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UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
Commission File Number: 001-33723
Main Street Capital Corporation (Exact name of registrant as specified in its charter)
(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)
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 ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares outstanding of the issuer's common stock as of May 5, 2016 was 51,221,175.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets—March 31, 2016 (unaudited) and December 31, 2015
Consolidated Statements of Operations (unaudited)—Three months ended March 31, 2016 and 2015
Consolidated Statements of Changes in Net Assets (unaudited)—Three months ended March 31, 2016 and 2015
Consolidated Statements of Cash Flows (unaudited)—Three months ended March 31, 2016 and 2015
Consolidated Schedule of Investments (unaudited)—March 31, 2016
Consolidated Schedule of Investments—December 31, 2015
Notes to Consolidated Financial Statements (unaudited)
Consolidated Financial Statement Schedule
Consolidated Schedule of Investments in and Advances to Affiliates for the Three Months Ended March 31, 2016
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
PART II OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Signatures
MAIN STREET CAPITAL CORPORATION Consolidated Balance Sheets (dollars in thousands, except shares and per share amounts)
ASSETS
Portfolio investments at fair value:
Control investments (cost: $361,823 and $387,727 as of March 31,2016 and December 31, 2015, respectively)
Affiliate investments (cost: $376,375 and $333,728 as of March 31, 2016 and December 31, 2015, respectively)
Non-Control/Non-Affiliate investments (cost: $974,053 and $945,187 as of March 31, 2016 and December 31, 2015, respectively)
Total portfolio investments (cost: $1,712,251 and $1,666,642 as of March 31, 2016 and December 31, 2015, respectively)
Marketable securities and idle funds investments (cost: $1,778 and $5,407 as of March 31, 2016 and December 31, 2015, respectively)
Total investments (cost: $1,714,029 and $1,672,049 as of March 31, 2016 and December 31, 2015, respectively)
Cash and cash equivalents
Interest receivable and other assets
Receivable for securities sold
Deferred financing costs (net of accumulated amortization of $9,608 and $8,965 as of March 31, 2016 and December 31, 2015, respectively)
Deferred tax asset, net
Total assets
LIABILITIES
Credit facility
SBIC debentures (par: $225,000 as of March 31, 2016 and December,31, 2015, par of $75,200 is recorded at a fair value of $74,006 and $73,860 as of March 31, 2016 and December 31, 2015, respectively)
4.50% Notes
6.125% Notes
Dividend payable
Interest payable
Accounts payable and other liabilities
Payable for securities purchased
Total liabilities
Commitments and contingencies (Note M)
NET ASSETS
Common stock, $0.01 par value per share (150,000,000 shares authorized; 50,767,218 and 50,413,744 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively)
Additional paid-in capital
Accumulated net investment income, net of cumulative dividends of $444,631 and $417,347 as of March 31, 2016 and December 31, 2015, respectively
Accumulated net realized gain from investments (accumulated net realized gain from investments of $32,608 before cumulative dividends of $68,658 as of March 31, 2016 and accumulated net realized gain from investments of $19,005 before cumulative dividends of $68,658 as of December 31, 2015)
Net unrealized appreciation, net of income taxes
Total net assets
Total liabilities and net assets
NET ASSET VALUE PER SHARE
The accompanying notes are an integral part of these financial statements
1
MAIN STREET CAPITAL CORPORATION Consolidated Statements of Operations (dollars in thousands, except shares and per share amounts) (Unaudited)
INVESTMENT INCOME:
Interest, fee and dividend income:
Control investments
Affiliate investments
Non-Control/Non-Affiliate investments
Interest, fee and dividend income
Interest, fee and dividend income from marketable securities and idle funds investments
Total investment income
EXPENSES:
Interest
Compensation
General and administrative
Share-based compensation
Expenses allocated to the External Investment Manager
Total expenses
NET INVESTMENT INCOME
NET REALIZED GAIN (LOSS):
Marketable securities and idle funds investments
Total net realized gain (loss)
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION):
Portfolio investments
SBIC debentures
Total net change in unrealized appreciation (depreciation)
INCOME TAXES:
Federal and state income, excise and other taxes
Deferred taxes
Income tax benefit (provision)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
NET INVESTMENT INCOME PER SHARE—BASIC AND DILUTED
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS PER SHARE—BASIC AND DILUTED
DIVIDENDS PAID PER SHARE:
Regular monthly dividends
Supplemental dividends
Total dividends
WEIGHTED AVERAGE SHARES OUTSTANDING—BASIC AND DILUTED
2
MAIN STREET CAPITAL CORPORATION Consolidated Statements of Changes in Net Assets (dollars in thousands, except shares) (Unaudited)
Balances at December 31, 2014
Public offering of common stock, net of offering costs
Purchase of vested stock for employee payroll tax withholding
Dividend reinvestment
Amortization of directors' deferred compensation
Issuance of restricted stock, net of forfeited shares
Dividends to stockholders
Net increase (loss) resulting from operations
Balances at March 31, 2015
Balances at December 31, 2015
Cumulative-effect to retained earnings for excess tax benefit
Issuance of restricted stock
Forfeited shares of terminated employees
Balances at March 31, 2016
3
MAIN STREET CAPITAL CORPORATION Consolidated Statements of Cash Flows (dollars in thousands) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net increase in net assets resulting from operations
Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities:
Investments in portfolio companies
Proceeds from sales and repayments of debt investments in portfolio companies
Proceeds from sales and return of capital of equity investments in portfolio companies
Investments in marketable securities and idle funds investments
Proceeds from sales and repayments of marketable securities and idle funds investments
Net change in net unrealized appreciation (depreciation)
Net realized (gain) loss
Accretion of unearned income
Payment-in-kind interest
Cumulative dividends
Share-based compensation expense
Amortization of deferred financing costs
Deferred tax (benefit) provision
Changes in other assets and liabilities:
Deferred fees and other
Net cash used in operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from public offering of common stock, net of offering costs
Dividends paid
Proceeds from credit facility
Repayments on credit facility
Other
Net cash provided by financing activities
Net decrease in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
Supplemental cash flow disclosures:
Interest paid
Taxes paid
Non-cash financing activities:
Shares issued pursuant to the DRIP
4
MAIN STREET CAPITAL CORPORATION Consolidated Schedule Of Investments March 31, 2016 (dollars in thousands) (Unaudited)
Control Investments(5)
Access Media Holdings, LLC(10)
Private Cable Operator
5.00% Current / 5.00% PIK Secured Debt (Maturity—July 22, 2020)
Preferred Member Units (5,265,000 units; 12% cumulative)
Member Units (45 units)
AmeriTech College, LLC
For-Profit Nursing and Healthcare College
10% Secured Debt (Maturity—May 15, 2016)
10% Secured Debt (Maturity—November 30, 2019)
10% Secured Debt (Maturity—January 31, 2020)
Preferred Member Units (294 units; 5%)(8)
ASC Interests, LLC
Recreational and Educational Shooting Facility
11% Secured Debt (Maturity—July 31, 2018)
Member Units (1,500 units)(8)
Bond-Coat, Inc.
Casing and Tubing Coating Services
12% Secured Debt (Maturity—December 28, 2017)
Common Stock (57,508 shares)
Café Brazil, LLC
Casual Restaurant Group
Member Units (1,233 units)(8)
CBT Nuggets, LLC
Produces and Sells IT Training Certification Videos
Member Units (416 units)(8)
CMS Minerals LLC
Oil & Gas Exploration & Production
Preferred Member Units (458 units)(8)
5
MAIN STREET CAPITAL CORPORATION
Consolidated Schedule Of Investments (Continued)
March 31, 2016
(dollars in thousands)
(Unaudited)
Datacom, LLC
Technology and Telecommunications Provider
5.25% Current / 5.25% PIK Secured Debt (Maturity—May 31, 2019)
Class A Preferred Member Units (15% cumulative)(8)
Class B Preferred Member Units (6,453 units)
Garreco, LLC
Manufacturer and Supplier of Dental Products
14% Secured Debt (Maturity—January 12, 2018)
Member Units (1,200 units)
GRT Rubber Technologies LLC
Manufacturer of Engineered Rubber Products
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity—December 19, 2019)(9)
Member Units (5,879 units)
Gulf Manufacturing, LLC
Manufacturer of Specialty Fabricated Industrial Piping Products
9% PIK Secured Debt (Ashland Capital IX, LLC) (Maturity—June 30, 2017)
Member Units (438 units)(8)
Harrison Hydra-Gen, Ltd.
Manufacturer of Hydraulic Generators
Common Stock (107,456 shares)
Hawthorne Customs and Dispatch Services, LLC
Facilitator of Import Logistics, Brokerage, and Warehousing
Member Units (500 units)(8)
Member Units (Wallisville Real Estate, LLC) (588,210 units)(8)
6
HW Temps LLC
Temporary Staffing Solutions
LIBOR Plus 9.50% (Floor 1.00%), Current Coupon 10.50%, Secured Debt (Maturity July 2, 2020)(9)
Preferred Member Units (3,200 units)(8)
Hydratec, Inc.
Designer and Installer of Micro-Irrigation Systems
Common Stock (7,095 shares)(8)
IDX Broker, LLC
Provider of Marketing and CRM Tools for the Real Estate Industry
12.5% Secured Debt (Maturity—November 15, 2018)
Member Units (5,400 units)
Indianapolis Aviation Partners, LLC
Fixed Base Operator
15% Secured Debt (Maturity—July 15, 2016)
Warrants (1,046 equivalent units)
Jensen Jewelers of Idaho, LLC
Retail Jewelry Store
Prime Plus 6.75% (Floor 2.00%), Current Coupon 10.25%, Secured Debt (Maturity—November 14, 2016)(9)
Member Units (627 units)(8)
Lamb's Venture, LLC
Aftermarket Automotive Services Chain
11% Secured Debt (Maturity—May 31, 2018)
Preferred Equity (non-voting)
Member Units (742 units)
9.5% Secured Debt (Lamb's Real Estate Investment I, LLC) (Maturity—October 1, 2025)
Member Units (Lamb's Real Estate Investment I, LLC) (1,000 units)(8)
7
Lighting Unlimited, LLC
Commercial and Residential Lighting Products and Design Services
8% Secured Debt (Maturity—August 22, 2016)
Warrants (71 equivalent units)
Member Units (700 units)
Marine Shelters Holdings, LLC (LoneStar Marine Shelters)
Fabricator of Marine and Industrial Shelters
12% PIK Secured Debt (Maturity—December 28, 2017)
Preferred Member Units (3,810 units)
MH Corbin Holding LLC
Manufacturer and distributor of traffic safety products
10% Secured Debt (Maturity—August 31, 2020)
Preferred Member Units (4,000 shares)
Mid-Columbia Lumber Products, LLC
Manufacturer of Finger-Jointed Lumber Products
10% Secured Debt (Maturity—December 18, 2017)
12% Secured Debt (Maturity—December 18, 2017)
Member Units (2,829 units)
9.5% Secured Debt (Mid—Columbia Real Estate, LLC) (Maturity—May 13, 2025)
Member Units (Mid—Columbia Real Estate, LLC) (250 units)(8)
MSC Adviser I, LLC(16)
Third Party Investment Advisory Services
Member Units (Fully diluted 100.0%)(8)
Mystic Logistics Holdings, LLC
Logistics and Distribution Services Provider for Large Volume Mailers
12% Secured Debt (Maturity—August 15, 2019)
Common Stock (5,873 shares)(8)
8
NAPCO Precast, LLC
Precast Concrete Manufacturing
Prime Plus 2.00% (Floor 7.00%), Current Coupon 9.00%, Secured Debt (Maturity—February 1, 2019)(9)
18% Secured Debt (Maturity—February 1, 2019)
Member Units (2,955 units)(8)
NRI Clinical Research, LLC
Clinical Research Service Provider
14% Secured Debt (Maturity—September 8, 2017)
Warrants (251,723 equivalent units)
Member Units (1,454,167 units)
NRP Jones, LLC
Manufacturer of Hoses, Fittings and Assemblies
6% Current / 6% PIK Secured Debt (Maturity—December 22, 2016)
Warrants (14,331 equivalent units)
Member Units (50,877 units)
OMi Holdings, Inc.
Manufacturer of Overhead Cranes
Common Stock (1,500 shares)
Pegasus Research Group, LLC (Televerde)
Provider of Telemarketing and Data Services
Member Units (460 units)(8)
PPL RVs, Inc.
Recreational Vehicle Dealer
11.1% Secured Debt (Maturity—July 1, 2016)
Common Stock (1,962 shares)
Principle Environmental, LLC
Noise Abatement Service Provider
12% Secured Debt (Maturity—April 30, 2017)
12% Current / 2% PIK Secured Debt (Maturity—April 30, 2017)
Preferred Member Units (19,631 units)(8)
Warrants (1,036 equivalent units)
9
Quality Lease Service, LLC
Provider of Rigsite Accommodation Unit Rentals and Related Services
8% PIK Secured Debt (Maturity—June 8, 2020)
Member Units (1,000 units)
River Aggregates, LLC
Processor of Construction Aggregates
Zero Coupon Secured Debt (Maturity—June 30, 2018)
Member Units (1,150 units)(8)
Member Units (RA Properties, LLC) (1,500 units)
SoftTouch Medical Holdings LLC
Home Provider of Pediatric Durable Medical Equipment
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity—October 31, 2019)(9)
Member Units (4,450 units)(8)
The MPI Group, LLC
Manufacturer of Custom Hollow Metal Doors, Frames and Accessories
9% Secured Debt (Maturity—October 2, 2018)
Series A Preferred Units (2,500 units; 10% Cumulative)
Warrants (1,424 equivalent units)
Member Units (MPI Real Estate Holdings, LLC) (100% Fully diluted)(8)
Travis Acquisition LLC
Manufacturer of Aluminum Trailers
12% Secured Debt (Maturity—August 30, 2018)
Member Units (7,282 units)
Uvalco Supply, LLC
Farm and Ranch Supply Store
9% Secured Debt (Maturity—January 1, 2019)
Member Units (2,011 units)(8)
10
Vision Interests, Inc.
Manufacturer / Installer of Commercial Signage
13% Secured Debt (Maturity—December 23, 2016)
Series A Preferred Stock (3,000,000 shares)
Common Stock (1,126,242 shares)
Ziegler's NYPD, LLC
6.5% Secured Debt (Maturity—October 1, 2019)
12% Secured Debt (Maturity—October 1, 2019)
14% Secured Debt (Maturity—October 1, 2019)
Warrants (587 equivalent units)
Preferred Member Units (10,072 units)
Subtotal Control Investments (28.6% of total investments at fair value)
11
Affiliate Investments(6)
AFG Capital Group, LLC
Provider of Rent-to-Own Financing Solutions and Services
11% Secured Debt (Maturity—November 7, 2019)
Warrants (42 equivalent units)
Member Units (186 units)
Barfly Ventures, LLC(10)
12% Secured Debt (Maturity—August 31, 2020)
Options (2 equivalent units)
Warrant (1 equivalent unit)
Boss Industries, LLC
Manufacturer and Distributor of Air, Power and Other Industrial Equipment
Preferred Member Units (2,242 units)(8)
Bridge Capital Solutions Corporation
Financial Services and Cash Flow Solutions Provider
13% Secured Debt (Maturity—April 18, 2017)
Warrants (22 equivalent shares)
Buca C, LLC
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity—June 30, 2020)(9)
Preferred Member Units (6 units; 6% cumulative)(8)
CAI Software LLC
Provider of Specialized Enterprise Resource Planning Software
12% Secured Debt (Maturity—October 10, 2019)
Member Units (65,356 units)(8)
CapFusion, LLC
Business Lender
13% Secured Debt (Maturity—March 25, 2021)
Warrants (1,600 equivalent units)
12
Chandler Signs Holdings, LLC(10)
Sign Manufacturer
12% Secured Debt (Maturity—July 4, 2021)
Class A Units (1,500,000 units)
Condit Exhibits, LLC
Tradeshow Exhibits / Custom Displays Provider
Member Units (3,936 units)(8)
Congruent Credit Opportunities Funds(12)(13)
Investment Partnership
LP Interests (Congruent Credit Opportunities Fund II, LP) (Fully diluted 19.8%)(8)
LP Interests (Congruent Credit Opportunities Fund III, LP) (Fully diluted 17.4%)(8)
Daseke, Inc.
Specialty Transportation Provider
12% Current / 2.5% PIK Secured Debt (Maturity—July 31, 2018)
Common Stock (19,467 shares)
Dos Rios Partners(12)(13)
LP Interests (Dos Rios Partners, LP) (Fully diluted 20.2%)
LP Interests (Dos Rios Partners—A, LP) (Fully diluted 6.4%)
East Teak Fine Hardwoods, Inc.
Distributor of Hardwood Products
Common Stock (6,250 shares)(8)
East West Copolymer & Rubber, LLC
Manufacturer of Synthetic Rubbers
12% Secured Debt (Maturity—October 17, 2019)
Warrants (2,510,790 equivalent units)
EIG Traverse Co-Investment, L.P.(12)(13)
LP Interests (Fully diluted 6.6%)(8)
Freeport Financial Funds(12)(13)
LP Interests (Freeport Financial SBIC Fund LP) (Fully diluted 9.3%)(8)
LP Interests (Freeport First Lien Loan Fund III LP) (Fully diluted 6.0%)(8)
13
Gault Financial, LLC (RMB Capital, LLC)
Purchases and Manages Liquidation of Distressed Assets
10% Secured Debt (Maturity—November 21, 2016)
Warrants (29,025 equivalent units)
Glowpoint, Inc.
Provider of Cloud Managed Video Collaboration Services
8% Secured Debt (Maturity—October 18, 2018)
12% Secured Debt (Maturity—October 18, 2018)
Common Stock (7,711,517 shares)
Guerdon Modular Holdings, Inc.
Multi-Family and Commercial Modular Construction Company
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity—August 13, 2019)(9)
13% Secured Debt (Maturity—August 13, 2019)
Common Stock (212,033 shares)
Houston Plating and Coatings, LLC
Provider of Plating and Industrial Coating Services
Member Units (248,082 units)(8)
I-45 SLF LLC(12)(13)
Member units (Fully diluted 20.0%; 24.4% profits interest)(8)
Indianhead Pipeline Services, LLC
Provider of Pipeline Support Services
12% Secured Debt (Maturity—February 6, 2017)
Preferred Member Units (33,819 units; 8% cumulative)(8)
Warrants (31,928 equivalent units)
Member Units (14,732 units)
KBK Industries, LLC
Manufacturer of Specialty Oilfield and Industrial Products
12.5% Secured Debt (Maturity—September 28, 2017)
Member Units (250 units)(8)
14
L.F. Manufacturing Holdings, LLC(10)
Manufacturer of Fiberglass Products
Member Units (2,179,001 units)(8)
MPS Denver, LLC
Specialty Card Printing
Member Units (13,800 units)
OnAsset Intelligence, Inc.
Provider of Transportation Monitoring / Tracking Products and Services
12% PIK Secured Debt (Maturity—December 31, 2015)(17)
Preferred Stock (912 shares; 7% cumulative)
Warrants (5,333 equivalent shares)
OPI International Ltd.(13)
Provider of Man Camp and Industrial Storage Services
10% Unsecured Debt (Maturity—April 8, 2018)
Common Stock (20,766,317 shares)
PCI Holding Company, Inc.
Manufacturer of Industrial Gas Generating Systems
12% Secured Debt (Maturity—March 31, 2019)
Preferred Stock (1,500,000 shares; 20% cumulative)(8)
Radial Drilling Services Inc.
Oil and Gas Lateral Drilling Technology Provider
12% Secured Debt (Maturity—November 22, 2016)(14)
Warrants (316 equivalent shares)
Rocaceia, LLC (Quality Lease and Rental Holdings, LLC)
12% Secured Debt (Maturity—January 8, 2018)(14)(18)
Preferred Member Units (250 units)
15
Samba Holdings, Inc.
Provider of Intelligent Driver Record Monitoring Software and Services
12.5% Secured Debt (Maturity—November 17, 2016)
Common Stock (170,963 shares)
Tin Roof Acquisition Company
12% Secured Debt (Maturity—November 13, 2018)
Class C Preferred Stock (Fully diluted 10.0%; 10% cumulative)(8)
UniTek Global Services, Inc.(11)
Provider of Outsourced Infrastructure Services
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity—January 13, 2019)(9)
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50% / 1.00% PIK, Current Coupon Plus PIK 10.50%, Secured Debt (Maturity—January 13, 2019)(9)
15% PIK Unsecured Debt (Maturity—July 13, 2019)
Preferred Stock (4,935,377 shares)
Common Stock (705,054 shares)
Universal Wellhead Services Holdings, LLC(10)
Provider of Wellhead Equipment, Designs, and Personnel to the Oil & Gas Industry
Class A Preferred Units (4,000,000 units; 4.5% cumulative)(8)
Volusion, LLC
Provider of Online Software-as-a-Service eCommerce Solutions
10.5% Secured Debt (Maturity—January 26, 2020)
Preferred Member Units (4,876,670 units)
Warrants (950,618 equivalent units)
Subtotal Affiliate Investments (21.4% of total investments at fair value)
16
Non-Control/Non-Affiliate Investments(7)
AccuMED Corp.(10)
Medical Device Contract Manufacturer
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—October 29, 2020)(9)
Adams Publishing Group, LLC(10)
Local Newspaper Operator
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity—November 3, 2020)(9)
Ahead, LLC(10)
IT Infrastructure Value Added Reseller
LIBOR Plus 6.50%, Current Coupon 7.10%, Secured Debt (Maturity—November 2, 2020)
Allflex Holdings III Inc.(11)
Manufacturer of Livestock Identification Products
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity—July 19, 2021)(9)
AM General LLC(11)
Specialty Vehicle Manufacturer
LIBOR Plus 9.00% (Floor 1.25%), Current Coupon 10.25%, Secured Debt (Maturity—March 22, 2018)(9)
AM3 Pinnacle Corporation(10)
Provider of Comprehensive Internet, TV and Voice Services for Multi-Dwelling Unit Properties
Common Stock (60,240 shares)
American Seafoods Group, LLC(11)
Catcher-Processor of Alaskan Pollock
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity—August 19, 2021)(9)
AMF Bowling Centers, Inc.(11)
Bowling Alley Operator
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity—September 18, 2021)(9)
17
Anchor Hocking, LLC(11)
Household Products Manufacturer
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity—June 4, 2018)(9)
Member Units (440,620 units)
AP Gaming I, LLC(10)
Developer, Manufacturer, and Operator of Gaming Machines
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity—December 20, 2020)(9)
Apex Linen Service, Inc.
Industrial Launderers
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—October 30, 2022)(9)
13% Secured Debt (Maturity—October 30, 2022)
Applied Products, Inc.(10)
Adhesives Distributor
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—September 30, 2019)(9)
Arcus Hunting LLC.(10)
Manufacturer of Bowhunting and Archery Products and Accessories
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity—November 13, 2019)(9)
Artel, LLC(11)
Provider of Secure Satellite Network and IT Solutions
LIBOR Plus 7.00% (Floor 1.25%), Current Coupon 8.25%, Secured Debt (Maturity—November 27, 2017)(9)
ATS Workholding, Inc.(10)
Manufacturer of Machine Cutting Tools and Accessories
LIBOR Plus 7.50% (Floor 1.00%), Default Interest 2.00%, Current Coupon 10.50%, Secured Debt (Maturity—March 10, 2019)(9)
18
ATX Networks Corp.(11)(13)
Provider of Radio Frequency Management Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—June 14, 2021)(9)
Berry Aviation, Inc.(10)
Airline Charter Service Operator
12.00% Current / 1.75% PIK Secured Debt (Maturity—January 30, 2020)
Common Stock (553 shares)
Bioventus LLC(10)
Production of Orthopedic Healing Products
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity—April 10, 2020)(9)
Blackbrush Oil and Gas LP(11)
Oil & Gas Exploration
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—July 30, 2021)(9)
Blackhawk Specialty Tools LLC(11)
Oilfield Equipment & Services
LIBOR Plus 5.25% (Floor 1.25%), Current Coupon 6.50%, Secured Debt (Maturity—August 1, 2019)(9)
Blue Bird Body Company(11)
School Bus Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity—June 26, 2020)(9)
Bluestem Brands, Inc.(11)(13)
Multi-Channel Retailer of General Merchandise
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity—November 6, 2020)(9)
Brainworks Software, LLC(10)
Advertising Sales and Newspaper Circulation Software
Prime Plus 7.25% (Floor 3.25%), Current Coupon 10.75%, Secured Debt (Maturity—July 22, 2019)(9)
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity—July 22, 2019)(9)
Brightwood Capital Fund III, LP(12)(13)
LP Interests (Fully diluted 1.6%)(8)
19
Brundage-Bone Concrete Pumping, Inc.(11)
Construction Services Provider
10.375% Secured Debt (Maturity—September 1, 2021)
Calloway Laboratories, Inc.(10)
Health Care Testing Facilities
17% PIK Secured Debt (Maturity—September 30, 2016)(14)
Warrants (125,000 equivalent shares)
Cengage Learning Acquisitions, Inc.(11)
Provider of Educational Print and Digital Services
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—March 31, 2020)(9)
Cenveo Corporation(11)
Provider of Commercial Printing, Envelopes, Labels, and Printed Office Products
6% Secured Debt (Maturity—August 1, 2019)
CGSC of Delaware Holdings Corp.(11)(13)
Insurance Brokerage Firm
LIBOR Plus 7.00% (Floor 1.25%), Current Coupon 8.25%, Secured Debt (Maturity—October 16, 2020)(9)
Charlotte Russe, Inc(11)
Fast-Fashion Retailer to Young Women
LIBOR Plus 5.50% (Floor 1.25%), Current Coupon 6.75%, Secured Debt (Maturity—May 22, 2019)(9)
Clarius ASIG, LLC(10)
Prints & Advertising Film Financing
15% PIK Secured Debt (Maturity—September 14, 2014)(17)
Clarius BIGS, LLC(10)
15% PIK Secured Debt (Maturity—January 5, 2015)(14)(17)
Compact Power Equipment, Inc.
Equipment / Tool Rental
12% Secured Debt (Maturity—October 1, 2017)
Series A Preferred Stock (4,298,435 shares)
20
Compuware Corporation(11)
Provider of Software and Supporting Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity—December 15, 2019)(9)
Covenant Surgical Partners, Inc.(11)
Ambulatory Surgical Centers
8.75% Secured Debt (Maturity—August 1, 2019)
CRGT Inc.(11)
Provider of Custom Software Development
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—December 19, 2020)(9)
CST Industries Inc.(11)
Storage Tank Manufacturer
LIBOR Plus 6.25% (Floor 1.50%), Current Coupon 7.75%, Secured Debt (Maturity—May 22, 2017)(9)
Darr Equipment LP(10)
Heavy Equipment Dealer
11.75% Current / 2% PIK Secured Debt (Maturity -April 15, 2020)
Warrants (915,734 equivalent units)
Digital River, Inc.(11)
Provider of Outsourced e-Commerce Solutions and Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—February 12, 2021)(9)
Drilling Info Holdings, Inc.
Information Services for the Oil and Gas Industry
Common Stock (3,788,865 shares)
ECP-PF Holdings Group, Inc.(10)
Fitness Club Operator
LIBOR Plus 9.00% (Floor 1.00%), Current Coupon 10.00%, Secured Debt (Maturity—November 26, 2019)(9)
EIG Fund Investments(12)(13)
LP Interests (EIG Global Private Debt fund-A, L.P.) (Fully diluted 0.5%)
21
EnCap Energy Fund Investments(12)(13)
LP Interests (EnCap Energy Capital Fund VIII, L.P.) (Fully diluted 0.1%)(8)
LP Interests (EnCap Energy Capital Fund VIII Co-Investors, L.P.) (Fully diluted 0.4%)
LP Interests (EnCap Energy Capital Fund IX, L.P.) (Fully diluted 0.1%)(8)
LP Interests (Encap Energy Capital Fund X, L.P.) (Fully diluted 0.1%)
LP Interests (EnCap Flatrock Midstream Fund II, L.P.) (Fully diluted 0.8%)(8)
LP Interests (EnCap Flatrock Midstream Fund III, L.P.) (Fully diluted 0.2%)(8)
Energy and Exploration Partners, LLC(11)
LIBOR Plus 10.00% (Floor 1.00%), Current Coupon 11.00%, Secured Debt (Maturity—September 7, 2016)(9)(14)
LIBOR Plus 6.75% (Floor 1.00%), Current Coupon 7.75%, Secured Debt (Maturity—January 22, 2019)(9)(14)
Evergreen Skills Lux S.á r.l. (d/b/a Skillsoft)(11)(13)
Technology-based Performance Support Solutions
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity—April 28, 2022)(9)
Extreme Reach, Inc.(11)
Integrated TV and Video Advertising Platform
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity—February 7, 2020)(9)
Flavors Holdings Inc.(11)
Global Provider of Flavoring and Sweetening Products and Solutions
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity—April 3, 2020)(9)
22
Fram Group Holdings, Inc.(11)
Manufacturer of Automotive Maintenance Products
LIBOR Plus 5.50% (Floor 1.50%), Current Coupon 7.00%, Secured Debt (Maturity—July 29, 2017)(9)
LIBOR Plus 9.50% (Floor 1.50%), Current Coupon 11.00%, Secured Debt (Maturity—January 29, 2018)(9)
GI KBS Merger Sub LLC(11)
Outsourced Janitorial Services to Retail/Grocery Customers
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity—October 29, 2021)(9)
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity—April 29, 2022)(9)
Grace Hill, LLC(10)
Online Training Tools for the Multi-Family Housing Industry
Prime Plus 5.25% (Floor 1.00%), Current Coupon 8.75%, Secured Debt (Maturity—August 15, 2019)(9)
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity—August 15, 2019)(9)
Great Circle Family Foods, LLC(10)
Quick Service Restaurant Franchise
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—October 28, 2019)(9)
Grupo Hima San Pablo, Inc.(11)
Tertiary Care Hospitals
LIBOR Plus 7.00% (Floor 1.50%), Current Coupon 8.50%, Secured Debt (Maturity—January 31, 2018)(9)
13.75% Secured Debt (Maturity—July 31, 2018)
GST Autoleather, Inc.(11)
Automotive Leather Manufacturer
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity—July 10, 2020)(9)
23
Guitar Center, Inc.(11)
Musical Instruments Retailer
6.5% Secured Debt (Maturity—April 15, 2019)
Halcon Resources Corporation(11)
9.75% Unsecured Debt (Maturity—July 15, 2020)
Hojeij Branded Foods, LLC(10)
Multi-Airport, Multi-Concept Restaurant Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—July 27, 2021)(9)
Horizon Global Corporation(11)
Auto Parts Manufacturer
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—June 30, 2021)(9)
Hostway Corporation(11)
Managed Services and Hosting Provider
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity—December 13, 2019)(9)
Hunter Defense Technologies, Inc.(11)
Provider of Military and Commercial Shelters and Systems
LIBOR Plus 6.50% (Floor 1.50%), Current Coupon 8.00%, Secured Debt (Maturity—August 5, 2019)(9)
Hygea Holdings, Corp.(10)
Provider of Physician Services
LIBOR Plus 9.25%, Current Coupon 9.87%, Secured Debt (Maturity—February 24, 2019)
Warrants (4,880,735 equivalent shares)
ICON Health & Fitness, Inc.(11)
Producer of Fitness Products
11.875% Secured Debt (Maturity—October 15, 2016)
iEnergizer Limited(11)(13)
Provider of Business Outsourcing Solutions
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity—May 1, 2019)(9)
24
Indivior Finance LLC(11)(13)
Specialty Pharmaceutical Company Treating Opioid Dependence
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—December 19, 2019)(9)
Industrial Container Services, LLC(10)
Steel Drum Reconditioner
LIBOR Plus 5.75% (Floor 1.00%), Current Coupon 6.75%, Secured Debt (Maturity—December 31, 2018)(9)
Infinity Acquisition Finance Corp.(11)
Application Software for Capital Markets
7.25% Unsecured Debt (Maturity—August 1, 2022)
Inn of the Mountain Gods Resort and Casino(11)
Hotel & Casino Owner & Operator
9.25% Secured Debt (Maturity—November 30, 2020)
Insurance Technologies, LLC(10)
Illustration and Sales-automation Platforms
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity—December 1, 2019)(9)
Intertain Group Limited(11)(13)
Business-to-Consumer Online Gaming Operator
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—April 8, 2022)(9)
iPayment, Inc.(11)
Provider of Merchant Acquisition
LIBOR Plus 5.25% (Floor 1.50%), Current Coupon 6.75%, Secured Debt (Maturity—May 8, 2017)(9)
iQor US Inc.(11)
Business Process Outsourcing Services Provider
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity—April 1, 2021)(9)
irth Solutions, LLC
Provider of Damage Prevention Information Technology Services
Member Units (27,893 units)
25
Jackmont Hospitality, Inc.(10)
Franchisee of Casual Dining Restaurants
LIBOR Plus 4.25% (Floor 1.00%), Current Coupon 5.25% / 2.50% PIK, Current Coupon Plus PIK 7.75%, Secured Debt (Maturity—May 26, 2021)(9)
Joerns Healthcare, LLC(11)
Manufacturer and Distributor of Health Care Equipment & Supplies
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity—May 9, 2020)(9)
JSS Holdings, Inc.(11)
Aircraft Maintenance Program Provider
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—August 31, 2021)(9)
Kendra Scott, LLC(11)
Jewelry Retail Stores
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—July 17, 2020)(9)
Keypoint Government Solutions, Inc.(11)
Provider of Pre-Employment Screening Services
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity—November 13, 2017)(9)
LaMi Products, LLC(10)
General Merchandise Distribution
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—September 16, 2020)(9)
Lansing Trade Group LLC(11)
Commodity Merchandiser
9.25% Unsecured Debt (Maturity—February 15, 2019)
Larchmont Resources, LLC(11)
LIBOR Plus 8.75% (Floor 1.00%), Current Coupon 9.75%, Secured Debt (Maturity—August 7, 2019)(9)
Leadrock Properties, LLC
Real Estate Investment
10% Secured Debt (Maturity—May 4, 2026)
26
Legendary Pictures Funding, LLC(10)
Producer of TV, Film, and Comic Content
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—April 22, 2020)(9)
LKCM Headwater Investments I, L.P.(12)(13)
LP Interests (Fully diluted 2.3%)
Looking Glass Investments, LLC(12)(13)
Specialty Consumer Finance
9% Unsecured Debt (Maturity—June 30, 2020)
Member Units (2.5 units)
Member Units (LGI Predictive Analytics LLC) (190,712 units)(8)
MediMedia USA, Inc.(11)
Provider of Healthcare Media and Marketing
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity—November 20, 2018)(9)
Messenger, LLC(10)
Supplier of Specialty Stationery and Related Products to the Funeral Industry
LIBOR Plus 7.25% (Floor 1.00%), Current Coupon 8.25%, Secured Debt (Maturity—September 9, 2020)(9)
Milk Specialties Company(11)
Processor of Nutrition Products
LIBOR Plus 7.00% (Floor 1.25%), Current Coupon 8.25%, Secured Debt (Maturity—November 9, 2018)(9)
Minute Key, Inc.
Operator of Automated Key Duplication Kiosks
10% Current / 2% PIK Secured Debt (Maturity—September 19, 2019)
Warrants (1,437,409 equivalent units)
Mood Media Corporation(11)(13)
Provider of Electronic Equipment
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—May 1, 2019)(9)
27
New Media Holdings II LLC(11)(13)
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity—June 4, 2020)(9)
North American Lifting Holdings, Inc.(11)
Crane Service Provider
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity—November 27, 2020)(9)
North Atlantic Trading Company, Inc.(11)
Marketer/Distributor of Tobacco Products
LIBOR Plus 6.50% (Floor 1.25%), Current Coupon 7.75%, Secured Debt (Maturity—January 13, 2020)(9)
Novitex Intermediate, LLC(11)
Provider of Document Management Services
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity—July 7, 2020)(9)
Ospemifene Royalty Sub LLC (QuatRx)(10)
Estrogen-Deficiency Drug Manufacturer and Distributor
11.5% Secured Debt (Maturity—November 15, 2026)(14)
Panolam Industries International, Inc.(11)
Decorative Laminate Manufacturer
LIBOR Plus 6.25% (Floor 1.25%), Current Coupon 7.50%, Secured Debt (Maturity—August 23, 2017)(9)
Paris Presents Incorporated(11)
Branded Cosmetic and Bath Accessories
LIBOR Plus 8.25% (Floor 1.00%), Current Coupon 9.25%, Secured Debt (Maturity—December 31, 2021)(9)
Parq Holdings Limited Partnership(11)(13)
Hotel & Casino Operator
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity—December 17, 2020)(9)
Permian Holdings, Inc.(11)
10.5% Secured Debt (Maturity—January 15, 2018)
28
Pernix Therapeutics Holdings, Inc.(10)
Pharmaceutical Royalty
12% Secured Debt (Maturity—August 1, 2020)
Pike Corporation(11)
Construction and Maintenance Services for Electric Transmission and Distribution Infrastructure
LIBOR Plus 8.50% (Floor 1.00%), Current Coupon 9.50%, Secured Debt (Maturity—June 22, 2022)(9)
Point.360(10)
Fully Integrated Provider of Digital Media Services
Warrants (65,463 equivalent shares)
Common Stock (163,658 shares)
Prowler Acquisition Corp.(11)
Specialty Distributor to the Energy Sector
LIBOR Plus 4.50% (Floor 1.00%), Current Coupon 5.50%, Secured Debt (Maturity—January 28, 2020)(9)
PT Network, LLC(10)
Provider of Outpatient Physical Therapy and Sports Medicine Services
LIBOR Plus 7.75% (Floor 1.00%), Current Coupon 8.75%, Secured Debt (Maturity—June 30, 2016)(9)
LIBOR Plus 7.75% (Floor 1.50%), Current Coupon 9.25%, Secured Debt (Maturity—November 1, 2018)(9)
QBS Parent, Inc.(11)
Provider of Software and Services to the Oil & Gas Industry
LIBOR Plus 4.75% (Floor 1.00%), Current Coupon 5.75%, Secured Debt (Maturity—August 7, 2021)(9)
Raley's(11)
Family-owned supermarket chain in California
LIBOR Plus 6.25% (Floor 1.00%), Current Coupon 7.25%, Secured Debt (Maturity—May 18, 2022)(9)
29
RCHP, Inc.(11)
Regional Non-Urban Hospital Owner/Operator
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity—April 23, 2019)(9)
LIBOR Plus 10.25% (Floor 1.00%), Current Coupon 11.25%, Secured Debt (Maturity—October 23, 2019)(9)
Renaissance Learning, Inc.(11)
Technology-based K-12 Learning Solutions
LIBOR Plus 7.00% (Floor 1.00%), Current Coupon 8.00%, Secured Debt (Maturity—April 11, 2022)(9)
RGL Reservoir Operations Inc.(11)(13)
Oil & Gas Equipment and Services
LIBOR Plus 5.00% (Floor 1.00%), Current Coupon 6.00%, Secured Debt (Maturity—August 13, 2021)(9)
RLJ Entertainment, Inc.(10)
Movie and TV Programming Licensee and Distributor
LIBOR Plus 8.75% (Floor 0.25%), Current Coupon 9.37%, Secured Debt (Maturity—September 11, 2019)(9)
RM Bidder, LLC(10)
Acquisition Vehicle
Warrants (327,532 equivalent units)
Member Units (2,779 units)
SAExploration, Inc.(10)(13)
Geophysical Services Provider
Common Stock (6,472 shares)
Sage Automotive Interiors, Inc(11)
Automotive Textiles Manufacturer
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity—October 8, 2021)(9)
Salient Partners L.P.(11)
Provider of Asset Management Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—June 9, 2021)(9)
30
Sotera Defense Solutions, Inc.(11)
Defense Industry Intelligence Services
LIBOR Plus 7.50% (Floor 1.50%), Current Coupon 9.00%, Secured Debt (Maturity—April 21, 2017)(9)
Stardust Finance Holdings, Inc.(11)
Manufacturer of Diversified Building Products
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity—March 13, 2022)(9)
Subsea Global Solutions, LLC(10)
Underwater Maintenance and Repair Services
LIBOR Plus 6.00% (Floor 1.50%), Current Coupon 7.50%, Secured Debt (Maturity—March 17, 2020)(9)
Synagro Infrastructure Company, Inc(11)
Waste Management Services
LIBOR Plus 5.25% (Floor 1.00%), Current Coupon 6.25%, Secured Debt (Maturity—August 22, 2020)(9)
Targus International, LLC(11)
Distributor of Protective Cases for Mobile Devices
15% PIK Secured Debt (Maturity—December 31, 2019)
Common Stock (Targus Cayman HoldCo Limited) (249,614 shares)(13)
TeleGuam Holdings, LLC(11)
Cable and Telecom Services Provider
LIBOR Plus 4.00% (Floor 1.25%), Current Coupon 5.25%, Secured Debt (Maturity—December 10, 2018)(9)
LIBOR Plus 7.50% (Floor 1.25%), Current Coupon 8.75%, Secured Debt (Maturity—June 10, 2019)(9)
Templar Energy LLC(11)
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity—November 25, 2020)(9)
The Tennis Channel, Inc.(10)
Television-Based Sports Broadcasting
Warrants (114,316 equivalent shares)
31
The Topps Company, Inc.(11)
Trading Cards & Confectionary
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity—October 2, 2018)(9)
TOMS Shoes, LLC(11)
Global Designer, Distributor, and Retailer of Casual Footwear
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity—October 30, 2020)(9)
Travel Leaders Group, LLC(11)
Travel Agency Network Provider
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—December 7, 2020)(9)
UniRush, LLC
Provider of Prepaid Debit Card Solutions
12% Secured Debt (Maturity—February 1, 2019)
Warrants (444,725 equivalent units)
US Joiner Holding Company(11)
Marine Interior Design and Installation
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—April 16, 2020)(9)
Valley Healthcare Group, LLC
Provider of Durable Medical Equipment
LIBOR Plus 12.50% (Floor 0.50%), Current Coupon 13.00%, Secured Debt (Maturity—December 29, 2020)(9)
Virtex Enterprises, LP(10)
Specialty, Full-Service Provider of Complex Electronic Manufacturing Services
12% Secured Debt (Maturity—December 27, 2018)
Preferred Class A Units (14 units; 5% cumulative)(8)
Warrants (11 equivalent units)
Vision Solutions, Inc.(11)
Provider of Information Availability Software
LIBOR Plus 8.00% (Floor 1.50%), Current Coupon 9.50%, Secured Debt (Maturity—July 23, 2017)(9)
32
Vivid Seats LLC(11)
Provider of Online Secondary Ticket Marketplace
LIBOR Plus 6.00% (Floor 1.00%), Current Coupon 7.00%, Secured Debt (Maturity—March 1, 2020)(9)
Western Dental Services, Inc.(11)
Dental Care Services
LIBOR Plus 6.50% (Floor 1.00%), Current Coupon 7.50%, Secured Debt (Maturity—November 1, 2018)(9)
Wilton Brands LLC(11)
Specialty Housewares Retailer
LIBOR Plus 7.25% (Floor 1.25%), Current Coupon 8.50%, Secured Debt (Maturity—August 30, 2018)(9)
Worley Claims Services, LLC(10)
Insurance Adjustment Management and Services Provider
LIBOR Plus 8.00% (Floor 1.00%), Current Coupon 9.00%, Secured Debt (Maturity—October 31, 2020)(9)
YP Holdings LLC(11)
Online and Offline Advertising Operator
LIBOR Plus 6.75% (Floor 1.25%), Current Coupon 8.00%, Secured Debt (Maturity—June 4, 2018)(9)
Zilliant Incorporated
Price Optimization and Margin Management Solutions
Preferred Stock (186,777 shares)
Warrants (952,500 equivalent shares)
Subtotal Non-Control/Non-Affiliate Investments (49.9% of total investments at fair value)
Total Portfolio Investments, March 31, 2016
33
Marketable Securities and Idle Funds Investments
Other Marketable Securities and Idle Funds Investments(13)(15)
Investments in Marketable Securities and Diversified, Registered Bond Funds
0
Subtotal Marketable Securities and Idle Funds Investments (0.1% of total investments at fair value)
Total Investments, March 31, 2016
34
MAIN STREET CAPITAL CORPORATION Consolidated Schedule Of Investments December 31, 2015 (dollars in thousands)
Preferred Member Units (4,500,000 units; 12% cumulative)
35
December 31, 2015
10.5% Secured Debt (Maturity—May 31, 2019)
9% Secured Debt (Maturity—January 8, 2016)
Preferred Stock (8% cumulative)(8)
36
15% Secured Debt (Maturity—January 15, 2016)
Member Units (700 units)(8)
37
9.5% Secured Debt (Mid-Columbia Real Estate, LLC) (Maturity—May 13, 2025)
Member Units (Mid-Columbia Real Estate, LLC) (250 units)(8)
Prime Plus 2.00% (Floor 7.00%), Current Coupon 9.00%, Secured Debt (Maturity—January 31, 2016)(9)
Prime Plus 2.00% (Floor 7.00%), Current Coupon 9.00%, Secured Debt (Maturity—February 1, 2016)(9)
18% Secured Debt (Maturity—February 1, 2016)
38
12% Secured Debt (Maturity—December 22, 2016)
39
Southern RV, LLC
13% Secured Debt (Maturity—August 8, 2018)
Member Units (1,680 units)(8)
13% Secured Debt (Southern RV Real Estate, LLC) (Maturity—August 8, 2018)
Member Units (Southern RV Real Estate, LLC) (480 units)
40
Subtotal Control Investments (30.8% of total investments at fair value)
41
Member Units (65,356 units)
Tradeshow Exhibits /Custom Displays Provider
42
LP Interests (Freeport Financial SBIC Fund LP) (Fully diluted 9.9%)(8)
LP Interests (Freeport First Lien Loan Fund III LP) (Fully diluted 6.4%)
43
Common Stock (170,577 shares)
Member units (Fully diluted 20.0%; 24.4% profits interest)
Preferred Member Units (33,819 units; 8% cumulative)
Preferred Stock (912 shares; 7% cumulative)(8)
44
45
Subtotal Affiliate Investments (19.4% of total investments at fair value)
46
AccuMED, Corp.(10)
LIBOR Plus 6.50%, Current Coupon 6.76%, Secured Debt (Maturity—November 2, 2020)
47
LIBOR Plus 7.50% (Floor 1.00%), Current Coupon 8.50%, Secured Debt (Maturity—March 10, 2019)(9)
48
49
50
11.75% Current / 2% PIK Secured Debt (Maturity—April 15, 2020)
Digity Media LLC(11)
Radio Station Operator
LIBOR Plus 4.75% (Floor 1.25%), Current Coupon 6.00%, Secured Debt (Maturity—February 8, 2019)(9)
LP Interests (EnCap Flatrock Midstream Fund III, L.P.) (Fully diluted 0.2%)
51
8.75% Secured Debt (Maturity—January 23, 2016)(14)
52
53
LIBOR Plus 5.50% (Floor 1.00%), Current Coupon 6.50%, Secured Debt (Maturity—August 5, 2019)(9)
54
55
Miramax Film NY, LLC(11)
Motion Picture Producer and Distributor
Member Units (500,000 units)(8)
56
11.5% Secured Debt (Maturity—November 15, 2026)
LIBOR Plus 6.00% (Floor 1.25%), Current Coupon 7.25%, Secured Debt (Maturity—August 23, 2017)(9)
57
58
LIBOR Plus 8.75% (Floor 0.25%), Current Coupon 9.16%, Secured Debt (Maturity—September 11, 2019)(9)
59
Targus Group International(11)
LIBOR Plus 9.50% (Floor 1.50%), Current Coupon 11.00% / 1.00% PIK, Current Coupon Plus PIK 12.00%, Secured Debt (Maturity—May 24, 2016)(9)(14)
60
Vantage Oncology, LLC(11)
Outpatient Radiation Oncology Treatment Centers
9.5% Secured Debt (Maturity—June 15, 2017)
61
Subtotal Non-Control/Non-Affiliate Investments (49.6% of total investments at fair value)
Total Portfolio Investments, December 31, 2015
62
PennantPark Investment Corporation(13)(15)
Business Development Company
Common Stock (343,149 shares)(8)
Subtotal Marketable Securities and Idle Funds Investments (0.2% of total investments at fair value)
Total Investments, December 31, 2015
63
MAIN STREET CAPITAL CORPORATION Notes to Consolidated Financial Statements (Unaudited)
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 diverse industry sectors. MSCC seeks to partner with entrepreneurs, business owners and management teams and generally provides "one stop" financing alternatives within its LMM portfolio. 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 II, LP ("MSC II" 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 ("RIA") under Investment Advisers Act of 1940, as amended (the "Advisers Act"). 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 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. The External Investment Manager is also a direct wholly owned subsidiary that has elected to be a taxable entity. The Taxable Subsidiaries and the External Investment Manager are each taxed at their normal corporate tax rates based on their taxable income.
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Notes to Consolidated Financial Statements (Continued)
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 financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). 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 Middle Market portfolio companies, Private Loan portfolio investments, Other Portfolio investments, and the investment in the External Investment Manager, but excludes all "Marketable securities and idle funds investments" (see Note C—Fair Value Hierarchy for Investments and Debentures—Portfolio Composition—Portfolio Investment Composition for additional discussion of Main Street's Investment Portfolio and definitions for the terms Private Loan and Other Portfolio). "Marketable securities and idle funds investments" are classified as financial instruments and are reported separately on Main Street's consolidated balance sheets and consolidated schedules of investments due to the nature of such investments (see Note B.11.). Main Street's results of operations and cash flows for the three months ended March 31, 2016 and 2015 and financial position as of March 31, 2016 and December 31, 2015, 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 Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. 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, 2016 and 2015 are not necessarily indicative of the operating results to be expected for the full year. Also, 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, 2015. 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.
Under regulations pursuant to Article 6 of Regulation S-X applicable to BDCs and Accounting Standards Codification ("Codification" or "ASC") 946, Financial Services—Investment Companies("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. MSCC's consolidated financial statements also include the financial position and operating results for MSCC's wholly owned operating subsidiary, Main Street Capital Partners, LLC, ("MSCP"),
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as the wholly owned subsidiary provides all of its services directly or indirectly to Main Street or its portfolio companies. Main Street has determined that all of its portfolio investments do not 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, with any adjustments to fair value recognized as "Net Change in 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% 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.
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 the Financial Accounting Standards Board ("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 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 private, 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 which have been originated 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 typically similar in size, structure, terms and conditions to investments Main Street holds in 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, Middle Market portfolio investments or Private Loan portfolio investments, including investments which may be managed by third parties. 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 securities 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 and a valuation process approved
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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 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 Middle Market and Private Loan 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 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 transactions in the equity securities of the portfolio company or third-party valuations of the portfolio company, and then performs a waterfall calculation by using 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, private 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
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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 its determination. 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 investments. Main Street's estimate of the expected repayment date of its debt securities is generally the legal 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 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
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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 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 11 LMM portfolio companies for the three months ended March 31, 2016, representing approximately 18% of the total LMM portfolio at fair value as of March 31, 2016, and on a total of 15 LMM portfolio companies for the three months ended March 31, 2015, representing approximately 23% of the total LMM portfolio at fair value as of March 31, 2015. Excluding investments in new LMM portfolio companies which have not been in the Investment Portfolio for at least twelve months subsequent to the initial investment as of March 31, 2016 and 2015, as applicable, and investments in the LMM portfolio companies that were not reviewed because their equity is publicly traded, the percentage of the LMM portfolio reviewed and certified by the independent financial advisory services firm for the three months ended March 31, 2016 and 2015 was 19% and 27% of the total LMM portfolio at fair value as of March 31, 2016 and 2015, 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. Because almost all of the Middle Market portfolio investments are typically valued using third party quotes or other independent pricing services (including 98% and 99% of the Middle Market portfolio investments as of March 31, 2016 and December 31, 2015, respectively), we do not generally consult with any financial advisory services firms in connection with determining the fair value of our Middle Market investments.
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
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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 10 Private Loan portfolio companies for the three months ended March 31, 2016, representing approximately 36% of the total Private Loan portfolio at fair value as of March 31, 2016. Excluding its investments in new Private Loan portfolio companies which have not been in the Investment Portfolio for at least twelve months subsequent to the most recent investment decision as of March 31, 2016 and its investments in the Private Loan portfolio companies that were not reviewed because the investment is publicly traded or quoted by banks, the percentage of the Private Loan portfolio reviewed and certified by its independent financial advisory services firm for the three months ended March 31, 2016 was 51% of the total Private Loan portfolio at fair value as of March 31, 2016.
For valuation purposes, all of Main Street's Other Portfolio investments are non-control investments. Main Street's Other Portfolio investments comprised approximately 4.3% and 4.2%, respectively, of Main Street's Investment Portfolio at fair value as of March 31, 2016 and December 31, 2015. 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 its investments using the NAV valuation method. For Other Portfolio debt 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 Other Portfolio debt investments in a current hypothetical sale using the Yield-to-Maturity valuation method. For Other Portfolio debt investments for which third-party quotes or other independent pricing are available and appropriate, Main Street determines the fair value of these investments through obtaining third party quotes or other independent pricing to the extent that these inputs are available and appropriate to determine fair value.
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 the value associated with Main Street's ability to control the capital structure of the company, as well as the timing of a potential exit.
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
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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.
The Board of Directors of Main Street has the final responsibility for overseeing, reviewing and approving, in good faith, Main Street's determination of the fair value for its Investment Portfolio, as well as its valuation procedures, consistent with 1940 Act requirements. Main Street believes its Investment Portfolio as of March 31, 2016 and December 31, 2015 approximates fair value as of those dates based on the markets in which Main Street operates and other conditions in existence on those reporting dates.
2. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements include investments in the Investment Portfolio whose values have been estimated by Main Street with the oversight, review and approval by Main Street's Board of Directors in the absence of readily ascertainable market values. Because of the inherent uncertainty of the Investment Portfolio valuations, those estimated values may differ significantly from the values that would have been determined had a readily available market for the investments existed, and it is reasonably possible that the differences could be material.
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, 2016, cash balances totaling $14.5 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.
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4. Marketable Securities and Idle Funds Investments
Marketable securities and idle funds investments include intermediate-term secured debt investments, independently rated debt investments and publicly traded debt and equity investments. See the consolidated schedule of investments for more information on Marketable securities and idle funds investments.
5. Interest, Dividend and Fee Income (Structuring and Advisory Services)
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 fully impaired, sold or written off, Main Street removes it from non-accrual status.
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. 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. For the three months ended March 31, 2016 and 2015, (i) approximately 3.1% and 2.2%, respectively, of Main Street's total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.8% and 1.0%, respectively, of Main Street's total investment income was attributable to cumulative dividend income not paid currently in cash.
As of March 31, 2016, Main Street's total Investment Portfolio had six investments on non-accrual status, which comprised approximately 0.5% of its fair value and 3.8% of its cost .. As of December 31, 2015, Main Street's total Investment Portfolio had six investments on non-accrual status, which comprised approximately 0.4% of its fair value and 3.7% of its cost.
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
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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.
A presentation of the investment income Main Street received from its Investment Portfolio in each of the periods presented is as follows:
Interest income
Dividend income
Fee income
Total interest, fee and dividend income
6. Deferred Financing Costs
Deferred financing costs include SBIC debenture commitment fees and SBIC debenture leverage fees on the SBIC debentures which are not accounted for under the fair value option under ASC 825 (as discussed further in Note B.11.). These fees are approximately 3.4% of the total comitment and drawn amounts, as applicable. These deferred financing costs have been capitalized and are being amortized into interest expense over the ten year term of each debenture agreement.
Deferred financing costs also include commitment fees and other costs related to Main Street's multi-year investment credit facility (the "Credit Facility," as discussed further in Note F) and its notes (as discussed further in Note G). These costs have been capitalized and are amortized into interest expense over the term of the individual instrument.
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 interest income based on the effective interest method 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 based on the effective interest method over the life of the debt investment. The actual collection of this interest is deferred until the time of debt principal repayment.
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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 based on the effective interest method 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 based on the effective interest method 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, 2016 and 2015, approximately 2.6% and 2.8%, respectively, of Main Street's total investment income was attributable to interest income for the accretion of discounts associated with debt investments, net of any premium reduction.
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.
Effective January 1, 2016, Main Street elected early adoption of ASU 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09," as discussed further below in Note B.13.). ASU 2016-09 requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement and no longer delay recognition of a tax benefit until the tax benefit is realized through a reduction to taxes payable. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Additionally, ASU 2016-09 allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, net of forfeitures, (current GAAP) or account for forfeitures when they occur. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. As such, Main Street has recorded a $1.8 million adjustment to "Net Unrealized Appreciation, Net of Income Taxes" on the consolidated balance sheet to capture the cumulative tax effect as of January 1, 2016. The company has elected to account for forfeitures as they occur and this change had no impact on its consolidated financial statements. The additional amendments (cash flows classification, minimum statutory tax withholding requirements and classification of awards as either a liability or equity) did not have an effect on Main Street's consolidated financial statements.
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
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pay corporate-level U.S. federal income taxes on any net ordinary 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) fifteenth day of the ninth month following the close of the year which generated such taxable income.
The Taxable Subsidiaries 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-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 its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in Main Street's consolidated financial statements.
MSCC's wholly owned subsidiary MSCP is included in Main Street's consolidated financial statements for financing reporting purposes. For tax purposes, MSCP has elected to be treated as a taxable entity, and therefore is not consolidated with MSCC for income tax purposes and 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 taxable income, or loss, of MSCP may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in Main Street's consolidated financial statements.
The Taxable Subsidiaries and MSCP 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 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 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.
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.
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10. Net Realized Gains or Losses and Net Change in 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 change in 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. Marketable securities and idle funds investments may include investments in certificates of deposit, U.S. government agency securities, independently rated debt investments, diversified bond funds and publicly traded debt and equity investments and the fair value determination for these investments under the provisions of ASC 820 generally consists of Level 1 and 2 observable inputs, similar in nature to those discussed further in Note C.
As part of Main Street's acquisition of the majority of the equity interests of MSC II in January 2010 (the "MSC II Acquisition"), Main Street elected the fair value option under ASC 825, Financial Instruments ("ASC 825") relating to accounting for debt obligations at their fair value, for the MSC II SBIC debentures acquired (the "Acquired Debentures") as part of the acquisition accounting related to the MSC II Acquisition and values those obligations as discussed further in Note C. In order to provide for a more consistent basis of presentation, Main Street has continued to elect the fair value option for SBIC debentures issued by MSC II subsequent to the MSC II Acquisition. When the fair value option is elected for a given SBIC debenture, the deferred loan costs associated with the debenture are fully expensed in the current period to "Net Change in Unrealized Appreciation (Depreciation)—SBIC debentures" as part of the fair value adjustment. Interest incurred in connection with SBIC debentures which are valued at fair value is included in interest expense.
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 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.
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13. Recently Issued or Adopted Accounting Standards
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-9 supersedes the revenue recognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. The FASB tentatively decided to defer the effective date of the new revenue standard for public entities under U.S. GAAP for one year. If finalized, the new guidance will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016. Main Street is currently evaluating the impact the adoption of this new accounting standard will have on its financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurements—Disclosures for Certain Entities that Calculate Net Asset Value per Share. This amendment updates guidance intended to eliminate the diversity in practice surrounding how investments measured at net asset value under the practical expedient with future redemption dates have been categorized in the fair value hierarchy. Under the updated guidance, investments for which fair value is measured at net asset value per share using the practical expedient should no longer be categorized in the fair value hierarchy, while investments for which fair value is measured at net asset value per share but the practical expedient is not applied should continue to be categorized in the fair value hierarchy. The updated guidance requires retrospective adoption for all periods presented and is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this standard during the three months ended March 31, 2016. There was no impact of the adoption of this new accounting standard on our consolidated financial statements as none of our investments are measured through the use of the practical expedient.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The new guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early application is permitted. The impact of the adoption of this new accounting standard on Main Street's consolidated financial statements is currently being evaluated.
In March 2016, the FASB issued ASU 2016-09, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
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of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The Company elected to early adopt this standard during the three months ended March 31, 2016. See further discussion of the impact of the adoption of this standard in Note B.8.
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 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 private companies). These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the investment.
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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). Main Street conducts reviews of fair value hierarchy classifications on a quarterly basis. During the classification process, Main Street may determine that it is appropriate to transfer investments between fair value hierarchy Levels. These transfers occur when Main Street has concluded that it is appropriate for the classification of an individual asset to be changed due to a change in the factors used to determine the selection of the Level. Any such changes are deemed to be effective during the quarter in which the transfer occurs.
As of March 31, 2016 and December 31, 2015, all of Main Street's LMM portfolio investments except for the debt and equity investments in one portfolio company consisted of illiquid securities issued by private companies. Those investments which were the exceptions were in a company with publicly traded equity. As a result, the fair value determination for the LMM portfolio investments primarily consisted of unobservable inputs. The fair value determination for the publicly traded equity security consisted of observable inputs in non-active markets for which sufficient observable inputs were available to determine the fair value. As a result, all of Main Street's LMM portfolio investments were categorized as Level 3 as of March 31, 2016 and December 31, 2015, except for the one publicly traded equity security which was categorized as Level 2.
As of March 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.
As of March 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.
As of March 31, 2016 and December 31, 2015, Main Street's Other Portfolio investments consisted of illiquid securities issued by private companies. 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, 2016 and December 31, 2015.
As of March 31, 2016 and December 31, 2015, Main Street's Marketable securities and idle funds investments consisted primarily of investments in publicly traded debt and equity investments. The fair value determination for these investments consisted of a combination of observable inputs in active markets for which sufficient observable inputs were available to determine the fair value of these investments. As a result, all of Main Street's Marketable securities and idle funds investments were categorized as Level 1 as of March 31, 2016 and December 31, 2015.
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The fair value determination of each portfolio investment categorized as Level 3 required one or more of the following unobservable inputs:
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, Middle Market, Private Loan and Other Portfolio debt securities are (i) risk adjusted discount rates used in the Yield-to-Maturity valuation technique (described in 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
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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, 2016 and December 31, 2015:
Equity investments
Debt investments
Discounted cash flow
Risk adjusted discount factor
8.2% - 15.4%(2)
Market approach
Third party quote
11.3 - 101.0
Total Level 3 investments
8.1% - 15.3%(2)
12.1 - 100.1
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, 2016 and 2015 (amounts in thousands). Net
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unrealized appreciation (depreciation) is included in the net change in unrealized appreciation (depreciation)—portfolio investments on the consolidated statements of operations.
Debt
Equity
Equity Warrant
As of March 31, 2016 and December 31, 2015, the fair value determination for the SBIC debentures recorded at fair value primarily consisted of unobservable inputs. As a result, the SBIC debentures which are recorded at fair value were categorized as Level 3. Main Street determines the fair value of these instruments primarily using a Yield-to-Maturity approach that analyzes the discounted cash flows of interest and principal for each SBIC debenture recorded at fair value based on estimated market interest rates for debt instruments of similar structure, terms, and maturity. Main Street's estimate of the expected repayment date of principal for each SBIC debenture recorded at fair value is the legal maturity date of the instrument. The significant unobservable inputs used in the fair value measurement of Main Street's SBIC debentures recorded at fair value are the estimated market interest rates used to fair value each debenture using the yield valuation technique described above. Significant increases (decreases) in the Yield-to-Maturity valuation inputs in isolation would result in a significantly lower (higher) fair value measurement.
The following tables provide a summary of the significant unobservable inputs used to fair value Main Street's Level 3 SBIC debentures as of March 31, 2016 and December 31, 2015 (amounts in thousands):
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The following tables provide a summary of changes for the Level 3 SBIC debentures recorded at fair value for the three month periods ended March 31, 2016 and 2015 (amounts in thousands):
SBIC debentures at fair value
At March 31, 2016 and December 31, 2015, Main Street's investments and SBIC debentures at fair value were categorized as follows in the fair value hierarchy for ASC 820 purposes:
LMM portfolio investments
Middle Market portfolio investments
Private Loan portfolio investments
Other Portfolio investments
External Investment Manager
Total portfolio investments
Total investments
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Investment Portfolio Composition
Main Street's LMM portfolio investments primarily consist of 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 $50 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, generally bear interest at fixed rates, 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 Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest- bearing debt securities in privately held companies based in the United States that are generally larger in size than the companies included in Main Street's LMM portfolio. Main Street's Middle Market portfolio companies generally have annual revenues between $150 million and $1.5 billion, and its Middle Market investments generally range in size from $3 million to $15 million. Main Street's Middle Market portfolio debt investments are generally secured by either a first or second 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's private loan ("Private Loan") portfolio investments are primarily debt securities which have been originated 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 typically similar in size, structure, terms and conditions to investments Main Street holds in its LMM portfolio and Middle Market portfolio. Main Street's Private Loan portfolio debt investments are generally secured by either a first or second 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.
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Main Street's other portfolio ("Other Portfolio") investments primarily consist of investments which are not consistent with the typical profiles for LMM, Middle Market and Private Loan 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.
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 of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds managed. Main Street has 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 HMS Income Fund, Inc. ("HMS 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. In the first quarter of 2014, Main Street began allocating cost to the External Investment Manager pursuant to the sharing agreement. Main Street's total expenses for the three months ended March 31, 2016 and 2015 are net of the costs allocated to the External Investment Manager of $1.2 million and $0.8 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, 2016 and 2015, 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, Middle Market and Private Loan portfolios as of March 31, 2016 and December 31, 2015 (this information excludes the Other Portfolio investments and the External Investment Manager which are discussed further below):
Number of portfolio companies
Fair value
Cost
% of portfolio at cost—debt
% of portfolio at cost—equity
% of debt investments at cost secured by first priority lien
Weighted-average annual effective yield(b)
Average EBITDA(c)
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% of total investments at cost—debt
% of total investments at cost—equity
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As of March 31, 2016, Main Street had Other Portfolio investments in ten companies, collectively totaling approximately $78.7 million in fair value and approximately $86.6 million in cost basis and which comprised approximately 4.3% of Main Street's Investment Portfolio at fair value. As of December 31, 2015, Main Street had Other Portfolio investments in ten companies, collectively totaling approximately $74.8 million in fair value and approximately $75.2 million in cost basis and which comprised approximately 4.2% of Main Street's Investment Portfolio at fair value.
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, 2016, there was no cost basis in this investment and the investment had a fair value of $27.8 million, which comprised 1.5% of Main Street's Investment Portfolio at fair value. As of December 31, 2015, there was no cost basis in this investment and the investment had a fair value of $27.3 million, which comprised 1.5% of Main Street's Investment Portfolio at fair value.
The following tables summarize the composition of Main Street's total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments, as of March 31, 2016 and December 31, 2015 (this information excludes the Other Portfolio investments and the External Investment Manager).
First lien debt
Second lien debt
Equity warrants
The following tables summarize the composition of Main Street's total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan 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, Middle Market portfolio investments and Private Loan portfolio investments, as of March 31, 2016 and December 31, 2015 (this information excludes the Other
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Portfolio investments and the External Investment Manager). The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
Southwest
Midwest
Northeast
West
Southeast
Canada
Other Non-United States
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Main Street's LMM portfolio investments, Middle Market portfolio investments and Private Loan 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, Middle Market portfolio investments and Private Loan portfolio investments by industry at cost and fair value as of March 31, 2016 and December 31, 2015 (this information excludes the Other Portfolio investments and the External Investment Manager).
Hotels, Restaurants & Leisure
Energy Equipment & Services
Machinery
Media
IT Services
Construction & Engineering
Software
Electronic Equipment, Instruments & Components
Specialty Retail
Health Care Providers & Services
Internet Software & Services
Diversified Consumer Services
Commercial Services & Supplies
Health Care Equipment & Supplies
Diversified Telecommunication Services
Diversified Financial Services
Auto Components
Food Products
Oil, Gas & Consumable Fuels
Building Products
Pharmaceuticals
Professional Services
Road & Rail
Consumer Finance
Leisure Equipment & Products
Air Freight & Logistics
Aerospace & Defense
Other(1)
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At March 31, 2016 and December 31, 2015, Main Street had no portfolio investment that was greater than 10% of the Investment Portfolio at fair value.
Unconsolidated Significant Subsidiaries
Main Street's investments are generally in small and mid-sized companies in a variety of industries. 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 these unconsolidated controlled portfolio companies, there are three tests utilized to determine if any of Main Street's Control Investments (as defined in Note A, including those unconsolidated controlled portfolio companies in which Main Street does not own greater than 50% of the voting securities) are considered significant subsidiaries: the investment test, the asset test and the income test. Rule 3-09 of Regulation S-X, as interpreted by the SEC, requires Main Street to include separate audited financial statements of an unconsolidated majority-owned subsidiary (Control
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Investments in which Main Street owns greater than 50% of the voting securities) in an annual report if any of the three tests exceed 20% of Main Street's total investments at fair value, total assets or total income, respectively. Rule 4-08(g) of Regulation S-X requires summarized financial information of a Control Investment in an annual report if any of the three tests exceeds 10% of Main Street's annual total amounts and summarized financial information in a quarterly report if any of the three tests exceeds 20% of Main Street's year-to-date total amounts.
As of March 31, 2016, Main Street had no single Control Investment that represented greater than 20% of its total Investment Portfolio at fair value and no single investment whose total assets represented greater than 20% of its total assets. After performing the income test for the three months ended March 31, 2016, Main Street determined that its income from three of its Control Investments individually generated more than 20% of its total income, primarily due to the unrealized appreciation that was recognized on the investments during the three months ended March 31, 2016. As such, GRT Rubber Technologies LLC and Travis Acquisition LLC were considered significant subsidiaries at the 20% level as of March 31, 2016. Additionally, CBT Nuggets, LLC, an unconsolidated portfolio company that was a Control Investment, but which was not majority-owned by Main Street, was also considered a significant subsidiary at the 20% level as of March 31, 2016.
The following table shows the summarized financial information for CBT Nuggets, LLC:
Balance Sheet Data
Current Assets
Noncurrent Assets
Current Liabilities
Noncurrent Liabilities
Summary of Operations
Total Revenue
Gross Profit
Income from Operations
Net Income
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The following table shows the summarized financial information for GRT Rubber Technologies LLC:
The following table shows the summarized financial information for Travis Acquisition LLC:
NOTE D—EXTERNAL INVESTMENT MANAGER
As discussed further in Note A.1., 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.
During May 2012, Main Street entered into an investment sub-advisory agreement with HMS Adviser, LP ("HMS Adviser"), which is the investment advisor to HMS Income, a non-publicly traded
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BDC whose registration statement on Form N-2 was declared effective by the SEC in June 2012, to provide certain investment advisory services to HMS Adviser. In December 2013, after obtaining required no-action relief from the SEC to allow it to own a registered investment adviser, Main Street assigned the sub-advisory agreement to the External Investment Manager since the fees received from such arrangement could otherwise have negative consequences on MSCC's ability to meet the source-of-income requirement necessary for it to maintain its RIC tax treatment. Under the investment sub-advisory agreement, the External Investment Manager is entitled to 50% of the base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with HMS Income. Based upon several fee waiver agreements with HMS Income and HMS Adviser, the External Investment Manager did not begin accruing the base management fee and incentive fees, if any, until January 1, 2014. Beginning January 1, 2016, the External Investment Manager conditionally agreed to waive a limited amount of the incentive fees otherwise earned during the three months ended March 31, 2016. During the three months ended March 31, 2016 and 2015, the External Investment Manager earned $2.3 million and $1.4 million, respectively, of management fees (net of fees waived, if any) under the sub-advisory agreement with HMS Adviser.
The investment in the External Investment Manager is accounted for using fair value accounting, with the fair value determined by Main Street and approved, in good faith, by Main Street's Board of Directors. 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 statement of operations in "Net Change in Unrealized Appreciation (Depreciation)—Portfolio investments".
The External Investment Manager has elected, for tax purposes, to be treated as a taxable entity, is not consolidated with Main Street for income tax purposes and 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 External Investment Manager has elected to be treated as a taxable entity to enable it to receive fee income and to allow MSCC to continue to comply with the "source-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. 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, 2016 and 2015, Main Street allocated $1.2 million and $0.8 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 dividend income from the External Investment Manager. For the three months ended March 31, 2016 and 2015, the total contribution to net investment income was $1.9 million and $1.2 million, respectively.
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Summarized financial information from the separate financial statements of the External Investment Manager as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015 is as follows:
Cash
Taxes receivable
Accounts receivable—HMS Income
Accounts payable to MSCC and its subsidiaries
Dividend payable to MSCC
Taxes payable
Total liabilities and equity
Management fee income
Expenses allocated from MSCC or its subsidiaries:
Salaries, share-based compensation and other personnel costs
Other G&A expenses
Total allocated expenses
Pre-tax income
Tax expense
Net income
NOTE E—SBIC DEBENTURES
SBIC debentures payable were $225.0 million at both March 31, 2016 and December 31, 2015, respectively. SBIC debentures provide for interest to be paid semi-annually, with principal due at the applicable 10-year maturity date of each debenture. The weighted-average annual interest rate on the SBIC debentures was 4.2% as of both March 31, 2016 and December 31, 2015. The first principal maturity due under the existing SBIC debentures is in 2017, and the remaining weighted-average duration as of March 31, 2016 was approximately 5.3 years. For the three months ended March 31, 2016 and 2015, Main Street recognized interest expense attributable to the SBIC debentures of $2.5 million in each period, respectively. Main Street has incurred upfront leverage and other miscellaneous fees of approximately 3.4% of the debenture principal amount. In accordance with SBA regulations, the Funds are precluded from incurring additional non-SBIC debt without the prior approval of the SBA. The Funds are subject to annual compliance examinations by the SBA. There have been no historical findings resulting from these examinations.
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As of March 31, 2016, the recorded value of the SBIC debentures was $223.8 million which consisted of (i) $74.0 million recorded at fair value, or $1.2 million less than the $75.2 million face value of the SBIC debentures held in MSC II, and (ii) $149.8 million reported at face value and held in MSMF. As of March 31, 2016, if Main Street had adopted the fair value option under ASC 825 for all of its SBIC debentures, Main Street estimates the fair value of its SBIC debentures would be approximately $211.8 million, or $13.2 million less than the $225.0 million face value of the SBIC debentures.
NOTE F—CREDIT FACILITY
Main Street maintains the Credit Facility to provide additional liquidity to support its investment and operational activities. The Credit Facility includes total commitments of $555.0 million from a diversified group of fourteen lenders and matures in September 2020. The Credit Facility also contains an accordion feature which allows Main Street to increase the total commitments under the facility up to $750.0 million from new and existing lenders on the same terms and conditions as the existing commitments.
Borrowings under the Credit Facility bear interest, subject to Main Street's election, on a per annum basis at a rate equal to the applicable LIBOR rate (0.44% as of March 31, 2016) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.5% as of March 31, 2016) plus 0.875%) as long as Main Street maintains an investment grade rating and meets certain agreed upon excess collateral and maximum leverage requirements, (ii) 2.0% (or the applicable base rate plus 1.0%) if Main Street maintains an investment grade rating but, does not meet certain excess collateral and maximum leverage requirements or (iii) 2.25% (or the applicable base rate plus 1.25%) if Main Street does not maintain an investment grade rating. 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. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum availability of at least 10% of the borrowing base, (ii) maintaining an interest coverage ratio of at least 2.0 to 1.0, (iii) maintaining an asset coverage ratio of at least 1.5 to 1.0, and (iv) maintaining a minimum tangible net worth. Main Street is in compliance with these covenants. The Credit Facility is provided on a revolving basis through its final maturity date in September 2020, and contains two, one-year extension options which could extend the final maturity by up to two years, subject to certain conditions, including lender approval.
At March 31, 2016, Main Street had $306.0 million in borrowings outstanding under the Credit Facility. As of March 31, 2016, if Main Street had adopted the fair value option under ASC 825 for its Credit Facility, Main Street estimates its fair value would approximate its recorded value. Main Street recognized interest expense related to the Credit Facility, including unused commitment fees and amortization of deferred loan costs, of $2.1 million and $1.7 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the interest rate on the Credit Facility was 2.3% which is consistent with the average interest rate for the three months ended March 31, 2016. Main Street was in compliance with all financial covenants of the Credit Facility.
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NOTE G—NOTES
In April 2013, Main Street issued $92.0 million, including the underwriters full exercise of their option to purchase additional principal amounts to cover over-allotments, in aggregate principal amount of 6.125% Notes due 2023 (the "6.125% Notes"). The 6.125% 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 6.125% 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 6.125% Notes mature on April 1, 2023, and may be redeemed in whole or in part at any time or from time to time at Main Street's option on or after April 1, 2018. The 6.125% Notes bear interest at a rate of 6.125% per year payable quarterly on January 1, April 1, July 1 and October 1 of each year. The total net proceeds to Main Street from the 6.125% Notes, after underwriting discounts and estimated offering expenses payable by Main Street, were approximately $89.0 million. Main Street has listed the 6.125% Notes on the New York Stock Exchange under the trading symbol "MSCA". Main Street may from time to time repurchase the 6.125% Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of March 31, 2016, the outstanding balance of the 6.125% Notes was $90.7 million. As of March 31, 2016, if Main Street had adopted the fair value option under ASC 825 for the 6.125% Notes, Main Street estimates the fair value would be approximately $92.1 million. Main Street recognized interest expense related to the 6.125% Notes, including amortization of deferred loan costs, of $1.5 million for each of the three months ended March 31, 2016 and 2015.
The indenture governing the 6.125% Notes (the "6.125% 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 6.125% Notes and the Trustee if Main Street ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 6.125% Notes Indenture. Main Street is in compliance with these covenants.
In November 2014, Main Street issued $175.0 million in aggregate principal amount of 4.50% unsecured notes due 2019 (the "4.50% Notes") at an issue price of 99.53%. 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 mature on December 1, 2019, and may be redeemed in whole or 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 semi-annually on June 1 and December 1 of each year. The total net proceeds from the
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4.50% Notes, resulting from the issue price and after underwriting discounts and estimated offering expenses payable by us, were approximately $171.2 million. Main Street may from time to time repurchase the 4.50% Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of March 31, 2016, the outstanding balance of the 4.50% Notes was $175.0 million. As of March 31, 2016, if Main Street had adopted the fair value option under ASC 825 for the 4.50% Notes, Main Street estimates its fair value would be approximately $180.0 million. Main Street recognized interest expense related to the 4.50% Notes, including amortization of deferred loan costs, of $2.1 million for each of the three months ended March 31, 2016 and 2015.
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 Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 4.50% Notes Indenture. Main Street is in compliance with these covenants.
NOTE H—FINANCIAL HIGHLIGHTS
Per Share Data:
NAV at the beginning of the period
Net investment income(1)
Net realized gain (loss)(1)(2)
Net change in net unrealized appreciation (depreciation)(1)(2)
Income tax benefit (provision)(1)(2)
Net increase in net assets resulting from operations(1)
Dividends paid to stockholders from net investment income
Distributions from capital gains
Total dividends paid
Accretive effect of public stock offerings (issuing shares above NAV per share)
Accretive effect of DRIP issuance (issuing shares above NAV per share)
Other(3)
NAV at the end of the period
Market value at the end of the period
Shares outstanding at the end of the period
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NAV at end of period
Average NAV
Average outstanding debt
Ratio of total expenses, including income tax expense, to average NAV(1)(2)
Ratio of operating expenses to average NAV(2)(3)
Ratio of operating expenses, excluding interest expense, to average NAV(2)(3)
Ratio of net investment income to average NAV(2)
Portfolio turnover ratio(2)
Total investment return(2)(4)
Total return based on change in NAV(2)(5)
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NOTE I—DIVIDENDS, DISTRIBUTIONS AND TAXABLE INCOME
Main Street paid regular monthly dividends of $0.180 per share in each month of January through March 2016, totaling $27.2 million, or $0.540 per share, for the three months ended March 31, 2016. The first quarter 2016 regular monthly dividends represent a 5.9% increase from the regular monthly dividends paid for the first quarter of 2015. For the three months ended March 31, 2015, Main Street paid total regular monthly dividends of $23.0 million, or $0.510 per share.
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 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) fifteenth day of the ninth month following the close of the year which generated such taxable income.
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 capital gains, but may also include qualified dividends or return of capital.
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Listed below is a reconciliation of "Net increase in net assets resulting from operations" to taxable income and to total distributions declared to common stockholders for the three months ended March 31, 2016 and 2015.
Book tax difference share-based compensation expense
Net change in net unrealized appreciation
Income tax provision (benefit)
Pre-tax book (income) loss not consolidated for tax purposes
Book income and tax income differences, including debt origination, structuring fees, dividends, realized gains and changes in estimates
Estimated taxable income(1)
Taxable income earned in prior year and carried forward for distribution in current year
Taxable income earned prior to period end and carried forward for distribution next period
Dividend payable as of period end and paid in the following period
Total distributions accrued or paid to common stockholders
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The income tax expense, or benefit, and the related tax assets and liabilities, generated by the Taxable Subsidiaries and MSCP, if any, are reflected in Main Street's consolidated financial statements. For the three months ended March 31, 2016, Main Street recognized a net income tax benefit of $2.3 million, principally consisting of deferred tax benefit of $2.6 million which is primarily the result of the net activity relating to the portfolio investments held in the Taxable Subsidiaries including changes in net operating loss carryforwards, changes in net unrealized appreciation or depreciation and other temporary book tax differences, partially offset by a $0.4 million provision for other current taxes which is primarily related to a $0.3 million provision for current U.S. federal income and state taxes, and a $0.1 million accrual for excise tax on our estimated spillover taxable income. For the three months ended March 31, 2015, Main Street recognized a net income tax benefit of $0.3 million which principally consisted of a deferred tax benefit of $0.7 million, partially offset by $0.4 million of accruals for current U.S. federal income and excise taxes, state and other taxes.
The net deferred tax asset at March 31, 2016 and December 31, 2015 was $8.4 million and $4.0 million, respectively, primarily related to net operating loss carryforwards, timing differences in net unrealized appreciation or depreciation and other temporary book tax differences relating to portfolio investments held by the Taxable Subsidiaries. In addition, Main Street recorded a one-time $1.8 million increase to deferred tax assets for previously unrecognized excess tax benefits associated with share-based compensation due to the early adoption of the new accounting standard ASU 2016-09 (See further discussion in Note B.8). For federal income tax purposes, the capital loss carryforward of $8.0 million in the Taxable Subsidiaries as of December 31, 2015 was fully utilized during the three months ended March 31, 2016.
NOTE J—COMMON STOCK
During November 2015, Main Street entered into a program (the "ATM Program") with underwriters through which it can sell, by means of at-the-market offerings from time to time, up to 1,000,000 shares of its common stock. During the first quarter of 2016, Main Street sold 321,714 shares of its common stock at a weighted-average price of $31.01 per share and raised $10.0 million of gross proceeds under the ATM Program. Net proceeds were $9.8 million after commissions to the underwriter on shares sold and offering costs. As of March 31, 2016, sales transactions representing 78,782 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 on the consolidated statement of operations and in the shares used to calculate net asset value per share. As of March 31, 2016, 537,718 shares were available for sale under the ATM Program.
During the fourth quarter of 2015, Main Street sold 140,568 shares of its common stock at a weighted-average price of $31.98 per share and raised $4.5 million of gross proceeds under the ATM
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Program. Net proceeds were $4.3 million after commissions to the underwriter on shares sold and offering costs.
During March 2015, Main Street completed a follow-on public equity offering of 4,370,000 shares of common stock, including the underwriters' full exercise of their option to purchase 570,000 additional shares, resulting in total net proceeds, including exercise of the underwriters' option to purchase additional shares and after deducting underwriting discounts and estimated offering expenses payable by Main Street, of approximately $127.8 million.
NOTE K—DIVIDEND REINVESTMENT PLAN ("DRIP")
Main Street's 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, the company's 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. 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.
For the three months ended March 31, 2016, $3.3 million of the total $27.2 million in dividends paid to stockholders represented DRIP participation. During this period, the DRIP participation requirements were satisfied with the issuance of 113,631 newly issued shares. For the three months ended March 31, 2015, $3.5 million of the total $23.0 million in dividends paid to stockholders represented DRIP participation. During this period, the DRIP participation requirements were satisfied with the issuance of 116,330 newly issued shares and with the purchase of 3,131 shares of common stock in the open market. The shares disclosed above relate only to Main Street's DRIP and exclude any activity related to broker-managed dividend reinvestment plans.
NOTE L—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
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Equity and Incentive Plan, net of shares forfeited, and the remaining shares of restricted stock available for issuance as of March 31, 2016.
Restricted stock authorized under the plan
Less net restricted stock granted during:
Year ended December 31, 2015
Three months ended March 31, 2016
Restricted stock available for issuance as of March 31, 2016
As of March 31, 2016, the following table summarizes the restricted stock issued to Main Street's independent 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.
For the three months ended March 31, 2016 and 2015, Main Street recognized total share-based compensation expense of $1.6 million and $1.3 million, respectively, related to the restricted stock issued to Main Street employees and independent directors.
As of March 31, 2016, there was $10.5 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 2.1 years as of March 31, 2016.
NOTE M—COMMITMENTS AND CONTINGENCIES
At March 31, 2016, Main Street had the following outstanding commitments (in thousands):
Investments with equity capital commitments that have not yet funded:
Encap Energy Fund Investments
EnCap Energy Capital Fund VIII, L.P.
EnCap Energy Capital Fund VIII Co-Investors, L.P.
EnCap Energy Capital Fund IX, L.P.
EnCap Energy Capital Fund X, L.P.
EnCap Flatrock Midstream Fund II, L.P.
EnCap Flatrock Midstream Fund III, L.P.
Congruent Credit Opportunities Funds
Congruent Credit Opportunities Fund II, LP
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Congruent Credit Opportunities Fund III, LP
Freeport Fund Investments
Freeport First Lien Loan Fund III LP
Freeport Financial SBIC Fund LP
I-45 SLF LLC
Dos Rios Partners
Dos Rios Partners, LP
Dos Rios Partners—A, LP
Brightwood Capital Fund III, LP
EIG Fund Investments
LKCM Headwater Investments I, L.P.
Access Media Holdings, LLC
Total equity commitments
Investments with commitments to fund revolving loans that have not been fully drawn or term loans with additional commitments not yet funded:
Barfly Ventures, LLC
Arcus Hunting LLC
Hojeij Branded Foods, LLC
Applied Products, Inc.
PT Network, LLC
LaMi Products, LLC
Messenger, LLC
Grace Hill, LLC
Mystic Logistics, Inc.
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Jackmont Hospitality, Inc.
Insurance Technologies, LLC
UniTek Global Services, Inc.
Subsea Global Solutions, LLC
AccuMED Corp.
Brainworks Software, LLC
Total loan commitments
Total commitments
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 N—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, 2016, Main Street had a receivable of $2.3 million due from the External Investment Manager which included approximately $1.6 million related primarily to operating expenses incurred by MSCC or its subsidiaries required to support the External Investment Manager's business, along with dividends declared but not paid by the External Investment Manager of approximately $0.7 million.
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 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, 2016, $1.1 million of compensation and fees had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). Of this amount, $1.05 million of this deferred compensation and fees was deferred into phantom Main Street stock units, representing 34,645 shares of our common stock. Any deferred amounts under the plan represented by our shares of common stock will not be issued or included as outstanding on the consolidated statement of changes in net assets until such
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shares are actually distributed to the participant in accordance with the plan, but are included in operating expenses and weighted average shares outstanding on our consolidated statement of operations as earned.
NOTE O—SUBSEQUENT EVENTS
In April 2016, Main Street led a new portfolio investment totaling $6.0 million of invested capital to facilitate the majority recapitalization of BBB Tank Services, LLC ("BBB"), with Main Street funding $4.8 million of the investment. Main Street's investment in BBB included a combination of first-lien, senior secured term debt and a direct equity investment. Main Street and its co-investor are also providing BBB an undrawn revolving line of credit to support its future working capital needs. Headquartered in Baytown, Texas, and founded in 2001, BBB provides products and services to the above-ground storage tank market. BBB's products and services include routine and emergency maintenance and repairs, replacement seals for floating roofs, application of protective coatings, and new tank construction and are provided primarily to owners of storage terminals that hold crude, refined petroleum products, chemicals and other commodities.
In April 2016, Safety Holdings, Inc., doing business as SambaSafety® ("SambaSafety"), completed a transaction with a private equity group to complete a majority recapitalization of SambaSafety. This transaction resulted in the repayment of Main Street's debt investment and the exit of Main Street's equity investment in SambaSafety. SambaSafety's innovative Software as a Service ("SaaS") solutions provide driver risk technology and information to employers, insurance, background screeners and fleet management companies. This enables companies with commercial and non-commercial fleets to easily identify and address unsafe driving behavior and take the appropriate actions necessary to maintain the safety of drivers, passengers and the communities in which they live and work. Additionally, SambaSafety solutions provide the insights insurance carriers need to accurately price risk throughout the insurance policy lifecycle. Main Street made its initial investment in SambaSafety in November 2011 and the majority recapitalization transaction resulted in realized value received by Main Street that is consistent with the fair market values for its investments in SambaSafety as of March 31, 2016.
In April 2016, Main Street led a new portfolio investment totaling $16.4 million of invested capital to facilitate the management-led buyout of Gulf Publishing Company ("Gulf") and The Petroleum Economist Limited ("Petroleum Economist", and together with Gulf, the "Companies"), with Main Street funding $13.1 million of the investment. Main Street's investment in the Companies included a combination of first-lien, senior secured term debt and a direct equity investment. Headquartered in Houston, Texas, Gulf Publishing Company was incorporated in 1916 by a team of oil company executives and oilfield equipment manufacturers as wildcat discoveries were being made along the Houston Ship Channel. Today, Gulf Publishing produces and distributes leading trade journals, industry research, databases, software, conferences and events designed for the needs of the energy industry.
During April 2016, Main Street declared a semi-annual supplemental cash dividend of $0.275 per share payable in June 2016. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that Main Street declared for the second quarter of 2016 of $0.180 per share for each of April, May and June 2016.
In May 2016, Main Street declared regular monthly dividends of $0.180 per share for each month of July, August and September of 2016. These regular monthly dividends equal a total of $0.540 per share for the third quarter of 2016 and represent a 2.9% increase from the regular monthly dividends declared for the third quarter of 2015. Including the regular monthly dividends declared for the first quarter of 2016, Main Street will have paid $17.775 per share in cumulative dividends since its October 2007 initial public offering.
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Schedule 12-14
MAIN STREET CAPITAL CORPORATION Consolidated Schedule of Investments In and Advances to Affiliates March 31, 2016 (dollars in thousands) (Unaudited)
Control Investments
Majority-owned investments
Mid-Columbia Lumber
Products, LLC
MSC Adviser I, LLC
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Other controlled investments
Hawthorne Customs and
Dispatch Services, LLC
Indianapolis Aviation
Partners, LLC
Marine Shelters Holdings, LLC
(LoneStar Marine Shelters)
Pegasus Research Group,
LLC (Televerde)
Amounts related to investments transferred to or from other 1940 Act classification during the period
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Affiliate Investments
Bridge Capital Solutions
Corporation
Chandler Signs Holdings, LLC
Congruent Credit Opportunities
Funds
East West Copolymer &
Rubber, LLC
EIG Traverse Co-Investment, L.P.
Freeport Financial Funds
Gault Financial, LLC (RMB
Capital, LLC)
Houston Plating and
Coatings, LLC
Indianhead Pipeline
Services, LLC
L.F. Manufacturing
Holdings, LLC
OPI International Ltd.
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Rocaceia, LLC (Quality Lease
and Rental Holdings, LLC)
Universal Wellhead Services
This schedule should be read in conjunction with Main Street's consolidated financial statements, including the consolidated schedule of investments and notes to the consolidated financial statements.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this section contains forward-looking statements that involve risks and uncertainties. Please see "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (the "SEC") on February 26, 2016, for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with the consolidated financial statements and related notes and other financial information included in the Annual Report on Form 10-K for the year ended December 31, 2015.
ORGANIZATION
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 receive 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 ("RIA") under Investment Advisers Act of 1940, as amended (the "Advisers Act"). 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 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. The External Investment Manager is also a direct wholly owned subsidiary that has elected to
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be a taxable entity. The Taxable Subsidiaries and the External Investment Manager are each taxed at their normal corporate tax rates based on their taxable income.
OVERVIEW
Our principal investment objective is to maximize our portfolio's total return by generating current income from our debt investments 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. Our LMM companies generally have annual revenues between $10 million and $150 million, and our LMM portfolio investments generally range in size from $5 million to $50 million. Our Middle Market investments are made in businesses that are generally larger in size than our LMM portfolio 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 $15 million. Our private loan ("Private Loan") portfolio investments are primarily debt securities which have been originated through strategic relationships with other investment funds on a collaborative basis. Private Loan investments are typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio.
We seek to fill the financing gap for LMM businesses, which, historically, have had more 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. We believe that our LMM investment strategy has limited correlation to the broader debt and equity markets.
Our Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest bearing debt securities in privately held companies that are generally larger in size than the companies included in our LMM portfolio. Our Middle Market portfolio debt investments are generally secured by either a first or second 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 Private Loan portfolio investments are primarily debt securities which have been originated 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 typically similar in size, structure, terms and conditions to investments we hold in our LMM portfolio and Middle Market portfolio. Our Private Loan portfolio debt investments are generally secured by either a first or second 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 other portfolio ("Other Portfolio") investments primarily consist of investments which are not consistent with the typical profiles for our LMM, Middle Market or Private Loan 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.
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Our external asset management business is conducted through the External Investment Manager. The External Investment Manager earns management fees based on the assets of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds managed. 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 HMS Income Fund, Inc. ("HMS Income"). Through this agreement, we share employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities.
The following tables provide a summary of our investments in the LMM, Middle Market and Private Loan portfolios as of March 31, 2016 and December 31, 2015 (this information excludes the Other Portfolio investments and the External Investment Manager which are discussed further below):
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EBITDA is not a meaningful valuation metric for our investments in these portfolio companies, and those portfolio companies whose primary purpose is to own real estate.
As of March 31, 2016, we had Other Portfolio investments in ten companies, collectively totaling approximately $78.7 million in fair value and approximately $86.6 million in cost basis and which comprised approximately 4.3% of our Investment Portfolio (as defined in "—Critical Accounting Policies—Basis of Presentation" below) at fair value. As of December 31, 2015, we had Other Portfolio investments in ten companies, collectively totaling approximately $74.8 million in fair value and approximately $75.2 million in cost basis and which comprised approximately 4.2% of our Investment Portfolio at fair value.
As previously discussed, the External Investment Manager is a wholly owned subsidiary that is treated as a portfolio investment. As of March 31, 2016, there was no cost basis in this investment and the investment had a fair value of $27.8 million, which comprised 1.5% of our Investment Portfolio at fair value. As of December 31, 2015, there was no cost basis in this investment and the investment had a fair value of $27.3 million, which comprised 1.5% of our Investment Portfolio at fair value.
Our portfolio investments are generally made through MSCC and the Funds. MSCC 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 Funds' investment returns as they are wholly owned subsidiaries of MSCC.
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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 beneficial operating expense structure when compared to other publicly traded and privately held investment firms which are externally managed, and our internally managed structure allows us the opportunity to leverage our non-interest operating expenses as we grow our Investment Portfolio. For each of the three months ended March 31, 2016 and 2015, the ratio of our total operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was 1.4% on an annualized basis.
During May 2012, we entered into an investment sub-advisory agreement with HMS Adviser, LP ("HMS Adviser"), which is the investment advisor to HMS Income, a non-publicly traded BDC whose registration statement on Form N-2 was declared effective by the SEC in June 2012, to provide certain investment advisory services to HMS Adviser. In December 2013, after obtaining required no-action relief from the SEC to allow us to own a registered investment adviser, we assigned the sub-advisory agreement to the External Investment Manager since the fees received from such arrangement could otherwise have negative consequences on our ability to meet the source-of-income requirement necessary for us to maintain our RIC tax treatment. Under the investment sub-advisory agreement, the External Investment Manager is entitled to 50% of the base management fee and the incentive fees earned by HMS Adviser under its advisory agreement with HMS Income. Based upon several fee waiver agreements with HMS Income and HMS Adviser, the External Investment Manager did not begin accruing the base management fee and incentive fees, if any, until January 1, 2014. Beginning January 1, 2016, the External Investment Manager conditionally agreed to waive a limited amount of the incentive fees otherwise earned during the three months ended March 31, 2016. During the three months ended March 31, 2016 and 2015, the External Investment Manager earned $2.3 million and $1.4 million, respectively, of management fees (net of fees waived, if any) under the sub-advisory agreement with HMS Adviser.
During April 2014, we received an exemptive order from the SEC permitting co-investments by us and HMS Income in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act. We have made, and in the future intend to continue to make, such co-investments with HMS Income 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 HMS Income and, if it is appropriate, to propose an allocation of the investment opportunity between us and HMS Income. Because the External Investment Manager may receive performance-based fee compensation from HMS Income, this may provide it an incentive to allocate opportunities to HMS Income instead of us.
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CRITICAL ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). For each of the periods presented herein, our consolidated financial statements include the accounts of MSCC and its consolidated subsidiaries. The Investment Portfolio, as used herein, refers to all of our investments in LMM portfolio companies, investments in Middle Market portfolio companies, Private Loan portfolio investments, Other Portfolio investments, and the investment in the External Investment Manager, but excludes all "Marketable securities and idle funds investments". "Marketable securities and idle funds investments" are classified as financial instruments and are reported separately on our consolidated balance sheets and consolidated schedules of investments due to the nature of such investments. Our results of operations and cash flows for the three months ended March 31, 2016 and 2015 and financial position as of March 31, 2016 and December 31, 2015, are presented on a consolidated basis. The effects of all intercompany transactions between us and our consolidated subsidiaries have been eliminated in consolidation.
Our accompanying unaudited consolidated financial statements are presented in conformity with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. 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, 2016 and 2015 are not necessarily indicative of the operating results to be expected for the full year. Also, 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, 2015. 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.
Under regulations pursuant to Article 6 of Regulation S-X applicable to BDCs and Accounting Standards Codification ("Codification" or "ASC") 946, Financial Services—Investment Companies("ASC 946"), we are precluded from consolidating other entities in which we have equity investments, including those in which we have a controlling interest, unless the other entity is another investment company. An exception to this general principle in ASC 946 occurs if we hold a controlling interest in an operating company that provides all or substantially all of its services directly to us or to any of our portfolio companies. Accordingly, as noted above, our consolidated financial statements include the financial position and operating results for the Funds and the Taxable Subsidiaries. Our consolidated financial statements also include the financial position and operating results for our wholly owned operating subsidiary, Main Street Capital Partners, LLC, ("MSCP"), as the wholly owned subsidiary provides all of its services directly or indirectly to Main Street or our portfolio companies. We have determined that all of our portfolio investments do not qualify for this exception, including the investment in the External Investment Manager. Therefore, our Investment Portfolio is carried on the consolidated balance sheet at fair value with any adjustments to fair value recognized as "Net Change in 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)."
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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. As of both March 31, 2016 and December 31, 2015, our Investment Portfolio valued at fair value represented approximately 96% 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.
Our Board of Directors has the final responsibility for overseeing, reviewing and approving, in good faith, our determination of the fair value for our Investment Portfolio and our valuation procedures, consistent with 1940 Act requirements. We believe our Investment Portfolio as of March 31, 2016 and December 31, 2015 approximates fair value as of those dates based on the markets in which we operate and other conditions in existence on those reporting dates.
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 fully impaired, 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 interest income over the life of the financing.
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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 below), 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, 2016 and 2015, (i) approximately 3.1% and 2.2%, respectively, of our total investment income was attributable to PIK interest income not paid currently in cash and (ii) approximately 0.8% and 1.0%, respectively, of our total investment income was attributable to cumulative dividend income not paid currently in cash.
Share-Based Compensation
We account for our share-based compensation plans using the fair value method, as prescribed by ASC 718, Compensation—Stock Compensation. Accordingly, for restricted stock awards, we measure the grant date fair value based upon the market price of our common stock on the date of the grant and amortize the fair value of the awards as share-based compensation expense over the requisite service period, which is generally the vesting term.
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 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) fifteenth day of the ninth month following the close of the year which generated such taxable income.
The Taxable Subsidiaries hold certain portfolio investments for us. The Taxable Subsidiaries permit us to hold equity investments in portfolio companies which are "pass-through" entities for tax purposes and to continue to comply with the "source-income" requirements contained in the RIC tax provisions of the Code. The Taxable Subsidiaries are consolidated with us for U.S. GAAP financial reporting purposes, and the portfolio investments held by the Taxable Subsidiaries are included in our 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. This
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income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements.
MSCC's wholly owned subsidiary MSCP is included in our consolidated financial statements for financing reporting purposes. For tax purposes, MSCP has elected to be treated as a taxable entity, and therefore is not consolidated with MSCC for income tax purposes and 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 taxable income, or loss, of MSCP may differ from its book income, or loss, due to temporary book and tax timing differences and permanent differences. This income tax expense, or benefit, if any, and the related tax assets and liabilities, are reflected in our consolidated financial statements.
INVESTMENT PORTFOLIO COMPOSITION
Our LMM portfolio investments primarily consist of secured debt, equity warrants and direct equity investments in privately held, LMM companies based in the United States. Our LMM portfolio companies generally have annual revenues between $10 million and $150 million, and our LMM investments generally range in size from $5 million to $50 million. The LMM debt investments are typically secured by either a first or second priority lien on the assets of the portfolio company, generally bear interest at fixed rates, and generally have a term of between five and seven years from the original investment date. In most LMM portfolio companies, we receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment.
Our Middle Market portfolio investments primarily consist of direct investments in or secondary purchases of interest-bearing 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 companies generally have annual revenues between $150 million and $1.5 billion, and our Middle Market investments generally range in size from $3 million to $15 million. Our Middle Market portfolio debt investments are generally secured by either a first or second 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 Other Portfolio investments primarily consist of investments which are not consistent with the typical profiles for LMM, Middle Market and Private Loan portfolio investments, including investments
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which may be managed by third parties. In the 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.
Our external asset management business is conducted through the External Investment Manager. The External Investment Manager earns management fees based on the assets of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds managed. 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 HMS Income. Through this agreement, we share employees with the External Investment Manager, including their related infrastructure, business relationships, management expertise and capital raising capabilities. In the first quarter of 2014, we began allocating costs to the External Investment Manager pursuant to the sharing agreement. Our total expenses for the three months ended March 31, 2016 and 2015 are net of expenses allocated to the External Investment Manager of $1.2 million and $0.8 million, respectively. The External Investment Manager earns management fees based on the assets of the funds under management and may earn incentive fees, or a carried interest, based on the performance of the funds 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 dividend income from the External Investment Manager. For the three months ended March 31, 2016 and 2015, the total contribution to our net investment income was $1.9 million and $1.2 million, respectively.
The following tables summarize the composition of our total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments at cost and fair value by type of investment as a percentage of the total combined LMM portfolio investments, Middle Market portfolio investments and Private Loan portfolio investments as of March 31, 2016 and December 31, 2015 (this information excludes the Other Portfolio investments and the External Investment Manager).
Our LMM portfolio investments, Middle Market portfolio investments and Private Loan 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
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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 Form 10-K for the fiscal year ended December 31, 2015 and "Risk Factors" below 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.
All new LMM portfolio investments receive an initial Investment Rating of 3.
The following table shows the distribution of our LMM portfolio investments on the 1 to 5 investment rating scale at fair value as of March 31, 2016 and December 31, 2015:
Total
Based upon our investment rating system, the weighted-average rating of our LMM portfolio was approximately 2.2 as of both March 31, 2016 and December 31, 2015.
As of March 31, 2016, our total Investment Portfolio had six investments on non-accrual status, which comprised approximately 0.5% of its fair value and 3.8% of our cost . As of December 31, 2015, our total Investment Portfolio had six investments on non-accrual status, which comprised approximately 0.4% of its fair value and 3.7% of its cost.
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The operating results of our portfolio companies are impacted by changes in the broader fundamentals of the United States economy. In the event that 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 and an increase in defaults. Consequently, we can provide no assurance that the performance of certain portfolio companies will not be negatively impacted by 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, 2016 and March 31, 2015
Net investment income
Net realized gain (loss) from investments
Net change in net unrealized appreciation (depreciation) from:
SBIC debentures and marketable securities and idle funds
Total net change in net unrealized appreciation (depreciation)
Distributable net investment income(a)
Distributable net investment income per share—Basic and diluted(a)
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investment income in accordance with U.S. GAAP to distributable net investment income is presented in the table above.
Investment Income
For the three months ended March 31, 2016, total investment income was $42.0 million, a 13% increase over the $37.2 million of total investment income for the corresponding period of 2015. This comparable period increase was principally attributable to (i) a $2.1 million increase in interest income primarily related to higher average levels of portfolio debt investments, (ii) a $2.5 million increase in dividend income from Investment Portfolio equity investments and (iii) a $0.5 million increase in fee income. The $4.8 million increase in total investment income in the three months ended March 31, 2016 includes a consistent amount of investment income from accelerated prepayment and repricing activity for certain Investment Portfolio debt investments when compared to the same period in 2015.
Expenses
For the three months ended March 31, 2016, total expenses increased to $14.8 million from $13.7 million for the corresponding period of 2015. This comparable period increase in operating expenses was principally attributable to (i) a $0.4 million increase in interest expense, primarily due to an increase in interest expense on the Credit Facility generally due to the higher average balance outstanding on the Credit facility in three months ended March 31, 2016 when compared to the prior year, (ii) a $0.4 million increase in general and other administrative expenses, (iii) a $0.3 million increase in compensation expense related primarily to increases in the number of personnel and base compensation levels and (iv) a $0.3 million increase in share-based compensation expense, with these increases partially offset by a $0.3 million increase in the expenses allocated to the External Investment Manager (see further discussion in "Overview"), in each case when compared to the prior year. For each of the three months ended March 31, 2016 and 2015, the ratio of our total operating expenses, excluding interest expense, as a percentage of our quarterly average total assets was 1.4% on an annualized basis.
Distributable Net Investment Income
For the three months ended March 31, 2016, distributable net investment income increased 16% to $28.8 million, or $0.57 per share, compared with $24.8 million, or $0.54 per share, in the corresponding period of 2015. The increase in distributable net investment income was primarily due to the higher level of total investment income, partially offset by higher operating expenses as discussed above. Distributable net investment income on a per share basis for the three months ended March 31, 2016 reflects a greater number of average shares outstanding compared to the corresponding period in 2015 primarily due to the March 2015 equity offering, shares issued through the ATM Program (as defined in "—Liquidity and Capital Resources—Capital Resources" below) and shares issued pursuant to our dividend reinvestment plan.
Net Investment Income
Net investment income for the three months ended March 31, 2016 was $27.2 million, or a 16% increase, compared to net investment income of $23.5 million for the corresponding period of 2015. The increase in net investment income was principally attributable to the increase in total investment income, partially offset by higher operating expenses as discussed above.
Net Increase in Net Assets Resulting from Operations
The net increase in net assets resulting from operations during the three months ended March 31, 2016 was $16.8 million, or $0.33 per share, compared with $35.4 million, or $0.77 per share, during the
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three months ended March 31, 2015. This $18.6 million decrease from the prior year period was primarily the result of a $40.0 million decrease in net change in unrealized appreciation (depreciation) to net unrealized depreciation of $26.2 million for the three months ended March 31, 2016, partially offset by (i) a $3.7 million increase in net investment income as discussed above, (ii) a $15.7 million increase in the net realized gain (loss) from investments from a net realized loss of $2.1 million during the three months ended March 31, 2015 to a net realized gain of $13.6 million for the three months ended March 31, 2016 and (iii) a $2.0 million increase in the income tax benefit from the prior year. The net realized gain of $13.6 million for the three months ended March 31, 2016 was primarily the result of (i) the net realized gain on the exit of a LMM investment totaling $14.4 million and (ii) the net realized gain of $1.3 million due to activity in our Other Portfolio, partially offset by (i) the net realized loss of $1.6 million on the exit of a Marketable securities and idle funds investment and (ii) the net realized loss of $0.9 million relating to the restructure of a Middle Market investment.
The following table provides a summary of the total unrealized depreciation of $26.2 million for the three months ended March 31, 2016:
Accounting reversals of net unrealized (appreciation) depreciation recognized in prior periods due to net realized gains/losses recognized during period
Net unrealized appreciation (depreciation) relating to portfolio investments
Total net change in unrealized appreciation (depreciation) relating to portfolio investments
Net unrealized appreciation relating to marketable securities
Unrealized depreciation relating to SBIC debentures(c)
The income tax benefit for the three months ended March 31, 2016 of $2.3 million principally consisted of (i) a deferred tax benefit of $2.6 million, which is primarily the result of the net activity relating to our portfolio investments held in our Taxable Subsidiaries, including changes in net operating loss carryforwards, changes in net unrealized appreciation/depreciation and other temporary book tax differences, partially offset by other current tax expense of $0.4 million related to accruals for U.S. federal income and excise taxes, state and other taxes.
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Liquidity and Capital Resources
Cash Flows
For the three months ended March 31, 2016, we experienced a net decrease in cash and cash equivalents in the amount of $3.1 million, which is the net result of $3.8 million of cash used for our operating activities and $0.7 million of cash provided by financing activities.
During the period, we used $3.8 million of cash for our operating activities, which resulted primarily from (i) cash flows we generated from the operating profits earned through our operating activities totaling $25.9 million, which is our $28.8 million of distributable net investment income, excluding the non-cash effects of the accretion of unearned income of $1.9 million, payment-in-kind interest income of $1.3 million, cumulative dividends of $0.3 million and the amortization expense for deferred financing costs of $0.6 million, (ii) cash uses totaling $121.2 million which primarily resulted from (a) the funding of new portfolio company investments and settlement of accruals for portfolio investments existing as of December 31, 2015, which together total $113.9 million, (b) $5.5 million related to decreases in payables and accruals and (d) increases in other assets of $1.8 million, and (iii) cash proceeds totaling $91.5 million from (a) $90.9 million in cash proceeds from the repayments of debt investments and sales of equity investments and (b) $0.6 million of cash proceeds from the sale of Marketable securities and idle funds investments.
During the three months ended March 31, 2016, $0.7 million in cash was provided by financing activities, which principally consisted of (i) $15.0 million in net cash proceeds from the Credit Facility and (ii) $9.8 million in net cash proceeds from the ATM Program, partially offset by (iii) $24.0 million in cash dividends paid to stockholders and (iv) $0.1 million for payment of deferred loan costs, SBIC debenture fees and other costs.
Capital Resources
As of March 31, 2016, we had $17.2 million in cash and cash equivalents, $1.5 million in Marketable securities and idle funds investments and $249.0 million of unused capacity under the Credit Facility, which we maintain to support our investment and operating activities. As of March 31, 2016, our net asset value totaled $1,077.0 million, or $21.18 per share.
The Credit Facility, which provides additional liquidity to support our investment and operational activities, includes total commitments of $555.0 million from a diversified group of fourteen lenders and matures in September 2020. The Credit Facility also contains an accordion feature which allows us to increase the total commitments under the facility up to $750.0 million from new and existing lenders on the same terms and conditions as the existing commitments.
Borrowings under the Credit Facility bear interest, subject to our election, on a per annum basis at a rate equal to the applicable LIBOR rate (0.44% as of March 31, 2016) plus (i) 1.875% (or the applicable base rate (Prime Rate of 3.5% as of March 31, 2016) plus 0.875%) as long as we maintain an investment grade rating and meet certain agreed upon excess collateral and maximum leverage requirements, (ii) 2.0% (or the applicable base rate plus 1.0%) if we maintain an investment grade rating but, do not meet certain excess collateral and maximum leverage requirements or (iii) 2.25% (or the applicable base rate plus 1.25%) if we do not maintain an investment grade rating. 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. The Credit Facility contains certain affirmative and negative covenants, including but not limited to: (i) maintaining a minimum availability of at least 10% of the borrowing base, (ii) maintaining an interest coverage ratio of at least 2.0 to 1.0, (iii) maintaining an asset coverage ratio of at least 1.5 to 1.0, and (iv) maintaining a minimum tangible net worth. The Credit Facility is provided on a revolving basis through its final
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maturity date in September 2020, and contains two, one-year extension options which could extend the final maturity by up to two years, subject to certain conditions, including lender approval. As of March 31, 2016, we had $306.0 million in borrowings outstanding under the Credit Facility, the interest rate on the Credit Facility was 2.3% and we were in compliance with all financial covenants of the Credit Facility.
Due to each of the Funds' status as a licensed SBIC, we have the ability to issue, through the Funds, debentures guaranteed by the SBA at favorable interest rates and favorable terms and conditions. In addition, in December 2015, the 2016 omnibus spending bill approved by Congress and signed into law by the President increased the amount of SBA-guaranteed debentures that affiliated SBIC funds can have outstanding from $225.0 million to $350.0 million. This new legislation may allow us to issue additional SBIC debentures, subject to SBA approval, above the $225.0 million that we have outstanding as of March 31, 2016. We announced on March 29, 2016 that we were issued a "green light" or "go forth" letter from the SBA inviting us to continue our application process to obtain a license to form and operate a third SBIC subsidiary to gain access to the additional SBIC debentures. 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 semi-annually. 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. On March 31, 2016, through our two wholly owned SBICs, we had $225.0 million of outstanding SBIC debentures guaranteed by the SBA, which bear a weighted-average annual fixed interest rate of approximately 4.2%, paid semi-annually, and mature ten years from issuance. The first maturity related to our SBIC debentures does not occur until 2017, and the remaining weighted-average duration is approximately 5.3 years as of March 31, 2016.
In April 2013, we issued $92.0 million, including the underwriters' full exercise of their over-allotment option, in aggregate principal amount of the 6.125% Notes. The 6.125% 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 6.125% 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 6.125% Notes mature on April 1, 2023, and may be redeemed in whole or in part at any time or from time to time at our option on or after April 1, 2018. We may from time to time repurchase 6.125% Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of March 31, 2016, the outstanding balance of the 6.125% Notes was $90.7 million.
The indenture governing the 6.125% Notes (the "6.125% 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 6.125% Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 6.125% Notes Indenture.
In November 2014, we issued $175.0 million in aggregate principal amount of the 4.50% Notes at an issue price of 99.53%. The 4.50% 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 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 mature on December 1, 2019, and may be redeemed in
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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 semi-annually on June 1 and December 1 of each year, beginning June 1, 2015. We may from time to time repurchase 4.50% Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of March 31, 2016, the outstanding balance of the 4.50% Notes was $175.0 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 Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the 4.50% Notes Indenture.
During March 2015, we completed a follow-on public equity offering of 4,370,000 shares of common stock, including the underwriters' full exercise of their option to purchase 570,000 additional shares, resulting in total net proceeds, including exercise of the underwriters' option to purchase additional shares and after deducting underwriting discounts and estimated offering expenses payable by us, of approximately $127.8 million.
During November 2015, we entered into a program (the "ATM Program") with underwriters through which we can sell, by means of at-the-market offerings from time to time, up to 1,000,000 shares of our common stock. During the fourth quarter of 2015, we sold 140,568 shares of our common stock at a weighted-average price of $31.98 per share and raised $4.5 million of gross proceeds under the ATM Program. Net proceeds were $4.3 million after commissions to the underwriter and offering costs. During the three months ended March 31, 2016, we sold 321,714 shares of our common stock at a weighted-average price of $31.01 per share and raised $10.0 million of gross proceeds under the ATM Program. Net proceeds were $9.8 million after commissions to the underwriter and offering costs. As of March 31, 2016, 537,718 shares were available for sale under the ATM Program.
We anticipate that we will continue to fund our investment activities through existing cash and cash equivalents, the liquidation of Marketable securities and idle funds investments, and a combination of future 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, Middle Market and Private Loan 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. The composition of Marketable securities and idle funds investments will vary in a given period based upon, among other things, changes in market conditions, the underlying fundamentals in our Marketable securities and idle funds investments, our outlook regarding future LMM, Middle Market and Private Loan portfolio investment needs, and any regulatory requirements applicable to us.
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 2016 annual meeting of stockholders because our common stock price per share had been trading significantly above the current 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.
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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 spillover 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 of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200%. This requirement limits the amount that we may borrow. In January 2008, we received an exemptive order from the SEC to exclude SBA guaranteed debt securities issued by MSMF and any other wholly owned subsidiaries of ours which operate as SBICs from the asset coverage requirements of the 1940 Act as applicable to us, which, in turn, enables us to fund more investments with debt capital.
Although we have been able to secure access to additional liquidity, including recent public equity and historical debt offerings, our $555.0 million Credit Facility, and the available leverage through the SBIC program, 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
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-9 supersedes the revenue recognition requirements under ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. The FASB tentatively decided to defer the effective date of the new revenue standard for public entities under U.S. GAAP for one year. If finalized, the new guidance will be effective for the annual reporting period beginning after December 15, 2017, including interim periods within that reporting period. Early adoption would be permitted for annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact the adoption of this new accounting standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease
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term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The new guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early application is permitted. The impact of the adoption of this new accounting standard on our consolidated financial statements is currently being evaluated.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods therein. Early application is permitted. The Company elected to early adopt this standard during the three months ended March 31, 2016. See further discussion of the impact of the adoption of this standard in "Note B.8.—Summary of Significant Accounting Policies—Share-based Compensation" in the notes to consolidated financial statements
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 financial statements upon adoption.
Inflation
Inflation has not had a significant effect on our results of operations in any of the reporting periods presented herein. However, our portfolio companies have experienced, and may in the future experience, the 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.
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 involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. At March 31, 2016, we had a total of $141.9 million in outstanding commitments comprised of (i) 30 investments with commitments to fund revolving loans that had not been fully drawn or term loans with additional commitments not yet funded and (ii) nine investments with equity capital commitments that had not been fully called.
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Contractual Obligations
As of March 31, 2016, the future fixed commitments for cash payments in connection with our SBIC debentures and the 4.50% Notes and the 6.125% Notes for each of the next five years and thereafter are as follows:
Interest due on SBIC debentures
Notes 6.125%
Interest due on 6.125% Notes
Interest due on 4.50% Notes
As of March 31, 2016, we had $306.0 million in borrowings outstanding under our Credit Facility, and the Credit Facility is currently scheduled to mature in September 2020. The Credit Facility contains two, one-year extension options which could extend the maturity to September 2021. See further discussion of the Credit Facility terms in "—Liquidity and Capital Resources—Capital Resources".
Related Party Transactions
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, 2016, we had a receivable of $2.3 million due from the External Investment Manager which included approximately $1.6 million primarily related to operating expenses incurred by us required to support the External Investment Manager's business, along with dividends declared but not paid by the External Investment Manager of approximately $0.7 million.
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 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, 2016, $1.1 million of compensation and fees had been deferred under the 2015 Deferred Compensation Plan (including amounts previously deferred under the 2013 Deferred Compensation Plan). As of March 31, 2016, $1.05 million of this deferred compensation and fees was deferred into phantom Main Street stock units, representing 34,645 shares of our common stock.
Recent Developments
In April 2016, we led a new portfolio investment totaling $6.0 million of invested capital to facilitate the majority recapitalization of BBB Tank Services, LLC ("BBB"), with us funding $4.8 million of the investment. Our investment in BBB included a combination of first-lien, senior secured term debt and a direct equity investment. We and our co-investor are also providing BBB an
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undrawn revolving line of credit to support its future working capital needs. Headquartered in Baytown, Texas, and founded in 2001, BBB provides products and services to the above-ground storage tank market. BBB's products and services include routine and emergency maintenance and repairs, replacement seals for floating roofs, application of protective coatings, and new tank construction and are provided primarily to owners of storage terminals that hold crude, refined petroleum products, chemicals and other commodities.
In April 2016, Safety Holdings, Inc., doing business as SambaSafety® ("SambaSafety"), completed a transaction with a private equity group to complete a majority recapitalization of SambaSafety. This transaction resulted in the repayment of our debt investment and the exit of our equity investment in SambaSafety. SambaSafety's innovative Software as a Service ("SaaS") solutions provide driver risk technology and information to employers, insurance, background screeners and fleet management companies. This enables companies with commercial and non-commercial fleets to easily identify and address unsafe driving behavior and take the appropriate actions necessary to maintain the safety of drivers, passengers and the communities in which they live and work. Additionally, SambaSafety solutions provide the insights insurance carriers need to accurately price risk throughout the insurance policy lifecycle. We made our initial investment in SambaSafety in November 2011 and the majority recapitalization transaction resulted in realized value received by us that is consistent with the fair market values for our investments in SambaSafety as of March 31, 2016.
In April 2016, we led a new portfolio investment totaling $16.4 million of invested capital to facilitate the management-led buyout of Gulf Publishing Company ("Gulf") and The Petroleum Economist Limited ("Petroleum Economist", and together with Gulf, the "Companies"), with us funding $13.1 million of the investment. Our investment in the Companies included a combination of first-lien, senior secured term debt and a direct equity investment. Headquartered in Houston, Texas, Gulf Publishing Company was incorporated in 1916 by a team of oil company executives and oilfield equipment manufacturers as wildcat discoveries were being made along the Houston Ship Channel. Today, Gulf Publishing produces and distributes leading trade journals, industry research, databases, software, conferences and events designed for the needs of the energy industry.
During April 2016, we declared a semi-annual supplemental cash dividend of $0.275 per share payable in June 2016. This supplemental cash dividend is in addition to the previously announced regular monthly cash dividends that we declared for the second quarter of 2016 of $0.180 per share for each of April, May and June 2016.
In May 2016, we declared regular monthly dividends of $0.180 per share for each month of July, August and September of 2016. These regular monthly dividends equal a total of $0.540 per share for the third quarter of 2016 and represent a 2.9% increase from the regular monthly dividends declared for the third quarter of 2015. Including the regular monthly dividends declared for the first quarter of 2016, we will have paid $17.775 per share in cumulative dividends since our October 2007 initial public offering.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments and Marketable securities and idle funds 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 of any debt investments that include floating interest rates. 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, 2016, approximately 61% of our debt investment portfolio (at cost) bore interest at floating rates, 97%
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of which were subject to contractual minimum interest rates. As of March 31, 2016, none of our Marketable securities and idle funds investments (at cost) bore interest at floating 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 and our 4.50% Notes and 6.125% Notes, which comprise the majority of our outstanding debt, are fixed for the life of such debt. As of March 31, 2016, we had not entered into any interest rate hedging arrangements. The following table shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of March 31, 2016.
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200
300
400
500
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 Chairman, Chief Executive Officer and President, our Chief Financial Officer, our Chief Compliance Officer and our 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 Securities Exchange Act of 1934). Based on that evaluation, our Chairman, Chief Executive Officer and President, our Chief Financial Officer, our Chief Compliance Officer and our 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 Securities Exchange Act of 1934. There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 try to 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
There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 that we filed with the SEC on February 26, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2016, we issued 113,631 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, 2016 under the dividend reinvestment plan was approximately $3.3 million.
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):
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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.
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EXHIBIT INDEX
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