Main Street Capital: Issues Third Unsecured Note
On November 16, 2017 Main Street Capital (MAIN) announced the issue and pricing of a new series of Unsecured Notes. Here are the details; analysis of the impact on earnings in the short and longer term and a discussion about trends in the BDC Fixed Income space.
MAIN is issuing $185mn of Unsecured Notes due December 1, 2022.
The yield is 4.5%, but is offered at $99.156 or a yield of 4.69%.
Interest will be paid semi-annually.
The issue can be repaid at any time prior to maturity, subject to a “make whole” premium.
The offering is expected to close November 21, 2017.
The credit rating on the new Unsecured Notes is BBB (Stable) from S&P.
Proceeds will be used to repay outstandings under the Revolver.
This is the third Unsecured Note will have outstanding.
Previously issued unsecured debt still outstanding include $92mn issued in 2013 of 6.125% Unsecured Notes due 2023. This debt trades under the public ticker MSCA.
Then there’s another 4.5% yielding Unsecured Note, issued in November 2014 for $175mn in proceeds and due December 1, 2019. This debt is institutionally placed- presumably like the current issue – and has no ticker.
At September 30, 2017, MAIN reported $355mn in borrowings under the Revolver.
The new Unsecured Note issue will repay almost half all Revolver outstandings.
The interest rate on the Revolver is likely between 3.1%-3.3%.
As a result, the short term impact will be negative on earnings given the costs of raising the new debt and the 1.4% or so higher interest expense on the unsecured debt versus the Revolver.
MAIN may draw on its Revolver, or other resources, to repay MSCA after April Fool’s Day 2018.
Given the high interest rate – relatively speaking on MSCA – that would reduce the BDC’s interest bill.
By our calculation, that would nominally save MAIN $2.75mn a year if the Revolver was the source of the capital.
Or, MAIN may choose to maintain all 3 Unsecured Notes outstanding to finance the ongoing growth in the BDC’s asset base.
As reported in the Prospectus, the BDC has already entered into an At The Market common stock selling program and sold $68mn of new shares since May 10. An even bigger number of potential equity sales are foreseen under the ATM program.
This is the third BDC Fixed Income story in a few days. As we reported previously, Solar Capital (SLRC) just issued a new Unsecured Note offering to fully repay its existing SLRA debt.
Then MVC Capital (MVC) issued a new Baby Bond to repay its more expensive, existing Unsecured Note with the ticker MVCB.
BDCs seem able to tap the debt markets at will.
Moreover- judging by the terms received by MAIN and SLRC – the cost of unsecured debt is quickly becoming competitive with secured Revolvers, with all their complex and restrictive covenant and borrowing base requirements.
As we’ve said before, the “better” BDC credits seem to be focused on accessing the institutional debt holder – as evidenced by the new MAIN Unsecured Note issue and SLRC’s.
The Never Ending Story
We don’t expect this flurry of debt issuance to slow down or stop in the short term.
With only a few weeks left in 2017, there may well be many additional issues waiting in the wings; finalizing their paperwork and watching what appetite investors might still have after these just closed issues.
We believe a word like “voracious” might be appropriate in this context.
Based on MAIN’s long term performance, and reviewing the balance of the BDC’s assets versus its debt liabilities, the creditworthiness of the new Unsecured Notes seems secure.
Moreover, the medium term nature of the Unsecured Notes reduces interest rate risk and the always-discussed but never experienced rise in medium term rates projected by some bond market pundits.
We are not pleased with the semi-annual payments or the BDC’s ability to call the new Unsecured Notes at any time, even if that has become the “new normal”.
Most – or least -of all, the 4.5% is very modest – but not surprising.
Given all the above, we are hesitant to add the new MAIN Unsecured Notes to our portfolios, even our leveraged Investment Fund.
We continue to hold a small position in MSCA, but we’ve been expecting the Baby Bond will be called in 2018 for some time so have not added to our holdings for months.Already a Member? Log In
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