Main Street Capital Corporation

Greetings and welcome to the Main Street Capital Corporation's second quarter earnings conference call. At this time, all participants are in the listen-only mode. A brief question and answer session will follow the formal 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. It is now my pleasure to introduce your host, Zach Vaughn, with Denard Laskar 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 2022 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer, David Magdol, President and Chief Investment Officer, and Jesse Morris, Chief Financial Officer and Chief Operating Officer. Also participating for the Q&A portion of the call is Nick Meserve, Managing Director and Head of the Private Credit Investment Group. 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 on 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 12th. Information on how to access the replay was included in yesterday's 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 5, 2022, 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. We appreciate everyone's participation on this morning's call. We hope that everyone's doing well. On today's call, I will provide my usual updates regarding our performance in the quarter, while also providing updates on our asset management activities, our recent declarations of our supplemental dividend in September and the increase to our monthly dividends for the fourth quarter, our expectations for dividends going forward, our recent investment activities and current investment pipeline, and several other noteworthy updates. Following my comments, David and Jesse will provide additional comments regarding our investment strategy, investment portfolio, financial results, capital structure and leverage, the impact of rising interest rates on our future net investment income, and our expectations for the third quarter, after which we'll be happy to take your questions. Before we begin with our normal quarterly commentary, I want to highlight a change we're making this quarter to our definition of Distributable Net Investment Income, or DNII, which Jesse will cover in more detail in his comments. Our goal in using DNII as a key operating metric has always been to increase the quality of our reporting by providing this metric of the amount of cash flow from our investment activities that is available to fund our recurring monthly dividends paid to shareholders and thereby increase the visibility our shareholders have regarding the quality and recurring nature of our monthly dividends. Given both the growth and increased variability of our deferred compensation expense or benefit, a non-cash item, over the last few quarters, We have concluded that it is appropriate to modify our definition of DNII to adjust for this item. All of our comments this morning are provided using this new definition of DNII. We are pleased with Main Street's strong second quarter results, which included a new quarterly record for net investment income per share and matched our prior quarterly record for DNII per share. These positive results included contributions from each of our primary investment strategies, and as a result of our strong performance, D&II per share exceeded our regular monthly dividends by 21%. This strong performance resulted in our recommendations to our board of directors for our most recent dividend announcements, which I'll detail later. While our net asset value per share declined in the quarter, the decline was primarily the result of the impact of market spread increases as opposed to company-specific performance on our private loan and middle market debt investments. We're very pleased with the continued strong performance of our lower middle market portfolio companies, which resulted in another quarter of significant fair value appreciation in this portfolio and partially offset the overall decline in the valuations of our debt investments. We are also very pleased with our recent investment grade rating assigned to us by Fitch in July and the support of our existing lender group that allowed us to complete the expansion and extension of our credit facility that we announced yesterday. We view these developments as significant enhancements to our current and future capital structure. We remain very confident that our highly unique lower middle market strategy, combined with the strength of our private loan platform and our asset management business, will allow us to continue to deliver superior results for our shareholders. Despite the increased market volatility and uncertainty over the last few months, we are very pleased that our lower middle market and private loan strategies have continued to deliver attractive investment originations. While our lower middle market investments of $32 million in the quarter were offset by several repayments, resulting in a net decrease in our low middle market investments on a cost basis of $5 million for the quarter. We are very pleased that since quarter end, we have already executed over $85 million of follow-on investments in existing low middle market portfolio companies. We are also very pleased that we have maintained our significant momentum in our private loan strategy, resulting in a net increase in our private loan investments of $72 million for the quarter. We believe that our second quarter results illustrate the benefits of the significant growth of our investment portfolio over the last year, and we expect these benefits to continue in the second half of the year. Despite the negative impact of the increase in market spreads to the fair values of our debt investments at quarter end, the underlying operating performance across most of our portfolio companies has continued to be strong. This strong performance provides us optimism about the overall value creation we expect from these companies in the third quarter. We continue to believe that the strength of our differentiated investment strategies, including our highly unique lower middle market strategy, combined with our diversified group of portfolio companies and our asset management business, will allow us to consistently deliver superior results for our shareholders. And we are very excited about our outlook for the remainder of the year. We've also continued to make progress in our asset management business. Amidst the income fund, the non-traded BDC we advised through our external investment manager, continue to maintain a fully invested portfolio at the end of the second quarter. We remain excited about our plans for the fund as we execute on our investment strategies and other strategic initiatives, and we are optimistic about the future performance of the fund. We continue to grow the investment portfolio at MS Private Loan Fund One through its co-investment activities with Main Street and MSC Income Fund and our private loan investment strategy, and we are excited about the growing benefits we expect to receive from this relationship in the future. We remain excited about our strategy for growing our asset management business within our internally managed structure and increasing the contributions from this unique benefit to our Main Street stakeholders. Based upon our results for the second quarter and the positive performance of our existing portfolio companies, combined with our favorable outlook in each of our primary investment strategies and for our asset management business, and the benefits of our efficient operating structure, earlier this week our board declared a supplemental dividend of 10 cents per share payable in September and an increase in monthly dividends for the fourth quarter of 2022 to 22 cents per share, payable in each of October, November and December. These monthly dividends represent a 4.8% increase from the fourth quarter of 2021 and a 2.3% increase from the third quarter of 2022. The supplemental dividend for September is due to our strong performance in the second quarter, which resulted in DNII per share that was over 13 cents are 21% greater than the monthly dividends paid during the quarter. This represents our fourth consecutive quarter of paying a supplemental dividend and results in total supplemental dividends paid over the last year of $0.35 per share, representing an additional 13% paid above our monthly dividends and an increase in total dividends paid for the 12-month period of 18.5% over the prior year. We're pleased to have been able to deliver this significant additional value to our shareholders. As a reminder, we currently expect to recommend that our board declare future supplemental dividends to the extent DNII significantly exceeds monthly dividends paid in future quarters, which is consistent with our practice for the last four quarters. Based upon our expectations for continued favorable performance in the third quarter, we currently anticipate proposing an additional supplemental dividend for the fourth quarter. Now turning to our current investment pipeline, We're pleased to maintain a number of attractive opportunities in our low-eminal market and private loan strategies. As of today, and after closing over $85 million of investments to date in the third quarter, I would characterize our low-eminal market investment pipeline as average. We remain excited about the quality of the investment opportunities in our current pipeline and about the prospects for follow-on investments in existing portfolio companies as we and our companies actively look to execute on various growth opportunities. We also continue to be very pleased with the performance of our private credit team and the significant growth they have provided for our private loan portfolio and our asset management business. And as of today, I would characterize our private loan investment pipeline as average. With that, I will turn the call over to David.