NEWS

On October 18, 2022 Main Street Capital (MAIN) announced preliminary, and partial, financial metrics for the IIIQ 2022″

Preliminary Estimates of Third Quarter 2022 Results

In commenting on the Company’s operating results for the third quarter of 2022, Dwayne L. Hyzak, Main Street’s Chief Executive Officer, stated, “We are very pleased with our third quarter results which include new quarterly records for net investment income per share and distributable net investment income per share. These results include positive contributions from each of our core strategies, demonstrating the continued strength of our overall platform, the benefits of our differentiated and diversified investment strategies and the quality of our portfolio companies. We also continue to maintain an attractive pipeline of investment opportunities across both our lower middle market and private loan investment strategies. As a result of our strong performance, distributable net investment income for the third quarter exceeded our regularly monthly dividends paid by over 25%.”

Main Street’s preliminary estimate of third quarter 2022 net investment income (“NII”) is $0.82 to $0.84 per share.  Main Street’s preliminary estimate of third quarter 2022 distributable net investment income (“DNII”), which is NII before non-cash compensation expense, is $0.87 to $0.89 per share.¹ 

Main Street’s preliminary estimate of net asset value (“NAV”) per share as of September 30, 2022 is $25.92 to $25.97, representing an increase of approximately $0.55 to $0.60 per share, or 2.2% to 2.4%, from the NAV per share of $25.37 as of June 30, 2022, with this increase after the impact of the supplemental dividend paid in September 2022 of $0.10 per share.  The estimated increase in NAV per share is primarily due to the record estimated NII described above in excess of the regular monthly dividends of $0.645 per share and supplemental dividend of $0.10 per share paid in the third quarter, the accretive impact from equity issuances during the quarter and net realized gains from our investment portfolio, partially offset by the impact of net unrealized depreciation from our investment portfolio.   Investment Portfolio Activity

The Company’s third quarter of 2022 operating activities include the following investment activity in its LMM, private loan and middle market investment strategies:

$111.5 million in total LMM portfolio investments, which after aggregate repayments of debt principal and return of invested equity capital from several LMM portfolio investments, resulted in a net increase of $84.5 million in the cost basis of our LMM investment portfolio;

a net increase of $174.3 million in the cost basis of our private loan investment portfolio; and

a net decrease of $1.1 million in the cost basis of our middle market investment portfolio.

Main Street Capital – Press Release – October 18, 2022

ANALYSIS

Keeping Us Busy

There’s a lot to unpack in what is a brief announcement:

The record level of EPS – by either way of counting – is notable.

Much Better

Last quarter, MAIN’s NII Per Share was $54.7mn or $0.75 per share.

The mid-point of the IIIQ 2022 estimate ($0.83) is an 11% increase in 3 months.

The Distributable Net Investment Income (DNII) was $58.3mn in the second quarter or $0.80 per share.

The mid-point of the third quarter DNII Per Share is $0.88, a 10% increase.

Behind

By the way, the analyst consensus for the NII Per Share is $0.76, drastically below the just announced mid-point of the IIIQ 2022 estimate.

Ours Is Not To Reason Why

Although MAIN seeks to explain – as we’ll see – the increase in NAV Per Share projected, there is no discussion of why earnings are so high.

We have to assume – as we’ve been projecting since the beginning of the year – that the uber-earnings in the IIIQ have mostly to do with higher interest rates.

Shocker

On the NAV Per Share side, we were surprised by MAIN’s indicating a 2.2%-2.4% in NAV Per Share.

Last quarter this metric was down (2.0%) for the BDC, more or less in line with most other BDCs.

We’d been expecting a similar modest drop in value this quarter, notwithstanding issuing equity at a premium and the boost from undistributed earnings.

Educated Guessing

This may be partly a reflection of heightened M&A activity in the lower middle market as owners and sponsors sold companies to “get ahead” of the coming possible recession and era of higher rates.

Gaps

Still, this number still begs many questions about the level of unrealized losses across the portfolio; the number of new companies – if any – on non accrual and what is happening to the EBITDA and debt coverage levels of borrowers both big and small.

In The Cards

We were not surprised by the high level of LMM net loan activity. For some time we’ve been hearing from other BDCs, trade publications and anecdotal data that there has not yet been a meaningful slump in deal doing in the smaller business market.

Furthermore – as we’ve noted before – most BDCs are close to their optimal portfolio size level and do not need to book too many loans – especially in an environment where loan repayments are low.

Bemused

We are a little surprised that MAIN is making such a big push to increase its “Private Loan” portfolio – composed of bigger companies than in the LMM – but the BDC may see an opportunity in the very high yields coming from those loans.

The yield on the Private Loan portfolio was 8.5% as of June 2022. Nobody can know for sure, but that yield may increase – thanks to the Fed – to 10.75%, or more, by year end.

That’s an increase of 26% over a 6 month period.

Private Loan portfolio companies have an average EBITDA of $41mn, which places them squarely in the middle of the middle market by size, by our categorization.

Tactical Retreat Continues

The slight decrease in the value of MAIN’s “Middle Market” portfolio is not surprising, as the BDC has been shrinking away from loans to these larger borrowers (average EBITDA $71mn, what we call Upper Middle Market and sometimes with enterprise values close to a billion dollars).

CONCLUSION

Self Interest

Obviously MAIN was eager to communicate these excellent metrics, especially after the BDC’s stock recently reached a 52 week low of $31.66.

Following this press release, MAIN’s stock price moved up 1.50%.

Once Upon A Time

In the past this sort of announcement might have caused an ever bigger response but MAIN’s principal shareholders – individual investors – may continue to be skittish.

Here is MAIN’s stock chart since August 8, 2022 when the BDC was peaking in price:

As this chart shows, MAIN went on to lose more than a quarter of its market capitalization in a few weeks as the very investors who caused the stock to reach near-record highs in the summer “bear bounce” ran in the other direction as the autumn leaves arrived.

Big Numbers

At some point, there is a good chance MAIN’s stock price might return to a new high – or better.

Just to match the 52 week high point, MAIN will need to trade up 36%.

If we go by the BDC Reporter’s own 5 year Target Price for MAIN of $47.58, the increase would be as much as 47%.

To Be Fair And Balanced

On the other hand, we can’t forget that in March 2020 – when investors were worrying that a recession of unfathomable proportions was headed our way courtesy of the pandemic – MAIN’s stock price reached $14.11 – or about (60%) lower than the current level.

No wonder retail investors – and everyone else – do not know what to think, as these recent price movements illustrate.

Speaking Out

For our part – always going recklessly on the record – we continue to believe MAIN – and most other BDCs – will be able to weather any coming recession, which will b e reflected in posting higher earnings in 2023 than in 2021 and 2022 and – on a case by case basis – either maintaining or decreasing their distribution levels at the beginning of this year.

Yes, Maybe.

MAIN appears to be on the right path.

On the other hand, the recession shoe (apparently 100% certain according to Bloomberg Economics ) has yet to drop…