Main Street Capital Corporation

Greetings and welcome to Main Street Capital Corporation's second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the following presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to Zach Vaughn with Denard Lascar Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's second quarter 2020 earnings conference call. Main Street issued a press release yesterday afternoon that details the company's second quarter financial and operating results. This document is available on the investor relations section of the company's website at mainstcapital.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until August 14th. Information on how to access the replay was included in yesterday's earnings release. We also advise you that this conference call is being broadcast live through the internet and can be accessed on the company's homepage. Please note that information reported on this call speaks only as of today, August 7, 2020, and therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call will contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, or similar expressions. These statements are based on management's estimates, assumptions, and projections as of the date of this call and there are no guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements. As a result of risks, uncertainties, and other factors, including, but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission, which can be found on the company's website or at sec.gov. Main Street assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including distributable net investment income. Please refer to yesterday's press release for a reconciliation of these measures to the most directly comparable GAAP financial measures. Certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. And now I'll turn the call over to Main Street CEO, Dwayne Hyzak.

Thanks, Zach. Good morning, everyone, and thank you for joining us today. Joining me for our call today with prepared comments are David Magdol, our President and Chief Investment Officer, and Brent Smith, our CFO. Also joining us for the Q&A portion of our call are Nick Meserve, our Managing Director and Head of our Middle Market Investment Group, and Jason Beauvais, our General Counsel. All of us at Main Street hope that you and your loved ones have been able to stay safe and healthy. We recognize that the last six months have been a very challenging time for everyone, and that significant uncertainty continues to exist about the near-term and long-term impact of the COVID-19 pandemic on our society and economy and the eventual timing for the return to normal. Despite these challenges, we remain committed to and focused on generating long-term value for our fellow shareholders. Given the ongoing impact of the pandemic, similar to last quarter's call, I will start today's call with some comments regarding the pandemic's impact. I will then comment on our overall performance in the second quarter Some developments within our asset management business, our recent dividend announcement, our investment activities and current investment pipeline, and several other updates. Following my comments, David and Brent will provide additional comments on our investment strategy, investment portfolio, and financial results, after which we will be happy to take your questions. Since our last conference call, we have continued to prioritize the health and well-being of our employees and the management teams and employees of our portfolio companies. We greatly appreciate the efforts of these individuals and we continue to be very pleased with our efforts and activities since the beginning of the pandemic. These individuals have historically been a key strength for our firm and they give us significant confidence in our ability to continue to maximize our opportunities in the current environment and in the future. While the economic environment since our last call has continued to be very challenging, and in many cases likely more challenging than most people envisioned in the early days of the pandemic, We believe that the performance across most of our portfolio companies has stabilized and we continue to feel good about the overall quality of our investment portfolio. We are also pleased that despite the ongoing impacts of the pandemic, we have continued to have success executing on new investments in both our lower middle market and private loan strategies. We recently enhanced our already strong liquidity position with our $125 million bond offering in July, and we remain confident that our very conservative capital structure and significant liquidity position will allow us to continue to manage through the current challenges and to successfully execute on the opportunities that exist with our portfolio companies and in our pipeline of attractive lower middle market and private loan investment opportunities. We're also very pleased with our recent announcement of the agreement under which we would become the sole investment advisor to HMS Income Fund. We believe that this transition is a natural progression of our historical role with HMS and we are excited about positioning the fund for the future while also executing our overall strategy to grow our asset management business within our internally managed structure and continue to provide this unique benefit to our Main Street stakeholders. Now turning specifically to our results for the second quarter, these results reflect the negative impact of the pandemic on the overall economy, most specifically in the decreased amount of dividend income we realized from our equity investments and in an increase in the number of investments on non-accrual status at quarter end and the number of investments that are underperforming consistent with the results being experienced across the broader market. We are confident that the decrease in dividend income is a temporary issue which will recover as the impacts of the pandemic subside and our investment team continues to maintain significant focus on working through the underperforming investments to realize the best possible outcome for our stakeholders. Despite the impact of these items, as a result of our diversified investment portfolio, together with the advantages of our differentiated investment strategy The alignment of our interests with our role in the market portfolio company management teams, our efficient operating structure, and alignment of interests with our shareholders, combined with our conservative capital structure and strong liquidity position, we believe that we are well positioned to weather the current market conditions and provide a favorable outcome for all of our stakeholders, and we remain comfortable with our commitment to maintaining a stable monthly dividend payment level going forward. To that end, earlier this week our board declared our fourth quarter 2020 regular monthly dividends of 20.5 cents per share, payable in each of October, November, and December, an amount that is unchanged from our monthly dividends for the third quarter. Now turning to our investment activities in the second quarter and our current investment pipeline, we completed lower-middle market investments of $85 million in the quarter, including an investment in one new company, and as of today I would characterize our lower middle market investment pipeline as average. Included in this investment pipeline are several follow-on investments in existing portfolio companies as these companies execute on various attractive opportunities. Despite the impact of the pandemic, we continue to be very active in our lower middle market strategy and we have several new investment opportunities in the pipeline that we expect to complete in the near future. More importantly, Based upon our historical experiences over the last two decades as the industry-leading partner for lower middle market companies and their management teams, we expect that our very unique debt and equity investment offering, combined with our ability to be a long-term and permanent partner to these companies, will result in a significant increase in new opportunities as the economy begins to recover. During the second quarter, we continued the successful focus of our non-lower middle market investment growth on our private loan portfolio. resulting in this portfolio growing by $9 million on a net basis in the quarter, while our middle market portfolio decreased by $25 million. As of today, I characterize our private loan investment pipeline as average. When looking at the performance of our investment portfolio during the quarter and since quarter end, we are pleased that the performance across most of our portfolio companies has stabilized, allowing us to begin the recovery of the unrealized depreciation we experienced in the first quarter due to the pandemic. and in closing, our officer and director group has continued to be regular purchasers of our shares, investing approximately $1.2 million during the second quarter. On a collective basis, our director and officer group owns Main Street shares valued at approximately $103 million a quarter end. With that, I will turn the call over to David.