Ken Dennard - Dennard Lascar Associates Vince Foster - CEO Brent Smith - CFO Dwayne Hyzak - COO.

Bryce Rowe - Robert W. Baird Christopher Nolan - FBR Robert Dodd - Raymond James Doug Mewhirter - SunTrust.

Welcome to the Main Street Capital Corporation Third Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the conference over to your host Ken Dennard, please go ahead..

Thanks Rob. Good morning everyone and thanks for joining us for Main Street Capital Corporation third quarter 2016 earnings conference call. Joining me today on the call is Chairman and Chief Executive Officer, Vince Foster, President and Chief Operating Officer, Dwayne Hyzak and Chief Financial Officer, Brent Smith.

Main Street issued a press release yesterday afternoon with the details of the company's third quarter 2016 financial and operating results. This document is available on the investor relations section of the company's website at mainstreetcapital.com.

A replay of today's call will be available beginning in about an hour after the completion of the call and will remain available until November 11. Information on how to access the replay feature was included in yesterday's news release.

We also advise you that this conference call is being broadcast live through the Internet so the webcast can be accessed through the companies webcast page and there is an archive there as well.

Please note that information reported on this call speaks only as of today November 4th, 2016 and therefore you are advised of time sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's conference call will contain forward-looking statements.

Many of these forward-looking statements can be identified by the use of the words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management estimates, assumptions and projections as of the date of this call and are not guarantees of future performance.

Actual results may differ materially from results expressed or implied in these statements as the 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 also 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 will derived from third-party sources and not independently verify. And now I'd like to turn the call over to Vince..

Thanks Ken and thank you for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend announcement and conclude by commenting on our investment pipeline.

Following my comments Dwayne Hyzak our President and Brent Smith, our CFO will cover our operating performance in more detail and account for our third quarter financial results, originations and exists, our recent announcements, our current liquidity position and key portfolio statistics and our expense ratio after which we will take your questions.

We are very pleased with our third quarter operating results. Our lower middle market portfolio primary area of focus was relatively stable in terms of net appreciation during the quarter with 21 of our other investments appreciating during the quarter and 18 depreciating.

In addition we realized a gain of roughly $18 million through the sale of a our portfolio company Travis Trailer [ph]. Our middle-market loans appreciated by $6.7 million during the quarter on a net basis and our private loans and other assets appreciated by $6.5 million during the quarter.

We finished the quarter with a net asset value per share of $21.62, a sequential increase of $0.51 a share over Q2. Our lower middle-market companies collectively continue to exhibit very conservative leverage ratios on a relative basis which Dwayne will cover in greater detail.

Earlier this week our Board declared our first quarter 2017 regular monthly dividends of $0.185 a share in each of January, February and March maintaining our fourth quarter payout rate. The X-dates for these dividends are December 20, January 18, and February 17th, respectively.

This past June we paid a semi-annual supplemental dividend of $0.275 a share and several weeks ago we declared a $0.275 per share supplemental dividend which will be paid in December. 2016 represents our fifth consecutive year of supplemental dividends beginning with the 2012 dividend declared in Q4 of that year.

We currently expect to ask our Board to declare our next semiannual supplemental dividend to be paid in the second quarter of 2017 in the range of $0.27 to $0.30 a share.

Primarily as a result of our realized gains in the second and third quarters we currently estimate that 100% of our third quarter regular dividends and most of our October regular dividend will be taxed as or similar to long-term capital gains for federal income tax purposes to our individual shareholders.

I summarized our aftermarket or ATM equity offering activity on our last call. Since then we have issued an additional 0.5 million shares through mid-October and netted proceeds of over $17 million.

We continue to be pleased with the execution to-date of the program and intend to continue utilizing the ATM alternative assuming continued favorable execution. As of today I would characterize our investment pipeline as above-average and we continue to expect a solid next 90 days from a lower middle-market origination perspective.

We continue to seek and receive significant equity participation in our lower middle-market investments and as of quarter end we own an average of the 36% fully diluted equity ownership position in a 99% of these investments in which we currently have equity exposure.

Our officer director group has continued to be regular purchasers of our shares investing approximately $0.5 million during the third quarter. With that I'd like to turn the call over to Dwayne to cover our portfolio performance in more detail..

Thanks Vince and good morning, everyone. We are pleased to report another quarter during which we grew both our total investment income and distributable net investment income and again generated distributable net investment income in excess of our recurring monthly dividends.

We believe that our unique investment strategy focused primarily on the underserved lower middle-market combined with our efficient operating structure continue to provide a value proposition that differentiates Main Street from other yield oriented investment options and generates the premium total returns realized as a result of the historical growth in our dividends per share, our net asset value share and our stock price.

As we’ve discussed in prior quarters we believe that the primary driver of our long-term success has been and continues to be our focus on the underserved lower middle-market and specifically our investment strategy of investing in both debt and equity in the lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market portfolio companies and not just the financing source.

A little over a year ago we began providing some highlights on different aspects of our focus on the lower middle-market to demonstrate the significant benefits of our unique investment strategy.

Since that time we have exited our investments in several lower middle-market companies including the exit of our investments in Travis Trailer during the third quarter so we wanted to provide an update on one of the aspects that we previously highlighted.

The third quarter of 2016 represents the end of Main Streets nine full year as a public company. During this time period we have exited 39 of our lower middle-market equity investments.

Of these exits 26 have resulted in realized gains with these gains totaling approximately $140 million while 13 have resulted in realized losses with these losses totaling approximately $14 million.

In addition when you compare our realized gains on these exists to our fair value marks two quarters and four quarters prior to exit the action by achieved on the exit of these equity investments exceeded a fair value marks two quarters prior to exit by approximately 25% and four quarters prior to exit by approximately 80%.

Specifically in the case of the exit of our investment in Travis Trailer during the third quarter, we generated a realized gain of approximately $18 million and in a cumulative 42% and a [indiscernible] rate of return and 2.9 times money investor return on our a cumulative debt and equity investments with the debt investments representing approximately 60% of our total invested capital.

In addition our actual realized value from the exit of our [indiscernible] investment was 23% or $4.6 million greater than our fair value estimate at June 30th and 77% or $10.9 million greater than our fair value estimate a year prior to exit.

We believe that our historical realized gains and the related comparison of these realized gains to our prior fair value estimates are helpful when evaluating the benefits of our lower middle-market investment strategy as well as when evaluating our current fair value estimates for these investments and the opportunity for upside in the ultimate value that might be realized upon the exit of these investments.

Consistent with prior quarters the contributions from the lower middle-market portfolio continue to be well diversified with 43 of our 71 lower middle-market companies with equity we investments having appreciation at September 30th and with 27 of those companies that are flow-through entities for tax purposes or approximately 60% of our total investments in flow-through entities contributing to our dividend income over the last 12 months.

In addition we also have several equity investments and non-flow through entities which had contributed to our dividend income over the last 12 months.

We believe that the diversity of our lower middle-market portfolio is very important when analyzing the benefits from our lower middle-market strategy and we believe that this diversity provides visibility to the recurring nature of these benefits in the future.

Now turning specifically to our investment portfolio at quarter end and our investment activity in the third quarter we are pleased to report that overall our portfolio performance remained strong.

Our investment activity in the third quarter included total follow-on investments in our lower middle-market portfolio of approximately $8 million which after aggregate repayments on debt investments and return of invest to equity capital from several lower middle-market portfolio investments resulted in a net decrease in our lower middle-market portfolio of approximately $26 million.

We have net increase in our middle-market portfolio of approximately $6 million and a net increase of our private loan portfolio of $30 million.

As result at September 30 we had investments in 197 portfolio companies that are more than 50 different industries across the lower middle market, middle-market and private loan components of our investment portfolio.

The largest portfolio company represents less than 5% of our total investment income for the last 12 months and less than 3% of our total portfolio fair value with the majority of our portfolio investments representing less than 1% of our income and our assets.

Additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday but I will touch on a few highlights. Our lower middle market portfolio included investments in 71 companies representing approximately $830 million of fair value which is approximately 18% above our cost basis.

At the lower middle-market portfolio level the portfolios median net senior debt to EBITDA ratio was a conservative 2.9 to 1 or 3.2 to 1 including portfolio company debt which his junior priority to our deposition.

As a complement to our lower middle-market portfolio and our middle-market portfolio we had investments in 81 companies representing approximately $620 million of fair value. In our private loan portfolio we had investments in 45 companies representing approximately $338 million in fair value.

The total investment portfolio at fair value at September 30, was approximately 106% of the related cost basis and we had five investments on our accrual status which comprised approximately 0.4% of the total investment portfolio at fair value and 2.8% at cost.

In summary Main Streets investment portfolio continues to perform at a high level and continues to deliver on our long-term goals. With that I will turn the call to Brent to cover our financial results, capital structure and the liquidity position..

Thanks, Dwayne. We are pleased to report that our total investment income increased by 9% for the third quarter over the same period in 2015 to a total of $46.6 million. Interest income increased by approximate $1.4 million dividend income increased by approximately $2.8 million and fee income was flat compared to the prior year.

The amount of income that is less consistent on a recurring basis or nonrecurring was approximately $1.7 million or $0.03 per share related to dividend income. Third quarter 2016 operating expenses excluding noncash share-based compensation expense increased by $0.8 million over the third quarter of the prior-year to a total of $13.9 million.

The increase was primarily related to a $0.6 million increase in compensation expense and a $0.3 million increase in interest expense. These increases were partially offset by part $0.1 million increase in the amount of cost allocated to our external investment manager.

The ratio of our total operating expenses excluding interest expense as a percentage of average total assets which we believe the key metric in evaluating our operating efficiency was 1.5% on an annualized basis for the third quarter and continues to compare very favorably to other BDCs and other yield oriented investment options.

Our increased total investment income and the continued leverage of our efficient operating structure resulted in a 11% increase in distributable net investment income for the third quarter of 2016 to a total of $32.7 million or $0.62 per share. Exceeding our recurring monthly dividends paid for the quarter by nearly 15%.

Our external investment manager's relationship with the HMS income fund benefited our net investment income by approximately $2 million in the third quarter of 2016.

Through a $1.2 million reduction of our operating expenses for cost reallocated to the external investment manager for services we provided to it and $0.8 million of dividend income from the external investment manager.

We recorded a net realized gain of $4.3 million during the third quarter primarily relating to a net realized gain on the exit of three lower middle-market investments partially offset by realized losses related to the exit of one private line investment and the restructuring of one middle-market investment and as Vince discussed we recorded net realized appreciation on the investment portfolio of $9.9 million in the third quarter primarily related to $6.7 million of net appreciation on our middle-market portfolio, $3.2 million of net appreciation related to our external investment manager, 2.8 million of net appreciation relating to our other portfolio and 0.5 million of net appreciation relating to our private loan portfolio.

This net appreciation was partially offset by net depreciation relating to our lower middle-market portfolio of $3.3 million excluding $4.6 million of appreciation generated during the quarter on our exit of Travis Trailer. Additional details for the change our net unrealized appreciation can be found in our earnings release.

Looking forward to the fourth quarter of 2016 and consistent with the information provided on our last earnings conference call we wanted to provide an update regarding the market movement relating to our middle-market portfolio. The overall market for middle-market debt investments has continued to improve during the fourth quarter.

Based on our static middle-market portfolio as of September 30, 2016 not taking into account any new investments or sales or repayments during the fourth quarter and based on quoted market prices for underlying middle-market debt investments our middle-market portfolio has generated approximately 2 million to 3 million in net unrealized appreciation to this point in the fourth quarter.

Our operating results for the third quarter of 2016 resulted in a net increase to net assets of $43.2 million or $0.82 per share. On a capital resources front our liquidity and overall capitalization remained strong. At the end of the second quarter we had $31.8 million of cash and $242 million up unused capacity under our credit facility.

Today we have approximately $28 million of cash and $243 million of unused capacity under the credit facility. In addition, we currently have $119 million of incremental SBIC debentures available to us under our third SBIC license. We are also very pleased to have recently extended maturity of our credit facility to September 2021.

As a result our credit facility will continue to provide significant flexibility within our capital structure on but we believe to be beneficial terms and conditions for the next five years.

As we look forward to the fourth quarter of 2016 we currently expect that we would generate distributable net investment income of $0.59 to $0.61 per share during the quarter. This estimate is $0.035 to $0.055 per share or 6% to 10% above our previously announced monthly dividends for the fourth quarter of $0.555 per share.

With that I will now turn the call back over to the Operator so we can take any questions..

[Operator Instructions]. Our first question today comes from Bryce Rowe of Baird. Please go ahead..

I wanted to ask a question about the pipeline and also question about capital structure and capital planning. On the pipeline specifically the lower middle-market pipeline you guys noted an above-average pipeline and potential for good activity over the next 90 days.

I was curious what you are seeing from a retainer perspective understanding that you don't really control that process all the time but with the level of activity that we've seen so far this year with the investment exits and securities and what you might see over the next quarter or so in terms of repayments?.

I think we only have one company actively talking with I think a member of our credit facility to refinance us so it's really pretty light. Again, you can't predict it but I don't see any real near-term material developments its there..

Bryce, what I would add is if we were on the same call a year ago you would've heard our common saying we are expecting elevated activity. I would say with the three large exits we've had over the last six to nine months that activity has largely run its course so we would not expect to see that same level of activity over the next 12 months..

It's kind of survivorship buys..

In terms of the capital structure you guys have clearly used the ATM program to your advantage this year and you also have had been approved for that third SBIC license so just curious how you way continued use of the ATM program and draws on the SBA and any other form of capital issuance that you might be considering, your notes or some form of debt?.

Sure. Obviously we are very excited about getting the SBIC facility utilize. That is really just a function of originating and closing investments and qualified small businesses so they are going to be somewhat smaller deals that are SBIC eligible.

When we go out and originate, we are originating both and it's somewhat arbitrary in terms of how much of the backlog is qualifying versus non-qualifying but clearly that's a priority for us.

It's not a priority to the extent that we are only looking at qualifying companies so if you have a company with significant non-US activity or certain industries that aren't SBIC eligible than they can't go in there and we put them in the pyramid and put them in a [indiscernible].

So that’s just kind of business as usual and then of course we have exits of SBIC investments that free up capital in the other two license entities, too. So, I expect by this time next year we'll be largely tapped out with respect to that facility. Once in a while we see a private loan to middle-market loan that qualifies.

But I would say in terms of balance sheet planning, in general what would look at Bryce is how much we have on the revolver and we want to use our revolver as a revolver so it's roughly 550. We have got about three in a quarter out. It has been pretty stable over the last several weeks.

We really aren't comfortable with getting the revolver all that much more drawn so it's really a function of thinking about a large non-SBIC qualifying -- relatively large that comes up, do we want to finance that thing off the revolver? We do have some equity dribbling in but it's not all that material when you think about 2 million shares over the last year.

It doesn't move the needle that much so what we really think about is when does it make sense to term out some of that revolver. If and when we do that it's going to be via issuing another investment-grade senior note. As we learned from the first time it needs to be 250 million.

Ideally we go to 50 million or 100 million tranches but you really can't do that, as a practical matter. So I would be looking at us to term out 250 of that revolver probably sooner rather than later if we can get good execution and good pricing.

We are fortunate enough that we can wait in here and we don't have to do it but we don't want to be in a position where we feel like we need to do it and then we need to accept whatever the market is going to give us.

The conditions are pretty good right now so we'll probably continue to monitor that very closely particularly since we got our earnings release out and we can focus on that more diligently..

I think that sums it up well. As you said we will look to be opportunistic on the debt market if the opportunity presents itself and we will continue to monitor as you said..

The next question comes from Christopher Nolan of FBR & Company. Please go ahead..

The lower middle market, you guys had the Travis Trailer $17.9 million gain and then I believe there were two other smaller realized losses if my math is correct, what were they?.

On the lower middle-market side we had a $2.2 million loss on the exit of radial drilling and we also had a $1.3 million loss on the exit NPS Denver. That was on the lower middle market side..

On the change in non-accruals, how much of the non-accruals are energy-related at this point?.

Right now we have three of the five that are energy-related..

Vince, by the way if you want to give commentary on the energy market, feel free..

I think we are on the rebound..

The next question is from Robert Dodd of Raymond James..

I everybody, two questions on dividend, one of the number this quarter and then a bigger clever on, on the '97 dividend income this quarter so record high by $2 million -- it's up $2 million from last quarter, $2.7 million from last year.

You pointed out some of that is nonrecurring -- not consistent I should say, can you give us any color, was there any onetime abnormally one time in that number or should we see Q1 or Q2 figures being more sustainable or has the group that are paying you dividends expanded materially?.

I think when we look at the nonrecurring nature or the less recurring nature of that it's really hard to determine what goes in that bucket. It is a fairly judgmental assessment.

When you look at this quarter we did get a dividend from that Travis Trailer prior to exits which was the result of cash on the balance sheet and their earnings for the quarter prior to exit.

So when you look at that, how do you categorize that, we obviously categorized significant portion of that is nonrecurring even when you look at it if you had a debt investment the gets paid off what do you do with that net interest? Do you characterize that as non-recurring, so we really struggle with what portion of the dividend income is nonrecurring just given the diverse nature of our portfolio and the number of companies that are paying dividends to us.

I think we look forward to projections for Q4 and Q1 for dividend income.

We do expect it to come down some and that’s what we were trying to signal with highlighting of a $1.7 million of that number being less recurring or nonrecurring but we are very comfortable with the nature of the dividend income that we have when you look at the types of companies both quality and diversity of companies that are contributing each quarter to that dividend number, it's one that we have a got a high level of comfort with..

Robert, the challenge with us with respect to dividends comes not so much with the flow through entities because they have their contracts that require to pay out dividends and for no other reason to cover that members tax obligations.

But it's with respect the C Corps [indiscernible] because they don't have to pay dividends and we tell our lower middle-market teams that have significant C Corp exposure, we stress that while the company might be appreciating, it's a dead asset from on Travis Trailer was an example, it's a dead asset from an NII perspective unless you can pay dividends so read about private equity firms doing dividend recaps periodically, while we have identical typical C Corps, we have the identical issue with our companies and we expect our managers if these companies are not exiting to figure out ways to generate some dividend activity as part of our evaluation of their performance.

So what I hope and expect is we have regularly recurring -- nonrecurring dividends, maybe one per portfolio a couple of times a year because otherwise we have -- you can go several years with the debt asset there, but that's something we are trying to discourage..

My follow-up question actually relates to something you said that Vince, in terms of like on the pass through S Corp or [indiscernible] your contractually obligated to pay dividend sufficient to cover the taxes.

Election-year, politics and taxes in this but there you go it we are coming up on election year, so some fairly radical differences between the two candidates on tax policy.

Do you have a view? Have you done any analysis if once candidate wins and taxation on past two entities drops to I think it is 15%, how would that affect the potential for dividend presuming that actually happened? How would that affect it?.

I don't think it's been thought through very well because you can tax pass-through me and come at a lower rate but realistically you're talking about an individual on our size companies if we weren’t individual that you give you pass way through all the way to the 1040 have several million dollars of income that’s going to put you at the upper 1% or 1/10th or 1% and you’re going to have taxes.

So I don't think that’s really been thought through. I think what's going to happen is corporate rates in general are under pressure to be lowered, foreign earnings are going to come back. They are under pressure to be repatriated with some relief on their rates.

I say pressure, these are the trends that we are seeing and hearing about predicting, so C-Corp rate is coming down and foreign earnings are coming back and small business incentives increasing to try to help small businesses and create job growth and so we are kind of both the beneficiaries of a lot of that and the victim of a lot of that so we wouldn't anticipate any changes really at the federal level that are going to be material.

What's kind of more interesting is what the states are doing because if we have a company in California, Wisconsin or Minnesota you might see a 45% to 50% distribution rate that is contractual whereas Texas it might be 35 so we spend more times worrying about the states where the companies operate etc.

in terms of trying to calibrate this distribution rates..

The next question comes from Doug Mewhirter of SunTrust. Please go ahead..

My first question, I noticed your fee offset or reimbursements from your externally managed fund dropped sequentially. I know you've been telegraphing that a little bit with the pressures from the [indiscernible] rule, have you seen outflows or net outflows from the HMS income fund? I saw they recently did a tender offer I didn't know how that went.

What is your read now that the dust is settled a little bit on the DRA [ph] how you think that would progress?.

Just to clarify HMS income fund has continued to raise capital all year. What we're seeing is sequentially lower capital raises but the total assets with respect to which our 1% fees is based on continued to increase.

Our management fees are going up quarter over quarter and we expect that have to continue but it's going to moderate to be less material until they have announce they are quit -- seize fundraising on April 1st and then at that point things should be pretty stable. We wouldn't expect the assets to change.

With respect to the tender offer all that is the requirement that they take any dividend reinvestment proceeds that they receive and offer liquidity to people that want to get out of the stock because the stock is not listed but that's not material at all and that happens four times a year.

So it's not the kind of tender offer you and I are used to seeing for commercial, industrial companies. And then with respect to how you allocate fees, I will give that to Brett..

Sure.

You’re always going to see some variability in the expense allocated to the external investment manager, that’s in large part driven by the level of originations they co-invest with us in a particular quarter so as you can see and as we talked about at length, the third quarter was not heavy on lower middle-market originations so that had some impact.

So even regardless of the growth in total HMS assets a lot will depend on whether it's lower middle-market or middle-market and we have a detailed allocation method that we apply here that goes by person, by [indiscernible] etcetera time spent versus originations versus monitoring so you're always going to have some level of volatility in that number..

My second question may be more a philosophical question, I have heard from maybe more traditional BDC managers that the market for these sort of traditional --syndicated loans middle market and large caps syndicated loans is getting much tougher in terms of terms of conditions and are getting looser, leverage is going up, coverage ratio is going down.

Does that affect your appetite for using sort of the middle-market bucket as sort of a parking spot or is there a point beyond which you actually think it's actually better to just to get in cash rather than trying to allocate to these traded middle-market loans?.

Again, we are operating in the bottom 3% to 5% of the syndicated universe when we transact there and we really haven't had much growth with respect to our portfolio either on an absolute basis or on a relative basis for some time.

We have a base so the "syndicated loans" we are really looking at and participating in our referred to as kind of middle-market loans because they really don't trade very much. There is relatively very few owners of those and it's almost may be more akin to a private placement.

These are the smaller loans and we're kind of a significant player in the bottom end of that market because we are not concerned about CLO eligibility and don't have force guidelines in terms of what we can invest and we can't so it makes us an attractive investor for price discovery, for helping structure the deals, and these smaller deals tend to have better structures, higher spreads and more attractive risk-adjusted returns and we are able Doug, to deploy what the leverage capacity we have much more easily.

Our lenders would much rather be secured by those types of loans that are lower middle-market loans depending on the lender.

Goldman Sachs is in our credit facility and they are much more interested and comfortable in those loans than trying to -- smaller type businesses around the country so it's kind of a win-win deal because our leverage returns our are ROE of those aspects can be attractive and we carved out a niche there.

In addition we would not have been selected and we couldn't have done the job that we did with HMS had we not been a player if you will or a participant in that space because that's what we put the HMS assets in when there capital rates ramped up and again they have leverage, too and there lenders are probably even more interested in those assets in terms of the market conditions with respect to what you're looking at, why don’t you make a couple of comments?.

From the middle-market side obviously the market conditions are tighter today than call at nine to 12 months ago. It was a wide open market I would say in fourth quarter last year and first quarter this year and we made a lot of purchases at a nice discount that we are now reaping some gains on.

The market has gotten tighter but at the same time EBITDA across the market is generically grown.

Leverages about the same as it was 12 to 18 months ago, in terms you only got much looser over the last 12 months they are not that bad, maybe if you can choose your option like it's been said we do play that smaller market of the syndicated book so it allows us to have more covenants a little tighter thresholds there..

There are no further questions at this time. I like to turn the floor back over to management for closing remarks..

Thanks for participating and we will talk to you next year. Bye..

Ladies and gentlemen thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day..