Main Street Capital Corporation (MAIN) Earnings Call Transcript

Greetings. Welcome to the Main Street Capital Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Zach Vaughan. Thank you, Zach. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for Main Street Capital Corporation's Third Quarter 2026 Earnings Conference Call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; David Magdol, President and Chief Investment Officer; and Ryan Nelson, Chief Financial Officer. Also participating in the Q&A portion of the call is Nick Meserve, Managing Director and Head of Main Street's Private Credit Investment Group. . Bank Street issued a press release yesterday afternoon that details the company's third 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 November 13. 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 home page. Please note that information reported on this call speaks only as of today, November 6, 2026, 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, or DNII, and DNII before taxes. ENII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles or GAAP, excluding the impact of noncash compensation expenses. The DNII before taxes is NII as determined in accordance with GAAP, excluding the impact of noncash compensation expenses and any tax expenses included in NII. Management believes that presenting DNII and DNII before taxes and the related per share amounts is useful and appropriate supplemental disclosure for analyzing Main Street Capital Corporation's financial performance since noncash compensation expenses do not result in a net cash impact to Main Street upon settlement and tax expenses included in NII may include excise tax expense, which is not solely attributable to NII and deferred taxes which are not payable in the current period. Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are net asset value or NAV and return on equity, or ROE. NAV is defined as total assets minus total liabilities and as also reported on a per share basis. Main Street defined ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. Please note that 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's CEO, Dwayne Hyzak.

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call. We hope that everyone is doing well. On today's call, we will provide our key quarterly updates, after which, we'll be happy to take your questions. We are pleased with our performance in the third quarter, which resulted in an annualized return on equity of 14.7%, DNII before taxes per share, in line with our guidance from last quarter's call and an increase in NAV per share. . We believe that these results continue to demonstrate the sustainable strength of our overall platform, the benefits of our differentiated and diversified investment strategies and the continued strength and quality of our portfolio companies. We're also pleased to have further enhanced our liquidity position and strengthen our capital structure as a result of an increase in SBIC debenture borrowing capacity through our SBIC funds in the third quarter. And again, through our recent investment-grade debt offering in October, both of which Ryan will discuss in more detail. Given our strong liquidity position and conservative leverage profile, we are very well positioned to continue the growth of our investment portfolio for the foreseeable future, and we're excited about the current opportunities we are seeing. We remain confident that our unique investment income and value creation drivers, together with our cost-efficient operations and conservative capital structure, allow us to continue to deliver superior results for our shareholders in the future. Our favorable results for the third quarter, combined with our continued positive future outlook, resulted in our most recent dividend announcements, which I will discuss in more detail later. Our NAV per share increased in the quarter primarily due to the impact of significant net fair value appreciation in our lower middle market investment portfolio. Ryan will also discuss our NAV per share increase in more detail. The continued favorable performance of the majority of our lower middle market portfolio companies resulted in another quarter of meaningful dividend income contributions and net fair value appreciation in our lower middle market equity investments. Consistent with my comments over the last few quarters, we continue to see increased impacts from higher levels of performance variances versus expectations for both our overperforming and underperforming portfolio companies, and those impacts are again reflected in our current results. As a result, we are focused on maintaining a disciplined approach that's consistent with our historical practice to managing our relationships with our overperforming and underperforming portfolio companies. Overall, based upon our current views of the investment portfolio and feedback from our portfolio of company management teams, we continue to maintain a positive view regarding the expected future contributions from our lower middle market portfolio companies. We also continue to see significant interest from potential buyers in several of our lower middle market portfolio companies, which we expect will lead to favorable realizations over the next few quarters. We believe this interest further highlights the strength and quality of our portfolio companies and their exceptional leadership teams. Now turning to our investment activity. The third quarter was slower than our expected normal quarterly activity in both of our primary investment strategies. Our lower middle market investment activity included 1 new portfolio company investment which when combined with other investment activity resulted in a net decrease in our lower middle market investments of $19 million, while our private loan investment activity resulted in a net decrease in our private loan investments of $2 million. David will discuss our investment activity in more detail. Now turning to our asset management business. We continue to produce positive results for the funds we advised through our external investment manager with the continued favorable performance in the third quarter resulting in meaningful incentive fee income for our asset management business and together with our recurring base management fees, a significant contribution to our net investment income. We remain excited about our plans for the external funds that we manage and are optimistic about the future performance of the funds and the expected returns for the investors of each fund. We also continue to be excited about our strategy and expectations for growing our asset management business within our internally managed structure. As part of these efforts, we remain focused on growing the investment portfolio of MSC Income Fund, a publicly traded BDC advice for our external investment manager, which is solely focused on our private loan investment strategy with respect to new portfolio company investments. MSC Income Fund's Third Quarter 2026 Financial Results Conference Call will be held later this morning during which we will provide additional details. Based upon our results for the third quarter and our favorable outlook for the future, earlier this week, our Board declared a supplemental dividend of $0.30 per share payable in December, representing our 21st consecutive quarterly supplemental dividend, and an increase to our regular monthly dividends for the fourth quarter of 2027 to $0.27 per share. These first quarter regular monthly dividends represent a 3.8% increase from the regular monthly dividends paid in the first quarter of 2026. The supplemental dividend for December as a result of our favorable performance in the third quarter and our net realized gains over the last few years and will result in total supplemental dividends paid during the trailing 12-month period of $1.20 per share, representing an additional 38% paid to our shareholders in excess of our regular monthly dividends. We currently expect to recommend that our Board continued to declare future supplemental dividends to the extent DNII before taxes significantly exceeds our regular monthly dividends paid or we generate meaningful net realized gains, and we maintain a stable to positive NAV per share in future quarters. Based upon our expectations for continued favorable performance in the fourth quarter, we currently anticipate proposing an additional significant supplemental dividend payable in March 2027. Now turning to our current investment pipeline. As of today, I'd characterize our lower middle market investment pipeline as average. Consistent with our experience in prior periods of broad economic uncertainty, we believe that our ability to provide highly flexible and customized financing solutions to lower middle market companies and their owners and management teams together with our differentiated long-term to permanent holding periods, represents an even more attractive solution to the needs of many lower middle market companies. And we are excited about our expectations for the continued growth of our lower middle market investment portfolio. In our private loan investment strategy, we continue to see an improved lending environment, and we have recently experienced a significant increase in the volume of attractive and viable opportunities, which we believe has us well positioned to capitalize on new private loan investment opportunities and to generate growth for our private loan portfolio and our asset management business. And as of today, I would characterize our private loan investment pipeline as well above average. With that, I will turn the call over to David.

Thanks, Dwayne, and good morning, everyone. As Dwayne highlighted in his remarks, we believe that our third quarter financial results continue to demonstrate the strength of Main Street's platform, our differentiated investment approach and our unique operating model. We are pleased to report that the overall operating performance for most of our portfolio companies continues to be positive, which contributed to our third quarter financial results. . Each quarter, we try to highlight different key aspects of our investment strategy and differentiated approach that allow us to consistently produce best-in-class results. For today's call, we thought it would be useful to spend some time discussing the support we provide to our lower middle market portfolio companies. In addition to our ongoing investment management activities and the managerial assistance we offer to our lower middle market portfolio companies, each year, we are excited to host and annual president's meeting event for the most senior leaders of our lower middle market portfolio companies. For those of you who are not familiar with our president's meeting, it's an annual event that we host for our lower middle market portfolio company leaders to network, old relationships, share best practices, learn from each other and from third-party speakers and benefit from being part of Main Street's family of portfolio companies. This year marked the tenth time we have hosted this event. Based on post-event feedback from our lower middle market portfolio company executives, the event is highly valued by the participants and the event improves each year as we refine our agenda based on the feedback we receive. Topics covered at our most recent event included artificial intelligent use cases presented by a panel of our portfolio company executives, insurance and risk management best practices presented by our in-house Chief Risk Officer; the business case for strategic talent management presented by our in-house talent operating partner, beginning your AI journey presented by a third-party industry expert. We had an economist speak about his views on the U.S. economy and our keynote speaker is Hall of Fame football coach who shared stories and strategies on leadership, talent development and how to build sustaining winning teams, both on and off the football field. As a result of this annual event, our portfolio companies have increasingly worked together, referred business to each other, utilize each other's operational resources and form long-term relationships that we believe are invaluable. One important topic we covered this year was best practices for using artificial intelligence in lower middle market businesses. This session was led by 2 of our portfolio companies, CEOs, together with the individuals at their companies who lead their internal AI efforts. They presented specific case studies on how they have used AI in their businesses, how they got started, lessons they learned along the way and what they would do differently if they were launching an AI initiative today. The audience Q&A was very active, and we are highly encouraged by the potential benefits our lower middle market portfolio companies can achieve as they continue to adopt AI in the future. Two other important sessions that we had were led by Manset executives and focused on risk management and human capital at portfolio company level. We are pleased to have our Chief Risk Officer, present on how we can support our portfolio companies with the implementation of enhanced risk management and insurance-related initiatives that we believe will benefit our companies going forward. Our in-house talent operating partner presented on how we can support our companies as they assess and strengthen their teams, compensation alignment, culture and organizational efficiency. She also addressed succession planning and management, which is a critical area of value creation and risk mitigation for our lower middle market companies. The engagement from the audience during the event was robust and led to post-event discussions that we believe will ultimately improve the future financial results and operating performance for our lower middle market portfolio companies. Given our primary focus on our lower middle market investment strategy and the unique benefits it can provide to us, our management team partners and their companies, we are excited to bring together the key leadership from our lower middle market portfolio companies at our Annual President's meeting. We always leave this event very excited about the quality of the individuals leading our lower middle market portfolio companies and the future value creation that we expect they and their teams can generate for our mutual benefit in the future. We left this year's event more excited than ever. Now turning to the composition of our investment portfolio as of September 30. We continue to maintain a highly diversified portfolio with investments in 187 companies spanning across numerous industries and end markets. Our largest portfolio companies, excluding the external investment manager, represented only 3.3% of our total investment income for the trailing 12-month period and 3.4% of our total investment portfolio fair value at quarter end. The majority of our portfolio investments represented less than 1% of our income and our assets. Our lower middle market investment activity for the third quarter included total investments of approximately $61 million, including an investment of $39 million in a new lower middle market portfolio company, which after aggregate investment activity resulted in a net decrease in our lower middle market portfolio of $19 million. In our private loan strategy, we completed $162 million in total private loan investments which after aggregate investment activity resulted in a net decrease in our private loan portfolio of $2 million. At the end of the third quarter, our lower middle market portfolio included investments in 92 companies, representing $3.3 billion of fair value, which was 28% above our related cost basis and our private loan portfolio included investments in 86 companies, representing $2.1 billion at fair value. The total investment portfolio at fair value at quarter end was 117% of our related cost basis. Additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday. With that, I'll turn the call over to Ryan to cover our financial results, capital structure and liquidity position.

Thank you, David. To echo Dwayne's and David's comments, we are pleased with our operating results for the third quarter, which included NII per share and DNII per share amounts that were in line with our prior guidance and another increase in NAV per share. Our total investment income for the third quarter was $142.5 million, increasing by $2.7 million or 1.9% over the third quarter of 2025 and decreasing by $7 million or 4.7% from the second quarter of 2026. Interest income increased by $8.6 million from a year ago and decreased by $800,000 from the second quarter of 2026. The increase from prior year was principally attributable to the impact of higher levels of income-producing debt investments, partially offset by the negative impact from investments on nonaccrual status and a decrease in interest rates primarily resulting from decreases in benchmark index rates on our floating rate debt investments. The decrease from the second quarter was principally attributable to the impact of a decrease in prepayment activity and lower levels of income-producing debt -- debt investments, partially offset by an increase in interest income due to an additional day in the third quarter. Dividend income decreased by $5.7 million when compared to a year ago, after a $1.4 million increase in unusual or nonrecurring dividends and decreased by $1.9 million from the second quarter, including a $300,000 decrease in unusual or nonrecurring dividends. The decrease in dividend income from prior year is primarily due to a decrease in dividends from our lower middle market companies as a result of exits since the beginning of comparable period and prior year and changes in the performance and capital allocation decisions of our existing lower middle market companies relative to the prior period. And decreases from our external investment manager, partially offset by an increase in dividend income from our private loan portfolio companies. The decrease in dividend income from the second quarter is primarily due to decreased dividends from our lower middle market portfolio companies as a result of changes in the performance and capital allocation decisions of our existing lower middle market portfolio companies partially offset by an increase in dividends from our private loan portfolio companies, other portfolio companies and the external investment manager. Fee income decreased by $100,000 from a year ago and by $4.4 million from the second quarter. The decrease in fee income from the second quarter is primarily due to a decrease in fee income from the refinancing and prepayment of debt investments, lower closing fees and lower middle market investments and other investment activity. Fee income considered nonrecurring increased by $700,000 from a year ago and decreased by $1.9 million from the second quarter of 2026. The third quarter included income considered less consistent or nonrecurring in nature, primarily related to dividend, accelerated interest and fee income, which totaled $6.1 million. These income items were $1.8 million or $0.02 per share higher than the third quarter of 2025, $3.4 million or $0.04 per share lower than the second quarter and fairly consistent with the prior 4 quarter average. The increase from the prior year is primarily due to higher nonrecurring dividend income and fees. The decrease from the second quarter was primarily due to lower nonrecurring fees and accelerated interest income. Our operating expenses increased by $6.7 million over the third quarter of 2025 and by $1.2 million in the second quarter. The increases in operating expenses from the prior year and second quarter were largely driven by increases in interest expense. The increase in interest expense from a year ago was primarily driven by an increase in average borrowings to fund a portion of the growth of our investment portfolio and an increase in the weighted average interest rate on our unsecured debt obligations resulting from borrowing and refinancing activities, partially offset by a decrease in the weighted average interest rate on our credit facilities resulting from decreases in benchmark index interest rates. The increase in interest expense from the second quarter was primarily driven by an increase in the weighted average interest rate on our unsecured debt obligations resulting from borrowing and refinancing activities. The ratio of our total operating expenses, excluding interest expense, as a percentage of our average total assets was 1.2% for the quarter on an annualized basis and 1.3% for the trailing 12-month period, and continues to be among the lowest in our industry. Our external investment manager contributed $8.4 million to our net investment income during the third quarter, which represents a decrease of $400,000 from the same quarter a year ago and a decrease of $300,000 from the second quarter. Our external investment manager earned gross incentive fees of $3.5 million during the third quarter and waived $600,000 in incentive fees from MSC Income Fund resulting in net incentive fees of $2.9 million. This net result represents a decrease of $1 million in net incentive fees from prior year and a decrease of $100,000 in net incentive fees from the second quarter of 2026. Our external investment manager ended the quarter with total assets under management of $1.8 billion. During the quarter, we recorded net fair value appreciation, including net unrealized depreciation and net realized losses on the investment portfolio of $40.9 million. This increase was primarily driven by net fair value appreciation in our lower middle market and private loan investment portfolios, partially offset by net fair value depreciation in our middle market investment portfolio and fair value depreciation of our external investment manager. The net fair value appreciation in our lower middle market portfolio was largely driven by the continued positive performance of certain of our portfolio companies. The net fair value appreciation in our private loan portfolio is primarily driven by net appreciation on several specific portfolio equity investments, partially offset by depreciation primarily associated with increases in market spreads. The net fair value depreciation on our middle market portfolio was primarily driven by net depreciation on specific portfolio investments. The depreciation of our external investment manager was primarily driven by decreases in the valuation multiples of publicly traded peers, which we use as a benchmark for valuation purposes and average incentive fees, partially offset by increased base management fees. Additional details on our net realized fair value activity are included in the press release that we issued yesterday. We ended the third quarter with investments on nonaccrual status, comprising 0.9% of the total investment portfolio at fair value and 3.5% at cost. Net asset -- net asset value, or NAV, increased by $0.30 per share over the second quarter or 0.9% and by $1.44 per share or 4.4% when compared to a year ago, to a record NAV per share of $34.22 at quarter end. Our regulatory debt-to-equity leverage calculated as total debt, excluding our SBIC debentures divided by NAV was 0.7x, and our regulatory asset coverage was 2.42x. These ratios continue to be more conservative than our long-term target range of 0.8x to 0.9x and 2.25x to 2.1x, respectively. We continue to be active on capital activities, aided by our strong relationships as we continue to manage our overall capital structure diversity. In September, we received SBA approval to increase our SBIC depenture by $75 million to a total of $425 million with the potential for at least $50 million of additional capacity under current SBA regulations. In October, we issued $500 million of investment grade unsecured notes maturing in January 2030 with a coupon rate of 6.55% and a yield of 6.8%. Given our current liquidity position and recent net investment activity, we were less active in our at-the-market or ATM program, raising net proceeds of $10 million from the equity issuances during the quarter. After giving effect to our capital activities, we entered the fourth quarter with strong liquidity, including cash and unused capacity under our credit facilities totaling $1.6 billion with our next term debt maturity of $400 million due in June 2027. We continue to believe that our conservative leverage, strong liquidity and continued access to capital are significant strengths that have proven to benefit us historically and have us well positioned for the future, allowing us to continue to execute our attractive investment strategies despite the current market uncertainty. Coming back to our operating results. DNII before taxes per share for the quarter of $0.98, was $0.09 per share lower than the third quarter of last year and $0.10 per share lower than the second quarter. Looking forward, we expect fourth quarter of 2026 DNII before taxes of at least $0.98 per share with the potential for upside driven by portfolio investment activity during the quarter. With that, I will now turn the call over to the operator so we can take any questions.

[Operator Instructions] Our first question is from Robert Dodd with Raymond James.

Congrats on the quarter again. Two questions, both related to pipelines, but the 2 different ones. On the private loan I mean you characterize well above average, and I think you said a significant increase in the pipeline. I mean that's quite good. How would you -- and I know when it's early in the pipeline, you don't necessarily know where pricing is going to shake out. That tends to come out at the end, right? . And in the past, you've lost some deals at the end related to unacceptable pricing for your return expectations? So can you kind of give us a framework around that in terms of the pipeline being well above average, but I mean do you expect that -- do you believe that market pricing in the private loan market has moved sufficiently that pipeline and that would be at sufficient pricing for you to actually be willing to close it, i.e., is that well above average, potentially well above our average originations or just opportunities?

Robert. Thanks for the question. I'll give you a couple of comments, and I'll let Nick add on anything else that he wants to add. But I would say when you look at our discussion each quarter on pipeline, what we're talking about is transactions that are not finalized clearly. They're still subject to diligence and legal documentation and some other activities. But by the point we put it in the pipeline, I would say the general terms and conditions, size of the facility, leverage loan-to-value and pricing are all pretty well defined. So everything that we have that we're quoting here would fit that category, clearly, still subject to diligence and legal documentation and finalizing the transaction. But for all intents and purposes, most of the terms have been agreed to. And that's consistent with what we would have been given to you in the past when we gave commentary on pipeline. Regarding pricing, I think we feel good about the pricing. It will be in line with what you've seen us execute historically. I don't think we've seen significant changes in pricing recently or in terms and conditions. I think overall, we feel good about the nature types of companies, the transaction structure and pricing that would be in these transactions or investments in the pipeline if they get executed. But that would be my comments, but Nick add on any additional color?

Yes, Robert. I think the only thing I'd add there would be the pipeline we do quarterly is we kind of do a judgment call on a consistent judgment call on how that moves forward. And so there's always the risk that either the sponsor doesn't win the transaction end of the day, they don't close or we don't finalize our financing, that's kind of baked into how we view the pipeline and expectations. So there's always a risk that we don't get to the finish line in close. But as of now, we feel really good about the pipeline.

Got it. Got it. And then for into the other side, the lower middle market average, averages in at. On that, it is an election year. I mean the elections are done, but it was only a couple of days ago, was any of the -- and there's obviously broad economic uncertainty, geopolitical issues with war, et cetera. I mean how would you characterize the likelihood of that lower middle market activity early-stage pipeline or pipeline accelerating given now the elections are behind us, but there's still a lot of other uncertainties. I mean, just trying to get a gauge on whether there was a temporary lull because of all that, and we could see a reacceleration above average or this is -- well, I mean, average is average. I mean we're going to stay here for a while.

Yes, Robert, I would say that it's too early to tell if there's going to be any impact from the election. I think the pipeline has averaged, as you said, it's not meant to be negative. We want it to be better, obviously, you always want to achieve as much positive outcome as you can, but the pipeline is average. And I don't think it's average because people are waiting on the election. I don't think we expect to see a big change postelection. If there's anything that drives activity to be slower than we would want it to be. I would say it's more just the continued uncertainty in the marketplace. There's a lot of moving parts and pieces across the U.S. economy, and that can cause transactions to either not come to market or if it does come to market and you get engaged in diligence, you can cause things to not go as planned just because of the uncertainty in the marketplace. But I wouldn't say there's anything that's impacted the pipeline as a result of the recent elections. But David, if you could add on anything you want to add?

No, nothing to add.

Our next question is from Arren Cyganovich with Truist Securities.

Maybe touch on the on the credit quality side, how are you seeing the health of your portfolio companies, I guess, both on the LMM side and also on the private loan side?

Sure, Arren. Thanks for joining us and thanks for the question. I would say it's consistent with what you've heard us say in the past. We're not seeing significant changes in the quality of the portfolio, whether it's the good high-performing companies or the number of companies that are underperforming. What I did include in my prepared comments, which I think we've been including for the last couple of quarters is that when you see overperformance or underperformance, you're seeing -- on both ends, you're seeing that variance versus expectations will be more significant. And I'd say that's continued in the current quarter. But outside of that, I wouldn't say there's any significant trends we're seeing.

All right. And I think you had touched on inbound interest in some of your LMN portfolios. Is that it seems like you always have some interest coming in on those. Anything in particular that seems like it would be more likely to move in the next 3 to 6 months?