Main Street Capital (MAIN 2.31%) put up an excellent second quarter, covering its dividend with net investment income and making unrealized gains from increases in the value of its investments.
The business development company reported net investment income of $28.9 million, or $0.58 per share. When gains and losses on its portfolio are included, it earned $40.8 million, or $0.82 per share, in the second quarter.
Breaking out the results
Main Street Capital has grown over the years so that it's no longer a pure play on debt and equity investments in the lower middle market (LMM), where the average company generates only $5.4 million of EBITDA. Its middle market portfolio -- which is almost exclusively debt investments in companies 19 times larger than its LMM portfolio -- has grown to rival the LMM portfolio in size. The private loan portfolio, which once made up a small portion of its investments, has since grown to 13% of investments, up from about 8.5% at the end of 2013. Private loan investments are similar to its LMM investments in size, with the difference being that they are investments made in connection with another investor, generally a private-equity sponsor.
This quarter, Main Street Capital generated gains in excess of losses in all but one of its business lines, with its lower middle market portfolio again generating the largest amount of unrealized gains during the quarter.
|
Net Unrealized Gains | ||
|---|---|---|
|
Lower middle market |
Middle market |
Private loan |
|
$13.8 million |
$5.2 million |
($4 million) |
Source: Press release.
Of its 69 portfolio companies in the lower middle market, 22 were written up, and seven companies were written down. The LMM portfolio is the most volatile by far. In all, 30% of its value currently comes from equity investments it makes alongside debt investments in the companies it invests in. The private loan and middle market portfolios are mostly debt.
The nonaccruals that didn't come
Prior to the second-quarter report, I created a list of a few potentially problematic portfolio companies to watch when Main Street Capital reports. Given that Main Street Capital has yet to file its full results with the SEC, there isn't enough information to check up on the "watch list" at the time of writing.
But we do know that Main Street Capital recorded a net realized loss of $5.6 million on its total investment portfolio this quarter, which suggests that it sold its positions in some of its losers this quarter, or at least recognized the permanent impairment of their value. Notably, the company now has four investments on nonaccrual, making up 3.1% and 0.3% of the portfolio at cost and fair value, respectively. That's down from five investments last quarter, which made up 3.9% and 1.2% of its total portfolio at cost and fair value, respectively. It's important to remember that nonaccruals can drop because an asset is sold or restructured, or because it starts paying again. A falling number of nonaccruals is not necessarily a sign of improvement.
The company does seem confident in its ability to pay its current dividend. Prior to its earnings release, Main Street Capital upped its monthly dividend to $0.18 per share from $0.175 per share. Last quarter, its executives discussed the potential for realizing capital gains due to appreciation from its LMM companies. Let's hope they're just as optimistic about realizing gains this quarter, especially since Main Street Capital is one of the most equity-heavy BDCs on the market today.
