NEWS

On March 24, 2020 Main Street Capital (MAIN) announced the addition of a new lender to its Revolving loan facility.

The new lender increases commitments to $740mn.

The full text of the press release is included below:

Main Street Capital Corporation (NYSE: MAIN) (“Main Street”) is pleased to announce the expansion of total commitments under its revolving credit facility (the “Credit Facility”) from $705.0 million to $740.0 million. The $35.0 million increase in total commitments was the result of the addition of a new lender relationship, which further diversifies the Main Street lending group under the Credit Facility to a total of eighteen participants. The recent increase in total commitments was executed under the accordion feature of the Credit Facility which allows for an increase up to $800.0 million in total commitments under the facility from new and existing lenders on the same terms and conditions as the existing commitments. The recent increase in total commitments under the Credit Facility provides Main Street with access to additional financing capacity in support of its future investment and operational activities.

In commenting on this expansion of the total commitments under the Credit Facility, Dwayne L. Hyzak, Main Street’s Chief Executive Officer, stated, “We are very pleased that we were able to expand the commitments under our credit facility to provide access to additional capital while further diversifying our lending group. Our credit facility, and more importantly the long-term relationships with each lender in our lending group, are extremely important to us, and we deeply value and appreciate these relationships. The confidence that this new lender and the individuals on its relationship team have shown in Main Street is very much appreciated, particularly given the current events and circumstances over the last few weeks.”

ANALYSIS

Normally

In any other time, this would be a routine announcement by MAIN, and earn just a brief reference on the BDC Reporter News Feed.

However – given the crisis – any information from any BDC is pounced on to ascertain – indirectly – what the future might hold.

MAIN has been one of the more transparent BDCs – although that’s a low bar – since the Covid-19 crisis began.

On March 18, 2020 the BDC outlined actions taken in response to the medical and financial crisis.

Different

MAIN is one of the few BDCs that did not adopt the Small Business Credit Availability Act (SBCAA) and the lower asset coverage requirements allowed.

That key metric was dropped – for those making the move – from 200% assets to debt to 150%.

MAIN stood pat at the 200% minimum level.

As a result, MAIN will have to show asset coverage of at least 200% at IQ 2020 at a time when leveraged loan values have dropped across the board.

Leading Question

How much of a challenge will that be ?

Kelly Thompson at Direct Lending offered up these illuminating numbers yesterday in an update:

Indicator

That implies a huge discount is going to be applied to BDC loan portfolios in a week when the IQ 2020 books are closed.

In the past recession, MAIN’s investment portfolio consisted almost exclusively of lower middle market borrowers (LMM). 

That allowed fair market valuations – and the unrealized loss impact on assets and book value and asset/debt coverage – to be less extreme than in the larger market.

Moreover, the BDC was principally funded by the SBIC at that time, which does not require marking portfolio assets to market.

This Time Is Different 

This time round, MAIN’s situation is more complex with half its portfolio assets consisting of large borrower leveraged loans like the kind covered by the S&P/LSTA data.

We would expect those assets, where had a value of $1.214bn, might need to be marked down by (25%) or more at quarter end.

By itself that will results in ($300 mn) in unrealized write-downs.

Eye Of Beholder

The remainder of the portfolio in lower middle market loans ($1.2bn) might not get as harsh a treatment.

It’s hard to know because some of the LMM exposure (as opposed to the UMM) is in the form of equity and – by rights – should be discounted sharply given current conditions.

As the valuation firms – and those of us who track BDC Level 3 valuations will tell you –  this quarterly snapshot of what a fund’s investments are worth is more art than science at the best of times.

For the IQ 2020, valuation firms are going to need psychic powers to ascertain where companies and the economy as a whole will fare in the months ahead.

Simplify

For the moment, and this we can get more granular and have better information, we’re using a (25%) discount for all of MAIN’s assets –  and most other BDCs – when trying to determine what their portfolio value might look like on March 31, 2020.

That discount, in turn, flows down to impact book value, NAV Per share, liquidity and – in a less obvious fashion – the immediate prospects of the firm.

We’re undertaking this analysis for all 45 BDCs (an effort which absorbed our waking hours yesterday) and are beginning with ever-popular MAIN.

A new “BDC: Pro-Forma BDC Data” Table will be appearing shortly in the Tools section of the website, joining our other research that all premium subscribers have access to.

Numbers

Getting back to MAIN:

The BDC had $2.6bn in portfolio assets at 12/31/2019.

Those assets were funded principally with equity ($1.5mn at FMV) and debt ($1.1bn). 

Of that debt – and probably the reason why MAIN is not concerned about getting caught by lower valuations – $306mn is owed to the SBA/SBIC and don’t count as debt for regulatory purposes.

As a result, MAIN’s official asset coverage was 322% , by our calculation.

Deep Impact

A (25%) drop in the portfolio value – all else being equal – will cost MAIN ($651mn) in unrealized portfolio value losses.

That will knock down the BDC’s equity by (42%) with one blow.

NAV Per Share will go from $23.91 to $13.78.

In a quarter MAIN will have lost – albeit in unrealized terms – a decade of NAV growth.

Top Shelf

However,  the asset to debt coverage will remain well above the current maximum regulatory limit of 150% and the historic limit  at 242%.

That’s one of the best pro-forma asset coverage ratios and a good sign – but not a definitive one – that the BDC can continue to operate normally.

Untapped

We wonder if the just expanded Revolver, which was only drawn $300mn, will get much extra use in the next quarter or two.

MAIN has a regulatory target “debt to equity” of 0.8x.

On a pro-forma basis, the IQ 2020 debt to equity will be at 0.9x; not so far from its 1:1 regulatory ceiling and above its own goal.

Nowhere To Grow

That implies MAIN’s balance sheet is more likely to shrink slightly, rather than grow – Revolver availability notwithstanding.

Moreover, demand for capital for new transactions will be minimal to nil.

MAIN,though, may keep busy advancing new monies to its existing portfolio companies, both those in the UMM and in the LMM.

Into The Great Unknown

Unknowable is what will happen next from a credit standpoint to MAIN and every other BDC out there.

Virtually every portfolio company is a potential credit problem.

Just recently under-performing companies of different stripes typically accounted for 10%-20% of portfolios.

As a result, investors and the BDC Reporter – not to mention the management of the BDC itself – have a huge amount of evaluation work to do.

Inception

There’s no point in getting started in earnest too early because we are in the very earliest stages of the financial adjustments underway at the borrowers.

In many cases – given that MAIN is headquartered in Texas –  many portfolio companies have not yet even had to contend with the layoffs and multiple disruptions that other regions are already in the midst of.

Then, there’s the uncertainty about how long the stay-home period lasts and the rolling task of determining what damage – large and small – with all been inflicted.

If there was a sense in the beginning that the global economy could just take a two week or 1 month break, that hope is fast dissipating.

As a result, there’s no way of knowing if MAIN’s pro-forma book value is anywhere near a good estimate of what the BDC is worth.

Moreover, all the prior metrics for investment income – and thus earnings – must be thrown out and calculated anew.

CONCLUSION

Nice Enough

MAIN’s press release about its Revolver facility lender is a glint of positive news in a cloud of grey, but probably does not tell us much.

Shareholders should brace themselves to absorb hundreds of millions of dollars of unrealized losses that will drastically cut NAV Per Share and AUM growth.

In fact – and despite being within regulatory leverage limits – MAIN is likely to grow smaller rather than bigger until the credit situation clarifies.

Even clarity may result in the need for more write-downs and – ultimately – substantial credit losses.

It’s just impossible to tell how much and by when and with what impact on the BDC’s financial fortunes.

Whatever re-assuring press releases get sent out, the harsh reality is that BDCs are navigating in a sea of trouble and without any horizon.

We are trying to offer readers the outline of what MAIN and other BDCs might look like when the fog clears.

Caveat

However, we’d be the first to warn against making  any hard assumption about what this or any other BDC will look like in the next several quarters.

Sadly, the constituency most at sea is the management of the BDC portfolio companies themselves whose business lives – in a matter of weeks – has been turned upside down.

The rest of us – including their BDC lenders/investors – will have to be patient till each business in turn can gain some sort of clarity.