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 March 31, 2022
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 May 5, 2022 was 72,979,061.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets—March 31, 2022 (unaudited) and December 31, 2021
1
Consolidated Statements of Operations (unaudited)—Three months ended March 31, 2022 and 2021
2
Consolidated Statements of Changes in Net Assets (unaudited)—Three months ended March 31, 2022 and 2021
3
Consolidated Statements of Cash Flows (unaudited)—Three months ended March 31, 2022 and 2021
4
Consolidated Schedule of Investments (unaudited)—March 31, 2022
5
Consolidated Schedule of Investments—December 31, 2021
26
Notes to Consolidated Financial Statements (unaudited)
48
Consolidated Schedules of Investments in and Advances to Affiliates (unaudited)—Three months ended March 31, 2022 and 2021
84
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
93
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
111
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
112
Item 6.
Exhibits
113
Signatures
114
MAIN STREET CAPITAL CORPORATION
Consolidated Balance Sheets
(in thousands, except shares and per share amounts)
March 31,
December 31,
2022
2021
(Unaudited)
ASSETS
Investments at fair value:
Control investments (cost: $1,099,019 and $1,107,597 as of March 31, 2022 and December 31, 2021, respectively)
$
1,486,663
1,489,257
Affiliate investments (cost: $583,428 and $578,539 as of March 31, 2022 and December 31, 2021, respectively)
559,439
549,214
Non‑Control/Non‑Affiliate investments (cost: $1,690,120 and $1,573,110 as of March 31, 2022 and December 31, 2021, respectively)
1,644,636
1,523,360
Total investments (cost: $3,372,567 and $3,259,246 as of March 31, 2022 and December 31, 2021, respectively)
3,690,738
3,561,831
Cash and cash equivalents
17,952
32,629
Interest receivable and other assets
68,320
56,488
Receivable for securities sold
—
35,125
Deferred financing costs (net of accumulated amortization of $9,705 and $9,462 as of March 31, 2022 and December 31, 2021, respectively)
3,973
4,217
Total assets
3,780,983
3,690,290
LIABILITIES
Credit facility
338,000
320,000
3.00% Notes due 2026 (par: $500,000 as of both March 31, 2022 and December 31, 2021)
497,741
497,609
5.20% Notes due 2024 (par: $450,000 as of both March 31, 2022 and December 31, 2021)
451,136
451,272
SBIC debentures (par: $350,000 as of both March 31, 2022 and December 31, 2021)
343,027
342,731
4.50% Notes due 2022 (par: $185,000 as of both March 31, 2022 and December 31, 2021)
184,595
184,444
Accounts payable and other liabilities
26,655
40,469
Payable for securities purchased
5,111
Interest payable
17,145
14,926
Dividend payable
15,519
15,159
Deferred tax liability, net
33,511
29,723
Total liabilities
1,907,329
1,901,444
Commitments and contingencies (Note K)
NET ASSETS
Common stock, $0.01 par value per share (150,000,000 shares authorized; 72,252,180 and 70,700,885 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively)
723
707
Additional paid‑in capital
1,807,739
1,736,346
Total undistributed earnings
65,192
51,793
Total net assets
1,873,654
1,788,846
Total liabilities and net assets
NET ASSET VALUE PER SHARE
25.89
25.29
The accompanying notes are an integral part of these consolidated financial statements
Consolidated Statements of Operations
Three Months Ended
INVESTMENT INCOME:
Interest, fee and dividend income:
Control investments
32,577
24,025
Affiliate investments
13,917
11,505
Non‑Control/Non‑Affiliate investments
32,901
27,277
Total investment income
79,395
62,807
EXPENSES:
Interest
(16,687)
(13,804)
Compensation
(7,269)
(6,318)
General and administrative
(3,226)
(2,975)
Share‑based compensation
(2,818)
(2,333)
Expenses allocated to the External Investment Manager
2,817
2,380
Total expenses
(27,183)
(23,050)
NET INVESTMENT INCOME
52,212
39,757
NET REALIZED GAIN (LOSS):
-
(10,925)
692
(4,803)
2,644
(2)
Total net realized gain (loss)
3,336
(15,730)
NET UNREALIZED APPRECIATION (DEPRECIATION):
8,279
14,261
3,041
6,417
3,432
13,323
Total net unrealized appreciation (depreciation)
14,752
34,001
INCOME TAXES:
Federal and state income, excise and other taxes
(1,309)
(634)
Deferred taxes
(3,788)
(48)
Income tax benefit (provision)
(5,097)
(682)
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
65,203
57,346
NET INVESTMENT INCOME PER SHARE—BASIC AND DILUTED
0.73
0.58
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE—BASIC AND DILUTED
0.91
0.84
WEIGHTED AVERAGE SHARES OUTSTANDING—BASIC AND DILUTED
71,708,326
68,126,576
Consolidated Statements of Changes in Net Assets
(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, 2020
67,762,032
677
1,615,940
(101,850)
1,514,767
Public offering of common stock, net of offering costs
117,388
3,626
3,628
2,333
Purchase of vested stock for employee payroll tax withholding
(180)
(7)
Dividend reinvestment
106,651
3,698
3,699
Amortization of directors’ deferred compensation
195
Issuance of restricted stock
15,007
Dividends to stockholders
96
(41,893)
(41,797)
Net increase (decrease) resulting from operations
Balances at March 31, 2021
68,000,898
680
1,625,881
(86,397)
1,540,164
Balances at December 31, 2021
70,737,021
1,502,430
15
63,507
63,522
2,818
114,043
4,812
4,813
147
Issuance of restricted stock, net of forfeited shares
16,913
109
(51,804)
(51,695)
Balances at March 31, 2022
72,370,407
Consolidated Statements of Cash Flows
(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
(315,369)
(208,186)
Proceeds from sales and repayments of debt investments in portfolio companies
218,781
121,027
Proceeds from sales and return of capital of equity investments in portfolio companies
19,963
13,920
Net unrealized (appreciation) depreciation
(14,752)
(34,001)
Net realized (gain) loss
(3,336)
15,730
Accretion of unearned income
(2,834)
(2,468)
Payment-in-kind interest
(937)
(2,389)
Cumulative dividends
(887)
(425)
Share-based compensation expense
Amortization of deferred financing costs
686
740
Deferred tax (benefit) provision
3,788
Changes in other assets and liabilities:
(11,731)
4,096
2,219
6,610
(13,667)
(504)
Deferred fees and other
378
1,172
Net cash used in operating activities
(49,677)
(24,951)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public offering of common stock, net of offering costs
Proceeds from public offering of 3.00% Notes due 2026
300,000
Dividends paid
(46,522)
(38,045)
Proceeds from issuance of SBIC debentures
20,200
Repayments of SBIC debentures
(40,000)
Proceeds from credit facility
185,000
125,000
Repayments on credit facility
(167,000)
(307,000)
Debt issuance premiums (costs), net
(5,743)
Purchases of vested stock for employee payroll tax withholding
Net cash provided by financing activities
35,000
58,033
Net increase (decrease) in cash and cash equivalents
(14,677)
33,082
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
31,919
CASH AND CASH EQUIVALENTS AT END OF PERIOD
65,001
Supplemental cash flow disclosures:
Interest paid
13,751
6,424
Taxes paid
2,874
(487)
Non-cash financing activities:
Value of shares issued pursuant to the DRIP
Consolidated Schedule of Investments
March 31, 2022
(dollars in thousands)
Portfolio Company (1) (20)
Business Description
Type of Investment (2) (3) (15)
Investment Date (24)
Shares/Units
Rate (39)
Maturity Date
Principal (4)
Cost (4)
Fair Value (18)
Control Investments (5)
Analytical Systems Keco Holdings, LLC
Manufacturer of Liquid and Gas Analyzers
Secured Debt
(9)
8/16/2019
12.00% (L+10.00%, Floor 2.00%)
8/16/2024
4,875
4,689
Preferred Member Units
3,200
5/20/2021
2,427
2,426
4,318
Warrants
(27)
420
8/16/2029
316
10,631
9,007
ASC Interests, LLC
Recreational and Educational Shooting Facility
12/31/2019
13.00%
7/31/2022
170
8/1/2013
1,650
1,642
Member Units
1,500
800
3,312
2,612
ATS Workholding, LLC
(10)
Manufacturer of Machine Cutting Tools and Accessories
(14)
11/16/2017
5.00%
8/16/2023
4,794
4,635
3,005
3,725,862
3,726
8,361
Barfly Ventures, LLC
Casual Restaurant Group
10/15/2020
7.00%
10/31/2024
711
10/26/2020
37
1,584
2,050
2,295
2,761
Batjer TopCo, LLC
HVAC Mechanical Contractor
3/7/2022
11.00%
3/31/2027
11,025
10,917
Preferred Stock
4,073
14,990
Bolder Panther Group, LLC
Consumer Goods and Fuel Retailer
12/31/2020
10.50% (L+9.00%, Floor 1.50%)
12/31/2025
49,194
48,901
Class B Preferred Member Units
(8)
140,000
8.00%
14,000
25,930
62,901
75,124
Brewer Crane Holdings, LLC
Provider of Crane Rental and Operating Services
1/9/2018
11.00% (L+10.00%, Floor 1.00%)
1/9/2023
7,936
7,919
2,950
4,279
7,780
12,198
15,699
Bridge Capital Solutions Corporation
Financial Services and Cash Flow Solutions Provider
7/25/2016
12/11/2024
8,813
(30)
1,000
(8) (30)
17,742
82
7/25/2026
2,132
4,260
12,945
15,073
Café Brazil, LLC
6/9/2006
1,233
1,742
2,630
California Splendor Holdings LLC
Processor of Frozen Fruits
3/30/2018
3/30/2023
28,000
27,932
(8) (19)
7/31/2019
6,725
15.00% PIK
9,867
6,157
10,775
17,265
48,574
55,064
CBT Nuggets, LLC
Produces and Sells IT Training Certification Videos
Consolidated Schedule of Investments (Continued)
6/1/2006
416
1,300
48,880
Centre Technologies Holdings, LLC
Provider of IT Hardware Services and Software Solutions
1/4/2019
1/4/2024
9,183
9,145
8,638
12,696
5,840
14,985
14,478
Chamberlin Holding LLC
Roofing and Waterproofing Specialty Contractor
2/26/2018
9.00% (L+8.00%, Floor 1.00%)
2/26/2023
17,681
17,621
4,347
11,440
24,140
11/2/2018
1,047,146
1,322
1,540
30,383
43,361
Charps, LLC
Pipeline Maintenance and Construction
Unsecured Debt
8/26/2020
10.00%
1/31/2026
5,694
4,617
2/3/2017
1,829
1,963
14,090
6,580
19,784
Clad-Rex Steel, LLC
Specialty Manufacturer of Vinyl-Clad Metal
12/20/2016
10.50% (L+9.50%, Floor 1.00%)
1/15/2024
10,480
10,411
12/20/2036
1,073
1,063
717
7,280
10,250
210
610
18,964
22,334
CMS Minerals Investments
Oil & Gas Exploration & Production
4/1/2016
100
1,729
2,057
Cody Pools, Inc.
Designer of Residential and Commercial Pools
3/6/2020
12.25% (L+10.50%, Floor 1.75%)
12/17/2026
42,494
42,139
42,482
587
8,317
47,640
50,456
90,122
Colonial Electric Company LLC
Provider of Electrical Contracting Services
3/31/2021
12.00%
3/31/2026
24,255
24,051
17,280
7,680
9,130
31,731
33,181
CompareNetworks Topco, LLC
Internet Publishing and Web Search Portals
1/29/2019
10.00% (L+9.00%, Floor 1.00%)
1/29/2024
5,797
5,779
1,975
13,610
7,754
19,407
Copper Trail Fund Investments
(12) (13)
Investment Partnership
LP Interests (CTMH, LP)
(31)
7/17/2017
38.8%
710
Datacom, LLC
Technology and Telecommunications Provider
7.50%
8,825
8,271
7,643
9,000
2,610
2,670
10,881
10,313
6
Digital Products Holdings LLC
Designer and Distributor of Consumer Electronics
4/1/2018
4/1/2023
16,523
16,483
3,857
9,501
9,835
25,984
26,318
Direct Marketing Solutions, Inc.
Provider of Omni-Channel Direct Marketing Services
2/13/2018
12.00% (L+11.00%, Floor 1.00%)
2/13/2024
23,756
23,619
23,737
8,400
22,450
32,019
46,187
Gamber-Johnson Holdings, LLC
Manufacturer of Ruggedized Computer Mounting Systems
6/24/2016
10.50% (L+8.50%, Floor 2.00%)
1/1/2025
21,598
21,540
9,042
17,692
45,120
39,232
66,718
Garreco, LLC
Manufacturer and Supplier of Dental Products
7/15/2013
9.00% (L+8.00%, Floor 1.00%, Ceiling 1.50%)
4,196
1,200
2,340
5,396
6,536
GRT Rubber Technologies LLC
Manufacturer of Engineered Rubber Products
12/19/2014
8.23% (L+8.00%)
10/29/2026
38,885
38,683
5,879
13,065
46,190
51,748
85,075
Gulf Manufacturing, LLC
Manufacturer of Specialty Fabricated Industrial Piping Products
8/31/2007
438
2,980
5,290
Gulf Publishing Holdings, LLC
Energy Industry Focused Media and Publishing
(9) (17) (19)
9/29/2017
10.50% (5.25% Cash, 5.25% PIK) (L+9.50%, Floor 1.00%)
9/30/2020
257
(17) (19)
4/29/2016
12.50% (6.25% Cash, 6.25% PIK)
4/29/2021
13,565
8,000
3,681
3,680
17,502
8,257
Harris Preston Fund Investments
LP Interests (2717 MH, L.P.)
10/1/2017
49.3%
2,860
4,317
LP Interests (2717 HPP-MS, L.P.)
3/11/2022
244
3,104
4,561
Harrison Hydra-Gen, Ltd.
Manufacturer of Hydraulic Generators
6/4/2010
107,456
718
3,530
Jensen Jewelers of Idaho, LLC
Retail Jewelry Store
11/14/2006
10.00% (Prime+6.75%, Floor 2.00%)
11/14/2023
2,450
2,439
627
811
15,120
3,250
17,570
Johnson Downie Opco, LLC
Executive Search Services
12/10/2021
13.00% (L+11.50%, Floor 1.50%)
12/10/2026
11,475
11,350
7
Preferred Equity
3,150
14,500
JorVet Holdings, LLC
Supplier and Distributor of Veterinary Equipment and Supplies
3/28/2022
3/28/2027
25,650
25,394
107,406
10,741
36,135
KBK Industries, LLC
Manufacturer of Specialty Oilfield and Industrial Products
1/23/2006
325
783
13,930
Kickhaefer Manufacturing Company, LLC
Precision Metal Parts Manufacturing
10/31/2018
11.50%
10/31/2023
20,415
20,336
9.00%
10/31/2048
3,906
3,868
581
12,240
992
2,460
37,436
38,904
Market Force Information, LLC
Provider of Customer Experience Management Services
7/28/2017
7/28/2023
3,400
(14) (19)
12.00% PIK
26,079
25,952
8,936
743,921
16,642
45,994
12,336
MH Corbin Holding LLC
Manufacturer and Distributor of Traffic Safety Products
8/31/2015
3/31/2022
8,170
4,368
3/15/2019
66,000
4,400
9/1/2015
4,000
6,000
18,570
MS Private Loan Fund I, LP
LP Interests
(8) (31)
1/26/2021
12.1%
7,500
7,581
MSC Adviser I, LLC
(16)
Third Party Investment Advisory Services
11/22/2013
29,500
132,920
Mystic Logistics Holdings, LLC
Logistics and Distribution Services Provider for Large Volume Mailers
8/18/2014
1/31/2024
6,098
5,873
2,720
11,060
8,818
17,158
NAPCO Precast, LLC
Precast Concrete Manufacturing
1/31/2008
2,955
2,975
13,370
Nebraska Vet AcquireCo, LLC
Mixed-Animal Veterinary and Animal Health Product Provider
10,500
10,418
6,284
6,237
6,987
7,700
23,642
24,355
NexRev LLC
Provider of Energy Efficiency Products & Services
2/28/2018
2/28/2025
15,999
15,966
13,837
86,400,000
6,880
2,690
22,846
16,527
NRP Jones, LLC
Manufacturer of Hoses, Fittings and Assemblies
12/21/2017
3/20/2023
2,080
8
12/22/2011
65,962
3,717
6,290
8,370
NuStep, LLC
Designer, Manufacturer and Distributor of Fitness Equipment
1/31/2017
7.50% (L+6.50%, Floor 1.00%)
1/31/2025
2,920
17,240
17,237
406
10,200
13,500
30,357
33,660
OMi Topco, LLC
Manufacturer of Overhead Cranes
8/31/2021
8/31/2026
17,500
17,345
4/1/2008
900
1,080
20,210
18,425
37,710
Orttech Holdings, LLC
Distributor of Industrial Clutches, Brakes and Other Components
7/30/2021
7/31/2026
24,375
24,163
10,000
34,163
Pearl Meyer Topco LLC
Provider of Executive Compensation Consulting Services
4/27/2020
4/27/2025
34,174
33,955
13,800
13,000
35,050
46,955
69,224
PPL RVs, Inc.
Recreational Vehicle Dealer
10/31/2019
7.50% (L+7.00%, Floor 0.50%)
11/15/2022
2,000
1,983
11/15/2016
11,655
6/10/2010
2,150
14,920
15,788
28,558
Principle Environmental, LLC
Noise Abatement Service Provider
2/1/2011
11/15/2026
973
968
7/1/2011
5,924
5,814
21,806
5,709
11,160
1/27/2021
1,037
13,691
18,652
Quality Lease Service, LLC
Provider of Rigsite Accommodation Unit Rentals and Related Services
6/8/2015
8,563
1,470
River Aggregates, LLC
Processor of Construction Aggregates
12/20/2013
369
3,280
Robbins Bros. Jewelry, Inc.
Bridal Jewelry Retailer
12/15/2021
12/15/2026
36,360
35,977
11,070
47,047
Tedder Industries, LLC
Manufacturer of Firearm Holsters and Accessories
8/31/2018
8/31/2022
16,800
16,763
505
8,579
25,342
Televerde, LLC
Provider of Telemarketing and Data Services
1/6/2011
460
1,290
5,472
1/26/2022
248
1,794
2,008
7,266
9
Trantech Radiator Topco, LLC
Transformer Cooling Products and Services
5/31/2019
5/31/2024
8,320
8,313
615
4,655
8,660
12,926
16,973
Vision Interests, Inc.
Manufacturer / Installer of Commercial Signage
Series A Preferred Stock
12/23/2011
3,000,000
3,000
VVS Holdco LLC
Omnichannel Retailer of Animal Health Products
(9) (30)
12/1/2021
7.00% (L+6.00%, Floor 1.00%)
12/1/2026
770
30,400
30,115
11,840
42,725
Ziegler’s NYPD, LLC
6/1/2015
10/1/2022
625
10/1/2008
6.50%
14.00%
2,750
6/30/2015
10,072
2,834
2,130
7/1/2015
10/1/2025
600
7,809
6,505
Subtotal Control Investments (79.3% of net assets at fair value)
1,099,019
10
Affiliate Investments (6)
AAC Holdings, Inc.
(11)
Substance Abuse Treatment Service Provider
(19)
12/11/2020
18.00% (10.00% Cash, 8.00% PIK)
6/25/2025
10,408
10,231
10,044
593,928
3,148
2,079
554,353
12/11/2025
1,940
13,379
14,063
AFG Capital Group, LLC
Provider of Rent-to-Own Financing Solutions and Services
4/25/2019
5/25/2022
58
11/7/2014
186
8,350
1,258
8,408
ATX Networks Corp.
Provider of Radio Frequency Management Equipment
9/1/2021
8.50% (L+7.50%, Floor 1.00%)
9/1/2026
7,667
7,092
7,322
10.00% PIK
9/1/2028
3,144
2,040
2,122
583
9,132
9,444
BBB Tank Services, LLC
Maintenance, Repair and Construction Services to the Above-Ground Storage Tank Market
(9) (17)
4/8/2016
4/8/2021
4,800
2,298
Preferred Stock (non-voting)
12/17/2018
162
800,000
5,762
Boccella Precast Products LLC
Manufacturer of Precast Hollow Core Concrete
9/23/2021
2/28/2027
320
6/30/2017
2,160,000
2,256
4,830
2,576
5,150
Brightwood Capital Fund Investments
LP Interests (Brightwood Capital Fund V, LP)
7/12/2021
15.8%
1,639
Buca C, LLC
12.25% (L+11.25%, Floor 1.00%)
6/30/2020
19,491
14,370
6.00% PIK
4,770
24,261
Career Team Holdings, LLC
Provider of Workforce Training and Career Development Services
12/17/2021
12.50%
20,250
20,060
450,000
4,499
24,559
Chandler Signs Holdings, LLC
Sign Manufacturer
Class A Units
1/4/2016
1,500,000
620
Classic H&G Holdings, LLC
Provider of Engineered Packaging Solutions
3/12/2020
3/12/2025
7,600
11
19,274
19,150
154
5,760
16,280
32,510
43,154
Congruent Credit Opportunities Funds
LP Interests (Congruent Credit Opportunities Fund III, LP)
2/4/2015
17.4%
9,150
8,853
DMA Industries, LLC
Distributor of aftermarket ride control products
11/19/2021
11/19/2026
21,200
21,004
5,944
26,948
Dos Rios Partners
LP Interests (Dos Rios Partners, LP)
4/25/2013
20.2%
6,605
10,419
LP Interests (Dos Rios Partners - A, LP)
6.4%
2,097
3,308
8,702
13,727
Dos Rios Stone Products LLC
Limestone and Sandstone Dimension Cut Stone Mining Quarries
Class A Preferred Units
6/27/2016
2,000,000
350
EIG Fund Investments
LP Interests (EIG Global Private Debt Fund-A, L.P.)
11/6/2015
11.1%
546
499
Flame King Holdings, LLC
Propane Tank and Accessories Distributor
10/29/2021
10/31/2026
7,528
21,006
9,360
10,400
38,934
Freeport Financial Funds
LP Interests (Freeport Financial SBIC Fund LP)
3/23/2015
9.3%
4,481
4,585
LP Interests (Freeport First Lien Loan Fund III LP)
7/31/2015
6.0%
7,629
7,231
12,110
11,816
GFG Group, LLC.
Grower and Distributor of a Variety of Plants and Products to Other Wholesalers, Retailers and Garden Centers
12,545
12,442
226
4,899
6,989
17,341
19,534
LP Interests (HPEP 3, L.P.)
8/9/2017
8.2%
3,445
4,684
Hawk Ridge Systems, LLC
Value-Added Reseller of Engineering Design and Manufacturing Solutions
12
12/2/2016
1/15/2026
2,585
34,800
34,680
2,850
16,570
150
870
40,265
54,825
Houston Plating and Coatings, LLC
Provider of Plating and Industrial Coating Services
Unsecured Convertible Debt
5/1/2017
5/1/2022
2,870
1/8/2003
322,297
2,352
2,969
5,352
5,839
I-45 SLF LLC
Member Units (Fully diluted 20.0%; 24.40% profitsinterest)
10/20/2015
19,000
14,439
Iron-Main Investments, LLC
Consumer Reporting Agency Providing Employment Background Checks and Drug Testing
8/2/2021
4,600
4,559
3,171
11/15/2021
28,944
28,759
8/3/2021
179,778
1,798
38,287
L.F. Manufacturing Holdings, LLC
Manufacturer of Fiberglass Products
Preferred Member Units (non-voting)
1/1/2019
14.00% PIK
12/23/2013
2,179,001
2,019
2,560
2,671
OnAsset Intelligence, Inc.
Provider of Transportation Monitoring / Tracking Products and Services
5/20/2014
12/31/2022
964
3/21/2014
983
5/10/2013
2,116
4/18/2011
4,415
6/5/2017
197
912
7.00% PIK
1,981
4/15/2021
635
830
4,699
5/10/2023
1,089
12,575
8,675
Oneliance, LLC
Construction Cleaning Company
8/6/2021
8/6/2026
5,600
5,550
1,056
6,606
Rocaceia, LLC (Quality Lease and Rental Holdings, LLC)
(14) (17)
1/8/2018
30,369
29,865
1/8/2013
250
2,500
32,365
SI East, LLC
Rigid Industrial Packaging Manufacturing
10.25%
8/31/2023
65,543
65,448
157
1,218
12,529
66,666
78,072
Slick Innovations, LLC
Text Message Marketing Platform
9/13/2018
9/13/2023
5,120
5,061
70,000
700
1,510
18,084
9/13/2028
181
400
5,942
7,030
13
Sonic Systems International, LLC
Nuclear Power Staffing Services
8/20/2021
8/20/2026
11,982
11,769
7,866
1,070
1,010
12,839
12,779
Superior Rigging & Erecting Co.
Provider of Steel Erecting, Crane Rental & Rigging Services
8/31/2020
8/31/2025
21,500
21,344
1,571
4,500
25,844
The Affiliati Network, LLC
Performance Marketing Solutions
8/9/2021
8/9/2026
11.83%
12,961
12,841
1,280,000
6,400
6,990
20,304
20,894
UnionRock Energy Fund II, LP
6/15/2020
1,243
1,653
UniTek Global Services, Inc.
Provider of Outsourced Infrastructure Services
(9) (19)
10/15/2018
8.50% (6.50% cash, 2.00% PIK) (2.00% PIK, L+5.50% Floor 1.00%)
8/20/2024
399
398
373
8/27/2018
1,996
1,985
1,864
Secured Convertible Debt
1/1/2021
2/20/2025
2,388
8/29/2019
1,133,102
20.00% PIK
1,844
2,833
8/21/2018
1,521,122
2,188
1,835
2,281,682
19.00% PIK
3,667
1/15/2015
4,336,866
13.50% PIK
7,924
4/1/2020
945,507
19,296
9,293
Universal Wellhead Services Holdings, LLC
Provider of Wellhead Equipment, Designs, and Personnel to the Oil & Gas Industry
(19) (30)
12/7/2016
716,949
1,032
4,000,000
5,032
Volusion, LLC
Provider of Online Software-as-a-Service eCommerce Solutions
(17)
1/26/2015
1/26/2020
17,084
5/16/2018
11/16/2023
409
4,876,670
5,989
1,831,355
1/26/2025
34,069
23,482
Subtotal Affiliate Investments (29.9% of net assets at fair value)
583,428
14
Non-Control/Non-Affiliate Investments (7)
Acousti Engineering Company of Florida
Interior Subcontractor Providing Acoustical Walls and Ceilings
11/2/2020
10.00% (L+8.50%, Floor 1.50%)
11/2/2025
11,115
11,018
5/26/2021
14.00% (L+12.50%, Floor 1.50%)
839
831
11,849
11,954
Adams Publishing Group, LLC
Local Newspaper Operator
3/11/2027
25,618
25,550
ADS Tactical, Inc.
Value-Added Logistics and Supply Chain Provider to the Defense Industry
3/29/2021
6.75% (L+5.75%, Floor 1.00%)
3/19/2026
21,861
21,488
20,969
American Health Staffing Group, Inc.
Healthcare Temporary Staffing
6,667
6,593
American Nuts, LLC
Roaster, Mixer and Packager of Bulk Nuts and Seeds
(9) (39)
7.75% (SOFR+6.75%, Floor 1.00%)
4/10/2026
19,756
19,411
9.75% (SOFR+8.75%, Floor 1.00%)
38,822
American Teleconferencing Services, Ltd.
Provider of Audio Conferencing and Video Collaboration Solutions
(9) (14)
9/17/2021
6/30/2022
164
5/19/2016
6/28/2023
13,706
790
16,686
954
ArborWorks, LLC
Vegetation Management Services
11/9/2021
8.00% (L+7.00%, Floor 1.00%)
11/9/2026
30,178
29,489
Common Equity
234
Arrow International, Inc
Manufacturer and Distributor of Charitable Gaming Supplies
(9) (23)
12/21/2020
9.18% (L+7.93%, Floor 1.25%)
12/21/2025
22,500
22,313
ATS Operating, LLC
For-Profit Thrift Retailer
1/18/2022
7.50%(SOFR+6.50%, Floor 1.00%)
1/18/2027
720
6.50%(SOFR+5.50%, Floor 1.00%)
6,660
8.50%(SOFR+7.50%, Floor 1.00%)
720,000
14,760
AVEX Aviation Holdings, LLC
Specialty Aircraft Dealer
13,289
12,991
360
13,351
BDS Solutions IntermediateCo, LLC
Outsourced Consumer Services Provider
2/7/2022
7.50% (SOFR+6.50%, Floor 1.00%)
2/7/2027
39,886
39,047
Berry Aviation, Inc.
Charter Airline Services
7/6/2018
12.00% (10.50% Cash, 1.50% PIK)
1/6/2024
193
(8) (19) (30)
11/12/2019
122,416
16.00% PIK
175
1,548,387
8.00% PIK
2,066
4,006
2,434
4,524
Binswanger Enterprises, LLC
Glass Repair and Installation Service Provider
3/10/2017
9.50% (L+8.50%, Floor 1.00%)
3/10/2023
12,001
11,933
1,050,000
1,050
730
12,983
12,731
Bluestem Brands, Inc.
Multi-Channel Retailer of General Merchandise
8/28/2020
8/28/2025
5,357
5,337
10/1/2020
723,184
2,775
5,358
8,112
Brainworks Software, LLC
Advertising Sales and Newspaper Circulation Software
(9) (14) (17)
8/12/2014
12.50% (Prime+9.25%, Floor 3.25%)
7/22/2019
7,817
4,201
LP Interests (Brightwood Capital Fund III, LP)
7/21/2014
1.6%
7,110
4,502
LP Interests (Brightwood Capital Fund IV, LP)
10/26/2016
0.6%
4,350
4,394
11,460
8,896
Burning Glass Intermediate Holding Company, Inc.
Provider of Skills-Based Labor Market Analytics
6/14/2021
6.00% (L+5.00%, Floor 1.00%)
6/10/2026
465
431
6/10/2028
20,084
19,767
20,198
20,515
Cadence Aerospace LLC
Aerostructure Manufacturing
(9) (19) (34)
11/14/2017
9.28% Cash, 0.22% PIK
28,553
28,432
CAI Software LLC
Provider of Specialized Enterprise Resource Planning Software
12/13/2021
1,788,527
1,789
596,176
Camin Cargo Control, Inc.
Provider of Mission Critical Inspection, Testing and Fuel Treatment Services
6/4/2026
15,378
15,246
15,301
Cenveo Corporation
Provider of Digital Marketing Agency Services
9/7/2018
322,907
6,183
3,849
Clarius BIGS, LLC
Prints & Advertising Film Financing
(14) (17) (19)
9/23/2014
1/5/2015
2,746
25
16
Computer Data Source, LLC
Third Party Maintenance Provider to the Data Center Ecosystem
23,294
22,874
23,165
Construction Supply Investments, LLC
Distribution Platform of Specialty Construction Materials to Professional Concrete and Masonry Contractors
12/29/2016
861,618
3,335
15,605
Darr Equipment LP
Heavy Equipment Dealer
12/26/2017
6/22/2023
4,681
4,413
(29)
4/15/2014
915,734
12/23/2023
474
160
5,155
4,573
DTE Enterprises, LLC
Industrial Powertrain Repair and Services
4/13/2018
9.50% (L+8.00%, Floor 1.50%)
4/13/2023
9,324
9,272
8,897
Class AA Preferred Member Units (non-voting)
1,077
Class A Preferred Member Units
776,316
776
11,125
10,294
Dynamic Communities, LLC
Developer of Business Events and Online Community Groups
7/17/2018
7/17/2023
5,681
5,645
5,327
Eastern Wholesale Fence LLC
Manufacturer and Distributor of Residential and Commercial Fencing Solutions
11/19/2020
8.00%, (L+7.00%, Floor 1.00%)
10/30/2025
33,484
32,953
Emerald Technologies Acquisition Co, Inc.
Design & Manufacturing
2/10/2022
7.25% (SOFR+6.25%, Floor 1.00%)
2/10/2028
9,375
9,190
9,234
EnCap Energy Fund Investments
LP Interests (EnCap Energy Capital Fund VIII, L.P.)
1/22/2015
0.1%
3,745
1,988
LP Interests (EnCap Energy Capital Fund VIII Co-Investors, L.P.)
1/21/2015
0.4%
947
LP Interests (EnCap Energy Capital Fund IX, L.P.)
3,903
2,155
LP Interests (EnCap Energy Capital Fund X, L.P.)
3/25/2015
8,815
LP Interests (EnCap Flatrock Midstream Fund II, L.P.)
3/30/2015
0.8%
1,515
LP Interests (EnCap Flatrock Midstream Fund III, L.P.)
3/27/2015
0.2%
6,070
5,037
29,581
20,457
17
EPIC Y-Grade Services, LP
NGL Transportation & Storage
6/22/2018
6/30/2027
6,875
6,806
5,815
Event Holdco, LLC
Event and Learning Management Software for Healthcare Organizations and Systems
12/22/2021
12/22/2026
46,154
45,700
Flip Electronics LLC
Distributor of Hard-to-Find and Obsolete Electronic Components
1/4/2021
8.50% (SOFR+7.50%, Floor 1.00%)
1/2/2026
6,185
6,061
Fortna Acquisition Co., Inc.
Process, Physical Distribution and Logistics Consulting Services
7/23/2019
5.21% (L+5.00%)
4/8/2025
7,542
7,477
Fuse, LLC
Cable Networks Operator
6/30/2019
6/28/2024
1,810
1,672
10,429
256
GeoStabilization International (GSI)
Geohazard Engineering Services & Maintenance
1/2/2019
5.58% (L+5.25%)
12/19/2025
20,710
20,621
20,606
GoWireless Holdings, Inc.
Provider of Wireless Telecommunications Carrier Services
1/10/2018
12/22/2024
18,249
18,164
Grupo Hima San Pablo, Inc.
Tertiary Care Hospitals
3/7/2013
9.25% (L+7.00%, Floor 1.50%)
4/30/2019
4,504
13.75%
2,055
49
12/24/2021
6,691
1,164
GS HVAM Intermediate, LLC
Specialized Food Distributor
10/18/2019
10/2/2024
13,187
13,118
GS Operating, LLC (Gexpro)
Distributor of Industrial and Specialty Parts
1/3/2022
6.75% (SOFR+6.00%, Floor 0.75%)
1/3/2028
30,182
29,359
HDC/HW Intermediate Holdings
Managed Services and Hosting Provider
12/21/2018
12/21/2023
3,449
3,422
3,063
Heartland Dental, LLC
Dental Support Organization
9/9/2020
4/30/2025
14,775
14,465
HOWLCO LLC
(11) (13) (21)
Provider of Accounting and Business Development Software to Real Estate End Markets
8/19/2021
10/23/2026
25,482
18
Hybrid Promotions, LLC
Wholesaler of Licensed, Branded and Private Label Apparel
6/30/2021
9.25% (L+8.25%, Floor 1.00%)
6/30/2026
7,088
6,964
6,930
IG Parent Corporation
Software Engineering
7/30/2026
10,067
9,905
10,040
Implus Footcare, LLC
Provider of Footwear and Related Accessories
6/1/2017
8.75% (L+7.75%, Floor 1.00%)
4/30/2024
18,656
18,449
17,623
Independent Pet Partners Intermediate Holdings, LLC
Omnichannel Retailer of Specialty Pet Products
(9) (19) (35)
8/20/2020
L+6.50% PIK
12/22/2022
6,442
12/10/2020
11/20/2023
18,154
17,258
3,235
4,405
11/20/2018
1,558,333
1,558
28,493
28,105
Industrial Services Acquisition, LLC
Industrial Cleaning Services
8/13/2021
7.75% (L+6.75%, Floor 1.00%)
8/13/2026
19,848
19,465
19,808
1/31/2018
144
122
166
5/17/2019
80
101
6/17/2016
729
20,571
20,804
Infolinks Media Buyco, LLC
Exclusive Placement Provider to the Advertising Ecosystem
11/1/2021
11/1/2026
8,658
8,477
Interface Security Systems, L.L.C
Commercial Security & Alarm Services
12/9/2021
11.75% (L+10.00%, Floor 1.75%)
8/7/2023
(9) (14) (19)
8/7/2019
9.75% (8.75% Cash, 1.00% PIK) (1.00% PIK + L+7.00%, Floor 1.75%)
7,313
7,237
3,831
12/7/2021
2,143
8,007
4,601
Intermedia Holdings, Inc.
Unified Communications as a Service
8/3/2018
7/19/2025
20,627
20,563
20,487
Invincible Boat Company, LLC.
Manufacturer of Sport Fishing Boats
8/28/2019
8.00% (L+6.50%, Floor 1.50%)
16,889
16,749
INW Manufacturing, LLC
Manufacturer of Nutrition and Wellness Products
5/19/2021
6.76% (L+5.75%, Floor 0.75%)
3/25/2027
7,123
7,166
Isagenix International, LLC
Direct Marketer of Health & Wellness Products
6/21/2018
6/14/2025
5,054
5,033
3,263
Jackmont Hospitality, Inc.
Franchisee of Casual Dining Restaurants
5/26/2015
11/4/2024
2,095
11/8/2021
2,826,667
19
2,415
Joerns Healthcare, LLC
Manufacturer and Distributor of Health Care Equipment & Supplies
8/21/2019
8/21/2024
4,034
3,993
3,329
11/8/2022
1,705
472,579
4,429
10,127
5,034
JTI Electrical & Mechanical, LLC
Electrical, Mechanical and Automation Services
37,658
36,786
1,684,211
1,684
38,470
Klein Hersh, LLC
Executive and C-Suite Placement for the Life Sciences and Healthcare Industries
11/13/2020
7.75% (L+7.00%, Floor 0.75%)
11/13/2025
42,519
41,620
42,478
KMS, LLC
Wholesaler of Closeout and Value-priced Products
10/4/2021
8.25% (L+7.25%, Floor 1.00%)
10/4/2026
7,562
7,405
Kore Wireless Group Inc.
(11) (13)
Mission Critical Software Platform
12/31/2018
6.11% (L+5.50%)
12/20/2024
11,385
11,322
11,342
Laredo Energy, LLC
5/4/2020
1,155,952
11,561
10,099
Lightbox Holdings, L.P.
Provider of Commercial Real Estate Software
5/23/2019
5.61% (L+5.00%)
5/9/2026
14,588
14,432
14,369
LKCM Headwater Investments I, L.P.
1/25/2013
2.3%
1,746
2,854
LL Management, Inc.
Medical Transportation Service Provider
5/2/2019
9/25/2023
17,424
17,314
LLFlex, LLC
Provider of Metal-Based Laminates
8/16/2021
8/16/2026
4,466
4,376
Logix Acquisition Company, LLC
Competitive Local Exchange Carrier
25,780
24,642
24,298
Looking Glass Investments, LLC
Specialty Consumer Finance
125
Mac Lean-Fogg Company
Manufacturer and Supplier for Auto and Power Markets
4/22/2019
5.88% (L+5.25%, Floor 0.625%)
12/22/2025
16,993
16,914
10/1/2019
13.75% (4.50% Cash, 9.25% PIK)
18,854
18,933
Mako Steel, LP
Self-Storage Design & Construction
(9) (38)
3/15/2021
8.18% (L+7.25%, Floor 0.75%)
3/13/2026
1,825
1,775
1,804
20
8.38 % (L+7.25%, Floor 0.75%)
15,542
15,290
15,362
17,065
17,166
MB2 Dental Solutions, LLC
Dental Partnership Organization
1/28/2021
1/29/2027
7,956
7,846
(9) (36)
7.10%
4,610
4,567
12,413
12,566
Mills Fleet Farm Group, LLC
Omnichannel Retailer of Work, Farm and Lifestyle Merchandise
10/24/2018
7.25% (L+6.25%, Floor 1.00%)
10/24/2024
17,781
17,582
NBG Acquisition Inc
Wholesaler of Home Décor Products
4/28/2017
6.99% (L+5.50%, Floor 1.00%)
4/26/2024
3,932
3,909
2,669
NinjaTrader, LLC
Operator of Futures Trading Platform
12/18/2019
12/18/2024
31,425
30,886
31,373
NNE Partners, LLC
3/2/2017
9.42% (L+9.25%)
12/31/2023
24,781
24,718
23,582
Northstar Group Services, Inc
Commercial & Industrial Services
6.50% (L+5.50%, Floor 1.00%)
11/12/2026
9,935
9,890
9,898
NTM Acquisition Corp.
Provider of B2B Travel Information Content
7/12/2016
8.25% (7.25% Cash, 1.00% PIK) (1.00%PIK + L+6.25%, Floor 1.00%)
6/7/2024
4,538
4,380
NWN Corporation
Value Added Reseller and Provider of Managed Services to a Diverse Set of Industries
5/7/2021
5/7/2026
42,972
42,158
41,730
Ospemifene Royalty Sub LLC
Estrogen-Deficiency Drug Manufacturer and Distributor
7/8/2013
4,540
91
OVG Business Services, LLC
Venue Management Services
11/29/2021
11/19/2028
13,866
13,580
Paragon Healthcare, Inc.
Infusion Therapy Treatment Provider
1/19/2022
6.75% (SOFR+5.75%, Floor 1.00%)
1/19/2027
18,388
17,632
Project Eagle Holdings, LLC
Provider of Secure Business Collaboration Software
7/6/2020
7.76% (L+6.75%, Floor 1.00%)
7/6/2026
29,663
29,110
29,641
RA Outdoors LLC
Software Solutions Provider for Outdoor Activity Management
4/8/2026
18,991
18,829
17,812
21
Research Now Group, Inc. and Survey Sampling International, LLC
Provider of Outsourced Online Surveying
12/29/2017
20,124
19,817
19,820
RM Bidder, LLC
Scripted and Unscripted TV and Digital Programming Provider
11/12/2015
2,779
46
24
(26)
187,161
10/20/2025
425
471
Roof Opco, LLC
Residential Re-Roofing/Repair
8/27/2021
8/27/2026
4,729
4,618
RTIC Subsidiary Holdings, LLC
Direct-To-Consumer eCommerce Provider of Outdoor Products
9/1/2020
9.00% (L+7.75%, Floor 1.25%)
9/1/2025
20,709
20,528
Rug Doctor, LLC.
Carpet Cleaning Products and Machinery
7/16/2021
11/16/2024
9,105
8,888
8,941
Salient Partners L.P.
Provider of Asset Management Services
10/30/2022
6,251
6,248
4,064
9/30/2021
1,250
2,435
7,498
6,499
Savers, Inc.
5/14/2021
6.25% (L+5.50%, Floor 0.75%)
4/26/2028
11,372
11,271
11,315
SIB Holdings, LLC
Provider of Cost Reduction Services
6,282
6,142
6,152
95,238
200
6,342
6,352
South Coast Terminals Holdings, LLC
Specialty Toll Chemical Manufacturer
12/13/2026
41,567
40,701
863,636
864
41,565
Staples Canada ULC
(10) (13) (21)
Office Supplies Retailer
(9) (22)
9/14/2017
9/12/2024
15,522
15,457
15,275
Stellant Systems, Inc.
Manufacturer of Traveling Wave Tubes and Vacuum Electronic Devices
1/0/1900
6.51% (L+5.50%, Floor 0.75%)
10/1/2028
7,681
7,609
7,566
Student Resource Center, LLC
Higher Education Services
6/25/2021
6/25/2026
10,588
10,394
9,844
Tacala Investment Corp.
(33)
Quick Service Restaurant Group
3/19/2021
4.25% (L+3.50%, Floor 0.75%)
2/5/2027
1,995
1,968
22
Team Public Choices, LLC
Home-Based Care Employment Service Provider
12/22/2020
12/18/2027
15,078
14,762
14,965
Tectonic Financial, LLC
Financial Services Organization
5/15/2017
200,000
5,630
Tex Tech Tennis, LLC
Sporting Goods & Textiles
7/7/2021
1,000,000
1,130
U.S. TelePacific Corp.
Provider of Communications and Managed Services
(9) (19) (39)
5/17/2017
9.25% (2.00% Cash, 7.25% PIK) (SOFR+1.00%, Floor 1.00%, 7.25% PIK)
5/2/2026
17,088
17,004
12,115
USA DeBusk LLC
Provider of Industrial Cleaning Services
10/22/2019
9/8/2026
37,188
36,460
Veregy Consolidated, Inc.
Energy Service Company
11/9/2020
11/3/2027
17,820
16,720
16,718
Vida Capital, Inc
Alternative Asset Manager
10/10/2019
6.33% (L+6.00%)
10/1/2026
16,835
16,663
15,502
Vistar Media, Inc.
Operator of Digital Out-of-Home Advertising Platform
4/3/2019
70,207
768
2,349
VORTEQ Coil Finishers, LLC
Specialty Coating of Aluminum and Light-Gauge Steel
11/30/2021
11/30/2026
25,962
25,476
1,038,462
1,038
26,514
Wahoo Fitness Acquisition L.L.C.
Fitness Training Equipment Provider
8/17/2021
8/12/2028
14,906
14,494
14,608
Wall Street Prep, Inc.
Financial Training Services
7/19/2021
7/19/2026
4,345
4,262
400,000
4,662
Watterson Brands, LLC
Facility Management Services
16,170
15,795
West Star Aviation Acquisition, LLC
Aircraft, Aircraft Engine and Engine Parts
3/1/2022
6.75% (SOFR+6.0%, Floor 0.75%)
3/1/2028
10,848
10,612
1,522,200
1,541
12,153
Winter Services LLC
Provider of Snow Removal and Ice Management Services
11,222
10,975
11,016
Xenon Arc, Inc.
Tech-enabled Distribution Services to Chemicals and Food Ingredients Primary Producers
6.75% (L+6.00%, Floor 0.75%)
38,504
37,387
23
YS Garments, LLC
Designer and Provider of Branded Activewear
(9) (37)
8/22/2018
6.51%
8/9/2024
12,940
12,880
12,811
Zips Car Wash, LLC
Express Car Wash Operator
2/11/2022
8.25%(L+7.25%, Floor 1.00%)
3/1/2024
17,734
17,433
Subtotal Non-Control/Non-Affiliate Investments (87.8% of net assets at fair value)
1,690,120
Total Portfolio Investments, March 31, 2022 (197.0% of net assets at fair value)
3,372,567
(1)
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.
Debt investments are income producing, unless otherwise noted. Equity and warrants are non-income producing, unless otherwise noted.
(3)
See Note C and Schedule 12-14 for a summary of geographic location of portfolio companies.
(4)
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, SOFR 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 March 31, 2022. As noted in this schedule, 68% of the loans (based on the par amount) contain LIBOR or SOFR floors which range between 0.50% and 2.00%, with a weighted-average floor of approximately 1.05%.
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.
(13)
Investment is not a qualifying asset as defined under Section 55(a) of the 1940 Act. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets.
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 $21.4 million Canadian Dollars and receive $16.9 million U.S. Dollars with a settlement date of September 14, 2022. The unrealized depreciation on the forward foreign currency contract was not significant as of March 31, 2022.
(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 security position.
(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.
(28)
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.
Short-term portfolio investments. See Note C for a description of short-term portfolio investments.
(34)
The security has an effective contractual interest rate of 2.00% PIK + L+6.50%, Floor 1.00%, but the issuer may, in its discretion, elect to pay the PIK interest in cash. The rate presented represents the effective current yield based on actual payments received during the period.
(35)
Delayed draw term loan facility permits the borrower to make an interest rate election on each new tranche of borrowings under the facility. The rate presented represents a weighted-average rate for borrowings under the facility. As of March 31, 2022, borrowings under the loan facility bear interest at L+6.00% or Prime+5.00%.
(36)
Delayed draw term loan facility permits the borrower to make an interest rate election on each new tranche of borrowings under the facility. The rate presented represents a weighted-average rate for borrowings under the facility. As of March 31, 2022, borrowings under the loan facility bear interest at L+6.00% (Floor 1.00%) or Prime+5.00%.
(37)
Delayed draw term loan facility permits the borrower to make an interest rate election on each new tranche of borrowings under the facility. The rate presented represents a weighted-average rate for borrowings under the facility. As of March 31, 2022, borrowings under the loan facility bear interest at L+5.50% (Floor 1.00%) or Prime+4.00%.
(38)
RLOC facility permits the borrower to make an interest rate election on each new tranche of borrowings under the facility. The rate presented represents a weighted-average rate for borrowings under the facility. As of March 31, 2022, borrowings under the loan facility bear interest at L+7.25% (Floor 0.75%).
(39)
SOFR based contracts may include a credit spread adjustment (the "Adjustment") that is charged in addition to the stated spread. The Adjustment is applied when the SOFR rate, plus the Adjustment, exceeds the stated floor rate, as applicable. As of March 31, 2022, the portfolio had Adjustments ranging from 0.10% to 0.26%.
December 31, 2021
Rate
4,945
4,736
4,894
10,679
9,630
1,636
2,556
1,930
2,641
39,000
38,687
10,194
23,170
62,881
72,364
8,060
8,037
4,280
7,710
12,317
15,747
4,060
14,873
2,570
27,915
9,510
13,275
48,200
50,700
50,620
9,416
9,370
8,864
15,210
14,704
17,817
17,738
30,500
43,497
4,599
13,990
6,562
19,684
10,401
1,081
1,071
530
18,962
22,252
1,838
1,974
42,497
42,117
42,484
50,434
90,124
24,570
24,351
32,031
33,481
6,477
6,452
12,000
8,427
18,477
8,892
8,296
7,668
10,906
10,278
16,853
16,801
27
26,302
26,636
24,070
23,911
24,048
18,350
32,311
42,398
9.50% (L+7.50%, Floor 2.00%)
21,535
49,700
39,227
71,298
2,270
6,466
8.10% (L+8.00%)
38,672
51,737
5,640
9,717
17,503
9,974
2,703
3,971
2,550
2,536
12,420
3,347
14,970
11,344
13,620
28
20,324
12,310
3,915
3,876
37,432
38,970
8,250
8,241
5,934
18,641
2/11/2021
2/28/2022
63,151
2,581
65,651
65,732
140,400
1/17/2022
6,378
6,377
8,840
9,097
15,218
13,560
10,412
4,868
4,829
22,228
22,941
2/28/2023
16,217
16,173
14,045
23,053
16,735
6,440
8,520
1,720
17,236
29,156
32,460
18,000
17,831
29
18,911
38,210
24,151
34,151
32,674
32,438
26,970
45,438
59,644
750
726
14,360
14,531
26,741
1,473
1,465
5,808
14,182
19,143
9,213
2,149
35,956
47,026
16,240
16,181
24,760
8,720
8,663
8,712
13,318
17,372
49.6%
3,828
6,122
30
(9)(30)
1,170
1,169
30,100
43,110
43,109
Subtotal Control Investments (83.3% of net assets at fair value)
1,107,597
31
10,202
10,011
9,794
13,159
13,813
7,740
1,344
7,884
3,067
9,055
2,508
10.25% (L+9.25%, Floor 1.00%)
20,050
Class A Common Units
24,550
7.00% (L+6.00%,
32
Floor 1.00%)
19,139
15,260
28,899
38,534
10,256
9,959
20,993
26,937
10,329
13,609
640
5,000,000
594
547
6,324
20,996
37,720
5,974
6,078
13,603
13,309
12,435
4,900
17,335
19,535
3,193
4,712
Value-Added Reseller of
33
Engineering Design and Manufacturing Solutions
34,672
14,680
40,257
52,835
2,960
3,210
6,170
Member Units (Fully diluted 20.0%; 24.40% profitsinterest) (8)
14,387
8/1/2026
4,557
3,170
20,000
19,805
12.50% PIK
8,944
38,274
107
2,557
2,126
2,664
935
4,286
192
12,322
8,422
5,547
6,603
65,850
65,738
11,570
66,956
77,420
34
5,320
5,248
6,129
7,230
11,757
12,827
21,332
25,832
280
262
12,834
19,496
397
396
371
1,986
1,852
1,197
2,375
1,757
1,498
19,103
8,929
17,434
5,990
34,419
23,833
Subtotal Affiliate Investments (30.7% of net assets at fair value)
578,539
35
12,111
12,005
850
841
12,846
22,136
21,734
22,012
7,067
6,988
4/10/2025
12,017
11,854
9/9/2021
89
520
32,605
31,873
32,107
22,300
13,320
13,005
13,365
4,694
4,674
168
208
1,671
2,487
6,513
7,389
36
12,194
12,107
13,157
12,924
6,852
7,200
4,269
11,550
429
20,134
19,803
19,985
20,232
20,414
(19) (35)
28,540
28,399
26,767
15,920
15,775
15,840
2,852
Chisholm Energy Holdings, LLC
5/15/2019
7.75% (L+6.25%, Floor 1.50%)
5/15/2026
2,857
2,804
2,663
2,756
21,681
21,234
14,640
12.50% (11.50% Cash, 1.00% PIK)
4,685
4,227
5,159
4,387
9,259
8,884
1,051
11,086
10,255
5,638
5,569
31,810
31,238
1,599
777
4,047
2,284
8,443
8,276
6,582
2,796
6,082
5,064
30,996
20,796
38
6,892
6,819
5,862
51,692
51,135
(9) (33)
9.09% (L+8.09%, Floor 1.00%)
5,400
5,304
5,287
5.09% (L+5.00%)
7,595
7,525
5.35% (L+5.25%)
20,615
18,534
18,440
18,576
1,269
13,243
13,167
GS Operating, LLC
2/24/2020
2/24/2025
28,451
28,068
3,419
3,059
14,813
14,477
14,887
Provider of Accounting and Business Development
39
Software to Real Estate End Markets
25,546
6,957
7,028
9,591
9,419
18,702
18,471
17,743
7.20%
6,563
17,891
16,861
4,329
28,217
27,753
19,897
19,490
120
81
99
20,591
20,483
8,680
8,487
525
5,233
7,762
5,758
20,559
20,527
17,510
17,354
40
6.50% (L+5.75%, Floor 0.75%)
7,406
7,205
7,258
5,158
5,135
3,865
2,100
314
2,414
3,989
3,658
1,004
9,422
37,895
36,972
38,656
43,321
42,342
43,278
7,415
5.72% (L+5.50%)
11,415
11,345
11,400
11,560
9,659
LaserAway Intermediate Holdings II, LLC
Aesthetic Dermatology Service Provider
10/18/2021
10/14/2027
4,130
4,050
4,115
5.22% (L+5.00%)
14,625
14,460
14,442
2,541
41
17,438
17,309
4,478
4,382
25,850
24,605
24,428
17,080
16,995
1,920
18,915
8.00% (L+7.25%, Floor 0.75%)
17,589
17,267
11,682
11,531
17,563
3,987
3,961
2,758
30,837
31,368
9.37% (4.87% Cash, 4.50% PIK) (4.50% PIK + L+4.75%)
24,709
23,154
9,952
10,034
8.25% (7.25% Cash, 1.00% PIK) (1.00%PIK +
4,598
4,552
42
L+6.25%, Floor 1.00%)
42,108
42,323
4,562
13,861
29,738
29,151
29,714
PT Network, LLC
Provider of Outpatient Physical Therapy and Sports Medicine Services
10/12/2017
8.50% (6.50% Cash, 2.00% PIK) (2.00% PIK + L+5.50%, Floor 1.00%)
11/30/2023
8,889
1/1/2020
8,969
19,374
19,193
18,352
19,789
19,899
2,800
2,704
18,191
17,997
11,145
10,902
43
6,247
4,063
7,497
6,498
11,295
11,386
6,134
6,145
6,334
6,345
50,704
49,589
50,453
16,116
16,039
15,620
7,625
10,969
10,753
10,826
1,994
15,109
14,778
15,071
4,650
5/2/2023
16,985
12,917
44
37,281
36,510
6.25% (L+5.25, Floor 1.00%)
11/3/2025
5,875
14,888
14,524
14,925
19,635
20,036
6.10% (L+6.00%)
17,089
16,905
15,850
767
1,726
25,450
26,488
15,000
14,569
14,916
4,373
4,288
4,285
4,688
25,876
25,267
10,018
10,061
38,600
37,423
13,034
12,967
12,578
Subtotal Non-Control/Non-Affiliate Investments (85.2% of net assets at fair value)
1,573,110
Total Portfolio Investments, December 31, 2021 (199.2% of net assets at fair value)
3,259,246
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
45
noted, are encumbered either as security for the Company’s Credit Facility or in support of the SBA-guaranteed debentures issued by the Funds.
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, 2021. As noted in this schedule, 67% of the loans (based on the par amount) contain LIBOR floors which range between 0.50% and 2.00%, with a weighted-average LIBOR floor of approximately 1.06%.
In connection with the Company's debt investment in Staples Canada ULC and in an attempt to mitigate any potential adverse change in foreign exchange rates during the term of the Company's investment, the Company maintains a forward foreign currency contract with Cadence Bank to lend $21.4 million Canadian Dollars and receive $16.9 million U.S. Dollars with a settlement date of September 14, 2022. The unrealized depreciation on the forward foreign currency contract was not significant as of December 31, 2021.
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 7.96% (Floor 1.00%) per the credit agreement and the Consolidated Schedule of Investments above reflects such higher rate.
Delayed draw term loan facility permits the borrower to make an interest rate election on each new tranche of borrowings under the facility. The rate presented represents a weighted-average rate for borrowings under the facility. As of December 31, 2021, borrowings under the loan facility bear interest at L+6.00% or Prime+5.00%.
47
Notes to the 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 investment strategy. 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 Private Loan (as defined in Note C) portfolio companies, investments in Middle Market portfolio companies, 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 and definitions for the defined terms Private Loan and Other Portfolio). Main Street’s results of operations and cash flows for the three months ended March 31, 2022 and 2021, and financial position as of March 31, 2022 and December 31, 2021, 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, 2021. 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 months ended March 31, 2022 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 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 directly by Main Street or 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 made in companies that are consistent with the size of companies Main Street invests in through 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, Private Loan portfolio investments or Middle Market 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, Private Loan and Middle Market 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, with such 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 Private Loan and Middle Market 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
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transactions in the equity securities of the portfolio company or third-party valuations of the portfolio company, and then performs a Waterfall calculation by allocating the enterprise value over the portfolio company’s securities in order of their preference relative to one another. The enterprise value is the fair value at which an enterprise could be sold in a transaction between two willing parties, other than through a forced or liquidation sale. Typically, privately held companies are bought and sold based on multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value. There is no single methodology for 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
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instances, Main Street may determine that it is not cost-effective, and as a result is not in its stockholders’ best interest, to consult with the nationally recognized independent financial advisory services firm on its investments in one or more LMM portfolio companies. Such instances include, but are not limited to, situations where the fair value of Main Street’s investment in a LMM portfolio company is determined to be insignificant relative to the total Investment Portfolio. Main Street consulted with and received an assurance certification from its independent financial advisory services firm in arriving at Main Street’s determination of fair value on its investments in a total of 19 LMM portfolio companies for the three months ended March 31, 2022, representing approximately 30% of the total LMM portfolio at fair value as of March 31, 2022, and on a total of 16 LMM portfolio companies for the three months ended March 31, 2021, representing approximately 26% of the total LMM portfolio at fair value as of March 31, 2021. Excluding its investments in LMM portfolio companies that, as of March 31, 2022 and 2021, 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 three months ended March 31, 2022 and 2021 was 36% and 29% of the total LMM portfolio at fair value as of March 31, 2022 and 2021, respectively.
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 18 Private Loan portfolio companies for the three months ended March 31, 2022, representing approximately 26% of the total Private Loan portfolio at fair value as of March 31, 2022, and on a total of 11 Private Loan portfolio companies for the three months ended March 31, 2021, representing approximately 22% of the total Private Loan portfolio at fair value as of March 31, 2021. Excluding its investments in Private Loan portfolio companies that, as of March 31, 2022 and 2021, 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 three months ended March 31, 2022 and 2021 was 42% and 29% of the total Private Loan portfolio at fair value as of March 31, 2022 and 2021, 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. The Company generally consults on a limited basis with a financial advisory services firm in connection with determining the fair value of its Middle Market portfolio investments due to the nature of these investments. The vast majority (93% as of both March 31, 2022 and December 31, 2021) of the Middle Market
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portfolio investments are valued using third-party quotes or other independent pricing services, or are new investments that will be consulted on once they have been in the Investment Portfolio for at least twelve months subsequent to the initial investment.
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 2.8% and 4.7% of Main Street’s Investment Portfolio at fair value as of March 31, 2022 and December 31, 2021, 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.
In December 2020, the SEC adopted 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 March 31, 2022 and December 31, 2021 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
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Portfolio valuations, those estimated values may differ materially from the values that would have been determined had a ready market for the securities existed.
The COVID-19 pandemic, and the related effect on the U.S. and global economies, has impacted, and threatens to continue to impact, the businesses and operating results of certain of Main Street’s portfolio companies, as well as market interest 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 experienced 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 March 31, 2022, cash balances totaling $15.8 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 March 31, 2022, Main Street’s total Investment Portfolio had nine investments on non-accrual status, which comprised approximately 0.6% of its fair value and 3.1% of its cost. As of December 31, 2021, Main Street’s total Investment Portfolio had nine investments on non-accrual status, which comprised approximately 0.7% of its fair value and 3.3% 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 March 31, 2022 and 2021, (i) approximately 1.2% and 3.8%, respectively, of Main Street’s total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 1.1% and 0.7%, 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
59,441
43,471
Dividend income
16,622
17,697
Fee income
3,332
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 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 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 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 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 March 31, 2022 and 2021, approximately 2.0% and 2.4%, 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.
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8. Share-Based Compensation
Main Street accounts for its share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards, Main Street measures the grant date fair value based upon the market price of its common stock on the date of the grant and amortizes the fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term.
Main Street has also adopted Accounting Standards Update (“ASU”) 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) be recognized as income tax expense or benefit in the income statement and not delay recognition of a tax benefit until the tax benefit is realized through a reduction to taxes payable. Accordingly, the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. Additionally, Main Street has elected to account for forfeitures as they occur.
9. Income Taxes
MSCC has elected to be treated for U.S. federal income tax purposes as a RIC. MSCC’s taxable income includes the taxable income generated by MSCC and certain of its subsidiaries, including the Funds, which are treated as disregarded entities for tax purposes. As a RIC, MSCC generally will not pay corporate-level U.S. federal income taxes on any net ordinary taxable income or capital gains that MSCC distributes to its stockholders. MSCC must generally distribute at least 90% of its “investment company taxable income” (which is generally its net ordinary taxable income and realized net short-term capital gains in excess of realized net long-term capital losses) and 90% of its tax-exempt income to maintain its RIC status (pass-through tax treatment for amounts distributed). As part of maintaining RIC status, undistributed taxable income (subject to a 4% non-deductible U.S. federal excise tax) pertaining to a given fiscal year may be distributed up to 12 months subsequent to the end of that fiscal year, provided such dividends are declared on or prior to the later of (i) the filing of the U.S. federal income tax return for the applicable fiscal year or (ii) the fifteenth day of the ninth month following the close of the year in which such taxable income was generated.
The Taxable Subsidiaries primarily hold certain portfolio investments for Main Street. The Taxable Subsidiaries permit Main Street to hold equity investments in portfolio companies which are “pass-through” entities for tax purposes and to continue to comply with the “source-of-income” requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with Main Street for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in Main Street’s consolidated financial statements as portfolio investments and recorded at fair value. The Taxable Subsidiaries are not consolidated with MSCC for income tax purposes and may generate income tax expense, or benefit, and tax assets and liabilities, as a result of their ownership of certain portfolio investments. The taxable income, or loss, of the Taxable Subsidiaries may differ from their book income, or loss, due to temporary book and tax timing differences and permanent differences. The Taxable Subsidiaries are each taxed at their normal corporate tax rates based on their taxable income. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the Taxable Subsidiaries are reflected in Main Street’s consolidated financial statements.
The External Investment Manager is an indirect wholly owned subsidiary of MSCC owned through a Taxable Subsidiary and is a disregarded entity for tax purposes. The External Investment Manager has entered into a tax sharing agreement with its Taxable Subsidiary owner. Since the External Investment Manager is accounted for as a portfolio investment of MSCC and is not included as a consolidated subsidiary of MSCC in MSCC’s consolidated financial statements, and as a result of the tax sharing agreement with its Taxable Subsidiary owner, for its stand-alone financial reporting purposes the External Investment Manager is treated as if it is taxed at normal corporate tax rates based on its taxable income and, as a result of its activities, may generate income tax expense or benefit. The income tax expense, or benefit, if any, and the related tax assets and liabilities, of the External Investment Manager are reflected in the External Investment Manager’s separate financial statements.
The Taxable Subsidiaries and the External Investment Manager use the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided, if necessary,
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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. Our stockholder’s equity includes an adjustment to classification as a result of permanent book-to-tax differences, which include differences in the book and tax treatment of income and expenses.
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 utilized the optional expedients and exceptions provided by ASU 2020-04 during the three months ended March 31, 2022, the effect of which was not material to the consolidated financial statements and the notes thereto. The Company continues to evaluate the potential impact that the amendments in this update will have on its consolidated financial statements and disclosures.
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In December 2021, the SEC published Staff Accounting Bulletin No. 120 (“SAB 120”) to provide accounting and disclosure guidance for stock compensation awards made to executives and conforming amendments to the Staff Accounting Bulletin Series to align with the current authoritative accounting guidance in ASC 718, Compensation – Stock Compensation. In part, SAB 120 requires that an entity disclose how it determines the current price of underlying shares for grant-date fair value, the policy for when an adjustment to the share price is required, how it determines the amount of an adjustment to the share price and any significant assumptions used in determining an adjustment to the share price. SAB 120 is effective for all stock compensation awards issued after December 1, 2021. Main Street is in compliance with the guidance pursuant to SAB 120 for any share-based compensation disclosures. See “Note J – Share-Based Compensation” for further discussion of Main Street’s policies and procedures regarding share-based compensation. The impact of SAB 120 was not material to the consolidated financial statements and the notes thereto.
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 March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021.
As of March 31, 2022 and December 31, 2021, Main Street’s Private Loan portfolio investments primarily consisted of investments in interest-bearing secured debt investments. The fair value determination for these investments consisted of a combination of observable inputs in non-active markets for which sufficient observable inputs were not available to determine the fair value of these investments and unobservable inputs. As a result, all of Main Street’s Private Loan portfolio investments were categorized as Level 3 as of March 31, 2022 and December 31, 2021.
As of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021.
As of March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021.
As of March 31, 2022, Main Street held one short-term portfolio investment, which was a secured debt investment. The fair value determination for this investment consisted of available observable inputs in non-active markets sufficient to determine the fair value of the investment. As a result, Main Street’s short-term portfolio investment was categorized as Level 2 as of March 31, 2022. As of December 31, 2021, Main Street held one short-term portfolio investment, which was a secured debt investment. The fair value determination for this investment consisted of available observable inputs in non-active markets sufficient to determine the fair value of the investment. As a result, Main Street’s short-term portfolio investment was categorized as Level 2 as of December 31, 2021.
The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
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The use of significant unobservable inputs creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement of Main Street’s LMM equity securities, which are generally valued through an average of the discounted cash flow technique and the market comparable/enterprise value technique (unless one of these approaches is determined to not be appropriate), are (i) EBITDA multiples and (ii) the weighted-average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. On the contrary, significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of Main Street’s LMM, Private Loan and Middle Market securities are (i) risk adjusted discount rates used in the Yield-to-Maturity valuation technique (see “Note B.1.—Valuation of the Investment Portfolio”) and (ii) the percentage of expected principal recovery. Significant increases (decreases) in any of these discount rates in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of these expected principal recovery percentages in isolation would result in a significantly higher (lower) fair value measurement. However, due to the nature of certain investments, fair value measurements may be based on other criteria, such as third-party appraisals of collateral and fair values as determined by independent third parties, which are not presented in the tables below.
The following tables provide a summary of the significant unobservable inputs used to fair value Main Street’s Level 3 portfolio investments as of March 31, 2022 and December 31, 2021:
Fair Value as of
Type of
Significant
Weighted
Investment
Valuation Technique
Unobservable Inputs
Range(3)
Average(3)
Median(3)
Equity investments
1,080,542
Discounted cash flow
WACC
9.0% - 21.0%
14.0
%
15.0
Market comparable / Enterprise value
EBITDA multiple (1)
4.8x - 8.3x(2)
6.7x
5.9x
Debt investments
2,253,438
Risk adjusted discount factor
5.6% - 15.4%(2)
9.8
9.3
Expected principal recovery percentage
0.0% - 200.0%
99.5
100.0
354,790
Market approach
Third‑party quote
5.5 - 100.5
93.6
98.0
Total Level 3 investments
3,688,770
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1,050,269
9.1% - 20.6%
13.8
14.8
4.8x - 7.7x(2)
6.6x
2,158,424
5.6% - 15.7%(2)
0.0% - 100.0%
99.6
351,144
3.0 - 100.5
94.4
99.0
3,559,837
The following tables provide a summary of changes in fair value of Main Street’s Level 3 portfolio investments for the three-month periods ended March 31, 2022 and 2021 (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
2,509,568
(183,699)
287,044
2,123
(6,807)
2,608,229
Equity
1,043,709
(17,569)
24,711
418
22,512
1,073,781
Equity Warrant
6,560
6,760
(201,268)
311,755
15,905
2020
1,807,134
(125,448)
157,787
5,529
8,999
(2,610)
1,851,391
866,734
(24,913)
18,290
11,146
11,696
3,810
886,763
10,998
330
(914)
(1,200)
9,214
2,684,866
(150,361)
176,077
17,005
19,781
2,747,368
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At March 31, 2022 and December 31, 2021, 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 March 31, 2022
(Level 1)
(Level 2)
(Level 3)
LMM portfolio investments
1,795,456
Private Loan portfolio investments
1,260,664
Middle Market portfolio investments
397,338
Other Portfolio investments
102,392
External Investment Manager
Short-term portfolio investments
Total investments
At December 31, 2021
1,716,415
1,141,772
395,167
166,083
Investment Portfolio Composition
Main Street’s principal investment objective is to maximize its portfolio’s total return by generating current income from its debt investments and current income and capital appreciation from its equity and equity-related investments, including warrants, convertible securities and other rights to acquire equity securities in a portfolio company. Main Street seeks to achieve its investment objective through its LMM, Private Loan, and Middle Market investment strategies.
Main Street’s LMM investment strategy involves investments in 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 $75 million. The LMM debt investments are typically secured by a first 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 private loan (“Private Loan”) investment strategy involves investments in privately held companies that are generally consistent with the size of its LMM portfolio companies or Middle Market portfolio companies, and its Private Loan investments generally range in size from $10 million to $75 million. Main Street’s Private Loan investments generally consist of loans that have been originated directly by Main Street or through strategic relationships with other investment funds on a collaborative basis, and are often referred to in the debt markets as “club deals.” Main Street’s Private Loan portfolio debt investments are generally secured by a first 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 may have the option to invest alongside the sponsor in the equity securities of its Private Loan portfolio companies.
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Main Street’s Middle Market investment strategy involves investments in syndicated loans to or debt securities in Middle Market companies, which Main Street defines as companies with annual revenues between $150 million and $1.5 billion, and its Middle Market investments generally range in size from $3 million to $25 million. Main Street’s Middle Market portfolio debt investments are generally secured by a first 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.
Main Street’s other portfolio (“Other Portfolio”) investments primarily consist of investments that are not consistent with the typical profiles for its LMM, Private Loan or Middle Market 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, Private Loan and Middle Market 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”). Through this agreement, Main Street shares employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities. Main Street allocates the related expenses to the External Investment Manager pursuant to the sharing agreement. Main Street’s total expenses for the three months ended March 31, 2022 and 2021 are net of expenses allocated to the External Investment Manager of $2.8 million and $2.4 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 months ended March 31, 2022 and 2021, Main Street did not record investment income from any single portfolio company in excess of 10% of total investment income.
The following tables provide a summary of Main Street’s investments in the LMM, Private Loan and Middle Market portfolios as of March 31, 2022 and December 31, 2021 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager, each of which is discussed further below):
As of March 31, 2022
LMM (a)
Private Loan
Middle Market
(dollars in millions)
Number of portfolio companies
75
79
Fair value
1,795.5
1,260.7
397.3
Cost
1,513.8
1,273.6
443.8
Debt investments as a % of portfolio (at cost)
71.7
95.8
93.3
Equity investments as a % of portfolio (at cost)
28.3
4.2
6.7
% of debt investments at cost secured by first priority lien
99.4
98.7
Weighted-average annual effective yield (b)
11.1
8.2
7.6
Average EBITDA (c)
7.0
43.1
70.0
63
As of December 31, 2021
73
1,716.4
1,141.8
395.2
1,455.7
1,157.5
440.9
70.9
95.7
29.1
4.3
11.2
7.5
6.2
41.3
76.0
For the three months ended March 31, 2022 and 2021, Main Street achieved an annualized total return on investments of 11.8% and 12.8%, respectively. For the year ended December 31, 2021, Main Street achieved an annualized total return on investments of 16.6%. 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 utilization of debt capital in its capital structure, Main Street’s expenses or any sales load paid by an investor.
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As of March 31, 2022, Main Street had Other Portfolio investments in 13 companies, collectively totaling approximately $102.4 million in fair value and approximately $109.9 million in cost basis and which comprised approximately 2.8% and 3.3% of Main Street’s Investment Portfolio at fair value and cost, respectively. As of December 31, 2021, Main Street had Other Portfolio investments in 13 companies, collectively totaling approximately $166.1 million in fair value and approximately $173.7 million in cost basis and which comprised approximately 4.7% and 5.3% of Main Street’s Investment Portfolio at fair value and cost, respectively.
As of March 31, 2022, Main Street had one short-term portfolio investment, which was a secured debt investment that had approximately $2.0 million in both fair value and cost basis and which comprised approximately 0.1% of Main Street’s Investment Portfolio at both fair value and cost. As of December 31, 2021, Main Street had one short-term portfolio investment, which was a secured debt investment that had approximately $2.0 million in both fair value and cost basis and which comprised approximately 0.1% of Main Street’s Investment Portfolio at both fair value and cost.
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 March 31, 2022, this investment had a fair value of approximately $132.9 million and a cost basis of $29.5 million, which comprised approximately 3.6% and 0.9% of Main Street’s Investment Portfolio at fair value and cost, respectively. As of December 31, 2021, this investment had a fair value of approximately $140.4 million and a cost basis of $29.5 million, which comprised approximately 3.9% and 0.9% 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, Private Loan portfolio investments and Middle Market portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Private Loan portfolio investments and Middle Market portfolio investments, as of March 31, 2022 and December 31, 2021 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager, each of which is discussed above).
Cost:
First lien debt
83.5
82.5
15.6
16.2
Second lien debt
0.3
0.6
Equity warrants
0.2
Other
0.4
Fair Value:
74.8
74.3
24.3
24.6
0.5
The following tables summarize the composition of Main Street’s total combined LMM portfolio investments, Private Loan portfolio investments and Middle Market 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, Private Loan portfolio investments and Middle Market portfolio investments, as of March 31, 2022 and December 31, 2021 (this
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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.
West
28.1
Northeast
21.6
22.6
Southwest
21.2
Midwest
15.2
15.1
Southeast
13.1
11.6
Canada
0.8
28.6
28.5
22.5
23.0
21.9
15.8
11.4
10.0
0.7
Main Street’s LMM portfolio investments, Private Loan portfolio investments and Middle Market 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, Private Loan portfolio investments and
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Middle Market portfolio investments by industry at cost and fair value as of March 31, 2022 and December 31, 2021 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager).
Machinery
7.8
7.3
Construction & Engineering
Internet Software & Services
6.6
7.2
Commercial Services & Supplies
5.2
5.9
Diversified Consumer Services
5.1
3.4
Distributors
4.6
4.7
Professional Services
Leisure Equipment & Products
4.0
4.1
Health Care Providers & Services
3.9
Energy Equipment & Services
3.6
Specialty Retail
3.5
IT Services
Diversified Telecommunication Services
2.5
2.6
Media
1.8
Communications Equipment
2.2
2.3
Containers & Packaging
Building Products
Aerospace & Defense
1.9
Textiles, Apparel & Luxury Goods
2.1
Diversified Financial Services
2.0
Tobacco
Food Products
Software
1.7
Oil, Gas & Consumable Fuels
1.6
Food & Staples Retailing
Internet & Catalog Retail
1.5
Health Care Equipment & Supplies
1.4
Chemicals
1.3
Hotels, Restaurants & Leisure
Electronic Equipment, Instruments & Components
Life Sciences Tools & Services
Computers & Peripherals
1.2
Electrical Equipment
1.0
Household Durables
0.9
Other (1)
3.0
3.3
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8.9
8.5
7.7
6.4
4.9
5.5
3.2
2.4
2.8
0.1
Construction Materials
1.1
At March 31, 2022 and December 31, 2021, Main Street had no portfolio investment that was greater than 10% of the Investment Portfolio at fair value.
Unconsolidated Significant Subsidiaries
In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, Main Street must determine which of its unconsolidated controlled portfolio companies, if any, are considered “significant subsidiaries.” 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. Rules 3-09 and 4-08(g) of
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Regulation S-X require Main Street to include (1) separate audited financial statements of an unconsolidated majority-owned subsidiary (Control Investments in which Main Street owns greater than 50% of the voting securities) in an annual report and (2) summarized financial information of a Control Investment in a quarterly report, respectively, if certain thresholds of the investment or income tests are exceeded and the unconsolidated portfolio company qualifies as a significant subsidiary.
As of March 31, 2022 and December 31, 2021, 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.
The External Investment Manager serves as the investment adviser and administrator to MSC Income pursuant to an Investment Advisory and Administrative Services Agreement entered into in October 2020 between the External Investment Manager and MSC Income (the “Advisory Agreement”). Under the Advisory Agreement, the External Investment Manager earns a 1.75% annual base management fee on MSC Income’s average total assets, an incentive fee equal to 20% of pre-investment fee net investment income above a specified investment return hurdle rate and a 20% incentive fee on cumulative net realized capital gains in exchange for providing advisory services to MSC Income.
The External Investment Manager provides administrative services for certain External Party clients that, to the extent not waived, are reported as administrative services fees. The administrative services fees generally represent expense reimbursements for a portion of the compensation, overhead and related expenses for certain professionals directly attributable to performing administrative services for a client. These fees are recognized as other revenue in the period in which the related services are rendered.
As described more fully in “Note L – Related Party Transactions”, the External Investment Manager also serves as the investment adviser and administrator to 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”). 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 March 31, 2022 and 2021, the External Investment Manager earned $5.4 million and $3.9 million, respectively, in base management fee income. During the three months ended March 31, 2022, the External Investment Manager earned $0.1 million in incentive fee income. No incentive fee income was earned in the three months ended March 31, 2021. During the three months ended March 31, 2022, the External Investment Manager earned $0.2 million in administrative services fee income. No administrative services fee income was earned in the three months ended March 31, 2021.
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 March 31, 2022 and 2021, Main Street allocated $2.8 million and $2.4 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 March 31, 2022 and 2021, the total contribution to Main Street’s net investment income was $5.1 million and $3.6 million, respectively.
Summarized financial information from the separate financial statements of the External Investment Manager as of March 31, 2022 and December 31, 2021 and for the three months ended March 31, 2022 and 2021 is as follows:
As of
Cash
Accounts receivable—advisory clients
5,735
5,595
Intangible Asset
35,235
35,095
Accounts payable to MSCC and its subsidiaries
3,462
3,288
Dividend payable to MSCC and its subsidiaries
2,273
2,307
Total liabilities and equity
Management fees
5,444
Incentive fees
137
Administrative services fees
151
Total revenues
5,732
Expenses allocated from MSCC or its subsidiaries:
Salaries, share‑based compensation and other personnel costs, net
(2,260)
(2,043)
Other G&A expenses
(557)
(337)
Total allocated expenses
(2,817)
(2,380)
Pre‑tax income
2,915
1,523
Tax expense
(642)
(344)
Net income
1,179
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NOTE E—DEBT
Summary of debt as of March 31, 2022 is as follows:
Outstanding Balance
Unamortized Debt Issuance (Costs)/Premiums
Recorded Value
Estimated Fair Value (1)
Credit Facility
3.00% Notes due 2026
500,000
(2,259)
465,150
5.20% Notes due 2024
1,136
459,644
SBIC Debentures
350,000
(6,973)
316,770
4.50% Notes due 2022
(405)
187,736
Total Debt
1,823,000
(8,501)
1,814,499
1,767,300
Summary of debt as of December 31, 2021 is as follows:
(2,391)
502,285
1,272
480,767
328,206
(556)
190,043
1,805,000
(8,944)
1,796,056
1,821,301
Summarized interest expense for the three months ended March 31, 2022 and 2021 is as follows (in thousands):
Three Months Ended March 31,
2,059
967
3,882
5,714
2,799
2,741
2,233
Total Interest Expense
16,687
13,804
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Under existing SBIC regulations, SBA-approved SBICs under common control have the ability to issue debentures guaranteed by the SBA up to a regulatory maximum amount of $350.0 million. Main Street’s SBIC debentures payable, under existing SBA-approved commitments, were $350.0 million at both March 31, 2022 and December 31, 2021. SBIC debentures provide for interest to be paid semiannually, with principal due at the applicable 10-year maturity date of each debenture. 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% as of both March 31, 2022 and December 31, 2021. The first principal maturity due under the existing SBIC debentures is in 2023, and the weighted-average remaining duration as of March 31, 2022 was approximately 5.9 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 March 31, 2022, the SBIC debentures consisted of (i) $175.0 million par value of SBIC debentures outstanding issued by MSMF, with a recorded value of $171.6 million that was net of unamortized debt issuance costs of $3.4 million and (ii) $175.0 million par value of SBIC debentures issued by MSC III with a recorded value of $171.5 million that was net of unamortized debt issuance costs of $3.5 million.
Main Street maintains the Credit Facility to provide additional liquidity to support its investment and operational activities. As of March 31, 2022, 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 $1.2 billion from new and existing lenders on the same terms and conditions as the existing commitments.
As of March 31, 2022, 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 (0.2% as of the most recent reset date for the period ended March 31, 2022) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.50% as of March 31, 2022) 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 March 31, 2022, 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 a 1940 Act asset coverage ratio 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 March 31, 2022, the interest rate on the Credit Facility was 2.1% (based on the LIBOR rate of 0.2% as of the most recent reset date plus 1.875%). The average interest rate for borrowings under the Credit Facility was 2.0% for each of the three months ended March 31, 2022 and 2021. As of March 31, 2022, 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”) at an issue price of 99.16%. The 4.50% 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 4.50% 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 4.50% Notes may be redeemed in whole or
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in part at any time at Main Street’s option subject to certain make-whole provisions. The 4.50% Notes 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, 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 in accordance with the 1940 Act and the rules promulgated thereunder.
The indenture governing the 4.50% Notes (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 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 March 31, 2022, 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 March 31, 2022, 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%. Subsequently, in October 2021, Main Street issued an additional $200.0 million aggregate principal amount of the 3.00% Notes at an issue price of 101.741%. The 3.00% Notes issued in October 2021 have identical terms as, and are a part of a single series with, the 3.00% Notes issued in January 2021. 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. The total net proceeds from the 3.00% Notes, resulting from the issue price and after net issue price premiums and estimated offering expenses payable, were approximately $498.3
million. Main Street may from time to time repurchase the 3.00% Notes in accordance with the 1940 Act and the rules promulgated thereunder.
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 March 31, 2022, Main Street was in compliance with these covenants.
NOTE F—FINANCIAL HIGHLIGHTS
Per Share Data:
NAV at the beginning of the period
22.35
Net investment income(1)
Net realized gain (loss)(1)(2)
0.05
(0.23)
Net unrealized appreciation (depreciation)(1)(2)
0.20
0.50
Income tax benefit (provision)(1)(2)
(0.07)
(0.01)
Net increase (decrease) in net assets resulting from operations(1)
Dividends paid from net investment income
(0.72)
(0.62)
Distributions from capital gains
Impact of the net change in monthly dividends declared prior to the end of the period and paid in the subsequent period
Accretive effect of stock offerings (issuing shares above NAV per share)
0.35
0.01
Accretive effect of DRIP issuance (issuing shares above NAV per share)
0.03
0.02
Other(3)
0.04
NAV at the end of the period
22.65
Market value at the end of the period
42.64
39.15
Shares outstanding at the end of the period
NAV at end of period
Average NAV
1,831,250
1,527,466
Average outstanding debt
1,784,750
1,263,950
Ratio of total expenses, including income tax expense, to average NAV (1)(2)
1.76
1.55
Ratio of operating expenses to average NAV (2)(3)
1.48
1.51
Ratio of operating expenses, excluding interest expense, to average NAV (2)(3)
0.57
0.61
Ratio of net investment income to average NAV (2)
2.85
2.60
Portfolio turnover ratio (2)
6.49
4.92
Total investment return (2)(4)
(3.32)
23.52
Total return based on change in NAV (2)(5)
3.64
3.79
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NOTE G—DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
Main Street currently pays regular monthly dividends to its stockholders and supplemental dividends to its stockholders from time to time. Future dividends, if any, will be determined by Main Street’s Board of Directors on a quarterly basis. Main Street paid regular monthly dividends of $0.215 per share, totaling $46.0 million or $0.645 per share, for the three months ended March 31, 2022, compared to aggregate regular monthly dividends of $41.8 million, or $0.615 per share, for the three months ended March 31, 2021. During the three months ended March 31, 2022, Main Street also paid a supplemental dividend of $5.4 million, or $0.075 per share. Main Street did not pay a supplemental dividend during the three months ended March 31, 2021.
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.
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 three months ended March 31, 2022 and 2021.
(estimated, dollars in thousands)
Book-tax difference from share-based compensation expense
Income tax provision (benefit)
5,097
682
Pre-tax book (income) loss not consolidated for tax purposes
(2,933)
5,353
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates
2,862
6,121
Estimated taxable income (1)
58,295
37,834
Taxable income earned in prior year and carried forward for distribution in current year
50,834
24,350
Taxable income earned prior to period end and carried forward for distribution next period
(72,844)
(34,231)
Dividend payable as of period end and paid in the following period
13,940
Total distributions accrued or paid to common stockholders
51,804
41,893
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 assets 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 months ended March 31, 2022 and 2021 (amounts in thousands):
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Current tax expense (benefit):
Federal
State
543
296
Excise
714
293
Total current tax expense (benefit)
1,309
634
Deferred tax expense (benefit):
2,807
194
981
(146)
Total deferred tax expense (benefit)
Total income tax provision (benefit)
The net deferred tax liability at March 31, 2022 and December 31, 2021 was $33.5 million and $29.7 million, respectively, with the change 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 March 31, 2022, 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 2034 through 2037. Any net operating losses generated in 2018 and future periods are not subject to expiration and will carryforward indefinitely until utilized. 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 three months ended March 31, 2022, Main Street sold 1,499,577 shares of its common stock at a weighted-average price of $42.82 per share and raised $64.2 million of gross proceeds under the ATM Program. Net proceeds were $63.4 million after commissions to the selling agents on shares sold and offering costs. As of March 31, 2022, sales transactions representing 118,227 shares had not settled and are not included in shares issued and outstanding on the face of the consolidated balance sheet but are included in the weighted average shares outstanding in the consolidated statement of operations and in the shares used to calculate the net asset value per share. During the three months ended March 31, 2022, Main Street entered into new distribution agreements to sell up to 15,000,000 shares through the ATM Program. As of March 31, 2022, 14,370,489 shares remained available for sale under the ATM Program.
During the year ended December 31, 2021, Main Street sold 2,332,795 shares of its common stock at a weighted-average price of $42.71 per share and raised $99.6 million of gross proceeds under the ATM Program. Net proceeds were $98.4 million after commissions to the selling agents on shares sold and offering costs.
NOTE I—DIVIDEND REINVESTMENT PLAN
The dividend reinvestment feature of Main Street’s dividend reinvestment and direct stock purchase plan (the “DRIP”) provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if Main Street declares a cash dividend, its stockholders who have not “opted out” of the DRIP by the dividend record date will have their cash dividend automatically reinvested into additional shares of MSCC common stock. The share requirements of the DRIP may be satisfied through the issuance of shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares will be valued based upon the final closing price of MSCC’s common stock on the valuation date determined for each dividend by Main Street’s Board of Directors. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased, before any associated brokerage or other costs. Main Street’s DRIP is administered by its transfer agent on behalf of Main Street’s record holders and participating brokerage firms. Brokerage firms and other financial intermediaries may decide not to participate in Main Street’s DRIP but may provide a similar dividend reinvestment plan for their clients.
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Summarized DRIP information for the three months ended March 31, 2022 and 2021 is as follows:
($ in millions)
DRIP participation
4.8
3.7
Shares issued for DRIP
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 March 31, 2022.
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)
Year ended December 31, 2021
(332,143)
Three months ended March 31, 2022
(5,228)
Restricted stock available for issuance as of March 31, 2022
1,179,303
As of March 31, 2022, 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
78
For the three months ended March 31, 2022 and 2021, Main Street recognized total share-based compensation expense of $2.8 million and $2.3 million, respectively, related to the restricted stock issued to Main Street employees and non-employee directors.
As of March 31, 2022, there was $11.8 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 1.9 years as of March 31, 2022.
NOTE K—COMMITMENTS AND CONTINGENCIES
At March 31, 2022, 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.
EnCap Energy Capital Fund X, L.P.
537
EnCap Flatrock Midstream Fund II, L.P.
4,586
EnCap Flatrock Midstream Fund III, L.P.
365
5,696
3,701
Brightwood Capital Fund III, LP
Brightwood Capital Fund V, LP
3,500
6,500
Freeport Fund Investments
Freeport Financial SBIC Fund LP
1,375
Freeport First Lien Loan Fund III LP
4,871
6,246
1,039
HPEP 3, L.P.
1,555
2717 HPP-MS, LP
1,611
Dos Rios Partners, LP
835
Dos Rios Partners - A, LP
265
1,100
Total Equity Commitments
44,010
Investments with commitments to fund revolving loans that have not been fully drawn or term loans with additional commitments not yet funded:
32,400
12,727
8,421
7,882
7,472
7,017
6,716
5,789
5,250
Rug Doctor, LLC
5,085
5,000
4,465
4,265
3,521
3,222
2,700
2,529
2,520
2,461
2,411
VVS Holdco, LLC
2,400
2,250
2,231
2,171
2,124
Fortna, Inc.
2,027
1,960
1,859
Evergreen North America Acquisitions, LLC
1,854
Career Team Acquireco LLC
1,800
1,600
1,415
1,364
1,340
1,333
1,067
982
920
913
Project BarFly, LLC
760
500
450
Classic H&G Holdco, LLC
Total Loan Commitments
228,218
Total Commitments
272,228
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.
Main Street has 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.
In accordance with ASC 842, Main Street has recorded this lease as a right-of-use asset and a lease liability and records lease expense on a straight-line basis.
Total operating lease cost incurred by Main Street for each of the three months ended March 31, 2022 and 2021 was $0.2 million. As of March 31, 2022, the asset related to the operating lease was $3.6 million and is included in the interest receivable and other assets balance on the consolidated balance sheet. The lease liability was $4.3 million and is included in the accounts payable and other liabilities balance on the consolidated balance sheet. As of March 31, 2022, the remaining lease term was 5.8 years and the discount rate was 4.2%.
The following table shows future minimum payments under Main Street’s operating lease as of March 31, 2022 (in thousands):
For the Years Ended December 31,
593
2023
804
2024
818
2025
832
2026
846
Thereafter
933
4,826
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 March 31, 2022, Main Street had a receivable of approximately $5.7 million due from the External Investment Manager, which included (i) approximately $3.5 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 $2.3 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 provided for a term loan of $40.0 million to MSC Income, bearing interest at a fixed rate of 5.00% per annum, and maturing 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 were 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 extinguished.
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 co-invests with Main Street in Main Street’s Private Loan investment strategy. 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 February 2022, Main Street increased its total commitment to the Private Loan Fund from $10.0 million to $15.0 million. 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 March 31, 2022, Main Street has funded $7.5 million of its limited partner commitment and Main Street’s unfunded commitment was $7.5 million. Main Street’s limited partner commitment to the Private Loan Fund was unanimously approved by the Board, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act.
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 and was subsequently amended on November 30, 2021 and on December 29, 2021 (as amended, the “PL Fund 2021 Note”), in an aggregate amount equal to the amount of limited partner capital commitments to the Private Loan Fund up to $85.0 million. Borrowings under the PL Fund 2021 Note bore interest at a fixed rate of 5.00% per annum and matured on February 28, 2022. The PL Fund 2021 Note 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. In February 2022, the Private Loan Fund fully repaid all borrowings outstanding under the PL Fund 2021 Note and the PL Fund 2021 Note was extinguished.
In March 2022, Main Street provided the Private Loan Fund with a new revolving line of credit pursuant to a Secured Revolving Promissory Note, dated March 17, 2022 (the “PL Fund 2022 Note”), which provides for borrowings up to $10.0 million. Borrowings under the PL Fund 2022 Note bear interest at a fixed rate of 5.00% per annum and mature on date upon which the Private Loan Fund’s investment period concludes, which is scheduled to occur in March 2026. Available borrowings under the PL Fund 2022 Note are subject to a 0.25% non-use fee. The PL Fund 2022 Note was unanimously approved by Main Street’s Board of Directors, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act. As of March 31, 2022, there were no borrowings outstanding under the PL Fund 2022 Note.
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 March 31, 2022, $16.5
million of compensation and dividend reinvestments, plus net unrealized gains and losses and investment income, and minus distributions had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). Of this amount, $6.5 million had been deferred into phantom Main Street stock units, representing 152,790 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 May 2022, Main Street declared a supplemental cash dividend of $0.075 per share payable in June 2022. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that Main Street declared for the second quarter of 2022 of $0.215 per share for each of April, May and June 2022.
In May 2022, Main Street also declared regular monthly dividends of $0.215 per share for each month of July, August and September of 2022. These regular monthly dividends equal a total of $0.645 per share for the third quarter of 2022, representing a 4.9% increase from the regular monthly dividends paid in the third quarter of 2021. Including the regular monthly and supplemental dividends declared for the second and third quarters of 2022, Main Street will have paid $34.26 per share in cumulative dividends since its October 2007 initial public offering.
As previously disclosed, in February 2022, Main Street’s Board unanimously approved the application of the reduced BDC asset coverage ratio, effective as of February 23, 2023 unless approved earlier by a vote of Main Street’s stockholders. At the Company’s 2022 annual meeting of stockholders (the “Annual Meeting”) on May 2, 2022, Main Street’s stockholders approved the application of the reduced BDC asset coverage ratio, effective the day after the Annual Meeting. As a result, the BDC asset coverage ratio applicable to Main Street decreased from 200% to 150% effective May 3, 2022. As of March 31, 2022, Main Street’s BDC asset coverage ratio was 227%.
83
Schedule 12-14
Consolidated Schedule of Investments In and Advances to Affiliates
(unaudited)
Amount of
Interest,
Fees or
Dividends
May 31,
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)
12.00% (L+10.00%, Floor 2.00%) Secured Debt
(576)
576
11.00% (L+10.00%, Floor 1.00%) Secured Debt
224
124
787
357
3,990
10.50% (L+9.50%, Floor 1.00%) Secured Debt
285
10.00% Secured Debt
348
10,780
10,860
12.25% (L+10.50%, Floor 1.75%) Secured Debt
1,380
2,888
2,890
687
10.00% (L+9.00%, Floor 1.00%) Secured Debt
159
688
1,610
158
7.50% Secured Debt
209
12.00% (L+11.00%, Floor 1.00%) Secured Debt
752
332
4,100
343
10.50% (L+8.50%, Floor 2.00%) Secured Debt
(4,580)
180
4,580
8.23% (L+8.00%) Secured Debt
803
1,217
10.00% (Prime+6.75%, Floor 2.00%) Secured Debt
103
11.50% Secured Debt
599
9.00% Secured Debt
88
(70)
102
12.00% PIK Secured Debt
13.00% Secured Debt
(1,495)
274
1,575
(7,480)
2,277
7,480
281
2,220
568
12.00% Secured Debt
554
514
479
7.50% (L+7.00%, Floor 0.50%) Secured Debt
1,257
219
560
104
198
679
1,117
140
269
407
6.50% Secured Debt
14.00% Secured Debt
Other controlled investments
2717 MH, L.P.
189
346
5.00% Secured Debt
7.00% Secured Debt
11.00% Secured Debt
196
10.50% (L+9.00%, Floor 1.50%) Secured Debt
1,160
10,214
292
2,760
368
286
(1,740)
412
1,740
288
233
9.00% (L+8.00%, Floor 1.00%) Secured Debt
419
295
10.00% Unsecured Debt
745
Copper Trail Energy Fund I, LP - CTMH
466
9.00% (L+8.00%, Floor 1.00%, Ceiling 1.50%) Secured Debt
94
(350)
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
(1,717)
212
1,717
13.00% (L+11.50%, Floor 1.50%) Secured Debt
382
318
310
211
MS Private Loan Fund
5.00% Unsecured Debt
435
17,000
80,151
(190)
190
Nebraska Vet AcquireCo, LLC (NVS)
541
1,408
218
(150)
7.50% (L+6.50%, Floor 1.00%) Secured Debt
504
743
24,150
1,518
8,080
1,756
582
(731)
1,808
85
7.00% (L+6.00%, Floor 1.00%) Secured Debt
889
Amounts related to investments transferred to or from other 1940 Act classification during the period
(236)
6,123
Total Control investments
122,644
119,115
Affiliate Investments
18.00% (10.00% Cash, 8.00% PIK) Secured Debt
478
86
8.50% (L+7.50%, Floor 1.00%) Secured Debt
230
10.00% PIK Unsecured Debt
12.00% (L+11.00%, Floor 1.00%) Unsecured Debt
(209)
2,507
Brightwood Capital Fund Investments - Fund V
139
639
12.25% (L+11.25%, Floor 1.00%) Secured Debt
540
12.50% Secured Debt
645
3,600
8.00% Secured Debt
1,020
352
163
1,106
647
90
(290)
290
1,204
1,493
108
383
251
702
579
1,890
1,990
771
8.00% Unsecured Convertible Debt
(90)
(240)
241
698
(280)
516
146
915
28,749
129
191
171
SI East, LLC (Stavig)
10.25% Secured Debt
2,048
960
959
182
213
267
(60)
656
1,521
11.83% Secured Debt
390
590
(1,885)
236
4,470
8.50% (6.50% cash, 2.00% PIK) (2.00% PIK, L+5.50% Floor 1.00%) Secured Debt
15.00% PIK Secured Convertible Debt
(80)
(87)
337
496
(6,123)
Total Affiliate investments
13,981
9,879
87
Consolidated Schedule of Investments in and Advances to Affiliates
March 31, 2021
2019
2,030
2,260
(L+10.00%, Floor 1.00%) Secured Debt
784
27,789
27,869
(L+8.00%, Floor 1.00%) Secured Debt
117
8,043
5,629
2,423
8,255
8,565
631
6,241
6,872
(L+9.50%, Floor 1.00%) Secured Debt
10,853
10,773
8,610
1,093
1,624
1,767
(L+10.50%, Floor 1.75%) Secured Debt
439
14,216
207
14,016
3,930
14,940
18,870
1,530
6,780
8,310
229
7,953
7,954
(1,800)
185
1,615
10.50% PIK Secured Debt
(1,801)
1,945
10,531
12,475
(6,030)
6,030
(1,294)
1,294
8,064
(1,560)
19,380
1,560
(L+11.00%, Floor 1.00%) Secured Debt
463
15,015
(L+7.00%, Floor 2.00%) Secured Debt
472
19,838
815
20,638
(88)
52,490
2,848
55,250
(L+7.00%) Secured Debt
299
16,775
944
44,900
(Prime+6.75%, Floor 2.00%) Secured Debt
153
415
7,620
655
22,269
22,280
3,901
1,550
PIK Secured Debt
(294)
13,562
294
13,268
(10.00% Cash, 3.00% PIK) Secured Debt
284
8,280
8,208
(1,170)
2,370
116,760
117,220
205
6,723
(1,710)
476
8,990
1,710
OMi Holdings, Inc.
(1,550)
20,380
18,830
1,064
34,689
34,703
2,513
1,013
15,940
11,500
12,330
(L+7.00%, Floor 0.50%) Secured Debt
11,806
11,612
(62)
214
6,397
6,340
(360)
840
(120)
10,380
(178)
4,460
578
(340)
340
5,690
8,644
8,649
979
1,780
2,070
(65)
2,702
2,684
1,120
1,715
(470)
470
2,730
(L+10.00%, Floor 2.00%) Secured Debt
4,874
4,889
(123)
3,184
8.00% Class B Preferred Member Units
276
(L+9.00%, Floor 1.50%) Secured Debt
744
27,225
27,239
14.00% Class A Preferred Member Units
(L+8.00%, Floor 1.50%) Secured Debt
Bond-Coat, Inc.
440
2,480
5,850
5,490
237
8,513
8,394
998
999
457
8,403
8,573
3,220
3,340
46,080
363
11,549
1,753
9,813
6,160
15,212
28,070
28,280
1,270
1,330
141
10,520
11,320
(8.67% Cash, 1.33% PIK) Unsecured Debt
(481)
356
8,475
904
7,718
0.15 Secured Debt
669
24,948
747
502
18,077
17,758
260
1,410
1,670
(L+8.00%, Floor 1.00%, Ceiling 1.50%) Secured Debt
4,519
4,510
(5.25% Cash, 5.25% PIK) (L+9.50%, Floor 1.00%) Secured Debt
253
(6.25% Cash, 6.25% PIK) Secured Debt
421
12,044
206
12,259
(130)
5,450
130
J&J Services, Inc.
12,800
12,680
13,200
142
5.0% Unsecured Debt
MSC Income Fund Inc.
5.0% Unecured Debt
39,822
(530)
16,100
15,570
326
10,395
178
16,726
188
16,696
NRI Clinical Research, LLC
135
5,620
1,490
136
5,750
(45)
2,821
3,240
11,390
529
17,193
17,203
Pegasus Research Group, LLC
(560)
8,830
8,270
482
16,301
14,718
8,136
2,894
1,895
4,788
2,028
(160)
3,160
OtherAmounts related toinvestments transferred toor from other1940 Act classificationduring the period
Total Control Investments
1,113,725
126,139
46,901
1,192,964
(10.00% Cash, 8.00% PIK) Secured Debt
9,187
362
9,548
(1,136)
2,938
1,802
(1,218)
510
5,810
6,320
491
404
American Trailer Rental Group LLC
1,870
16,010
17,880
(L+11.00%, Floor 1.00%) Unsecured Debt
4,722
4,742
PIK Preferred Stock (non-voting)
6,040
(2.56% Cash, 7.69% PIK) (L+9.25%, Floor 1.00%) Secured Debt
(373)
14,256
13,883
410
7,190
(46)
1,489
47,474
3,399
44,121
(420)
1,460
1,040
11,180
758
24,800
215
11,540
LP Interests (Fund II)
(4,449)
4,355
4,449
Copper Trail Energy Fund I, LP
LP Interests (Copper Trail Energy Fund I, LP)
1,782
1,843
(316)
5,417
5,101
(100)
1,620
(230)
East Teak Fine Hardwoods, Inc.
300
526
446
245
10,321
1,398
8,923
5,264
315
15,588
468
18,400
8,030
9,320
490
2,900
(830)
5,080
4,250
3,258
374
3,632
456
15,789
14,428
PIK Preferred Member Units (non-voting)
PIK Unsecured Debt
7,301
7,520
PCI Holding Company, Inc.
(203)
(357)
9.50% Secured Debt
32,963
3,789
29,213
380
0
9,780
10,160
5,720
172
5,560
653
21,298
21,306
1,092
PIK Preferred Stock
(52)
3,208
92
3,228
(L+6.50% Floor 1.00%) Secured Debt
393
2,098
19,243
291
366,301
34,356
24,934
375,723
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 the 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, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2022 and elsewhere in this Quarterly Report on Form 10-Q and our other SEC filings. Other factors that could cause actual results to differ materially include changes in the economy and future changes in laws or regulations and conditions in our operating areas.
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.
This discussion should be read in conjunction with our consolidated financial statements as of December 31, 2021, and for the year then ended, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the year ended December 31, 2021, as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report.
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, together with MSMF, the “Funds”), and each of their general partners. 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.
COVID-19 UPDATE
The COVID-19 pandemic and its effect on the U.S. and global economies, including the current related impacts to supply chain delays, labor and material availability and price increases, 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 March 31, 2022, we continued to work collectively with our employees and portfolio companies to navigate these significant challenges. Neither our management team 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, we are unable to predict with any certainty the extent to which these events, or any future impacts related to the pandemic, 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 OF OUR BUSINESS
Our principal investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and current income 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 our investment objective through our lower middle market (“LMM”), Private Loan (as defined below), and middle market (“Middle Market”) investment strategies. Our LMM investment strategy involves investments in companies that generally have annual revenues between $10 million and $150 million and our LMM portfolio investments generally range in size from $5 million to $75 million. Our Middle Market investment strategy involves investments in companies that are generally larger in size than our LMM 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 $25 million. Our private loan (“Private Loan”) investment strategy involves investments in companies that are consistent with the size of the companies in our LMM and Middle Market investment strategies, and our Private Loan investments generally range in size from $10 million to $75 million.
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.
Private Loan investments generally consist of loans that have been originated directly by us or through strategic relationships with other investment funds on a collaborative basis and are often referred to in the debt markets as “club deals.” Our Private Loan portfolio debt investments are generally secured by a first 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 Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest-bearing syndicated loans or 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 a first priority lien on the assets of the portfolio company and typically have an expected duration of between three and seven years from the original investment date.
Our other portfolio (“Other Portfolio”) investments primarily consist of investments that are not consistent with the typical profiles for our LMM, Private Loan or Middle Market 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, our Investment Portfolio may also include short-term portfolio investments that are atypical of our LMM, Private Loan and Middle Market 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”). 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”) and its other clients. Through this agreement, we share employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities.
Our portfolio investments are generally made through MSCC, the Taxable Subsidiaries and the Funds. MSCC, the Taxable Subsidiaries 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 Taxable Subsidiaries’ and 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 better alignment of interests between our management team, our employees and our shareholders, and a beneficial operating expense structure when compared to other publicly traded and privately held investment firms which are externally managed. 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 1.4%, respectively, for the trailing twelve months ended March 31, 2022 and 2021, and 1.5% for the year ended December 31, 2021. The ratio of our total operating expenses, including interest expense, as a percentage of our quarterly average total assets was 3.3% for each of the trailing twelve months ended March 31, 2022 and 2021 and 3.4% for the year ended December 31, 2021. Our ratio of expenses as a percentage of our average net asset value is described in greater detail in “Note F – Financial Highlights” to the consolidated financial statements included in “Item 1. Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.
The External Investment Manager earns management fees based on the assets of the funds and accounts under management and may earn incentive fees, or a carried interest, based on the performance of the funds and accounts managed. The total contribution of the External Investment Manager to our net investment income consists of the combination of the expenses allocated to the External Investment Manager and the dividend income earned from the External Investment Manager. The total contribution to our net investment income was $5.1 million and $3.6 million for the three months ended March 31, 2022 and 2021, respectively. The External Investment Manager earned base management fee income of $5.4 million and $3.9 million during the three months ended March 31, 2022 and 2021, respectively. During the three months ended March 31, 2022, the External Investment Manager earned $0.1 million in incentive fee income. No incentive fee income was earned in the three months ended March 31, 2021. During the three months ended March 31, 2022, the External Investment Manager earned $0.2 million in administrative services fee income. No administrative services fee income was earned in the three months ended March 31, 2021. Our total expenses are net of expenses allocated to the External Investment Manager for the three months ended March 31, 2022 and 2021 of $2.8 million and $2.4 million, respectively.
Additionally, the External Investment Manager has entered into an Investment Management Agreement with 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”), 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.
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We have received an exemptive order from the SEC permitting co-investments among us, MSC Income and other funds and clients 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, and in the future intend to continue to make co-investments with MSC Income, the Private Loan Fund and other clients 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, 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 and clients advised by the External Investment Manager, this may provide the Company and the External Investment Manager an incentive to allocate opportunities to other participating funds and clients 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. Additional information regarding the operation of the co-investment program is set forth in the order granting exemptive relief, which may be reviewed on the SEC’s website at www.sec.gov. In addition to the co-investment program described above, we also co-invest in syndicated deals and other transactions where price is the only negotiated point by us and our affiliates.
INVESTMENT PORTFOLIO SUMMARY
The following tables provide a summary of our investments in the LMM, Private Loan and Middle Market portfolios as of March 31, 2022 and December 31, 2021 (this information excludes the Other Portfolio investments, short-term portfolio investments and the External Investment Manager which are discussed further below):
For the three months ended March 31, 2022 and 2021, we achieved an annualized total return on investments of 11.8% and 12.8%, respectively. For the year ended December 31, 2021, we achieved an annualized total return on investments of 16.6%. 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. Our total return on investments is not reflective of what an investor in shares of our common stock will realize on its investment because it does not reflect changes in the market value of our stock, our utilization of leverage or debt capital in our capital structure, our expenses or any sales load paid by an investor.
As of March 31, 2022, we had Other Portfolio investments in 13 companies, collectively totaling approximately $102.4 million in fair value and approximately $109.9 million in cost basis and which comprised approximately 2.8% and 3.3% of our Investment Portfolio at fair value and cost, respectively. As of December 31, 2021, we had Other Portfolio investments in 13 companies, collectively totaling approximately $166.1 million in fair value and approximately $173.7 million in cost basis and which comprised approximately 4.7% and 5.3% of our Investment Portfolio at fair value and cost, respectively.
As of March 31, 2022, we had one short-term portfolio investment, which was a secured debt investment that had approximately $2.0 million in both fair value and in cost basis and which comprised approximately 0.1% of our Investment Portfolio at both fair value and cost. As of December 31, 2021, we had Other Portfolio investments in 13 companies, collectively totaling approximately $166.1 million in fair value and approximately $173.7 million in cost basis and which comprised approximately 4.7% and 5.3% of our Investment Portfolio at fair value and cost, respectively.
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As previously discussed, the External Investment Manager is a wholly owned subsidiary that is treated as a portfolio investment. As of March 31, 2022, this investment had a fair value of approximately $132.9 million and a cost basis of $29.5 million, which comprised approximately 3.6% and 0.9% of our Investment Portfolio at fair value and cost, respectively. As of December 31, 2021, this investment had a fair value of approximately $140.4 million and a cost basis of $29.5 million, which comprised approximately 3.9% and 0.9% of our Investment Portfolio at fair value and cost, respectively.
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 – Summary of Significant Accounting Policies” 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 both March 31, 2022 and December 31, 2021, our Investment Portfolio valued at fair value represented approximately 97% of our total assets. 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.
In December 2020, the SEC adopted 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 March 31, 2022 and December 31, 2021 approximates fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.
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Revenue Recognition
Interest and Dividend Income
We record interest and dividend income on the accrual basis to the extent amounts are expected to be collected. Dividend income is recorded as dividends are declared by the portfolio company or at the point an obligation exists for the portfolio company to make a distribution. In accordance with our valuation policies, we evaluate accrued interest and dividend income periodically for collectability. When a loan or debt security becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally place the loan or debt security on non-accrual status and cease recognizing interest income on that loan or debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a loan or debt security’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, or if a loan or debt security is sold or written off, we remove it from non-accrual status.
Fee Income
We may periodically provide services, including structuring and advisory services, to our portfolio companies or other third parties. For services that are separately identifiable and evidence exists to substantiate fair value, fee income is recognized as earned, which is generally when the investment or other applicable transaction closes. Fees received in connection with debt financing transactions for services that do not meet these criteria are treated as debt origination fees and are deferred and accreted into income over the life of the financing.
Payment-in-Kind (“PIK”) Interest and Cumulative Dividends
We hold certain debt and preferred equity instruments in our Investment Portfolio that contain PIK interest and cumulative dividend provisions. The PIK interest, computed at the contractual rate specified in each debt agreement, is periodically added to the principal balance of the debt and is recorded as interest income. Thus, the actual collection of this interest may be deferred until the time of debt principal repayment. Cumulative dividends are recorded as dividend income, and any dividends in arrears are added to the balance of the preferred equity investment. The actual collection of these dividends in arrears may be deferred until such time as the preferred equity is redeemed or sold. To maintain RIC tax treatment (as discussed in “Note B.9. – Income Taxes” in the notes to the consolidated financial statements), 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 March 31, 2022 and 2021 (i) approximately 1.2% and 3.8%, respectively, of our total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 1.1% and 0.7%, 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, Private Loan portfolio investments and Middle Market portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Private Loan portfolio investments and Middle Market portfolio investments as of March 31, 2022 and December 31, 2021 (this information excludes the Other Portfolio, short-term portfolio investments and the External Investment Manager).
Our LMM portfolio investments, Private Loan portfolio investments and Middle Market 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, 2021 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 March 31, 2022, our total Investment Portfolio had nine investments on non-accrual status, which comprised approximately 0.6% of its fair value and 3.1% of its cost. As of December 31, 2021, our total Investment Portfolio had nine investments on non-accrual status, which comprised approximately 0.7% of its fair value and 3.3% 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, 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 March 31, 2022 and 2021
Net Change
16,588
(4,133)
Net investment income
12,455
Net realized gain (loss) from investments
19,066
NM
Net unrealized appreciation (depreciation) from investments
(19,249)
(4,415)
Net increase in net assets resulting from operations
7,857
(dollars in thousands, except per share amounts)
Share‑based compensation expense
485
Distributable net investment income(a)
55,030
42,090
Net investment income per share—Basic and diluted
0.15
Distributable net investment income per share—Basic and diluted(a)
0.77
0.62
Net Change % not meaningful
Investment Income
Total investment income for the three months ended March 31, 2022 was $79.4 million, a 26% increase from the $62.8 million of total investment income for the corresponding period of 2021. The following table provides a summary of the changes in the comparable period activity.
15,970
(a)
(1,075)
(b)
1,693
(c)
(d)
Expenses
Total expenses for the three months ended March 31, 2022 were $27.2 million, an 18% increase from the $23.1 million in the corresponding period of 2021. The following table provides a summary of the changes in the comparable period activity.
Employee compensation expenses
7,544
6,072
1,472
Deferred compensation plan expense
(275)
246
(521)
(212)
Total compensation expense
7,269
6,318
951
G&A expense
3,226
Interest expense
2,883
Gross expenses
30,000
25,430
4,570
Allocation of expenses to the External Investment Manager
(437)
27,183
23,050
4,133
Net Investment Income
Net investment income for the three months ended March 31, 2022 increased 31% to $52.2 million, or $0.73 per share, compared to net investment income of $39.8 million, or $0.58 per share, for the corresponding period of 2021. The increase in net investment income was principally attributable to the increase in total investment income, partially offset by higher operating expenses, both as discussed above. The increase in net investment income per share reflects these changes, and the impact of the increase in weighted average shares outstanding for the three months ended March 31, 2022, 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 on a per share basis includes (i) a $0.03 per share decrease in investment income considered less consistent or non-recurring and (ii) a decrease in compensation expense of $0.01 per share resulting from the comparable period difference in the fair value of deferred compensation plan assets and corresponding liabilities, both of which are discussed above.
Distributable Net Investment Income
Distributable net investment income for the three months ended March 31, 2022 increased 31% to $55.0 million, or $0.77 per share, compared with $42.1 million, or $0.62 per share, in the corresponding period of 2021. The increase in distributable net investment income was primarily due to the increased level of total investment income, partially offset by higher operating expenses, excluding share-based compensation expense, both as discussed above, and the net impact of the increase in weighted average shares outstanding for the three months ended March 31, 2022, 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 distributable net investment income on a per share basis includes (i) a decrease in investment income considered less consistent or non-recurring and (ii) a decrease in compensation expense resulting
from the comparable period difference in the fair value of deferred compensation plan assets and corresponding liabilities, both of which are 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 $3.3 million for the three months ended March 31, 2022:
Three Months Ended March 31, 2022
Full Exits
Partial Exits
Restructures
Other (a)
Total (a)
Net Gain/(Loss)
# of Investments
LMM Portfolio
Private Loan Portfolio
1,529
Middle Market Portfolio
Other Portfolio
1,531
240
1,771
Short-term Portfolio
Total net realized gain/(loss)
Net Unrealized Appreciation (Depreciation)
The following table provides a summary of the total net unrealized appreciation of $14.8 million for the three months ended March 31, 2022:
Private
Middle
LMM(a)
Loan
Market
Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods due to net realized (gains / income) losses recognized during the current period
(0.7)
(0.1)
(1.7)
(2.2)
Net unrealized appreciation (depreciation) relating to portfolio investments
20.7
(0.6)
(6.3)
17.0
Total net unrealized appreciation (depreciation) relating to portfolio investments
21.0
(8.0)
Income Tax Benefit (Provision)
The income tax provision for the three months ended March 31, 2022 of $5.1 million principally consisted of (i) a deferred tax provision of $3.8 million, which is primarily the result of the net activity relating to our portfolio investments held in our Taxable Subsidiaries, including changes in loss carryforwards, changes in net unrealized appreciation/depreciation and other temporary and permanent book-tax differences, and (ii) a current tax provision of $1.3 million related to a $0.7 million provision for excise tax on our estimated undistributed taxable income and a $0.6 million provision for current U.S. federal and state income taxes. The income tax provision for the three months ended March 31, 2021 of $0.7 million principally consisted of a current tax provision of $0.6 million related to a $0.3 million provision for current U.S. federal and state income taxes and a $0.3 million provision for excise tax on our estimated undistributed taxable income.
Net Increase (Decrease) in Net Assets Resulting from Operations
The net increase in net assets resulting from operations for the three months ended March 31, 2022 was $65.2 million, or $0.91 per share, compared with $57.3 million, or $0.84 per share, during the three months ended March 31, 2021. The tables above provide a summary of the reasons for the change in net increase in net assets resulting from operations for the three months ended March 31, 2022 as compared to the three months ended March 31, 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 three months ended March 31, 2022, we realized a net decrease in cash and cash equivalents of $14.7 million, which is the net result of $49.7 million of cash used in our operating activities, partially offset by $35.0 million of cash provided by our financing activities.
The $49.7 million of cash used in our operating activities resulted primarily from (i) cash uses totaling $315.4 million for the funding of new and follow-on portfolio company investments and settlement of accruals for portfolio investments existing as of December 31, 2021 and (ii) $23.8 million related to changes in other assets and liabilities, partially offset by (i) cash proceeds totaling $238.9 million from the sales and repayments of debt investments and sales of and return on capital from equity investments and (ii) cash flows that we generated from the operating profits earned totaling $50.6 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.
The $35.0 million of cash provided by our financing activities principally consisted of (i) $63.5 million in net cash proceeds from our ATM Program (described below) and direct stock purchase plan and (ii) $18.0 million in net proceeds from the Credit Facility, partially offset by $46.5 million in cash dividends paid to stockholders.
Capital Resources
As of March 31, 2022, we had $18.0 million in cash and cash equivalents and $517.0 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 March 31, 2022, our net asset value totaled $1,873.7 million, or $25.89 per share.
The Credit Facility provides additional liquidity to support our investment and operational activities. As of March 31, 2022, 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 $1.2 billion from new and existing lenders on the same terms and conditions as the existing commitments. As of March 31, 2022, 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 (0.2% as of the most recent reset date for the period ended March 31, 2022) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.50% as of March 31, 2022) 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 March 31, 2022, 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 a 1940 Act asset coverage ratio 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 March 31, 2022, we had $338.0 million in borrowings outstanding under the Credit Facility, the
interest rate on the Credit Facility was 2.1% (based on the LIBOR rate of 0.2% as of the most recent reset date of March 1, 2022 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 March 31, 2022 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 5.9 years as of March 31, 2022. 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”) at an issue price of 99.16%. The 4.50% Notes are unsecured obligations and rank pari passu with our current and future 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; 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 may be redeemed in whole or in part at any time at our option subject to certain make-whole provisions. The 4.50% Notes 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 in accordance with the 1940 Act and the rules promulgated thereunder. As of March 31, 2022, the outstanding principal balance of the 4.50% Notes was $185.0 million.
The indenture governing the 4.50% Notes (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 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 March 31, 2022, 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 in aggregate principal amount of the 5.20% Notes at an issue price of 105.0%. Also, in July 2020, we issued an additional $125.0 million in 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 March 31, 2022, 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
105
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 March 31, 2022, 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%. 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%. The 3.00% Notes issued in October 2021 have identical terms as, and are a part of a single series with, the 3.00% Notes issued in January 2021. The 3.00% 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 3.00% 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 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 March 31, 2022, the outstanding principal balance of the 3.00% Notes was $500.0 million.
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 March 31, 2022, 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 three months ended March 31, 2022, we sold 1,499,577 shares of our common stock at a weighted-average price of $42.82 per share and raised $64.2 million of gross proceeds under the ATM Program. Net proceeds were $63.4 million after commissions to the selling agents on shares sold and offering costs. As of March 31, 2022, sales transactions representing 118,227 shares had not settled and are not included in shares issued and outstanding on the face of the consolidated balance sheet but are included in the weighted average shares outstanding in the consolidated statement of operations and in the shares used to calculate net asset value per share. During the three months ended March 31, 2022, we entered into new distribution agreements to sell up to 15,000,000 shares through the ATM Program. As of March 31, 2022, 14,370,489 shares remained available for sale under the ATM Program.
During the year ended December 31, 2021, we sold 2,332,795 shares of our common stock at a weighted-average price of $42.71 per share and raised $99.6 million of gross proceeds under the ATM Program. Net proceeds were $98.4 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, Private Loan and Middle Market 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, Private Loan and Middle Market 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.
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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 2022 annual meeting of stockholders, and have not sought such authorization since 2012, 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, or BDC asset 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). 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 BDC asset coverage ratio, which, in turn, enables us to fund more investments with debt capital. In May 2022, our stockholders also approved the application of the reduced BDC asset coverage ratio. As a result, the BDC asset coverage ratio applicable to us decreased from 200% to 150% effective May 3, 2022. As of March 31, 2022, our BDC asset coverage ratio was 227%.
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
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. For a description of 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.
Inflation
Inflation has not historically had a significant effect on our results of operations in any of the reporting periods presented herein. However, our portfolio companies have experienced, specifically including over the last few quarters as a result of the COVID-19 pandemic, recent geopolitical events and the related supply chain and labor issues, and may continue to experience, the increasing 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. These issues and challenges related to inflation are receiving significant attention from our investment teams and the management teams of our portfolio companies as we work to manage these growing challenges. Prolonged or more severe impacts of inflation to our portfolio companies could continue to impact their operating profits and, thereby, increase their borrowing costs, and as a result negatively impact their ability to service their debt obligations and/or reduce their available cash for distributions. In addition, these factors could have a negative impact on the fair value of our investments in these portfolio companies. The combined impacts of these impacts 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 March 31, 2022, we had a total of $272.2 million in outstanding commitments comprised of (i) 72 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 March 31, 2022, the future fixed commitments for cash payments in connection with our SBIC debentures, the 4.50% Notes, 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):
Interest due on 3.00% Notes due 2026
7,517
67,517
Interest due on 5.20% Notes due 2024
23,400
11,700
58,500
SBIC debentures
16,000
63,800
270,200
Interest due on SBIC debentures
5,166
9,899
8,455
7,228
15,565
53,541
Interest due on 4.50% Notes due 2022
8,325
Operating Lease Obligation (1)
230,001
65,103
549,773
23,060
523,074
286,698
1,677,709
As of March 31, 2022, we had $338.0 million in borrowings outstanding under our Credit Facility, and the Credit Facility is scheduled to mature in April 2026.
Related Party Transactions and Agreements
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 March 31, 2022, we had a receivable of approximately $5.7 million due from the External Investment Manager, which included $3.5 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 – Income Taxes” and “Note D – External Investment Manager” in the notes to the consolidated financial statements) and $2.3 million of dividends declared but not paid by the External Investment Manager. 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 the External Investment Manager’s relationship with MSC Income and its other clients. See “Note A.1 – Organization” and “Note D – External Investment Manager” in the notes to the consolidated financial statements for more information regarding 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 initially provided for a term loan of $40.0 million to MSC Income, bearing interest at a fixed rate of 5.00% per annum, and maturing 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 were 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 extinguished.
In May 2022, we purchased 94,697 shares of common stock of MSC Income from MSC Income at the price shares were purchased by MSC Income stockholders pursuant to MSC Income’s dividend reinvestment plan for its May dividend on such date. In addition, certain of our officers and employees own shares of MSC Income and therefore have direct pecuniary interests in MSC Income. As of March 31, 2022, we did not own any shares of MSC Income. Our purchase of MSC Income common stock was unanimously approved by the Board and MSC Income’s board of directors, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act, of each board.
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 co-invests with Main Street in Main Street’s Private Loan investment strategy. 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 February 2022, Main Street increased its total commitment to the Private Loan Fund from $10.0 million to $15.0 million. In addition, certain of our 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 March 31, 2022, we have funded approximately $7.5 million of our limited partner commitment and our unfunded commitment was approximately $7.5 million. Our limited partner commitment to the Private Loan Fund was unanimously approved by our Board of Directors, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act.
Additionally, we provided the Private Loan Fund with a revolving line of credit pursuant to an Unsecured Revolving Promissory Note, dated February 5, 2021 and was subsequently amended on November 30, 2021 and on December 29, 2021 (as amended, the “PL Fund 2021 Note”), in an aggregate amount equal to the amount of limited partner capital commitments to the Private Loan Fund up to $85.0 million. Borrowings under the PL Fund 2021 Note bore interest at a fixed rate of 5.00% per annum and matured on February 28, 2022. The PL Fund 2021 Note was unanimously approved by our Board of Directors, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act. In February 2022, the Private Loan Fund fully repaid all borrowings outstanding under the PL Fund 2021 Note and the PL Fund 2021 Note was extinguished.
In March 2022, we provided the Private Loan Fund with a new revolving line of credit pursuant to a Secured Revolving Promissory Note, dated March 17, 2022 (the “PL Fund 2022 Note”), which provides for borrowings up to $10.0 million. Borrowings under the PL Fund 2022 Note bear interest at a fixed rate of 5.00% per annum and mature on date upon which the Private Loan Fund’s investment period concludes, which is scheduled to occur in March 2026. Available borrowings under the PL Fund 2022 Note are subject to a 0.25% non-use fee. The PL Fund 2022 Note was unanimously approved by our Board of Directors, including each director who is not an “interested person,” as such term is defined in Section 2(a)(19) of the 1940 Act. As of March 31, 2022, there were no borrowings outstanding under the PL Fund 2022 Note.
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 March 31, 2022, $16.5 million of compensation and dividend reinvestments, plus net unrealized gains and losses and investment income and minus distributions had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). Of this amount, $7.3 million had been deferred into phantom Main Street stock units, representing 162,040 shares of our common stock. Any amounts deferred under the plan represented by phantom Main Street stock units will not be issued or included as outstanding on the consolidated statements of changes in net assets until such shares are actually distributed to the participant in accordance with the plan, but the related phantom stock units are included in weighted average shares outstanding with the related dollar amount of the deferral included in total expenses in Main Street’s consolidated statements of operations as earned. The dividend amounts related to additional phantom
stock units are included in the statements of changes in net assets as an increase to dividends to stockholders offset by a corresponding increase to additional paid-in capital.
Recent Developments
In May 2022, we declared a supplemental cash dividend of $0.075 per share payable in June 2022. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that we declared for the second quarter of 2022 of $0.215 per share for each of April, May and June 2022.
In May 2022, we also declared regular monthly dividends of $0.215 per share for each month of July, August and September of 2022. These regular monthly dividends equal a total of $0.645 per share for the third quarter of 2022, representing a 4.9% increase from the regular monthly dividends paid in the third quarter of 2021. Including the regular monthly and supplemental dividends declared for the second and third quarters of 2022, we will have paid $34.26 per share in cumulative dividends since our October 2007 initial public offering.
As previously disclosed, in February 2022, our Board unanimously approved the application of the reduced BDC asset coverage ratio, effective as of February 23, 2023 unless approved earlier by a vote of our stockholders. At our 2022 annual meeting of stockholders (the “Annual Meeting”) on May 2, 2022, our stockholders approved the application of the reduced BDC asset coverage ratio, effective the day after the Annual Meeting. As a result, the BDC asset coverage ratio applicable to us decreased from 200% to 150% effective May 3, 2022. As of March 31, 2022, our asset coverage ratio was 227%.
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 Related 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 Related to our Investments — We are subject to risks associated with the current interest rate environment and changes in interest rates will affect our cost of capital, net investment income and the value of our investments.” and “Risk Factors — Risks Related to Leverage — 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021 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 March 31, 2022, approximately 73% of our debt investment portfolio (at cost) bore interest at floating rates, 93% of which were subject to contractual minimum interest rates. Our interest expense will be affected by changes in the published LIBOR rate in connection with our Credit Facility; however, the interest rates on our outstanding SBIC debentures, 4.50% Notes, 5.20% Notes and 3.00% Notes, which collectively comprise the majority of our outstanding debt, are fixed for the life of such debt. As of March 31, 2022, 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
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to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of March 31, 2022.
Increase
(Increase)
(Decrease)
Decrease
(Decrease) in Net
in Interest
Basis Point Change
Income
Expense
Income per Share
(1,327)
(516)
(1,315)
(50)
(1,028)
(217)
(683)
128
2,919
(845)
2,074
6,623
(1,690)
4,933
0.07
11,105
(2,535)
8,570
0.12
15,830
(3,380)
12,450
0.17
20,704
(4,225)
16,479
0.23
25,625
(5,070)
20,555
0.28
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 March 31, 2022 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, 2021, 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, 2021.
The risks described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 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 March 31, 2022, we issued 114,043 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 March 31, 2022 under the dividend reinvestment plan was approximately $4.8 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
10.1
*
Form of Equity Distribution Agreement dated March 3, 2022 (previously filed as Exhibit 1.1 to Main Street Capital Corporation’s Current Report on Form 8-K filed on March 4, 2022 (File No. 1-33723)).
10.2
Main Street Capital Corporation 2022 Equity and Incentive Plan (previously filed as Exhibit 4.4 to Main Street Capital Corporation’s Registration Statement on Form S-8 filed on May 3, 2022 (Reg. No. 333-264643)).
10.3
Main Street Capital Corporation 2022 Non-Employee Director Restricted Stock Plan (previously filed as Exhibit 4.5 to Main Street Capital Corporation’s Registration Statement on Form S-8 filed on May 3, 2022 (Reg. No. 333-264643)).
10.4
Form of Restricted Stock Agreement — Main Street Capital Corporation 2022 Equity and Incentive Plan (previously filed as Exhibit 4.6 to Main Street Capital Corporation’s Registration Statement on Form S-8 filed on May 3, 2022 (Reg. No. 333-264643)).
10.5
Form of Restricted Stock Agreement — Main Street Capital Corporation 2022 Non-Employee Director Restricted Stock Plan (previously filed as Exhibit 4.7 to Main Street Capital Corporation’s Registration Statement on Form S-8 filed on May 3, 2022 (Reg. No. 333-264643)).
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: May 6, 2022
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)