.00% (L+7.00%, Floor 2.00%)
6/24/2021
20,638
9,042
17,692
55,370
38,330
76,008
Garreco, LLC
July 15, 2013
Manufacturer and Supplier of Dental Products
7
9.00% (L+8.00%, Floor 1.00%, Ceiling 1.50%)
4,519
1,200
2,210
5,719
6,729
GRT Rubber Technologies LLC
December 19, 2014
Manufacturer of Engineered Rubber Products
7.10% (L+7.00%)
12/31/2023
16,775
5,879
13,065
44,900
29,840
61,675
Gulf Manufacturing, LLC
August 31, 2007
Manufacturer of Specialty Fabricated Industrial Piping Products
438
2,980
5,640
Gulf Publishing Holdings, LLC
April 29, 2016
Energy Industry Focused Media and Publishing
(9) (17) (19)
10.50% (5.25% Cash, 5.25% PIK) (L+9.50%, Floor 1.00%)
9/30/2020
257
(17) (19)
12.50% (6.25% Cash, 6.25% PIK)
4/29/2021
13,565
10,462
3,681
17,503
10,719
Harris Preston Fund Investments
October 1, 2017
LP Interests (2717 MH, L.P.)
49.3%
2,703
3,391
Harrison Hydra-Gen, Ltd.
June 4, 2010
Manufacturer of Hydraulic Generators
107,456
718
3,530
J&J Services, Inc.
October 31, 2019
Provider of Dumpster and Portable Toilet Rental Services
11.50%
10,800
10,727
2,814
7,085
15,400
17,812
26,200
Jensen Jewelers of Idaho, LLC
November 14, 2006
Retail Jewelry Store
10.00% (Prime+6.75%, Floor 2.00%)
11/14/2023
2,750
2,734
627
811
11,260
3,545
14,010
KBK Industries, LLC
January 23, 2006
Manufacturer of Specialty Oilfield and Industrial Products
325
783
13,620
Kickhaefer Manufacturing Company, LLC
October 31, 2018
Precision Metal Parts Manufacturing
10/31/2023
20,415
20,313
581
12,240
9.00%
10/31/2048
3,924
3,885
992
1,210
37,430
37,648
Market Force Information, LLC
July 28, 2017
Provider of Customer Experience Management Services
7/28/2023
3,400
(14) (19)
12.00% PIK
26,079
25,952
11,159
743,921
16,642
45,994
14,559
MH Corbin Holding LLC
Manufacturer and Distributor of Traffic Safety Products
3/31/2022
8,330
8,312
6,006
66,000
4,400
4,000
6,000
18,712
MS Private Loan Fund I, LP
January 26, 2021
6/30/2022
30,291
LP Interests
13.9%
31,291
MSC Adviser I, LLC
(16)
November 22, 2013
Third Party Investment Advisory Services
29,500
128,080
MSC Income Fund Inc.
January 28, 2021
Business Development Company
1/28/2026
60,000
59,648
Mystic Logistics Holdings, LLC
August 18, 2014
Logistics and Distribution Services Provider for Large Volume Mailers
1/17/2022
6,709
6,706
5,873
2,720
7,170
9,426
13,876
NAPCO Precast, LLC
January 31, 2008
Precast Concrete Manufacturing
2,955
2,975
13,560
Nebraska Vet AcquireCo, LLC
Mixed-Animal Veterinary and Animal Health Product Provider
10,500
10,408
6,500
16,908
NexRev LLC
February 28, 2018
Provider of Energy Efficiency Products & Services
11.00%
2/28/2023
16,443
16,390
14,750
86,400,000
6,880
3,280
23,270
18,030
NRP Jones, LLC
December 22, 2011
Manufacturer of Hoses, Fittings and Assemblies
3/20/2023
2,080
65,962
114
240
3,603
6,200
5,797
8,520
NuStep, LLC
January 31, 2017
Designer, Manufacturer and Distributor of Fitness Equipment
7.50% (L+6.50%, Floor 1.00%)
1/31/2025
10.50%
17,240
17,223
406
10,200
13,500
29,023
32,340
Orttech Holdings, LLC
July 30, 2021
Distributor of Industrial Clutches, Brakes and Other Components
7/31/2026
24,416
24,183
11,600
35,783
Pearl Meyer Topco LLC
April 27, 2020
Provider of Executive Compensation Consulting Services
4/27/2025
33,674
33,416
13,800
13,000
21,480
46,416
55,154
Pegasus Research Group, LLC
January 6, 2011
Provider of Telemarketing and Data Services
1,290
PPL RVs, Inc.
June 10, 2010
Recreational Vehicle Dealer
7.50% (L+7.00%, Floor 0.50%)
11/15/2022
12,405
12,369
12,375
2,000
2,150
13,690
14,519
26,065
Principle Environmental, LLC
February 1, 2011
Noise Abatement Service Provider
4/30/2023
6,397
6,352
19,631
4,600
9,580
1,036
12,152
Quality Lease Service, LLC
June 8, 2015
Provider of Rigsite Accommodation Unit Rentals and Related Services
9,813
3,030
10
River Aggregates, LLC
March 30, 2011
Processor of Construction Aggregates
369
Tedder Industries, LLC
August 31, 2018
Manufacturer of Firearm Holsters and Accessories
8/31/2022
16,800
16,733
479
8,136
24,869
Trantech Radiator Topco, LLC
May 31, 2019
Transformer Cooling Products and Services
5/31/2024
8,720
615
6,650
13,313
15,308
UnionRock Energy Fund II, LP
June 15, 2020
49.6%
4,048
6,455
Vision Interests, Inc.
June 5, 2007
Manufacturer / Installer of Commercial Signage
9/30/2022
2,028
Series A Preferred Stock
3,000,000
3,000
5,028
Ziegler’s NYPD, LLC
October 1, 2008
10/1/2022
625
6.50%
10,072
2,834
2,130
10/1/2025
600
7,809
6,505
OMi Topco, LLC
April 1, 2008
Manufacturer of Overhead Cranes
8/31/2026
18,000
17,824
900
1,080
20,210
18,904
38,210
Subtotal Control Investments (79.3% of net assets at fair value)
988,222
11
Affiliate Investments (6)
AAC Holdings, Inc.
(11)
June 30, 2017
Substance Abuse Treatment Service Provider
(19)
18.00% (10.00% Cash, 8.00% PIK)
6/25/2025
9,995
9,799
9,708
593,928
3,148
2,110
554,353
12/11/2025
1,970
12,947
13,788
AFG Capital Group, LLC
November 7, 2014
Provider of Rent-to-Own Financing Solutions and Services
5/25/2022
231
186
7,380
1,431
7,611
ATX Networks Corp.
June 30, 2015
Provider of Radio Frequency Management Equipment
8.50% (L+7.50%, Floor 1.00%)
9/1/2026
7,667
7,092
10.00% PIK
9/1/2028
3,067
1,963
583
9,055
BBB Tank Services, LLC
April 8, 2016
Maintenance, Repair and Construction Services to the Above-Ground Storage Tank Market
4/8/2021
4,800
3,748
Preferred Stock (non-voting)
(8) (14) (19)
162
800,000
5,762
Boccella Precast Products LLC
Manufacturer of Precast Hollow Core Concrete
2/28/2027
320
2,160,000
2,256
4,830
2,576
5,150
Brightwood Capital Fund Investments
July 21, 2014
LP Interests (Brightwood Capital Fund V, LP)
15.8%
Buca C, LLC
10.25% (L+9.25%, Floor 1.00%)
6/30/2020
19,491
14,370
6.00% PIK
4,770
24,261
CAI Software LLC
October 10, 2014
Provider of Specialized
12
Enterprise Resource Planning Software
12.50%
12/7/2023
66,601
66,261
77,960
174
12,590
66,435
79,191
Chandler Signs Holdings, LLC
January 4, 2016
Sign Manufacturer
Class A Units
1,500,000
650
Classic H&G Holdings, LLC
March 12, 2020
Provider of Engineered Packaging Solutions
7.00% (L+6.00%, Floor 1.00%)
3/12/2025
1,400
19,130
154
5,760
26,290
34,294
Congruent Credit Opportunities Funds
January 24, 2012
LP Interests (Congruent Credit Opportunities Fund III, LP)
(8) (31)
17.4%
10,700
10,403
Dos Rios Partners
April 25, 2013
LP Interests (Dos Rios Partners, LP)
20.2%
6,605
9,984
LP Interests (Dos Rios Partners - A, LP)
6.4%
2,097
3,170
8,702
13,154
Dos Rios Stone Products LLC
June 27, 2016
Limestone and Sandstone Dimension Cut Stone Mining Quarries
Class A Preferred Units
2,000,000
909
EIG Fund Investments
November 6, 2015
LP Interests (EIG Global Private Debt Fund-A, L.P.)
11.1%
595
474
Freeport Financial Funds
June 13, 2013
LP Interests (Freeport Financial SBIC Fund LP)
9.3%
5,974
6,133
LP Interests (Freeport First Lien Loan Fund III LP)
6.0%
7,629
7,231
13,603
13,364
GFG Group, LLC.
Grower and Distributor of a Variety of Plants and Products to Other Wholesalers, Retailers and Garden Centers
12,545
12,431
13
226
4,900
6,990
17,331
19,421
August 9, 2017
LP Interests (HPEP 3, L.P.)
8.2%
3,193
4,183
Hawk Ridge Systems, LLC
(13)
December 2, 2016
Value-Added Reseller of Engineering Design and Manufacturing Solutions
12/2/2023
2,585
18,400
18,391
2,850
13,160
150
690
23,976
34,835
Houston Plating and Coatings, LLC
January 8, 2003
Provider of Plating and Industrial Coating Services
Unsecured Convertible Debt
5/1/2022
2,900
322,297
2,352
3,460
5,352
6,360
I-45 SLF LLC
October 20, 2015
Member Units (Fully diluted 20.0%; 24.40% profitsinterest) (8)
20.0%
19,000
15,002
Iron-Main Investments, LLC
August 3, 2021
Consumer Reporting Agency Providing Employment Background Checks and Drug Testing
8/1/2026
4,555
3,168
102,738
1,027
8,750
L.F. Manufacturing Holdings, LLC
December 23, 2013
Manufacturer of Fiberglass Products
Preferred Member Units (non-voting)
14.00% PIK
103
2,179,001
2,019
2,100
2,122
2,203
OnAsset Intelligence, Inc.
April 18, 2011
Provider of Transportation Monitoring / Tracking Products and Services
12/31/2022
7,987
187
912
7.00% PIK
1,981
14
635
830
4,699
5/10/2023
12,074
8,174
Oneliance, LLC
August 6, 2021
Construction Cleaning Company
8/6/2026
5,600
5,545
1,056
6,601
Rocaceia, LLC (Quality Lease and Rental Holdings, LLC)
January 8, 2013
(14) (32)
1/8/2018
30,369
29,865
250
2,500
32,365
SI East, LLC
Rigid Industrial Packaging Manufacturing
10.25%
8/31/2023
63,600
63,472
157
1,218
10,420
64,690
74,020
Slick Innovations, LLC
September 13, 2018
Text Message Marketing Platform
9/13/2023
5,320
5,239
70,000
700
1,510
18,084
9/13/2028
181
6,120
7,230
Sonic Systems International, LLC
August 20, 2021
Nuclear Power Staffing Services
8/20/2026
11,982
11,747
7,866
1,070
12,817
Superior Rigging & Erecting Co.
August 31, 2020
Provider of Steel Erecting, Crane Rental & Rigging Services
8/31/2025
21,500
21,323
1,571
4,500
25,823
The Affiliati Network, LLC
August 9, 2021
Performance Marketing Solutions
8/9/2026
381
11.83%
13,623
1,280,000
6,400
20,404
UniTek Global Services, Inc.
April 15, 2011
Provider of Outsourced Infrastructure Services
(9) (19)
8.50% (6.50% cash, 2.00% PIK) (2.00% PIK, L+5.50% Floor 1.00%)
8/20/2024
2,376
2,362
2,214
Secured Convertible Debt
2/20/2025
1,197
2,163
1,133,102
20.00% PIK
1,671
2,833
1,521,122
2,188
1,112
15
2,281,682
19.00% PIK
3,667
945,507
4,336,866
13.50% PIK
7,924
19,009
8,322
Universal Wellhead Services Holdings, LLC
October 30, 2014
Provider of Wellhead Equipment, Designs, and Personnel to the Oil & Gas Industry
(14) (19) (30)
716,949
1,032
4,000,000
5,032
Volusion, LLC
January 26, 2015
Provider of Online Software-as-a-Service eCommerce Solutions
(17)
1/26/2020
17,434
11/16/2023
409
4,876,670
5,990
1,831,355
1/26/2025
34,419
23,833
Subtotal Affiliate Investments (28.8% of net assets at fair value)
505,935
16
Non-Control/Non-Affiliate Investments (7)
Acousti Engineering Company of Florida
November 2, 2020
Interior Subcontractor Providing Acoustical Walls and Ceilings
10.00% (L+8.50%, Floor 1.50%)
11/2/2025
12,246
12,134
12,242
14.00% (L+12.50%, Floor 1.50%)
850
840
12,974
13,082
Adams Publishing Group, LLC
November 19, 2015
Local Newspaper Operator
8.75% (L+7.00%, Floor 1.75%)
7/3/2023
4,920
4,842
4,885
ADS Tactical, Inc.
March 7, 2017
Value-Added Logistics and Supply Chain Provider to the Defense Industry
6.75% (L+5.75%, Floor 1.00%)
3/19/2026
23,437
22,992
23,583
American Nuts, LLC
April 10, 2018
Roaster, Mixer and Packager of Bulk Nuts and Seeds
4/10/2025
12,045
11,863
American Teleconferencing Services, Ltd.
May 19, 2016
Provider of Audio Conferencing and Video Collaboration Solutions
9/9/2021
1,138
(9) (14) (17)
13,706
5,487
16,686
6,625
Arcus Hunting LLC
January 6, 2015
Manufacturer of Bowhunting and Archery Products and Accessories
13,537
Arrow International, Inc
December 21, 2020
Manufacturer and Distributor of Charitable Gaming Supplies
(9) (23)
9.18% (L+7.93%, Floor 1.25%)
12/21/2025
22,500
22,291
22,307
ASC Ortho Management Company, LLC
Provider of Orthopedic Services
5,117
5,074
5,111
13.75% PIK
12/1/2023
2,342
2,323
7,397
7,453
Berry Aviation, Inc.
July 6, 2018
Charter Airline Services
12.00% (10.50% Cash, 1.50% PIK)
1/6/2024
4,676
4,654
17
(8) (19) (30)
122,416
16.00% PIK
1,548,387
8.00% PIK
6,487
6,801
BigName Commerce, LLC
May 11, 2017
Provider of Envelopes and Complimentary Stationery Products
8.25% (L+7.25%, Floor 1.00%)
5/11/2022
1,899
1,896
Binswanger Enterprises, LLC
March 10, 2017
Glass Repair and Installation Service Provider
3/10/2023
12,387
12,328
1,050,000
1,050
730
13,378
13,117
Bluestem Brands, Inc.
December 19, 2013
Multi-Channel Retailer of General Merchandise
8/28/2025
5,357
5,335
723,184
1,350
5,358
6,685
Brainworks Software, LLC
August 12, 2014
Advertising Sales and Newspaper Circulation Software
12.50% (Prime+9.25%, Floor 3.25%)
7/22/2019
7,817
4,201
LP Interests (Brightwood Capital Fund III, LP)
1.6%
7,200
4,178
LP Interests (Brightwood Capital Fund IV, LP)
0.6%
4,350
4,499
11,550
8,677
Burning Glass Intermediate Holding Company, Inc.
June 14, 2021
Provider of Skills-Based Labor Market Analytics
6.00% (L+5.00%, Floor 1.00%)
6/10/2028
20,134
19,756
Cadence Aerospace LLC
November 14, 2017
Aerostructure Manufacturing
9.50% (7.50% Cash, 2.00% PIK) (2.00% PIK + L+6.50%, Floor 1.00%)
28,554
28,391
26,464
Camin Cargo Control, Inc.
Provider of Mission Critical Inspection, Testing and Fuel Treatment Services
18
6/4/2026
16,000
15,848
15,920
Central Security Group, Inc.
December 4, 2017
Security Alarm Monitoring Service Provider
10/16/2025
6,839
6,600
329,084
1,481
1,399
8,320
7,999
Cenveo Corporation
September 4, 2015
Provider of Digital Marketing Agency Services
322,907
6,183
2,664
Chisholm Energy Holdings, LLC
May 15, 2019
7.75% (L+6.25%, Floor 1.50%)
5/15/2026
2,857
2,801
2,661
Clarius BIGS, LLC
September 23, 2014
Prints & Advertising Film Financing
(14) (17) (19)
1/5/2015
2,776
28
Clickbooth.com, LLC
December 5, 2017
Provider of Digital Advertising Performance Marketing Solutions
9.50% (L+8.50%, Floor 1.00%)
7,700
7,637
Computer Data Source, LLC
Third Party Maintenance Provider to the Data Center Ecosystem
21,100
20,632
Construction Supply Investments, LLC
December 29, 2016
Distribution Platform of Specialty Construction Materials to Professional Concrete and Masonry Contractors
861,618
3,335
10,580
Corel Corporation
(11) (13) (21)
July 24, 2019
Publisher of Desktop and Cloud-based Software
5.12% (L+5.00%)
7/2/2026
22,891
22,143
Darr Equipment LP
April 15, 2014
Heavy Equipment Dealer
12.50% (11.50% Cash, 1.00% PIK)
6/22/2023
6,004
5,622
915,734
12/23/2023
6,478
DTE Enterprises, LLC
April 13, 2018
Industrial Powertrain Repair and Services
4/13/2023
9,324
9,247
8,871
Class AA Preferred
1,024
19
Member Units (non-voting)
776,316
776
440
11,047
10,335
Dynamic Communities, LLC
July 17, 2018
Developer of Business Events and Online Community Groups
12.50% (4.75% Cash, 7.75% PIK) (L+11.50%, Floor 1.00%)
7/17/2023
5,751
5,702
5,506
Eastern Wholesale Fence LLC
November 19, 2020
Manufacturer and Distributor of Residential and Commercial Fencing Solutions
7.50%, (L+6.50%, Floor 1.00%)
10/30/2025
19,961
19,630
19,850
EnCap Energy Fund Investments
December 28, 2010
LP Interests (EnCap Energy Capital Fund VIII, L.P.)
0.1%
3,745
1,516
LP Interests (EnCap Energy Capital Fund VIII Co-Investors, L.P.)
0.4%
777
LP Interests (EnCap Energy Capital Fund IX, L.P.)
2,254
LP Interests (EnCap Energy Capital Fund X, L.P.)
8,862
8,571
LP Interests (EnCap Flatrock Midstream Fund II, L.P.)
0.8%
6,712
LP Interests (EnCap Flatrock Midstream Fund III, L.P.)
0.2%
6,975
6,285
32,521
22,240
EPIC Y-Grade Services, LP
June 22, 2018
NGL Transportation & Storage
6/30/2027
6,910
6,832
5,955
20
Flip Electronics LLC
January 4, 2021
Distributor of Hard-to-Find and Obsolete Electronic Components
(9) (33)
8.99% (L+7.99%, Floor 1.00%)
1/2/2026
5,400
5,298
5,365
Fortna Acquisition Co., Inc.
July 23, 2019
Process, Physical Distribution and Logistics Consulting Services
5.08% (L+5.00%)
4/8/2025
7,615
7,534
7,551
Fuse, LLC
June 30, 2019
Cable Networks Operator
6/28/2024
1,810
1,672
10,429
256
2,066
GeoStabilization International (GSI)
December 31, 2018
Geohazard Engineering Services & Maintenance
5.33% (L+5.25%)
12/19/2025
11,138
11,063
11,083
GoWireless Holdings, Inc.
December 31, 2017
Provider of Wireless Telecommunications Carrier Services
12/22/2024
18,534
18,432
18,589
Grupo Hima San Pablo, Inc.
March 7, 2013
Tertiary Care Hospitals
9.25% (L+7.00%, Floor 1.50%)
4/30/2019
4,504
2,363
(14) (17)
13.75%
10/15/2018
2,055
2,040
49
6,544
2,412
GS HVAM Intermediate, LLC
October 18, 2019
Specialized Food Distributor
10/2/2024
13,015
12,933
GS Operating, LLC
February 24, 2020
Distributor of Industrial and Specialty Parts
8.00% (L+6.50%, Floor 1.50%)
2/24/2025
25,592
25,243
HDC/HW Intermediate Holdings
December 21, 2018
Managed Services and Hosting Provider
12/21/2023
3,457
3,422
3,064
Heartland Dental, LLC
September 9, 2020
Dental Support Organization
4/30/2025
14,813
14,454
14,887
HOWLCO LLC
August 19, 2021
Provider of Accounting and Business Development Software to Real Estate End Markets
10/23/2026
25,610
21
HW Temps LLC
July 2, 2015
Temporary Staffing Solutions
3/29/2023
7,844
7,790
Hybrid Promotions, LLC
June 30, 2021
Wholesaler of Licensed, Branded and Private Label Apparel
9.25% (L+8.25%, Floor 1.00%)
6/30/2026
7,088
6,951
IG Parent Corporation
Software Engineering
7/30/2026
9,615
9,438
Implus Footcare, LLC
June 1, 2017
Provider of Footwear and Related Accessories
8.75% (L+7.75%, Floor 1.00%)
4/30/2024
18,749
18,495
17,639
Independent Pet Partners Intermediate Holdings, LLC
November 20, 2018
Omnichannel Retailer of Specialty Pet Products
6.15% PIK (L+6.00% PIK)
12/22/2022
6,563
11/20/2023
17,620
16,449
3,235
4,095
1,558,333
1,558
27,805
27,107
Industrial Services Acquisition, LLC
June 17, 2016
Industrial Cleaning Services
7.75% (L+6.75%, Floor 1.00%)
8/13/2026
19,483
19,048
144
118
80
79
20,145
20,037
Inn of the Mountain Gods Resort and Casino
October 30, 2013
Hotel & Casino Owner & Operator
9.25%
11/30/2023
6,677
6,444
Interface Security Systems, L.L.C
August 7, 2019
Commercial Security & Alarm Services
9.75% (8.75% Cash, 1.00% PIK) (1.00% PIK + L+7.00%, Floor 1.75%)
8/7/2023
7,313
7,234
6,306
Intermedia Holdings, Inc.
August 3, 2018
Unified Communications as a Service
22
7/19/2025
20,680
20,608
20,693
Invincible Boat Company, LLC.
August 28, 2019
Manufacturer of Sport Fishing Boats
17,770
17,602
INW Manufacturing, LLC
May 19, 2021
Manufacturer of Nutrition and Wellness Products
6.50% (L+5.75%, Floor 0.75%)
3/25/2027
7,242
7,304
Isagenix International, LLC
June 21, 2018
Direct Marketer of Health & Wellness Products
6/14/2025
5,261
5,237
4,406
Jackmont Hospitality, Inc.
May 26, 2015
Franchisee of Casual Dining Restaurants
10/14/2021
3,901
Joerns Healthcare, LLC
April 3, 2013
Manufacturer and Distributor of Health Care Equipment & Supplies
8/21/2024
4,016
3,966
472,579
4,429
855
8,395
4,603
Kemp Technologies Inc.
June 27, 2019
Provider of Application Delivery Controllers
3/29/2024
16,265
16,042
903,225
1,395
5,230
17,437
21,495
Klein Hersh, LLC
November 13, 2020
Executive and C-Suite Placement for the Life Sciences and Healthcare Industries
8.25% (L+7.50%, Floor 0.75%)
11/13/2025
31,688
30,974
31,641
Kore Wireless Group Inc.
(11) (13)
Mission Critical Software Platform
5.63% (L+5.50%)
12/20/2024
18,993
18,920
18,969
Larchmont Resources, LLC
August 13, 2013
8/9/2021
2,180
2,071
2,828
353
2,533
2,075
Laredo Energy, LLC
January 15, 2019
1,155,952
11,560
9,771
23
Lightbox Holdings, L.P.
May 23, 2019
Provider of Commercial Real Estate Software
5.13% (L+5.00%)
5/9/2026
14,663
14,491
14,589
LKCM Headwater Investments I, L.P.
January 25, 2013
2.3%
1,746
3,302
LL Management, Inc.
May 2, 2019
Medical Transportation Service Provider
9/25/2023
17,481
17,337
LLFlex, LLC
August 16, 2021
Provider of Metal-Based Laminates
8/16/2026
4,401
Logix Acquisition Company, LLC
Competitive Local Exchange Carrier
25,991
24,657
24,724
Looking Glass Investments, LLC
July 1, 2015
Specialty Consumer Finance
25
Lulu's Fashion Lounge, LLC
August 31, 2017
Fast Fashion E-Commerce Retailer
10.50% (8.00% Cash, 2.50% PIK) (2.50% PIK + L+7.00%, Floor 1.00%)
8/28/2022
10,687
10,593
9,138
Lynx FBO Operating LLC
September 30, 2019
Fixed Based Operator in the General Aviation Industry
7.25% (L+5.75%, Floor 1.50%)
9/30/2024
13,475
13,276
4,872
687
880
13,963
14,355
Mac Lean-Fogg Company
April 22, 2019
Manufacturer and Supplier for Auto and Power Markets
5.38% (L+4.75%, Floor 0.625%)
12/22/2025
17,080
16,991
13.75% (4.50% Cash, 9.25% PIK)
1,901
18,892
18,981
Mako Steel, LP
March 15, 2021
Self-Storage Design & Construction
8.00% (L+7.25%, Floor 0.75%)
3/13/2026
17,468
17,687
MB2 Dental Solutions, LLC
Dental Partnership Organization
1/29/2027
9,955
9,800
24
Mills Fleet Farm Group, LLC
October 24, 2018
Omnichannel Retailer of Work, Farm and Lifestyle Merchandise
7.25% (L+6.25%, Floor 1.00%)
10/24/2024
17,781
17,546
NBG Acquisition Inc
April 28, 2017
Wholesaler of Home Décor Products
6.50% (L+5.50%, Floor 1.00%)
4/26/2024
4,015
3,986
3,449
NinjaTrader, LLC
December 18, 2019
Operator of Futures Trading Platform
8.25% (L+6.75%, Floor 1.50%)
12/18/2024
17,625
17,344
17,600
NNE Partners, LLC
March 2, 2017
9.38% (4.88% Cash, 4.50% PIK) (4.50% PIK + L+4.75%)
24,499
22,487
NTM Acquisition Corp.
July 12, 2016
Provider of B2B Travel Information Content
8.25% (7.25% Cash, 1.00% PIK) (1.00%PIK + L+6.25%, Floor 1.00%)
6/7/2024
4,622
4,576
NWN Corporation
May 7, 2021
Value Added Reseller and Provider of Managed Services to a Diverse Set of Industries
5/7/2026
41,138
40,209
Ospemifene Royalty Sub LLC
July 8, 2013
Estrogen-Deficiency Drug Manufacturer and Distributor
11/15/2026
4,694
115
Project Eagle Holdings, LLC
July 6, 2020
Provider of Secure Business Collaboration Software
7/6/2026
29,813
29,184
29,510
PT Network, LLC
November 1, 2013
Provider of Outpatient Physical Therapy and Sports Medicine Services
8.50% (6.50% Cash, 2.00% PIK) (2.00% PIK + L+5.50%, Floor 1.00%)
8,668
RA Outdoors LLC
April 8, 2021
Software Solutions Provider for Outdoor Activity Management
4/8/2026
19,422
19,232
Research Now Group, Inc. and Survey Sampling International, LLC
Provider of Outsourced Online Surveying
20,176
19,816
19,989
RM Bidder, LLC
November 12, 2015
Scripted and Unscripted TV and Digital Programming Provider
2,779
46
29
(26)
187,161
10/20/2025
425
471
Roof Opco, LLC
August 27, 2021
Residential Re-Roofing/Repair
8/27/2026
2,800
2,699
RTIC Subsidiary Holdings, LLC
September 1, 2020
Direct-To-Consumer eCommerce Provider of Outdoor Products
9.00% (L+7.75%, Floor 1.25%)
9/1/2025
18,303
18,098
18,302
Rug Doctor, LLC.
July 16, 2021
Carpet Cleaning Products and Machinery
7.25% (6.25% Cash, 1.00% PIK) (1.00% PIK + L+5.25%, Floor 1.00%)
5/16/2022
9,367
9,220
Salient Partners L.P.
June 25, 2015
Provider of Asset Management Services
10/30/2022
7,501
7,496
5,312
Savers, Inc.
May 14, 2021
For-Profit Thrift Retailer
4/26/2028
12,900
12,777
13,061
Staples Canada ULC
(10) (13) (21)
September 14, 2017
Office Supplies Retailer
(9) (22)
8.00% (L+7.00%, Floor 1.00%)
9/12/2024
16,764
16,674
16,230
Student Resource Center, LLC
June 25, 2021
Higher Education Services
6/25/2026
11,250
11,021
Team Public Choices, LLC
October 28, 2019
Home-Based Care Employment Service Provider
12/18/2027
18,147
17,735
Tectonic Financial, LLC
May 15, 2017
Financial Services Organization
26
4,180
Tex Tech Tennis, LLC
July 7, 2021
Sporting Goods & Textiles
1,000,000
Time Manufacturing Acquisition LLC
February 24, 2021
Manufacturer and Distributor of Utility Equipment
2/3/2023
1,476
1,473
U.S. TelePacific Corp.
May 17, 2017
Provider of Communications and Managed Services
5/2/2023
17,088
16,966
14,247
USA DeBusk LLC
October 22, 2019
Provider of Industrial Cleaning Services
9/8/2026
37,281
36,474
36,974
Veregy Consolidated, Inc.
November 9, 2020
Energy Service Company
11/3/2027
15,893
14,753
15,972
Vida Capital, Inc
October 10, 2019
Alternative Asset Manager
6.08% (L+6.00%)
10/1/2026
17,149
Vistar Media, Inc.
February 17, 2017
Operator of Digital Out-of-Home Advertising Platform
70,207
767
Wahoo Fitness Acquisition L.L.C.
August 17, 2021
Fitness Training Equipment Provider
8/12/2028
15,000
14,556
14,700
Wall Street Prep, Inc.
July 19, 2021
Financial Training Services
7/19/2026
4,373
400,000
4,680
YS Garments, LLC
August 22, 2018
Designer and Provider of Branded Activewear
8/9/2024
13,034
12,961
12,578
Zilliant Incorporated
June 15, 2012
Price Optimization and Margin Management Solutions
186,777
260
(28)
952,500
6/15/2022
1,071
1,225
1,550
Short-term portfolio investments
(34) (35)
34,377
34,341
27
Subtotal Non-Control/Non-Affiliate Investments (76.9% of net assets at fair value)
1,338,405
Total Portfolio Investments, September 30, 2021 (185.1% of net assets at fair value)
2,832,562
All investments are Lower Middle Market portfolio investments, unless otherwise noted. See Note C 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 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.
Income producing through dividends or distributions.
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 September 30, 2021. As noted in this schedule, 70% 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 1.08%.
Private Loan portfolio investment. See Note C for a description of Private Loan portfolio investments.
Middle Market portfolio investment. See Note C for a description of Middle Market portfolio investments.
(12)
Other Portfolio investment. See Note C for a description of Other Portfolio investments.
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.
Non-accrual and non-income producing investment.
(15)
All of the Company’s portfolio investments are generally subject to restrictions on resale as “restricted securities.”
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.
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.
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 $20.6 million Canadian Dollars and receive $16.3 million U.S. Dollars with a settlement date of September 14, 2022. The unrealized depreciation on the forward foreign currency contract is $0.1 million as of September 30, 2021.
(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 7.25% (Floor 1.25%) per the credit agreement and the Consolidated Schedule of Investments above reflects such higher rate.
(24)
Investment date represents the date of initial investment in the portfolio company.
(25)
Warrants are presented in equivalent shares with a strike price of $10.92 per share.
Warrants are presented in equivalent units with a strike price of $14.28 per unit.
Warrants are presented in equivalent shares/units with a strike price of $0.01 per share/unit.
Warrants are presented in equivalent shares with a strike price of $0.001 per share.
Warrants are presented in equivalent units with a strike price of $1.50 per unit.
Shares/Units represent ownership in an underlying Real Estate or HoldCo entity.
Investment is not unitized. Presentation is made in percent of fully diluted ownership unless otherwise indicated.
(32)
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.
(33)
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 7.99% (Floor 1.00%) per the credit agreement and the Consolidated Schedule of Investments above reflects such higher rate.
(34)
Short-term portfolio investments. See Note C for a description of short-term portfolio investments.
(35)
Short-term portfolio investments bear interest at index based floating interest rates which range from LIBOR plus 2.75% to LIBOR plus 4.75%, with LIBOR floors which range from 0% to 0.75% (with a weighted average LIBOR floor of approximately 0.14%), and with resulting interest rates which range from of 2.83% to 4.83% as of September 30, 2021.
1,750
1,715
1,120
3,215
2,835
Analytical Systems Keco, LLC
5,155
4,874
8,390
8,084
11/16/2021
4,824
3,347
8,550
Project BarFly, LLC
343
1,927
27,500
27,225
51,419
Bond-Coat, Inc.
December 28, 2012
Casing and Tubing Coating Services
57,508
6,350
8,556
8,513
5,850
12,793
14,363
8,403
3,220
998
12,533
13,621
2,030
8,100
8,014
8,043
27,854
27,789
6,241
54,898
50,328
46,080
11,628
11,549
6,160
17,389
17,709
15,212
15,136
28,070
1,270
27,898
44,552
10.00% (8.67% Cash, 1.33% PIK)
9,388
7,641
8,475
15.00%
6/5/2022
669
10,520
8,710
19,664
12/20/2021
10,880
10,853
8,610
1,111
1,100
19,443
21,093
31
2,179
1,624
14,216
14,092
14,940
22,409
29,156
7,954
7,910
7,953
6,780
9,885
14,733
747
5/31/2021
1,800
1,615
10.50% PIK
12,507
12,475
10,531
1,294
6,453
6,030
21,599
12,146
18,173
18,077
27,578
27,912
15,090
19,380
23,407
34,387
Gamber-Johnson Holdings, LLC ("GJH")
19,838
19,807
8,619
14,844
52,490
34,651
72,328
32
1/31/2021
1,410
5,929
GRT Rubber Technologies LLC ("GRT")
7.15% (L+7.00%)
4,510
13,147
13,135
12,044
17,066
12,294
2,599
2,702
LP Interests (2717 HPP-MS, L.P.)
2,849
2,952
5,450
3,374
7,620
4,185
11,020
12,800
12,697
12,680
19,782
25,480
13,200
33
22,415
22,269
3,948
3,909
1,160
39,410
39,578
13,562
44,194
15,162
13.00% (10.00% Cash, 3.00% PIK)
8,570
8,527
8,280
2,370
18,927
10,650
Third Party InvestmentAdvisory Services
116,760
6,733
6,723
8,990
9,443
15,713
16,100
Nebraska Vet AcquireCo, LLC (NVS)
10,395
16,895
17,097
17,016
16,726
1,470
23,896
18,196
NRI Clinical Research, LLC
September 8, 2011
Clinical Research Service Provider
34
6/8/2022
5,620
5,572
251,723
6/8/2027
252
1,490
1,454,167
765
6,589
12,710
3,717
2,821
4,901
1/31/2022
17,193
10,780
27,393
27,973
OMi Holdings, Inc.
20,380
37,513
37,202
15,940
50,202
53,142
8,830
11,855
11,781
11,806
11,500
13,931
23,306
Principle Environmental, LLC (d/b/a TruHorizon Environmental Solutions)
6,335
1,018
870
12,135
17,767
3,240
35
16,400
16,301
24,437
8,644
13,299
14,674
2,894
9/30/2019
3,160
5,188
Ziegler's NYPD, LLC
979
1,780
6,134
Subtotal Control Investments (73.5% of net assets at fair value)
831,490
36
9,406
9,187
2,938
12,335
15,273
491
5,810
1,691
6,301
American Trailer Rental Group LLC
June 7, 2017
Provider of Short-term Trailer and Container Rental
73,493
8,596
16,010
4,773
4,722
151
280
5,724
5,153
6,040
19,004
14,256
23,774
Provider of Specialized Enterprise Resource Planning Software
47,474
47,133
2,095
7,190
49,228
54,664
1,460
Charlotte Russe, Inc
May 28, 2013
Fast-Fashion Retailer to Young Women
19,041
3,141
24,800
24,583
9,510
30,343
34,310
LP Interests (Congruent Credit Opportunities Fund II, LP)
19.8%
4,449
94
11,741
11,540
16,190
11,634
LP Interests (Copper Trail Energy Fund I, LP)
12.4%
2,161
1,782
5,417
1,720
7,137
East Teak Fine Hardwoods, Inc.
April 13, 2006
Distributor of Hardwood Products
6,250
480
300
739
526
5,264
10,785
10,321
16,759
15,585
3,071
3,258
18,366
8,030
21,366
26,850
38
5,080
7,980
20.00% Fully Diluted, 24.40% Profits Interest
20,200
15,789
2,050
2,112
2,143
6/30/2021
7,301
64
5,333
4/18/2021
1,919
11,265
7,365
PCI Holding Company, Inc.
December 18, 2012
Manufacturer of Industrial Gas Generating Systems
3,927
Salado Stone Holdings, LLC
1,250
5,720
5,605
1,330
360
6,486
7,409
9.50%
32,963
32,760
32,962
9,780
38,760
42,742
Provider of Steel Erection, Crane Rental & Rigging Services
21,298
39
25,798
7.50% (L+6.50% Floor 1.00%)
2,708
2,687
2,426
1,441
2,832
375
17,907
5,633
(19) (30)
20,234
19,242
291
37,219
25,523
Subtotal Affiliate Investments (24.2% of net assets at fair value)
416,479
40
Acousti Engineering Company of Florida, Inc.
10/31/2025
12,858
5,863
5,745
5,813
7.00% (L+6.25%, Floor 0.75%)
7/26/2023
19,633
19,529
Aethon United BR LP
September 8, 2017
9/8/2023
9,750
9,659
9,544
Affordable Care Holding Corp.
May 9, 2019
5.75% (L+4.75%, Floor 1.00%)
10/22/2022
14,246
14,066
14,044
ALKU, LLC.
Specialty National Staffing Operator
5.75% (L+5.50%)
7/29/2026
9,466
9,385
9,478
4/10/2023
12,130
11,954
12,111
6/8/2023
17,358
16,634
8,071
APTIM Corp.
August 17, 2018
Engineering, Construction & Procurement
7.75%
6/15/2025
12,452
9,734
3/31/2021
11,009
9.23% (L+7.98%, Floor 1.25%)
10,000
9,901
41
5,206
5,148
5,149
13.25% PIK
2,116
2,091
7,239
7,265
8.75% (7.25% Cash, 1.50% PIK) (1.50% PIK + L+6.25%, Floor 1.00%)
13,402
13,342
12,263
12.00% (10.50% Cash, 1.5% PIK)
4,624
4,595
145
904
6,411
5,673
2,044
2,037
2,011
3/9/2022
12,958
12,798
670
13,848
13,628
BLST Operating Company, LLC.
653
70
8/28/2030
5,332
8,459
5,000
4,745
15,800
13,204
42
9.50% (4.25% Cash, 5.25% PIK) (5.25% PIK + L+3.25%, Floor 1.00%)
27,703
27,484
26,359
California Pizza Kitchen, Inc.
August 29, 2016
11.50% (L+10.00%, Floor 1.50%)
11/23/2024
7,288
7,315
13.50% (1.00% Cash, 12.50% PIK) (1.00% Cash, L+11.00% PIK, Floor 1.50%)
2,657
2,590
2,524
15.00% (1.00% Cash, 14.00% PIK) (1.00% Cash, L+12.50% PIK, Floor 1.50%)
5/23/2025
2,291
1,833
169,088
949
1,860
13,118
13,532
6,891
5,823
1,645
8,372
7,468
6/7/2023
5,250
5,129
4,909
177,130
5,309
2,613
10,438
7,522
3,571
3,498
3,274
7,850
7,750
5,637
8,617
43
LP Interests (CTEF I, LP)
67
5.23% (L+5.00%)
19,403
18,580
19,124
5,959
6,433
Digital River, Inc.
February 24, 2015
Provider of Outsourced e-Commerce Solutions and Services
2/12/2023
13,422
9,213
9,004
Class AA Preferred Member Units (non-voting)
951
10,940
10,835
12.50% (6.25% Cash, 6.25% PIK) (L+11.50%, Floor 1.00%)
5,256
4,921
11,857
11,523
Echo US Holdings, LLC.
November 12, 2019
Developer and Manufacturer of PVC and Polypropylene Materials
7.88% (L+6.25%, Floor 1.63%)
10/25/2024
22,190
22,090
Electronic Transaction Consultants, LLC
July 24, 2020
Technology Service Provider for Toll Road and Infrastructure Operators
7/24/2025
9,829
44
3,813
959
465
4,366
1,291
6,426
2,546
6,982
5,793
32,684
17,480
Encino Acquisition Partners Holdings, Inc.
November 16, 2018
10/29/2025
8,932
8,297
6,944
6,854
5,799
Fortna, Inc.
5.15% (L+5.00%)
7,673
7,553
7,486
1,472
5.40% (L+5.25%)
11,224
11,137
11,196
17,113
16,988
16,976
45
3,375
3,424
11,053
10,952
11,007
Gexpro Services
29,180
28,692
28,953
3,474
3,429
3,351
14,925
14,501
Hunter Defense Technologies, Inc.
March 29, 2018
Provider of Military and Commercial Shelters and Systems
35,246
34,820
9,801
9,698
8,994
Hyperion Materials & Technologies, Inc.
September 12, 2019
Manufacturer of Cutting and Machine Tools & Specialty Polishing Compounds
8/28/2026
22,275
21,894
20,813
Ian, Evan & Alexander Corporation (EverWatch)
July 31, 2020
Cybersecurity, Software and Data Analytics provider to the Intelligence Community
7/31/2025
16,529
16,158
18,890
18,566
17,172
6.31% PIK (L+6.00% PIK)
6,111
16,670
15,086
25,990
24,432
13.00% (6.00% Cash, 7.00% PIK)
12/17/2022
5,624
5,579
112
71
6,662
6,337
11.75% (8.75% Cash, 3.00% PIK) (3.00% PIK + L+7.00%, Floor 1.75%)
7,245
7,145
20,839
20,755
20,823
8,876
8,793
5,541
3,130
5/26/2021
3,954
3,953
3,157
3,955
2,795
8,384
6,811
17,387
18,638
18,937
47
8.75% (L+8.00%, Floor 0.75%)
34,098
19,090
19,003
18,828
11.00% PIK (L+10.00% PIK, Floor 1.00%)
2,185
983
113
2,538
1,096
10,238
14,623
14,368
3,524
16,504
16,337
26,131
24,550
24,171
Specialty ConsumerFinance
LSF9 Atlantis Holdings, LLC
5/1/2023
9,206
9,177
11,152
10,983
9,535
13,613
13,369
13,521
48
780
14,056
14,301
5.63% (L+5.00%, Floor 0.625%)
17,251
1,870
1,841
19,019
19,092
MHVC Acquisition Corp.
May 8, 2017
Provider of Differentiated Information Solutions, Systems Engineering, and Analytics
6.25% (L+5.25%, Floor 1.00%)
4/29/2024
19,797
19,716
19,846
13,860
13,595
13,609
4,070
4,034
3,399
16,875
16,543
16,849
9.48% (4.75% Cash, 4.50% PIK) (4.50% PIK + L+4.75%)
23,683
23,572
21,025
14,963
14,583
Novetta Solutions, LLC
June 21, 2017
Provider of Advanced Analytics Solutions for Defense Agencies
10/17/2022
22,912
22,629
22,864
4,224
Ospemifene Royalty Sub LLC (QuatRx)
4,765
121
PaySimple, Inc.
September 9, 2019
Leading Technology Services Commerce Platform
5.65% (L+5.50%)
8/23/2025
24,448
24,225
23,959
PricewaterhouseCoopers Public Sector LLP
May 24, 2018
Provider of Consulting Services to Governments
8.15% (L+8.00%)
5/1/2026
8,969
8.73% (6.73% Cash, 2.00% PIK) (2.00% PIK + L+5.50%, Floor 1.00%)
8,601
17,930
17,497
17,715
17,260
17,026
SAFETY Investment Holdings, LLC
Provider of Intelligent Driver Record Monitoring Software and Services
2,350
8/31/2021
6,443
4,542
13,032
12,896
12,382
TEAM Public Choices, LLC
12,500
12,126
12,406
Tectonic Financial, Inc.
50
TGP Holdings III LLC
September 30, 2017
Outdoor Cooking & Accessories
9/25/2025
5,500
5,448
5,307
The Pasha Group
February 2, 2018
Diversified Logistics and Transportation Provided
1/26/2023
10,162
9,585
9,323
10/22/2024
24,948
24,561
24,591
September 14, 2016
16,913
15,486
14,587
14,888
6.15% (L+6.00%)
17,853
17,626
17,272
12.00% (8.50% Cash, 3.50% PIK) (3.50% PIK + L+7.50%, Floor 1.00%)
4/3/2023
4,636
4,513
910
69,675
4/3/2029
920
5,280
6,466
13,997
13,902
12,911
1,190
1,450
Subtotal Non-Control/Non-Affiliate Investments (79.5% of net assets at fair value)
1,268,740
Total Portfolio Investments, December 31, 2020 (177.2% of net assets at fair value)
2,516,709
51
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, 2020. As noted in this schedule, 61% 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 1.11%.
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 $15.8 million Canadian Dollars and receive $12.0 million U.S. Dollars with a settlement date of September 14, 2021. The unrealized appreciation on the forward foreign currency contract is $0.4 million as of December 31, 2020.
52
53
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”) and Main Street Capital III, LP (“MSC III” and, together with MSMF, 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 (as defined in Note C) investments, Other Portfolio (as defined in Note C) 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, 2021 and 2020, cash flows for the nine months ended September 30, 2021 and 2020, and financial position as of September 30, 2021 and December 31, 2020, 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. 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, 2020. 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, 2021 and 2020 are not necessarily indicative of the operating results to be expected for the full year. 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. For purposes of determining the classification of its Investment Portfolio, Main Street has excluded consideration of any voting securities or board appointment rights held by third-party investment funds advised by the External Investment Manager.
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
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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.
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 may also include short-term portfolio investments that are atypical of Main Street’s LMM, Middle Market and Private Loan portfolio investments in that they are intended to be a short-term deployment of capital and are more liquid than investments within the other portfolios. 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 and short-term portfolio investments 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 and short-term 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
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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 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, changes in market based interest rates 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
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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 43 LMM portfolio companies for the nine months ended September 30, 2021, representing approximately 70% of the total LMM portfolio at fair value as of September 30, 2021, and on a total of 40 LMM portfolio companies for the nine months ended September 30, 2020, representing approximately 64% of the total LMM portfolio at fair value as of September 30, 2020. Excluding its investments in LMM portfolio companies that, as of September 30, 2021 and 2020, 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 Main Street’s independent financial advisory services firm for the nine months ended September 30, 2021 and 2020 was 74% and 69% of the total LMM portfolio at fair value as of September 30, 2021 and 2020, respectively.
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 91% and 90% of the Middle Market portfolio investments as of September 30, 2021 and December 31, 2020, respectively), Main Street has not consulted with or received an assurance certification from its independent financial advisory services firm 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, 2021, representing approximately 57% of the total Private Loan portfolio at fair value as of September 30, 2021, and on 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. Excluding its investments in Private Loan portfolio companies that, as of September 30, 2021 and 2020, 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 Main Street’s independent financial advisory services firm for the nine months ended
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September 30, 2021 and 2020 was 75% and 71% of the total Private Loan portfolio at fair value as of September 30, 2021 and 2020, respectively.
For valuation purposes, all of Main Street’s short-term 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. Because all of the short-term portfolio investments are typically valued using third-party quotes or other independent pricing services, Main Street generally does not consult with any financial advisory services firms in connection with determining the fair value of its short-term portfolio investments.
For valuation purposes, all of Main Street’s Other Portfolio investments are non-control investments. Main Street’s Other Portfolio investments comprised 6.2% and 3.6% of Main Street’s Investment Portfolio at fair value as of September 30, 2021 and December 31, 2020, respectively. Similar to the LMM investment portfolio, market quotations 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 SEC recently adopted new Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its executive officers or investment adviser as a valuation designee to determine the fair value for its investment portfolio, subject to the active oversight of the board. Main Street’s Board of Directors has approved policies and procedures pursuant to Rule 2a-5 (the “Valuation Procedures”) and has designated a group of its executive officers to serve as the Board’s valuation designee. Main Street adopted the Valuation Procedures effective April 1, 2021. Main Street believes its Investment Portfolio as of September 30, 2021 and December 31, 2020 approximates fair value as of those dates based on the markets in which it 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, pursuant to valuation policies and procedures approved and overseen 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.
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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 rate 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 has been experiencing increased volatility since the beginning of the COVID-19 pandemic.
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, 2021, cash balances totaling $56.8 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 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, 2021, Main Street’s total Investment Portfolio had eight investments on non-accrual status, which comprised approximately 0.9% of its fair value and 3.5% of its cost. As of December 31, 2020, Main Street’s total Investment Portfolio had seven investments on non-accrual status, which comprised approximately 1.3% of its fair value and 3.6% 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, 2021 and 2020, (i) approximately 2.1% and 3.7%, respectively, of Main Street’s total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.6% and 0.7%, 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, 2021 and 2020, (i) approximately 3.0% and 3.0%, respectively, of Main Street’s total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.6% and 0.6%, 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.
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A presentation of total investment income Main Street received from its Investment Portfolio in each of the periods presented is as follows:
Interest income
50,468
42,138
139,882
128,587
Dividend income
23,012
8,106
59,328
23,942
Fee income
3,299
1,710
7,671
7,580
Total interest, fee and dividend income
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. 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 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, 2021 and 2020, approximately 1.8% and 3.3%, respectively, of Main Street’s total investment income was attributable to interest income from the accretion of discounts associated with debt
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investments, net of any premium reduction. For the nine months ended September 30, 2021 and 2020, approximately 2.1% and 2.1%, 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.
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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.
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.
To estimate the fair value of Main Street’s multiple tranches of unsecured debt instruments as disclosed in Note E – Debt, Main Street uses quoted market prices. For the estimated fair value of Main Street’s SBIC debentures, Main Street uses the Yield-to-Maturity valuation method based on projections of the discounted future free cash flows that the debt security will likely generate, including both the discounted cash flows of the associated interest and principal amounts for the debt security.
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 when LIBOR reference is no longer used. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the nine months ended September 30,
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2021. 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 “May 2020 Release”), Amendments to Financial Disclosures about Acquired and Disposed Businesses, announcing its adoption of rules amending Rule 1-02(w)(2) under Regulation S-X used in the determination of a significant subsidiary specific to investment companies, including BDCs. In part, the rules adopted pursuant to the May 2020 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 pursuant to the May 2020 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.
In December 2020, the SEC published Release No. IC-34084 (the “December 2020 Release”) Use of Derivatives by Registered Investment Companies and Business Development Companies, announcing its adoption of Rule 18f-4 and amendment of Rule 6c-11 under the 1940 Act to provide an updated, comprehensive approach to the regulation of registered investment companies’, including BDCs’, use of derivatives and address investor protection concerns. In part, the rules adopted pursuant to the December 2020 Release require that funds using derivatives generally will have to adopt a derivatives risk management program that a derivatives risk manager administers and that the fund’s board of directors oversees, and comply with an outer limit on fund leverage. Funds that use derivatives only in a limited manner will not be subject to these requirements, but they will have to adopt and implement policies and procedures reasonably designed to manage the fund’s derivatives risks. Funds also will be subject to reporting and recordkeeping requirements regarding their derivatives use. Main Street adopted the rules pursuant to the December 2020 Release during the quarter ended March 31, 2021. As Main Street is a limited user of derivatives, the impact of the adoption of these rules on the 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).
As of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, Main Street’s private loan (“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, 2021 and December 31, 2020.
As of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020.
As of September 30, 2021, Main Street held several short-term portfolio investments consisting primarily of investments in secured debt investments and independently rated debt investments. The fair value determination for these investments consisted of available observable inputs in non-active markets sufficient to determine the fair value of these investments. As a result, all of Main Street’s short-term portfolio investments were categorized as Level 2 as of September 30, 2021. Main Street did not hold any short-term portfolio investments as of December 31, 2020.
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The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
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.
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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, 2021 and December 31, 2020:
Fair Value as of
Type of
Significant
Weighted
Investment
(in thousands)
Valuation Technique
Unobservable Inputs
Range(3)
Average(3)
Median(3)
Equity investments
977,015
Discounted cash flow
WACC
9.3% - 20.6%
13.9
%
14.9
Market comparable / Enterprise Value
EBITDA multiple (1)
4.5x - 8.5x(2)
6.8x
6.0x
Debt investments
1,722,560
Risk adjusted discount factor
6.1% - 16.0%(2)
10.1
10.0
Expected principal recovery percentage
0.0% - 100.0%
100.0
383,188
Market approach
Third‑party quote
38.2 - 101.3
96.1
98.0
Total Level 3 investments
3,082,763
877,732
9.4% - 21.0%
14.3
15.0
7.0x
6.1x
1,339,079
7.4% - 15.3%(2)
10.6
10.8
99.4
468,055
45.0 - 100.3
94.7
96.5
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, 2021 and 2020 (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
1,807,134
(528,158)
814,863
13,279
2,115
(3,485)
2,105,748
Equity
866,734
(64,335)
48,181
(2,826)
115,774
5,767
969,295
Equity Warrant
10,998
(1,940)
944
(2,282)
7,720
(592,493)
863,044
118,833
2019
1,782,575
(299,726)
367,944
49,393
(88,706)
(12,268)
1,799,212
809,538
(25,304)
50,535
(4,047)
(65,837)
12,268
777,153
10,211
1,165
(1,931)
2,602,324
(326,195)
418,479
46,511
(156,474)
2,584,645
At September 30, 2021 and December 31, 2020, Main Street’s investments 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, 2021
(Level 1)
(Level 2)
(Level 3)
LMM portfolio investments
1,494,109
Middle Market portfolio investments
420,941
Private Loan portfolio investments
845,961
Other Portfolio investments
193,672
External Investment Manager
Total investments
At December 31, 2020
1,285,524
445,609
740,370
96,603
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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.
Based upon Main Street’s liquidity and capital structure management activities, Main Street’s Investment Portfolio may also include short-term portfolio investments that are atypical of Main Street’s LMM, Middle Market and Private Loan portfolio investments in that they are intended to be a short-term deployment of capital. Those assets are typically expected to be liquidated in one year or less. These short-term investments are not expected to be a significant portion of the overall Investment Portfolio.
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 under management for external parties and may earn incentive fees, or a carried interest, based on the performance of the assets 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 MSC Income Fund, Inc. (“MSC Income”), formerly known as HMS Income Fund, Inc. 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 are net of expenses allocated to the External Investment Manager for the three months ended September 30, 2021 and 2020 of $2.7 million and $1.9 million, respectively, and for the nine months ended September 30, 2021 and 2020 of $7.7 million and $5.3 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, 2021 and 2020, 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, 2021 and December 31, 2020 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager, all of which are discussed further below):
As of September 30, 2021
LMM (a)
Middle Market
Private Loan
(dollars in millions)
Number of portfolio companies
Fair value
1,494.1
420.9
846.0
Cost
1,245.3
456.7
865.5
Debt investments as a % of portfolio (at cost)
69.4
93.1
94.5
Equity investments as a % of portfolio (at cost)
30.6
6.9
5.5
% of debt investments at cost secured by first priority lien
98.8
97.2
97.9
Weighted-average annual effective yield (b)
11.2
7.4
8.4
Average EBITDA (c)
5.7
77.5
47.3
As of December 31, 2020
1,285.5
445.6
740.4
1,104.6
488.9
769.0
65.8
93.0
93.8
34.2
7.0
6.2
98.1
92.4
95.4
11.6
7.9
8.7
5.3
76.5
58.1
For the three months ended September 30, 2021 and 2020, Main Street achieved an annualized total return on investments of 18.0% and 16.5%, respectively. For the nine months ended September 30, 2021 and 2020, Main Street achieved an annualized total return on investments of 16.9% and an annualized total loss on investments of 0.1%, respectively. Total return on investments is calculated using the interest, dividend, and fee income, as well as the realized and unrealized change in fair value of the Investment Portfolio for the specified period. Main Street’s total return on investments is not reflective of what an investor in shares of Main Street’s common stock will realize on its investment because it does not reflect changes in the market value of Main Street’s stock, Main Street’s expenses or any sales load paid by an investor.
As of September 30, 2021, Main Street had Other Portfolio investments in fourteen companies, collectively totaling approximately $193.7 million in fair value and approximately $201.1 million in cost basis and which comprised approximately 6.2% and 7.1% of Main Street’s Investment Portfolio at fair value and cost, respectively. As of December 31, 2020, Main Street had Other Portfolio investments in twelve companies, collectively totaling approximately $96.6 million in fair value and approximately $124.7 million in cost basis and which comprised approximately 3.6% and 5.0% of Main Street’s Investment Portfolio at fair value and cost, respectively.
As of September 30, 2021, Main Street had short-term portfolio investments in eight companies, collectively totaling approximately $34.3 million in fair value and approximately $34.4 million in cost basis and which comprised approximately 1.1% and 1.2% of Main Street’s Investment Portfolio at fair value and cost, respectively. As of December 31, 2020, Main Street held no short-term investments.
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, 2021, this investment had a fair value of approximately $128.1 million and a cost basis of $29.5 million, which comprised approximately 4.1% and 1.0% of Main Street’s Investment Portfolio at fair value and cost, respectively. As of December 31, 2020, this investment had a fair value of approximately $116.8 million and a cost basis of $29.5 million, which comprised approximately 4.3% and 1.2% of Main Street’s Investment Portfolio at fair value and cost, respectively.
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, 2021 and December 31, 2020 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager, all of which are discussed above).
Cost:
First lien debt
80.5
77.0
17.6
19.0
Second lien debt
1.1
2.7
Equity warrants
0.3
0.5
Other
0.8
Fair Value:
71.6
70.0
26.7
26.4
1.0
2.4
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, 2021 and December 31, 2020 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager). The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
Southwest
24.1
24.3
Northeast
24.0
22.6
West
20.9
21.0
Midwest
14.7
18.2
Southeast
14.4
12.8
Canada
1.9
24.9
24.7
23.3
21.7
21.4
15.9
19.7
11.5
1.7
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
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Private Loan portfolio investments by industry at cost and fair value as of September 30, 2021 and December 31, 2020 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager).
Construction & Engineering
6.0
Machinery
6.4
Internet Software & Services
5.2
Leisure Equipment & Products
4.2
Commercial Services & Supplies
5.1
4.7
Software
5.0
4.4
Professional Services
4.9
Health Care Providers & Services
4.6
Energy Equipment & Services
4.5
Specialty Retail
4.3
3.1
IT Services
3.7
4.0
Diversified Telecommunication Services
2.6
Communications Equipment
3.0
3.3
Containers & Packaging
1.6
Food Products
Tobacco
2.2
Oil, Gas & Consumable Fuels
3.2
Building Products
1.4
Aerospace & Defense
2.0
5.9
Diversified Financial Services
2.1
Hotels, Restaurants & Leisure
Diversified Consumer Services
1.8
Media
Distributors
Electronic Equipment, Instruments & Components
Computers & Peripherals
1.5
Life Sciences Tools & Services
1.2
Household Durables
1.3
Trading Companies & Distributors
Food & Staples Retailing
Transportation Infrastructure
Other (1)
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8.3
8.1
6.1
5.4
4.8
3.4
3.6
3.8
2.8
2.9
2.5
2.3
Construction Materials
0.9
At September 30, 2021 and December 31, 2020, Main Street had no portfolio investment that was greater than 10% of the Investment Portfolio at fair value.
Unconsolidated Significant Subsidiaries
In evaluating its unconsolidated controlled portfolio companies in accordance with Regulation S-X, 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 investments. The income test is generally measured by dividing the absolute value of the combined sum 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 change in net assets resulting from operations for the same period. Regulation S-X requires 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
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the investment or income tests are exceeded and the unconsolidated portfolio company qualifies as a significant subsidiary.
As of September 30, 2021 and December 31, 2020, 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 and Note C, 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 was the investment adviser to MSC Income at the time, 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 was entitled to 50% of the annual base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with MSC Income. 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 whereby the External Investment Manager became the sole investment adviser and administrator to MSC Income pursuant to an Investment Advisory and Administrative Services Agreement entered into between the External Investment Manager and MSC Income (the “Advisory Agreement”). The Advisory Agreement includes a 1.75% annual management fee, reduced from 2.00%, and the same incentive fee as under MSC Income’s prior advisory agreement with HMS Adviser, with the External Investment Manager receiving 100% of such fee income (increased from 50% previously).
As described more fully in Note L – Related Party Transactions, the External Investment Manager launched a new private fund, MS Private Loan Fund I, LP, a private investment fund with a strategy to co-invest with Main Street in Private Loan portfolio investments (the “Private Loan Fund”), in December 2020. The External Investment Manager entered into an Investment Management Agreement in December 2020 with the Private Loan Fund, pursuant to which the External Investment Manager provides investment advisory and management services to the Private Loan Fund in exchange for an asset-based fee and certain incentive fees. The External Investment Manager may also advise other clients, including funds and separately managed accounts, pursuant to advisory and services agreements with such clients in exchange for asset-based and incentive fees.
During the three months ended September 30, 2021 and 2020, the External Investment Manager earned $4.6 million and $2.3 million, respectively, in base management fee income. During the three months ended September 30, 2021, incentive fee income earned was not significant, while no incentive fee income was earned in the three months ended September 30, 2020. During the nine months ended September 30, 2021 and 2020, the External Investment Manager earned $12.7 million and $7.2 million, respectively, in base management fee income. During the nine months ended September 30, 2021, an insignificant amount of incentive fee income was earned, while no incentive fee income was earned in the nine months ended September 30, 2020.
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
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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, 2021 and 2020, Main Street allocated $2.7 million and $1.9 million of total expenses, respectively, to the External Investment Manager. For the nine months ended September 30, 2021 and 2020, Main Street allocated $7.7 million and $5.3 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, 2021 and 2020, the total contribution to Main Street’s net investment income was $4.2 million and $2.2 million, respectively. For the nine months ended September 30, 2021 and 2020, the total contribution to Main Street’s net investment income was $11.6 million and $6.7 million, respectively.
Summarized financial information from the separate financial statements of the External Investment Manager as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020 is as follows:
As of
Cash
Accounts receivable—advisory clients
4,638
3,520
4,691
Accounts payable to MSCC and its subsidiaries
3,232
2,423
Dividend payable to MSCC and its subsidiaries
1,459
1,097
Total liabilities and equity
Management fee income
4,592
2,338
12,707
7,160
Incentive fees
Total revenues
4,611
12,726
Expenses allocated from MSCC or its subsidiaries:
Salaries, share‑based compensation and other personnel costs
(2,278)
(1,206)
(6,394)
(3,393)
Other G&A expenses
(450)
(686)
(1,286)
(1,947)
Total allocated expenses
(2,728)
(1,892)
(7,680)
(5,340)
Pre‑tax income
446
5,046
1,820
Tax expense
(424)
(108)
(1,138)
(426)
Net income
338
3,908
1,394
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NOTE E—DEBT
Summary of debt as of September 30, 2021 is as follows:
Outstanding Balance
Unamortized Debt Issuance (Costs)/Premiums
Recorded Value
Estimated Fair Value (1)
SBIC Debentures
350,000
(7,565)
333,954
Credit Facility
4.50% Notes due in 2022
185,000
(708)
192,639
5.20% Notes due 2024
450,000
1,408
489,155
3.00% Notes due 2026
(4,555)
306,897
Total Debt
1,485,000
(11,420)
1,473,580
1,522,645
Summary of debt as of December 31, 2020 is as follows:
309,800
(5,828)
309,907
4.50% Notes due 2022
(1,164)
194,938
1,817
488,102
1,213,800
(5,175)
1,208,625
1,261,947
Summarized interest expense for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
2,704
2,977
8,002
8,981
1,574
1,942
7,305
4.50% Notes Due 2022
2,233
6,699
5.20% Notes Due 2024
5,713
5,337
17,141
13,842
3.00% Notes due in 2026
2,487
7,124
Total Interest Expense
14,711
12,489
42,914
36,827
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
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debentures payable, under existing SBA-approved commitments, were $350.0 million and $309.8 million at September 30, 2021 and December 31, 2020, 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, 2021, Main Street issued $80.2 million of SBIC debentures and opportunistically prepaid $40.0 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. Main Street expects to maintain SBIC debentures under the SBIC program in the future, subject to periodic repayments and borrowings, in an amount up to the regulatory maximum amount for affiliated SBIC funds. The weighted-average annual interest rate on the SBIC debentures was 2.9% and 3.4% as of September 30, 2021 and December 31, 2020, respectively. The first principal maturity due under the existing SBIC debentures is in 2023, and the weighted-average remaining duration as of September 30, 2021 was approximately 6.4 years. 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, 2021, the SBIC debentures consisted of (i) $175.0 million par value of SBIC debentures outstanding issued by MSMF, with a recorded value of $171.3 million that was net of unamortized debt issuance costs of $3.7 million and (ii) $175.0 million par value of SBIC debentures issued by MSC III with a recorded value of $171.2 million that was net of unamortized debt issuance costs of $3.8 million.
Main Street maintains the Credit Facility to provide additional liquidity to support its investment and operational activities. As of September 30, 2021, the Credit Facility included total commitments of $855.0 million from a diversified group of 18 lenders, held a maturity date in April 2026 and contained an accordion feature which allowed Main Street to increase the total commitments under the facility to up to $1,200.0 million from new and existing lenders on the same terms and conditions as the existing commitments.
As of September 30, 2021, borrowings under the Credit Facility bore 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 the most recent reset date for the period ended September 30, 2021) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.25% as of September 30, 2021) 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. As of September 30, 2021, the Credit Facility contained certain affirmative and negative covenants, including but not limited to: (i) maintaining minimum liquidity, (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, (iv) maintaining a minimum tangible net worth and (v) maintaining a minimum asset coverage ratio of 200% with respect to the consolidated assets (with certain limitations on the contribution of equity in financing subsidiaries as specified therein) of MSCC and the guarantors under the Credit Facility to the secured debt of MSCC and the guarantors.
As of September 30, 2021, the interest rate on the Credit Facility was 2.0% (based on the LIBOR rate of 0.1% as of the most recent reset date plus 1.875%). The average interest rate for borrowings under the Credit Facility was 2.0% for each of the three months ended September 30, 2021 and 2020, and 2.0% and 2.7% for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, Main Street was in compliance with all financial covenants of the Credit Facility.
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,
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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.
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, 2021, Main Street was in compliance with these covenants.
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 aggregate principal amount 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 issue price 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.
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, 2021, Main Street was in compliance with these covenants.
In January 2021, Main Street issued $300.0 million in aggregate principal amount of 3.00% unsecured notes due July 14, 2026 (the “3.00% Notes”) at an issue price of 99.004%. The total net proceeds from the 3.00% Notes, resulting from the issue price and after underwriting discounts and estimated offering expenses payable, were approximately $294.8 million. The 3.00% 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 3.00% 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 3.00% Notes may be redeemed in whole or in part at any time at Main Street’s option subject to certain make-whole provisions. The 3.00% Notes bear interest at a rate of 3.00% per year
payable semiannually on January 14 and July 14 of each year. Main Street may from time to time repurchase the 3.00% Notes in accordance with the 1940 Act and the rules promulgated thereunder. See Note M for discussion of the recent issuance of an additional $200.0 million of the 3.00% Notes in October 2021.
The indenture governing the 3.00% Notes (the “3.00% 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 3.00% 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 3.00% Notes Indenture. As of September 30, 2021, Main Street was in compliance with these covenants.
NOTE F—FINANCIAL HIGHLIGHTS
Per Share Data:
NAV at the beginning of the period
23.91
Net investment income(1)
Net realized gain (loss) (1)(2)
0.15
(0.69)
Net unrealized appreciation (depreciation)(1)(2)
1.71
(1.80)
Income tax benefit (provision)(1)(2)
(0.33)
0.23
Net increase (decrease) in net assets resulting from operations(1)
(1.85)
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)
0.26
0.21
Accretive effect of DRIP issuance (issuing shares above NAV per share)
0.06
0.07
Other(3)
0.01
(0.06)
NAV at the end of the period
21.52
Market value at the end of the period
41.10
29.57
Shares outstanding at the end of the period
66,138,440
NAV at end of period
Average NAV
1,586,020
1,416,672
Average outstanding debt
1,264,680
1,136,300
Ratio of total expenses, including income tax expense, to average NAV (1) (2)
6.19
3.36
Ratio of operating expenses to average NAV (2) (3)
4.76
4.36
Ratio of operating expenses, excluding interest expense, to average NAV (2) (3)
2.05
1.76
Ratio of net investment income to average NAV (2)
8.29
6.94
Portfolio turnover ratio (2)
20.69
10.96
Total investment return (2) (4)
33.57
(27.31)
Total return based on change in NAV (2) (5)
15.61
(3.25)
NOTE G—DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
Main Street currently pays monthly dividends to its stockholders. Future monthly dividends, if any, will be determined by its Board of Directors on a quarterly basis. Main Street paid regular monthly dividends of $0.205 per share, totaling $42.3 million, or $0.615 per share, for the three months ended September 30, 2021, and $126.2 million, or $1.845 per share, for the nine months ended September 30, 2021 compared to aggregate regular monthly dividends of approximately $40.6 million, or $0.615 per share, for the three months ended September 30, 2020, and $120.2 million or $1.845 for the nine months ended September 30, 2020.
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, 2021 and 2020.
(estimated, dollars in thousands)
Book-tax difference from share-based compensation expense
(5,436)
2,710
Income tax provision (benefit)
22,691
(14,253)
Pre-tax book (income) loss not consolidated for tax purposes
(35,701)
2,413
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates
6,027
53,521
Estimated taxable income (1)
106,922
112,087
Taxable income earned in prior year and carried forward for distribution in current year
24,350
29,107
Taxable income earned prior to period end and carried forward for distribution next period
(18,959)
(34,189)
Dividend payable as of period end and paid in the following period
13,554
Total distributions accrued or paid to common stockholders
126,866
120,559
The income tax expense (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. The income tax expense, or benefit, and the related tax asset and liabilities generated by the Taxable Subsidiaries, if any, are reflected in Main Street’s consolidated statement of operations. Main Street’s provision for income taxes was comprised of the following for the three and nine months ended September 30, 2021 and 2020 (amounts in thousands):
Current tax expense (benefit):
Federal
(239)
(99)
State
692
1,712
200
Excise
136
427
629
Total current tax expense (benefit)
953
2,242
1,420
Deferred tax expense (benefit):
7,989
(147)
15,284
(14,998)
3,342
489
5,165
(675)
Total deferred tax expense (benefit)
11,331
342
Total income tax provision (benefit)
12,284
1,507
The net deferred tax liability at September 30, 2021 and December 31, 2020 was $23.0 million and $2.6 million, respectively, 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, 2021, 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 2028 through 2037. Any net operating losses generated in 2018 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, 2017 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, 2021, Main Street sold 1,111,194 shares of its common stock at a weighted-average price of $40.59 per share and raised $45.1 million of gross proceeds under the ATM Program. Net proceeds were $44.5 million after commissions to the selling agents on shares sold and offering costs. As of September 30, 2021, 4,602,178 shares remained available for sale under the ATM Program.
During the year ended December 31, 2020, Main Street sold 2,645,778 shares of its common stock at a weighted-average price of $32.10 per share and raised $84.9 million of gross proceeds under the ATM Program. Net proceeds were $83.8 million after commissions to the selling agents on shares sold and offering costs.
NOTE I—DIVIDEND REINVESTMENT PLAN
The dividend reinvestment feature of Main Street’s dividend reinvestment and direct stock purchase plan (the “DRIP”) provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if Main Street declares a cash dividend, its stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividend automatically reinvested into additional shares of MSCC common stock. The share requirements of the DRIP may be satisfied through the issuance of shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares will be valued based upon the final closing price of MSCC’s common stock on the valuation date determined for each dividend by Main Street’s Board of Directors. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased, before any associated brokerage or other costs. Main Street’s DRIP is administered by its transfer agent on behalf of Main Street’s record holders and participating brokerage firms. Brokerage firms and other financial intermediaries may decide not to participate in Main Street’s DRIP but may provide a similar dividend reinvestment plan for their clients.
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Summarized DRIP information for the nine months ended September 30, 2021 and 2020 is as follows:
($ in millions)
DRIP participation
11.4
12.2
Shares issued for DRIP
293,647
387,534
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.
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, 2021.
Restricted stock authorized under the plan
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)
Year ended December 31, 2020
(370,272)
Nine months ended September 30, 2021
(332,718)
Restricted stock available for issuance as of September 30, 2021
1,183,956
As of September 30, 2021, 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)
(4,949)
251,702
For the three months ended September 30, 2021 and 2020, Main Street recognized total share-based compensation expense of $2.9 million and $2.6 million, respectively, related to the restricted stock issued to Main Street employees and non-employee directors. For the nine months ended September 30, 2021 and 2020, Main Street
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recognized total share-based compensation expense of $8.0 million and $8.2 million, respectively, related to the restricted stock issued to Main Street employees and non-employee directors.
As of September 30, 2021, there was $17.1 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 2.1 years as of September 30, 2021.
NOTE K—COMMITMENTS AND CONTINGENCIES
At September 30, 2021, Main Street had the following outstanding commitments (in thousands):
Investments with equity capital commitments that have not yet funded:
Amount
Congruent Credit Opportunities Fund III, LP
8,117
Encap Energy Fund Investments
EnCap Energy Capital Fund IX, L.P.
230
EnCap Energy Capital Fund X, L.P.
772
EnCap Flatrock Midstream Fund II, L.P.
4,586
EnCap Flatrock Midstream Fund III, L.P.
410
5,998
3,701
Brightwood Capital Fund III, LP
Brightwood Capital Fund V, LP
7,000
Freeport Fund Investments
Freeport Financial SBIC Fund LP
1,375
Freeport First Lien Loan Fund III LP
4,032
5,407
819
HPEP 3, L.P.
1,555
Dos Rios Partners, LP
835
Dos Rios Partners - A, LP
265
Total Equity Commitments
45,197
85
Investments with commitments to fund revolving loans that have not been fully drawn or term loans with additional commitments not yet funded:
19,709
8,760
7,500
3,889
Classic H&G Holdco, LLC
2,600
Evergreen North America Acquisitions, LLC
2,317
2,027
1,875
1,866
1,591
1,340
1,278
760
750
584
500
457
281
193
Total Loan Commitments
129,931
Total Commitments
175,128
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 available capital to fund its unfunded commitments as necessary. The Company had total unrealized depreciation of $0.1 million on the outstanding unfunded commitments as of September 30, 2021.
86
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, 2021 and 2020 was $0.2 million and for each of the nine months ended September 30, 2021 and 2020 was $0.5 million. As of September 30, 2021, the asset related to the operating lease was $4.0 million and is included in the interest receivable and other assets balance on the consolidated balance sheet. The lease liability was $4.7 million and is included in the accounts payable and other liabilities balance on the consolidated balance sheet. As of September 30, 2021, the remaining lease term was 6.3 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, 2021 (in thousands):
For the Years Ended December 31,
194
2022
790
2023
804
2024
818
2025
832
Thereafter
1,779
5,217
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, 2021, Main Street had a receivable of approximately $4.7 million due from the External Investment Manager, which included (i) approximately $3.2 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 $1.5 million of dividends declared but not paid by the External Investment Manager. MSCC has entered into an agreement with the External Investment Manager to share employees in connection with its asset management business generally, and specifically for the External Investment Manager’s relationship with MSC Income and its other clients (see further discussion in Note A.1 and Note D).
From time to time, Main Street may make investments in clients of the External Investment Manager in the form of debt or equity capital on terms approved by Main Street’s Board of Directors. In January 2021, Main Street entered into a Term Loan Agreement with MSC Income (the “Term Loan Agreement”). The Term Loan Agreement was unanimously approved by Main Street’s Board, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act, and the board of directors of MSC Income, including each director who is not an “interested person” of MSC Income or the External Investment Manager. The Term Loan Agreement initially
87
provided for a term loan of $40.0 million to MSC Income, bearing interest at a fixed rate of 5.00% per annum, and matures in January 2026. The Term Loan Agreement was amended in July 2021 to provide for borrowings up to an additional $35.0 million, $20.0 million of which was funded upon signing of the amendment and $15.0 million available in two additional advances during the six months following the amendment date. Borrowings under the Term Loan Agreement are expressly subordinated and junior in right of payment to all secured indebtedness of MSC Income. In October 2021, MSC Income fully repaid all borrowings outstanding under the Term Loan Agreement and the Term Loan Agreement was terminated.
In December 2020, the External Investment Manager entered into an Investment Management Agreement with the Private Loan Fund to provide investment advisory and management services in exchange for an asset-based fee and certain incentive fees. The Private Loan Fund is a private investment fund exempt from registration under the 1940 Act that invests in debt investments in middle market companies generally with EBITDA between $7.5 million and $50 million and generally owned by a private equity sponsor, which Main Street generally refers to as Private Loan investments. In connection with the Private Loan Fund’s initial closing in December 2020, Main Street committed to contribute up to $10.0 million as a limited partner and will be entitled to distributions on such interest. In addition, certain of Main Street’s officers and employees (and certain of their immediate family members) have made capital commitments to the Private Loan Fund as limited partners and therefore have direct pecuniary interests in the Private Loan Fund. As of September 30, 2021, Main Street has funded approximately $1.0 million of its limited partner commitment and Main Street’s unfunded commitment was approximately $9.0 million.
Additionally, Main Street provided the Private Loan Fund with a revolving line of credit pursuant to an Unsecured Revolving Promissory Note, dated February 5, 2021 (the “Private Loan Fund Loan”), in an aggregate amount equal to the amount of limited partner capital commitments to the Private Loan Fund up to $50.0 million. Borrowings under the Private Loan Fund Loan bear interest at a fixed rate of 5.00% per annum and will mature on the earlier of June 30, 2022 and the date of the Private Loan Fund’s final closing. The Private Loan Fund Loan was unanimously approved by Main Street’s Board, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act, and the board of directors of the Private Loan Fund, including each director who is not an “interested person” of Private Loan Fund or the External Investment Manager. As of September 30, 2021, there were $30.3 million of borrowings outstanding under the Private Loan Fund Loan.
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 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, 2021, $14.6 million of compensation and dividend reinvestments net of unrealized gains and losses and distributions had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). Of this amount, $6.6 million had been deferred into phantom Main Street stock units, representing 159,369 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
In October 2021, Main Street issued an additional $200.0 million in aggregate principal amount of the 3.00% Notes at an issue price of 101.741%, resulting in an effective interest rate of 2.60%. The total net proceeds from the 3.00% Notes, resulting from the issue price and after underwriting discounts and estimated offering expenses payable, were approximately $203.5 million. Main Street used the proceeds from this debt issuance to repay outstanding
88
borrowings under its Credit Facility, providing significant additional liquidity for its ongoing investment activities and to facilitate future availability for the repayment of its existing 4.50% Notes due 2022.
In November 2021, Main Street declared a supplemental cash dividend of $0.10 per share payable in December 2021. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that Main Street declared for the fourth quarter of 2021 of $0.210 per share for each of October, November and December 2021.
During November 2021, Main Street declared regular monthly dividends of $0.215 per share for each month of January, February and March of 2022. These regular monthly dividends equal a total of $0.645 per share for the first quarter of 2022, representing a 4.9% increase from the regular monthly dividends paid in the first quarter of 2021. Including the regular monthly and supplemental dividends declared for the fourth quarter of 2021 and first quarter of 2022, Main Street will have paid $32.820 per share in cumulative dividends since its October 2007 initial public offering.
89
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
ASK (Analytical Systems Keco Holdings, LLC)
(3,200)
2,356
12.00% (L+10.00%, Floor 2.00%) Secured Debt
520
4,873
134
220
540
470
4,564
188
11.00% (L+10.00%, Floor 1.00%) Secured Debt
2,579
35,832
196
8,129
15.00% PIK Preferred Member Units
939
1,640
2,181
10.00% Secured Debt
10.50% (L+9.50%, Floor 1.00%) Secured Debt
878
453
454
15,450
1,602
12.25% (L+10.50%, Floor 1.75%) Secured Debt
8,000
4,169
8.00% Secured Debt
(1,800)
185
(1,294)
(6,030)
10.50% PIK Secured Debt
(1,801)
1,945
12,476
5.00% Secured Debt
564
8,288
(2,230)
672
2,230
12.00% (L+11.00%, Floor 1.00%) Secured Debt
1,401
15,006
235
3,744
2,880
9.00% (L+7.00%, Floor 2.00%) Secured Debt
1,435
3,636
7.10% (L+7.00%) Secured Debt
3,640
1,264
10.00% (Prime+6.75%, Floor 2.00%) Secured Debt
244
660
11.50% Secured Debt
1,915
9.00% Secured Debt
266
282
12.00% PIK Secured Debt
(2,403)
2,403
(2,370)
13.00% Secured Debt
(2,059)
854
2,299
11,320
(1,820)
548
12.00% Secured Debt
622
(170)
170
176
550
2,190
805
7.50% (L+7.00%, Floor 0.50%) Secured Debt
708
221
330
(490)
490
(920)
(62)
649
620
350
14.00% Secured Debt
292
6.50% Secured Debt
Other controlled investments
2717 MH, L.P.
585
689
(400)
116
(304)
472
346
1,930
7.00% Secured Debt
367
10.50% (L+9.00%, Floor 1.50%) Secured Debt
329
2,582
11,775
14.00% Class A Preferred Member Units
1,067
8.00% Class B Preferred Member Units
6,310
2,087
9.50% (L+8.00%, Floor 1.50%) Secured Debt
(2,320)
4,310
(1,570)
397
1,570
372
1,279
6,540
(320)
969
2,059
160
(3,930)
3,707
9.00% (L+8.00%, Floor 1.00%) Secured Debt
1,117
3,720
2,120
10.00% Unsecured Debt
(382)
846
3,723
91
1,938
24,969
315
5,220
10.00% (L+9.00%, Floor 1.00%) Secured Debt
609
1,492
Copper Trail Energy Fund I, LP - CTMH
1,494
990
9.00% (L+8.00%, Floor 1.00%, Ceiling 1.50%) Secured Debt
308
1,130
10.50% (5.25% Cash, 5.25% PIK) (L+9.50%, Floor 1.00%) Secured Debt
12.50% (6.25% Cash, 6.25% PIK) Secured Debt
(2,012)
1,065
849
2,431
(1,920)
1,920
1,084
456
MS Private Loan Fund
5.00% Unsecured Debt
642
33,866
3,575
352
1,603
(2,540)
1,823
2,540
11.00% Secured Debt
(1,351)
1,417
16,727
2,005
(4,835)
2,805
(1,238)
(48)
380
5,668
3,619
(45)
6,440
189
10.50% Secured Debt
7.50% (L+6.50%, Floor 1.00%) Secured Debt
12,600
5,539
1,949
5,540
258
3,223
310
3,838
(1,550)
1,486
2,032
2,407
3,781
(160)
92
Amounts related to investments transferred to or from other 1940 Act classification during the period
Total Control investments
340,046
117,553
Affiliate Investments
(1,038)
1,038
(968)
968
18.00% (10.00% Cash, 8.00% PIK) Secured Debt
(89)
1,329
744
223
10.00% PIK Unsecured Debt
8.50% (L+7.50%, Floor 1.00%) Secured Debt
8.75% (7.25% Cash, 1.50% PIK) (1.50% PIK + L+6.25%, Floor 1.00%) Secured Debt
(4,528)
1,133
1,521
13,784
(280)
12.00% (L+11.00%, Floor 1.00%) Unsecured Debt
(1,000)
464
1,001
15.00% PIK Preferred Stock (non-voting)
(162)
(1,210)
379
Brightwood Capital Fund Investments - Fund V
10.25% (L+9.25%, Floor 1.00%) Secured Debt
(373)
487
373
7,321
1,900
1,921
12.50% Secured Debt
5,547
23,601
4,474
(810)
810
(3,141)
4,110
820
7.00% (L+6.00%, Floor 1.00%) Secured Debt
(73)
1,807
5,599
(4,449)
4,355
(96)
1,137
Copper Trail Energy Fund I, LP
(203)
378
4,567
(340)
340
(80)
180
177
869
613
3,156
2,090
1,211
15,631
270
5,130
691
1,366
(1,620)
1,620
8.00% Unsecured Convertible Debt
182
803
1,177
413
1,386
15,787
1,215
98
191
14.00% PIK Preferred Member Units (non-voting)
Meisler Operating LLC
17,048
(7,414)
(830)
129
686
2,852
(694)
SI East, LLC (Stavig)
5,422
2,102
4,782
10.25% Secured Debt
(74)
2,332
34,500
3,862
545
433
111
1,982
11.83% Secured Debt
421
13,862
239
15.00% PIK Secured Convertible Debt
966
105
2,249
2,162
20.00% PIK Preferred Stock
737
(230)
8.50% (6.50% cash, 2.00% PIK) (2.00% PIK, L+5.50% Floor 1.00%) Secured Debt
183
2,425
243
991
1,736
19,243
(12,263)
Total Affiliate investments
195,509
88,934
Consolidated Schedule of Investments in and Advances to Affiliates
September 30, 2020
(410)
2,440
LIBOR Plus 8.00% (Floor 1.00%)
(40)
826
7,104
18,200
19,464
LIBOR Plus 10.00% (Floor 1.00%)
(65)
2,490
27,801
27,775
7,163
(1,141)
7,382
1,141
LIBOR Plus 9.50% (Floor 1.00%)
897
10,781
10,847
(1,020)
317
9,630
1,020
10% Secured Debt
1,107
(69)
203
1,697
LIBOR Plus 10.50% (Floor 1.75%)
143
1,320
15,600
3,523
11,840
LIBOR Plus 11.00% (Floor 1.00%)
9,397
3,010
5,360
1,464
15,707
(140)
140
20,060
LIBOR Plus 6.50% (Floor 2.00%)
1,303
19,022
1,626
3,054
53,410
53,240
LIBOR Plus 7.00%
988
15,016
1,759
(2,020)
2,593
47,450
2,020
45,430
Guerdon Modular Holdings, Inc.
16.00% Secured Debt
(12,776)
12,588
12,776
LIBOR Plus 8.50% (Floor 1.00%)
(993)
1,010
993
(1,140)
1,140
(2,849)
2,983
Harborside Holdings, LLC
(4,640)
9,560
4,640
5,020
IDX Broker, LLC
(42)
13,400
13,442
9,337
(9,088)
1,193
15,040
Prime Plus 6.75% (Floor 2.00%)
(56)
324
356
3,654
236
8,270
7,270
9.50% Current/2.00% PIK Secured Debt
2,247
24,982
1,414
2,947
23,449
(90)
12,150
268
3,939
3,917
(11,612)
242
22,621
11,704
13,712
2,695
1,091
2,886
(5,280)
(76)
888
8,890
8,598
(1,810)
2,960
Mid-Columbia Lumber Products, LLC
148
119
3,644
3,900
101
9.50% Secured Debt
701
(959)
709
1,390
(3,440)
74,520
3,440
71,080
605
6,253
6,721
1,760
8,410
10,170
2,480
543
16,950
19,430
2,243
34,676
269
LIBOR Plus 8.75% PIK (Floor 0.50%)
964
12,118
149
11,767
9,930
11,140
(2,160)
13,390
2,160
11,230
1,090
930
(4,880)
9,289
301
4,880
4,710
9,102
8,708
3,115
7,769
201
(630)
4,089
630
3,459
(3,586)
3,296
3,705
293
2,715
(130)
1,269
130
1,139
Access Media Holdings, LLC
10.00% PIK Secured Debt
(2,449)
6,387
2,449
3,938
(284)
LIBOR Plus 10.00% (Floor 2.00%)
546
5,210
4,925
1,639
1,611
(240)
(1,230)
4,521
3,407
(939)
15.00% Secured Debt
11,473
11,596
(4,990)
8,300
4,990
3,310
8,989
8,632
5,610
1,316
7,797
443
8,240
(500)
3,500
996
(5,120)
954
50,850
5,120
45,730
1,114
12,136
459
11,696
6,060
1,551
17,773
1,835
15,973
3,960
2,915
24,040
(530)
1,846
8.67% Current / 1.33% PIK
596
8,507
455
6,920
9,400
872
10,142
1,655
18,452
678
18,013
1,734
5,174
6,908
LIBOR Plus 8.00% (Floor 1.00%, Ceiling 1.50%)
4,515
(860)
2,560
860
1,700
(3,030)
135
7,430
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 5.25% / 5.25% PIK
247
6.25% Current / 6.25% PIK
(1,091)
1,226
12,493
1,295
11,828
(2,420)
2,420
120
172
3,277
(2,330)
104
7,970
2,330
1,508
17,430
14,400
4,835
11,920
15,470
13,140
(2,280)
14,760
2,280
12,480
11.00% PIK Secured Debt
(596)
1,483
17,469
16,628
(5,360)
(55)
950
598
5,981
1,554
1,415
1,230
333
377
4,988
5,321
582
6,376
(1,400)
1,832
19,703
19,575
1,530
8,170
9,700
Zero Coupon Secured Debt
722
(3,840)
3,169
3,390
1,582
16,912
16,934
(7,832)
4,252
1,032,721
174,015
181,459
1,020,713
838
578
5,180
LIBOR Plus 7.25% (Floor 1.00%)
(182)
1,119
27,087
27,269
8,540
5,010
13,550
(51)
501
4,698
4,702
131
146
290
(138)
982
13,244
138
13,382
(670)
424
6,270
LIBOR Plus 9.25% (Floor 1.00%)
(1,326)
1,534
18,794
1,326
17,491
(4,005)
4,701
4,005
1,897
9,160
19,500
2,053
26,607
5,930
(690)
(91)
2,740
227
26,000
2,790
259
LP Interests (Fund II)
LP Interests (Fund III)
(399)
576
13,915
1,819
12,096
(672)
597
508
1,854
(759)
7,033
759
(241)
241
(100)
LP Interests (EIG Global Private Debt fund-A, L.P.)
(165)
110
304
(697)
5,778
697
5,081
(204)
631
9,696
989
364
2,474
LIBOR Plus 6.00% (Floor 1.00%)
384
984
3,023
7,900
(1,260)
4,260
1,260
(4,270)
10,330
4,270
(2,215)
1,803
14,407
2,215
15,392
6,474
7,084
12.00% Current Secured Debt
1,037
11,356
2,680
4,430
(413)
570
770
9.50% Current, Secured Debt
2,459
1,520
1,292
8,200
9,720
14.00% Current, Secured Debt
6,197
6,080
12.00% Current, Secured Debt
21,290
LIBOR Plus 6.50% (Floor 1.00%)
(283)
178
2,962
306
2,671
(2,684)
2,684
(771)
212
2,282
771
1,723
382
1,889
945
(3,667)
(800)
(181)
1,843
19,352
(9,050)
9,050
4,950
(150)
Amounts related to investments transferred to or from other1940 Act classification during the period
(337)
2,195
330,287
101,944
82,006
348,030
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 I of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021 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
Main Street Capital Corporation (“MSCC” or “Main Street”) is a principal investment firm. MSCC wholly owns several investment funds, including Main Street Mezzanine Fund, LP (“MSMF”) and Main Street Capital III, LP (“MSC III” and, collectively with MSMF, the “Funds”) and each of their general partners.
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, 2021, we continued to work collectively with our employees and portfolio companies to navigate the significant challenges created by the COVID-19 pandemic and the labor and supply constraints, rising costs, and supply chain disruptions. 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, was negatively impacted by the economic effects of the COVID-19 pandemic in 2020. We continue to maintain access to multiple sources of liquidity, including cash, unused capacity under our Credit Facility and, as discussed under Liquidity and Capital Resources, access to capital markets for both equity and unsecured note issuances. As of September 30, 2021, 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, 2021. 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 evolving situation and guidance from U.S. 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. We seek to achieve this objective by primarily focusing on providing customized debt and equity financing to lower middle market (“LMM”) companies and debt capital to middle market (“Middle Market”) companies. 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 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.
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 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.
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.
Subject to changes in our cash and overall liquidity, as well as our capital structure management activities, our Investment Portfolio may also include short-term portfolio investments that are atypical of our LMM, Middle Market and Private Loan portfolio investments in that they are intended to be a short-term deployment of capital. These assets are typically expected to be liquidated in one year or less and are not expected to be a significant portion of the overall Investment Portfolio.
Our external asset management business is conducted through MSC Adviser I, LLC (the “External Investment Manager”). The External Investment Manager earns management fees based on the assets under management for external parties and may earn incentive fees, or a carried interest, based on the performance of the assets 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 MSC Income Fund, Inc. (“MSC Income”), formerly known as HMS Income Fund, Inc., and its other investment advisory clients. Through this agreement, we share
employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities.
During May 2012, we entered into an investment sub advisory agreement with HMS Adviser, LP (“HMS Adviser”), which was the investment adviser to MSC Income at the time, 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 was entitled to 50% of the annual base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with MSC Income. 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 whereby the External Investment Manager became the sole investment adviser and administrator to MSC Income pursuant to an Investment Advisory and Administrative Services Agreement entered into between the External Investment Manager and MSC Income (the “Advisory Agreement”). The Advisory Agreement includes a 1.75% annual management fee, reduced from 2.00% previously, and the same incentive fee as under MSC Income’s prior advisory agreement with HMS Adviser, with the External Investment Manager receiving 100% of such fee income (increased from 50% previously).
In April 2014, we received an exemptive order from the SEC permitting co-investments by us and MSC Income in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act. During December 2020, we received an amended exemptive order from the SEC permitting co-investments by us, MSC Income and other funds advised by the External Investment Manager in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act. We have made co-investments with MSC Income and the Private Loan Fund (as defined below), and in the future intend to make co-investments with MSC Income, the Private Loan Fund and other funds advised by the External Investment Manager, 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 us and the External Investment Manager’s advised clients, including MSC Income, as applicable, and if it is appropriate, to propose an allocation of the investment opportunity between such parties. Because the External Investment Manager may receive performance-based fee compensation from funds advised by the External Investment Manager, including MSC Income and the Private Loan Fund, this may provide the Company and the External Investment Manager an incentive to allocate opportunities to other participating funds instead of us. However, both we and the External Investment Manager have policies and procedures in place to manage this conflict, including oversight by the independent members of our Board of Directors.
The External Investment Manager launched its first private fund, MS Private Loan Fund I, LP, a private investment fund with a strategy to co-invest with Main Street in Private Loan portfolio investments (the “Private Loan Fund”), in December 2020. The External Investment Manager entered into an Investment Management Agreement in December 2020 with the Private Loan Fund, pursuant to which the External Investment Manager provides investment advisory and management services to the Private Loan Fund in exchange for an asset-based fee and certain incentive fees.
The External Investment Manager earned base management fee income of $4.6 million and $2.3 million during the three months ended September 30, 2021 and 2020, respectively, and $12.7 million and $7.2 million during the nine months ended September 30, 2021 and 2020, respectively. During the three and nine months ended September 30, 2021, an insignificant amount of incentive fee income was earned, while no incentive fee income was earned in the three and nine months ended September 30, 2020.
We allocate certain expenses to the External Investment Manager pursuant to the sharing agreement between it and MSCC. Our total expenses are net of expenses allocated to the External Investment Manager for the three months ended September 30, 2021 and 2020 of $2.7 million and $1.9 million, respectively, and for the nine months ended September 30, 2021 and 2020 of $7.7 million and $5.3 million, respectively. 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. The total contribution to our net investment income was $4.2 million and $2.2 million for the three months ended September 30, 2021 and 2020, respectively, and $11.6 million and $6.7 million for the nine months ended September 30, 2021 and 2020, respectively.
See “Note C – Fair Value Hierarchy for Investments and Debentures – Portfolio Composition – Investment Portfolio Composition” in the notes to consolidated financial statements for a summary of Main Street’s investments in the LMM, Middle Market and Private Loan portfolios as of September 30, 2021 and December 31, 2020.
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 and our External Investment Manager’s asset management business. The ratio of our total operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was 1.5% and 1.3%, respectively, for the trailing twelve months ended September 30, 2021 and 2020, and 1.3% for the year ended December 31, 2020. The ratio of our total operating expenses, including interest expense, as a percentage of our quarterly average total assets was 3.4% and 3.2%, respectively, for the trailing twelve months ended September 30, 2021 and 2020, and 3.2% for the year ended December 31, 2020. Our ratio of expenses as a percentage of our average net asset value is described in greater detail in Note F to the consolidated financial statements included in “Item 1. Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. Critical accounting policies are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on our current and future financial condition and results of operations.
Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board of Directors. Our critical accounting policies and estimates include the Investment Portfolio Valuation and Revenue Recognition policies described below. Our significant accounting policies are described in greater detail in Note B to the consolidated financial statements included in “Item 1. Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
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. We consider
this determination to be a critical accounting estimate, given the significant judgments and subjective measurements required. As of September 30, 2021 and December 31, 2020 our Investment Portfolio valued at fair value represented approximately 96% and 97% 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.
The SEC recently adopted new Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its executive officers or investment adviser as a valuation designee to determine the fair value for its investment portfolio, subject to the active oversight of the board. Our board of directors has approved policies and procedures pursuant to Rule 2a-5 (the “Valuation Procedures”) and has designated a group of our executive officers to serve as the Board’s valuation designee. We adopted the Valuation Procedures effective April 1, 2021. We believe our investment portfolio as of September 30, 2021 and December 31, 2020 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
106
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, 2021 and 2020, (i) approximately 2.1% and 3.7%, respectively, of our total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.6% and 0.7%, respectively, of our total investment income was attributable to cumulative dividend income not paid currently in cash. For the nine months ended September 30, 2021 and 2020, (i) approximately 3.0% and 3.0%, respectively, of our total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.6% and 0.6%, respectively, of our total investment income was attributable to cumulative dividend income not paid currently in cash.
INVESTMENT PORTFOLIO COMPOSITION
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, 2021 and December 31, 2020 (this information excludes the Other Portfolio, short-term 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 Annual Report on Form 10-K for the fiscal year ended December 31, 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, 2021, our total Investment Portfolio had eight investments on non-accrual status, which comprised approximately 0.9% of its fair value and 3.5% of its cost. As of December 31, 2020, our total Investment
107
Portfolio had seven investments on non-accrual status, which comprised approximately 1.3% of its fair value and 3.6% 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 did 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, 2021 and September 30, 2020
Net Change
24,825
(5,983)
Net investment income
18,842
Net realized gain (loss) from investments
22,179
NM
Net unrealized appreciation (depreciation) from investments
(24,483)
(10,777)
Net increase in net assets resulting from operations
5,761
(dollars in thousands, except per share amounts)
Share‑based compensation expense
Distributable net investment income(a)
52,173
33,023
19,150
Net investment income per share—Basic and diluted
0.25
Distributable net investment income per share—Basic and diluted(a)
0.76
0.50
Not Meaningful
108
Investment Income
Total investment income for the three months ended September 30, 2021 was $76.8 million, a 48% increase from the $52.0 million of total investment income for the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
(a)
14,906
184
(b)
1,589
(c)
(d)
Expenses
Total expenses for the three months ended September 30, 2021 was $27.5 million, a 28% increase from the $21.5 million in the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
Employee compensation expenses
9,598
4,407
5,191
Deferred compensation plan expense
573
(595)
(104)
Total compensation expense
9,576
4,980
4,596
G&A expense
3,047
3,354
(307)
Interest expense
2,222
Gross expenses
30,203
23,384
6,819
Allocation of expenses to the External Investment Manager
(836)
27,475
21,492
5,983
109
Net Investment Income
Net investment income for the three months ended September 30, 2021 increased 62% to $49.3 million, or $0.71 per share, compared to net investment income of $30.5 million, or $0.46 per share, for the corresponding period of 2020. The increase in net investment income and net investment income per share was principally attributable to the 48% increase in total investment income, partially offset by the 28% increase in total expenses, both as discussed above, and the 4% increase in weighted average shares outstanding to 69.0 million for the three months ended September 30, 2021, 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 increase in net investment income per share includes (i) an increase of $0.07 per share in investment income from dividend income activity considered to be less consistent or non-recurring and (ii) an increase of $0.05 per share related to higher accelerated prepayment, repricing and other activity related to certain Investment Portfolio debt investments, as discussed above, and (iii) an increase of $0.01 per share due to the decrease in compensation expense related to our deferred compensation plan, primarily attributable to changes in the fair value of the deferred compensation plan assets.
Distributable Net Investment Income
Distributable net investment income for the three months ended September 30, 2021 increased 58% to $52.2 million, or $0.76 per share, compared with $33.0 million, or $0.50 per share, in the corresponding period of 2020. The increase in distributable net investment income and distributable net investment income per share was primarily due to the increased level of total investment income, partially offset by (i) the increase in total expenses, excluding share-based compensation expense, and (ii) a greater number of average shares outstanding compared to the corresponding period in 2020, all as described above. The increase in distributable net investment income per share includes the impacts of (i) the increase in investment income from dividend activity considered to be less consistent or non-recurring and an increase in accelerated prepayment, repricing and other income activity related to certain Investment Portfolio debt investments and (ii) the decrease in compensation expense attributable to the change in the fair value of the deferred compensation plan assets during the third quarter of 2021, both as discussed above.
Net Realized Gain (Loss) from Investments
The following table provides a summary of the primary components of the total net realized gain on investments of $8.3 million for the three months ended September 30, 2021:
Three Months Ended September 30, 2021
Full Exits
Partial Exits
Restructures
Other (a)
Total (a)
Net Gain/(Loss)
# of Investments
LMM Portfolio
13,275
(362)
12,913
Middle Market Portfolio
(4,485)
Private Loan Portfolio
Other Portfolio
(101)
Short-term Portfolio
Total net realized gain/(loss)
(442)
Net Unrealized Appreciation (Depreciation)
The following table provides a summary of the total net unrealized appreciation of $38.6 million for the three months ended September 30, 2021:
Middle
Private
LMM(a)
Market
Loan
Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods due to net realized (gains / income) losses recognized during the current period
(9.6)
(0.3)
(1.4)
0.2
(11.1)
Net unrealized appreciation relating to investments
27.9
15.7
49.7
Total net unrealized appreciation relating to investments
18.3
38.6
Income Tax Benefit (Provision)
The income tax provision for the three months ended September 30, 2021 of $12.3 million principally consisted of (i) a deferred tax provision of $11.3 million, which is primarily the result of the net activity relating to our portfolio investments held in our wholly owned taxable subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation/depreciation and other temporary book-tax differences, and (ii) a current tax provision of $1.0 million, related to a $0.9 million provision for current U.S. federal and state income taxes and a $0.1 million provision for excise tax on our estimated undistributed taxable income. The income tax provision for the three months ended September 30, 2020 of $1.5 million principally consisted of (i) a current tax provision of $1.2 million related to a $0.8 million provision for current U.S. federal and state income taxes, and a $0.4 million provision for excise tax on our estimated undistributed taxable income and (ii) a deferred tax provision of $0.3 million.
Net Increase (Decrease) in Net Assets Resulting from Operations
The net increase in net assets resulting from operations for the three months ended September 30, 2021 was $84.0 million, or $1.22 per share, compared with $78.2 million, or $1.18 per share, during the three months ended September 30, 2020. The tables above provide a summary of the net increase in net assets resulting from operations for the three months ended September 30, 2021.
Comparison of the nine months ended September 30, 2021 and September 30, 2020
46,772
(13,615)
33,157
(44,323)
Net realized loss on extinguishment of debt
534
Net unrealized appreciation (depreciation) from:
(118,030)
235,102
(460)
234,642
(36,944)
286,287
(254)
139,418
106,515
32,903
0.42
2.03
1.63
0.40
Total investment income for the nine months ended September 30, 2021 was $206.9 million, a 29% increase from the $160.1 million of total investment income for the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
Interest Income
11,295
Dividend Income
35,386
Total Investment Income
Total expenses for the nine months ended September 30, 2021 was $75.4 million, a 22% increase from the $61.8 million in the corresponding period of 2020. The following table provides a summary of the changes in the comparable period activity.
21,834
11,589
10,245
956
22,790
12,280
10,510
9,439
9,827
(388)
6,087
83,104
67,149
15,955
Allocation of expenses to the external investment manager
(2,340)
75,424
61,809
13,615
Net investment income for the nine months ended September 30, 2021 increased 34% to $131.5 million, or $1.92 per share, compared to net investment income of $98.3 million, or $1.50 per share, for the corresponding period of 2020. The increase in net investment income and net investment income per share was principally attributable to the 29% increase in total investment income, partially offset by the 22% increase in total expenses, both as discussed above, and the 5% increase in weighted average shares outstanding to 68.6 million for the nine months ended September 30, 2021, primarily due to shares issued through the ATM Program, shares issued pursuant to our equity incentive plans and shares issued pursuant to our dividend reinvestment plan. The increase in net investment income per share includes (i) an increase of $0.15 per share in investment income from dividend income activity considered to be less consistent or non-recurring and (ii) an increase of $0.02 per share related to higher accelerated prepayment, repricing and other activity related to certain Investment Portfolio debt investments.
Distributable net investment income for the nine months ended September 30, 2021 increased 31% to $139.4 million, or $2.03 per share, compared with $106.5 million, or $1.63 per share, in the corresponding period of 2020. The increase in distributable net investment income and distributable net investment income per share was primarily due to the increased level of total investment income, partially offset by (i) the increase in total expenses, excluding share-based compensation expense, and (ii) a greater number of average shares outstanding compared to the corresponding period in 2020, all as described above. The increase in distributable net investment income per share includes the impacts of the increase in investment income from dividend income activity considered to be less consistent or non-recurring, and the increase in accelerated prepayment, repricing and other income activity related to certain Investment Portfolio debt investments, as discussed above.
The following table provides a summary of the primary components of the total net realized gain on investments of $10.6 million for the nine months ended September 30, 2021:
Nine Months Ended September 30, 2021
28,004
(10,925)
(569)
16,510
(4,243)
6,153
(2,575)
351
(3,321)
19,312
6,930
(15,453)
(214)
The following table provides a summary of the total net unrealized appreciation of $117.1 million for the nine months ended September 30, 2021:
(5.9)
(1.3)
73.7
10.9
27.4
118.4
67.8
7.8
9.5
32.0
117.1
The income tax provision for the nine months ended September 30, 2021 of $22.7 million principally consisted of (i) a deferred tax provision of $20.4 million, which is primarily the result of the net activity relating to our portfolio investments held in our wholly owned taxable subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation/depreciation and other temporary book-tax differences and (ii) a current tax provision of $2.2 million, related to a $1.6 million provision for current U.S. federal and state income taxes and a $0.6 million provision for excise tax on our estimated undistributed taxable income. 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, partially offset by a current tax provision of $1.4 million, primarily related to a $1.1 million provision for excise tax on our estimated undistributed taxable income and $0.3 million provision for current U.S. federal and state income taxes.
The net increase in net assets resulting from operations for the nine months ended September 30, 2021 was $236.4 million, or $3.45 per share, compared with a net decrease of $49.9 million, or $0.76 per share, during the nine months ended September 30, 2020. The tables above provide a summary of the net increase in net assets resulting from operations for the nine months ended September 30, 2021.
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, 2021, we realized a net increase in cash and cash equivalents of $27.7 million, which is the net result of $158.7 million of cash used in our operating activities and $186.4 million of cash provided by our financing activities.
The $158.7 million of cash used in our operating activities resulted primarily from cash uses totaling $911.1 million for the funding of new portfolio company investments and settlement of accruals for portfolio investments existing as of December 31, 2020, partially offset by (i) cash proceeds totaling $614.4 million from the sales and repayments of debt investments and sales of and return on capital from equity investments, (ii) cash flows that we
generated from the operating profits earned totaling $123.1 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 $186.4 million of cash provided by our financing activities principally consisted of (i) $300.0 million in cash proceeds from the issuance of the 3.00% Notes, (ii) $80.2 million in cash proceeds from the issuance of SBIC debentures and (iii) $44.8 million in net cash proceeds from our ATM Program (described below) and direct stock purchase plan, partially offset by (i) $114.5 million in cash dividends paid to stockholders, (ii) $69.0 million in net repayments on the Credit Facility, (iii) $40.0 million in repayment of SBIC debentures, (iv) $10.2 million for debt issuance costs, SBIC debenture fees and other costs, and (v) $5.0 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, 2021, we had $59.6 million in cash and cash equivalents and $655.0 million of unused capacity under the Credit Facility, before considering the accordion feature discussed below, which we maintain to support our investment and operating activities. As of September 30, 2021, our net asset value totaled $1,684.3 million, or $24.27 per share.
The Credit Facility provides additional liquidity to support our investment and operational activities. As of September 30, 2021, the Credit Facility included total commitments of $855.0 million from a diversified group of 18 lenders, held a maturity date in April 2026 and contained an accordion feature which allowed us to increase the total commitments under the facility to up to $1,200.0 million from new and existing lenders on the same terms and conditions as the existing commitments. As of September 30, 2021, borrowings under the Credit Facility bore 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, 2021) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.25% as of September 30, 2021) 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. As of September 30, 2021, the Credit Facility contained certain affirmative and negative covenants, including but not limited to: (i) maintaining minimum liquidity, (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, (iv) maintaining a minimum tangible net worth and (v) maintaining a minimum asset coverage ratio of 200% with respect to the consolidated assets (with certain limitations on the contribution of equity in financing subsidiaries as specified therein) of MSCC and the guarantors under the Credit Facility to the secured debt of MSCC and the guarantors. As of September 30, 2021, we had $200.0 million in borrowings outstanding under the Credit Facility, the interest rate on the Credit Facility was 2.0% (based on the LIBOR rate of 0.1% as of the most recent reset date of September 1, 2021 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 $350.0 million of outstanding SBIC debentures guaranteed by the SBA as of September 30, 2021 through our wholly owned SBICs, which bear a weighted-average annual fixed interest rate of approximately 2.9%, paid semiannually, and mature ten years from issuance. The first maturity related to our SBIC debentures occurs in 2023, and the weighted-average remaining duration is approximately 6.4 years as of September 30, 2021. During the nine months ended September 30, 2021, Main Street issued $80.2 million of SBIC debentures and opportunistically prepaid $40.0 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 maintain SBIC debentures under the SBIC program in the future, subject to periodic repayments and borrowings, in an amount up to the regulatory maximum amount for affiliated SBIC funds.
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, 2021, the outstanding principal 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 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, 2021, we were in compliance with these covenants.
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%. 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, 2021, the outstanding principal 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. As of September 30, 2021, we were in compliance with these covenants.
In January 2021, we issued $300.0 million in aggregate principal amount of 3.00% unsecured notes due July 14, 2026 (the “3.00% Notes”) at an issue price of 99.004%. The total net proceeds from the 3.00% Notes, resulting from the issue price and after underwriting discounts and estimated offering expenses payable, were approximately $294.8 million. The 3.00% Notes are unsecured obligations and rank pari passu with our current and future unsecured indebtedness; senior to any of its future indebtedness that expressly provides it is subordinated to the 3.00% 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 3.00% Notes may be redeemed in whole or in part at any time at our option subject to certain make whole provisions. The 3.00% Notes bear interest at a rate of 3.00% per year payable semiannually on January 14 and July 14 of each year. We may from time to time repurchase the 3.00% Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of September 30, 2021, the outstanding principal balance of the 3.00% Notes was
117
$300.0 million. In October 2021, we issued an additional $200.0 million in aggregate principal amount of the 3.00% Notes at an issue price of 101.741%. See Recent Developments for further discussion.
The indenture governing the 3.00% Notes (the “3.00% 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 3.00% 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 3.00% Notes Indenture. As of September 30, 2021, we were in compliance with these covenants.
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, 2021, we sold 1,111,194 shares of our common stock at a weighted-average price of $40.59 per share and raised $45.1 million of gross proceeds under the ATM Program. Net proceeds were $44.5 million after commissions to the selling agents on shares sold and offering costs. As of September 30, 2021, 4,602,178 shares remained available for sale under the ATM Program.
During the year ended December 31, 2020, we sold 2,645,778 shares of our common stock at a weighted-average price of $32.10 per share and raised $84.9 million of gross proceeds under the ATM Program. Net proceeds were $83.8 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. We may also invest in short-term portfolio investments that are atypical of our LMM, Middle Market and Private Loan portfolio investments in that they are intended to be a short-term deployment of capital and are more liquid than investments within the other portfolios. Short-term portfolio investments consist primarily of investments in secured debt investments and independently rated debt 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 2021 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 the Funds 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
See “Note B.13 – Recently Issued or Adopted Accounting Standards” to the consolidated financial statements included in this Quarterly Report on Form 10-Q for a discussion of recently issued or adopted accounting standards.
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, including as a result of the COVID 19 pandemic, and may continue to 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. Prolonged or more severe impacts of inflation to our portfolio companies could impact their ability to service their debt obligations and/or reduce their available cash for distributions which in turn could negatively affect our results of operations.
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, 2021, we had a total of $175.1 million in outstanding commitments comprised of (i) fifty-one 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, 2021, the future fixed commitments for cash payments in connection with our SBIC debentures, the 4.50% Notes due 2022, the 5.20% Notes, the 3.00% Notes and rent obligations under our office lease for each of the next five years and thereafter are as follows (dollars in thousands):
63,800
270,200
Interest due on SBIC debentures
10,209
9,899
8,455
7,228
22,793
58,584
Interest due on 4.50% Notes due 2022
4,163
8,325
12,488
Interest due on 5.20% Notes due 2024
11,700
23,400
70,200
Interest due on 3.00% Notes due 2026
45,050
Operating Lease Obligation (1)
16,057
236,774
59,103
543,773
17,060
603,772
1,476,539
As of September 30, 2021, we had $200.0 million in borrowings outstanding under our Credit Facility, and the Credit Facility is scheduled to mature in April 2026.
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, 2021, we had a receivable of $4.7 million due from the External Investment Manager, which included $3.2 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 in Note B.9 and Note D in the notes to consolidated financial statements) and $1.5 million of dividends declared but not paid by the External Investment Manager.
From time to time, we may make investments in clients of the External Investment Manager in the form of debt or equity capital on terms approved by our Board of Directors. In January 2021, we entered into a Term Loan Agreement with MSC Income (the “Term Loan Agreement”). The Term Loan Agreement was unanimously approved by our Board, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act and the board of directors of MSC Income, including each director who is not an “interested person” of MSC Income or the External Investment Manager. The Term Loan Agreement provides for a term loan of $75.0 million to MSC Income, bearing interest at a fixed rate of 5.00% per annum, and matures in January 2026. Borrowings under the Term Loan Agreement are expressly subordinated and junior in right of payment to all secured indebtedness of MSC Income. In October 2021, MSC Income fully repaid all borrowings outstanding under the Term Loan Agreement and the Term Loan Agreement was terminated.
In December 2020, the External Investment Manager entered into an Investment Management Agreement with the Private Loan Fund, pursuant to which the External Investment Manager provides investment advisory and management services to the Private Loan Fund in exchange for an asset-based fee and certain incentive fees. The Private Loan Fund is a private investment fund exempt from registration under the 1940 Act that invests in debt investments in middle market companies generally with EBITDA between $7.5 million and $50 million and generally owned by a private equity sponsor, which we generally refer to as Private Loan investments. In connection with the Private Loan Fund’s initial closing in December 2020, we committed to contribute up to $10.0 million as a limited partner and will be entitled to distributions on such interest. In addition, certain of our officers and employees (and certain of their immediate family members) made capital commitments to the Private Loan Fund as limited partners and therefore have direct pecuniary interests in the Private Loan Fund. Additionally, we have provided the Private Loan Fund with a revolving line of credit pursuant to an Unsecured Revolving Promissory Note, dated February 5, 2021 (the “Private Loan Fund Loan”), in an aggregate amount equal to the amount of limited partner capital commitments to the Private Loan Fund up to $50.0 million. Borrowings under the Private Loan Fund Loan bear interest at a fixed rate of 5.00% per annum and will mature on the earlier of June 30, 2022 and the date of the Private Loan Fund’s final closing. The Private Loan Fund Loan was unanimously approved by our Board, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act and the board of directors of the Private Loan Fund, including each director who is not an “interested person” of the Private Loan Fund or 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, 2021, $14.6 million of compensation and dividend reinvestments net of unrealized gains and losses and distributions had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). Of this amount, $6.6 million had been deferred into phantom Main Street stock units, representing 159,369 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.
Recent Developments
In October 2021, we issued an additional $200.0 million in aggregate principal amount of the 3.00% Notes at an issue price of 101.741%, resulting in an effective interest rate of 2.60%. The total net proceeds from the offering of the 3.00% Notes, resulting from the public issue price and after underwriting discounts and estimated offering expenses payable, were approximately $203.5 million. We used the proceeds from this debt issuance to repay outstanding borrowings under our Credit Facility, providing significant additional liquidity for our ongoing investment activities and to facilitate future availability for the repayment of our existing 4.50% Notes due 2022.
In November 2021, we declared a supplemental cash dividend of $0.10 per share payable in December 2021. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that we declared for the fourth quarter of 2021 of $0.210 per share for each of October, November and December 2021.
During November 2021, we declared regular monthly dividends of $0.215 per share for each month of January, February and March of 2022. These regular monthly dividends equal a total of $0.645 per share for the first quarter of 2022, representing a 4.9% increase from the regular monthly dividends paid in the first quarter of 2021. Including the regular monthly and supplemental dividends declared for the fourth quarter of 2021 and first quarter of 2022, we will have paid $32.820 per share in cumulative dividends since our October 2007 initial public offering.
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 Investments — Changes relating to the LIBOR calculation process, the phase-out of LIBOR and the use of replacement rates for LIBOR may adversely affect the value of our portfolio securities.”, “Risk Factors — Risks Relating to Our Investments — Changes in interest rates may affect our cost of capital, net investment income and value of our investments.” and “Risk Factors — Risks Relating to Our Debt Financing — Because we borrow money, the potential for gain or loss on amounts invested in us is magnified and may increase the risk of investing in us.” included in our Form 10-K for the fiscal year ended December 31, 2020 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, 2021, approximately 67.4% of our debt investment portfolio (at cost) bore interest at floating rates, 89.2% 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, 3.00% Notes, 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, 2021, 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, 2021.
Increase
(Increase)
(Decrease)
Decrease
(Decrease) in Net
in Interest
Basis Point Change
Income
Expense
Income per Share
(222)
(215)
(50)
(201)
(194)
436
(64)
(112)
1,496
(1,500)
3,358
(2,000)
1,358
0.02
6,583
(2,500)
4,083
10,029
(3,000)
7,029
0.10
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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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
In addition to the other information set forth in this report, you should carefully consider the risk factors described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which could materially affect our business, financial condition and/or operating results. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2021, we issued 95,364 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, 2021 under the dividend reinvestment plan was approximately $4.0 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 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
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).
*
Exhibit previously filed with the Securities and Exchange Commission, as indicated, and incorporated herein by reference.
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 5, 2021
Dwayne L. Hyzak
Chief Executive Officer
(principal executive officer)
/s/ JESSE E. MORRIS
Jesse E. Morris
Chief Financial Officer and Chief Operating Officer
(principal financial officer)
/s/ LANCE A. PARKER
Lance A. Parker
Vice President and Chief Accounting Officer
(principal accounting officer)