Main Street Capital Corporation (MAIN) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Main Street Capital's First Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, May 10, 2013. I would now like to turn the conference over to Ben Burnham of Dennard-Lascar Associates. Please go ahead.

Thank you, Alicia, and good morning, everyone. And thanks for joining us for the Main Street Capital Corporation First Quarter 2013 Earnings Conference Call. Joining me today on the call are Chairman, President and CEO, Vince Foster; Vice Chairman, Todd Reppert; and Chief Financial Officer, Dwayne Hyzak. Main Street issued a press release yesterday afternoon that details the company's quarterly financial and operating results. This document is available on the Investor Relations section of the company's website at www.mainstcapital.com. If you would like to be added to the company's e-mail list to receive press releases, please call Dennard-Lascar Associates at (713)529-6600. A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until May 17. Information on how to access the replay is included in yesterday's press release. We also advise you that this conference call is being broadcast live through an Internet webcast that can be accessed on the company's web page. Please note that information reported on this call speaks only as of today, May 10, 2013. And therefore, you are advised that time-sensitive information may no longer be accurate as of the time of any replay listening. Our conference call today 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 and similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call and they are not 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 www.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 and distributable net realized income. Please refer to yesterday's press release which can be found on the company's website 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'd like to turn the call over to Vince.

Thanks, Ben, and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent regular monthly dividend announcement and our dividend outlook, highlight our origination activity and conclude by commenting on the current investment environment in our markets. Following my comments, Todd will cover our portfolio performance in more detail, then Dwayne will comment on our first quarter financial results, our current liquidity position and certain key portfolio statistics, after which we will take your questions. Our investment portfolio delivered solid performance during the first quarter. Our lower middle market investments appreciated during the quarter by $6 million on a net basis, with 17 of our investments appreciating during the quarter and 10 depreciating, and our middle market investments appreciated by $4.7 million during the quarter. We finished the quarter with a net asset value per share of $18.55, a sequential decrease of $0.04 per share over the last quarter. Our net asset value per share at March 31, '13, would have been $18.90 a share absent the impact in net asset value of the $0.35 per share special dividend paid during the quarter, reflecting the continued strength of our investment portfolio. Our lower middle market companies ended the quarter with $110 million of cash on their balance sheets and continue to exhibit very conservative leverage and debt service coverage ratios. Earlier this week, we announced that our Board declared our regular monthly dividends for the third quarter of $0.155 a share payable in July, August and September, respectively. The third quarter dividends represent a 7% increase over the second quarter of 2012. In setting our third quarter dividends, our Board targeted a payout percentage in the 90% to 95% range of our net investment income before the impact of our recent senior notes offering which we currently estimate will decrease our net investment income by $0.03 a share in the second and third quarters. During the course of our last conference call, I referenced our spillover taxable income which we now estimate to be $40 million. To reduce this amount, stay in compliance with the regulated investment company tax rules and reduce the 4% federal excise tax payable on the spillover amount that carries over into next year 2014, we will ask our Board early next week to declare another special dividend of $0.20 a share payable in July. This will posture us to request our Board to declare a similar special dividend at the end of this year, assuming our annual dividends continue to be covered by our net investment income. We expect that we will continue to pay any special dividend on a semiannual basis going forward. Earlier this year, we reported to our shareholders via Form 1099 that over 46% of our 2012 dividends will be taxed at the highly favorable 2012 tax rates on long-term capital gains. We currently expect that 90% of our regular monthly dividends paid in February and March of this year will be taxed at the favorable 2013 tax rates on long-term capital gains. We are extremely pleased to once again deliver this level of tax efficiency to our taxpaying shareholders. I would like to turn now to originations. Our originations for the quarter totaled $56.2 million with the lower middle market producing $43.2 million, and on a net basis, middle market and private loans producing $13 million. As of today, our lower middle market transaction pipeline is consistent with the levels we have historically experienced. The early part of this year was slower, likely being impacted by tax rate change-related fourth quarter of 2012 accelerated activity. We continue to seek significant equity participation in our lower middle market investments and as of quarter end, continue to average 33% fully diluted equity ownership position in the 93% of these investments in which we currently have equity exposure. Our office of director group has continued to purchase shares via our dividend reinvestment plan, investing over $840,000 via this program during the first quarter. And at March 31, our office of director group owned $100 million worth of our shares. With that, I'd like to turn the call over to Todd Reppert to cover our portfolio performance in more detail.

Okay. Thanks, Vince, and good morning, everyone. We are pleased to report another strong quarter which supports our key long-term goals for sustainable growth and dividends per share while also generating meaningful growth and book value per share. We think the combination of steady long-term growth in our dividend payout and meaningful book value per share growth are a 2-pronged value proposition that differentiates Main Street and has clearly generated the premium total returns realized by our investors. In the 5-plus years since our IPO, Main Street's performance has supported this value proposition. Since the IPO, Main Street has been able to cumulatively grow its announced recurring quarterly dividends per share by 41% while never decreasing our dividend payout and has grown NAV per share from approximately $12.85 to $18.55. These increases were even more notable given that 2 of the first 5 years as a public company involved the recessionary economic environment, and substantially all of the BDC sector experienced reductions of book value per share from 2007 till now. In our experience, many investment companies or funds discuss capital preservation as a key goal but few have consistently achieved that goal over the economic cycles. We expect that our proven investment strategy, combined with a conservative capital structure will allow us to continue our history of meaningful NAV growth over the long-term. In addition, the significant amount of undistributed taxable income or spillover generated today has allowed us to begin paying periodic special dividends in addition to our regular monthly dividends. The large spillover amount means that we have significantly outearned our dividends paid to date which gives us a lot of future flexibility to support both regular, recurring and special dividends. The equity component of our lower middle market investment strategy remains a significant differentiating advantage for Main Street. It is the primary driver behind approximately $3.30 per share of gross net unrealized appreciation within our investment portfolio at March 31, as well as our cumulative NAV growth per share. These equity positions support growth in our taxable income and therefore, our dividends paid through current dividend income received and periodic realized gains harvested from the $3 plus per share of net unrealized depreciation. Due to our spillover position in our appreciating of the portfolio, we are not solely reliant on growth or yield trends in our debt portfolio in order to grow and cover the dividends paid to shareholders. These factors also put us in the position, do not have to reach for risk or make investments outside of our historical credit parameters to grow and cover our dividends. This is differentiated from many other investment companies who are experiencing flat or declining earnings and potentially dividends based on the impact of market trends on yields and portfolio growth. I'm also pleased to report that our overall portfolio performance remains strong and the portfolio continues to improve its diversification by issuer, industry, end markets, geography and vintage. At March 31, we had investments in 147 portfolio companies that are in approximately 50 different industries across the lower middle market, middle market and private loan components of our portfolio. The largest portfolio of company investment represents less than 3% of our total investment income and the vast majority of our portfolio investments represent less than 1% of our assets. This increasing diversity add structural protection to our portfolio, our revenue sources and our cash flow, which translates into structural protection for our shareholders. I would also characterize the bulk of our lower middle market portfolio as seasoned and that we have been in a majority of these investments for at least 2 years and many for significantly longer. The seasoned nature of lower middle market portfolio is reflected in a deleveraged or lower-risk position for many these investments and an expanding list of equity investments with growing or accelerating unrealized depreciation. At March 31, our equity investment portfolio had a blended fair value that is well over 2x its cost basis, reflecting over $105 million of net unrealized depreciation. Importantly, these equity positions had a low-cost basis relative to ownership involved since they are a combination of nominally priced warrants and lower-basis, lower-multiple direct equity investments. This is a benefit of our direct origination platform in the lower middle market and is the starting point for the meaningful unrealized depreciation we have experienced in most equity investments. In summary, Main Street continues to perform at a high level and deliver upon our long-term goals of sustaining and growing our dividends, as well as generating meaningful growth and book value per share. Our investors should derive great comfort that they are invested in a very capable and broad team at Main Street with all of our personnel being directly aligned with continuing to generate significant shareholder returns over the long-term. With that, I'll turn the call over to Dwayne for more detailed comments our financial performance.

Thanks, Todd. We are pleased to report that we generated significant increases from the prior year in both total investment income and net investment income and continued appreciation on our investment portfolio during the first quarter of 2013. For the first quarter, our total investment income increased by 25% over the same period in 2012 to a total of $25.6 million. This increase was primarily driven by a $3.6 million increase in interest income associated with higher levels of portfolio debt investments and a $1 million increase in dividend income from portfolio equity investments. The increase in investment income in the first quarter included a net decrease of approximately $1.2 million of investment income related to accelerated prepayment and repricing activity for certain portfolio debt investments and marketable securities investments when compared to the first quarter of 2012. The decrease was primarily related to $1.8 million of nonrecurring investment income associated with 2 lower middle market debt investments in the first quarter of 2012, which was partially offset by an increase in investment income from higher accelerated prepayment and repricing activity of certain middle market debt investments in the first quarter of 2013 when compared to prior year. First quarter 2013 operating expenses, excluding noncash share-based compensation expense, increased by $700,000 over the first quarter of 2012 to a total of $7.8 million. The operating expense increase was a result of higher compensation and related expenses primarily due to increases in personnel and higher other general and administrative expenses in comparison to prior year. The ratio of our total operating expenses excluding interest expense as a percentage of average total asset, which we believe is a key metric in evaluating our operating efficiency, was 1.7% on an annualized basis for the first quarter of 2013 compared to 2% on an annualized basis for the first quarter of 2012. We believe that this metric continues to compare very favorably to other BDCs and is approximately 1/3 of the same metric for the externally managed BDCs of size similar to Main Street. This low-cost, internally managed operating structure allowed us to deliver a greater portion of the gross portfolio returns to our shareholders and we believe that it provides for greater alignment of the interest of our management with the interest of our shareholders. Due to our increased total investment income and the continued leverage of our low-cost operating structure, distributable net investment income for the first quarter of 2013 increased by 33% over the first quarter of prior year to $17.9 million or $0.52 per share and exceeded our dividends paid for the first quarter by $0.07 per share. While the dollar amount of distributable net investment income increased by 33% over the prior year, the per share percentage increase was approximately 4% due to the higher average number of shares outstanding compared to the corresponding period in the prior year primarily due to the impact of the June and December 2012 follow-on stock offerings. All other first quarter 2013 per share measures were similarly affected by the higher weighted average shares outstanding. During the first quarter of 2013, we had total net unrealized appreciation of $8.8 million. As Vince previously mentioned, this total net unrealized appreciation included $10 million of net appreciation on our portfolio investments, which was partially offset by $1.2 million of unrealized depreciation on the SBIC debentures held by our wholly-owned subsidiary, Main Street Capital II. We also recognized a net tax provision of $2.1 million, $1.4 million of which was related to deferred taxes on a net unrealized appreciation on equity investments held in our taxable subsidiaries. The operating results for the first quarter of 2013 resulted in a net increase in net assets from operations of $23.6 million or $0.68 per share. As a result of our increased in net assets from operations for the first quarter, our net asset value per share at quarter end was $18.55 or an increase of $0.32 or 2% from December 31 after excluding the impact of the $0.35 per share special dividend we paid in January of 2013. On the capital resources front, our liquidity and overall capitalization remain strong and our positions were further strengthened by several recent activities. As of March 31, we had $26.2 million of cash and $146.5 million of unused capacity under our credit facility. At quarter end, we continue to have $225 million of SBIC leverage outstanding which bears a weighted average fixed interest rate of approximately 4.8% and matures 10 years from the original issue date. The weighted average remaining duration for the existing SBIC leverage is approximately 6.1 years as of March 31. Since the end of the first quarter, we have made several material improvements to our capital structure to provide significant additional liquidity and additional long-term source of capital. The first such improvement is our recent increase in the total commitments under our credit facility which we completed earlier this week and through which we expanded the total commitments under our credit facility by $65 million to a total of $352.5 million with increases from 4 of the existing lenders in our lending group. As a result, we currently have over $230 million of unused capacity under the facility, with this facility available to us through September 2017. The second improvement was the completion of our first senior notes offering in April, which further diversified our capital base and provided as an additional long-term source of financing. Upon completion of the senior notes offering, we raised total net proceeds of $89 million after deducting underwriting discounts and estimated offering expenses. These senior notes bear an interest rate of 6 1/8% and mature in April 2023. In addition to the benefits of their long-term duration, the senior notes provide us with additional capital flexibility as they may be redeemed in whole or in part at any time at our option, on or after April 1, 2018. While we will continue to explore various financing sources to support future operational and investment activities, we remain focused on maintaining significant liquidity and matching the expected duration of our borrowing arrangements with our investment assets. As we look forward to the second quarter of 2013 and consider the impact of our current quarter estimates for total investment income and the impacts of our recent senior notes offering which will increase our quarterly interest expense by approximately $0.03 per share when compared to the interest rate on our credit facility, we expect that these factors will result in second quarter 2013 net investment income per share which is approximately $0.01 to $0.02 above our previously announced dividends for the second quarter of $0.465 per share. Now let me finish with a few portfolio statistics, all as of March 31. In our lower middle market portfolio, we had 57 investments representing approximately $520 million of fair value or approximately 25% above the cost basis of approximately $412 million. Consistent with our investment strategy, approximately 76% of our lower middle market portfolio investments at cost were in the form of secured debt investments, and approximately 93% of those debt investments held the first lien security position. The weighted average expected yield on our lower middle market portfolio debt investments was 14.2%. We hold equity positions in 93% of our lower middle market portfolio companies with an average fully diluted equity ownership of approximately 33%. At the lower middle market portfolio level, the portfolio's median net senior debt to EBITDA ratio was 2.0:1 or 2.3:1 including portfolio company debt, which is junior in priority to our debt position. Based upon our internal investment rating system with the rating of 1 being the highest and 5 being the lowest, the weighted average investment rating for our lower middle market investment portfolio was 2.2 on March 31, 2013, compared to 2.1 on December 31, 2012. And during the first quarter, we had 3 portfolio companies improve their rating and 2 portfolio companies decrease the rating. In our middle market portfolio, we had investments in 80 companies representing approximately $362 million in fair value that were generating a weighted average yield of approximately 8.2%. Our middle market portfolio investments are primarily in the form of debt investments, and approximately 91% of our middle market portfolio debt investments at cost held the first lien security position. The weighted average revenues for the 80 companies in the middle market portfolio was approximately $557 million. In our private loan portfolio, we had investments in 10 companies, collectively totaling approximately $74.5 million in fair value with a total cost basis of approximately $73.8 million. The weighted average revenues for the 10 companies in our private loan portfolio was approximately $194 million. Our private loan portfolio investments are primarily in the form of debt investments and all such debt investments held the first lien security position. The weighted average annual effective yield on our private loan portfolio debt investments was approximately 14%. The total investment portfolio fair value at March 31, 2013, was approximately 113% of the related cost basis, and we have 1 portfolio investment on an accrual status and 1 fully impaired portfolio investment which, together, represent approximately 0.7% of the total investment portfolio at cost. With that, I will now turn the call back to the operator so we may take any questions.

[Operator Instructions] And our first question comes from the line of Bryce Rowe with Robert W. Baird. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Just noticed in the press release that the EBITDA to senior interest expense fell pretty meaningfully from 4x down to 3x. Just wanted to get some color behind that, if there is any.

Yes, Bryce. We went from main to median, is that right, Dwayne, this quarter?

That's correct.

Because what was happening is, we were getting less comfortable that a main statistic is going to be as meaningful in that you have different size companies lot of them have deleveraged to a significant extent and we thought what's more meaningful to us is at the mean level we have 1/2 the companies that are -- that have more conservative statistics than have more aggressive statistics, where we're just getting less and less comfortable with the mean. And in addition, I think where the accounting profession is headed is probably to start wanting to get into these statistics more and more in terms of -- even though their investments finally get into potentially start auditing all these companies, et cetera. So we -- again, we felt less and less comfortable with median -- or mean and went to median. And when we look around at the space, normally, it's remotely disclosing anything like this. So that's kind of change we made. Dwayne, would you add anything else?

I think, just as we -- as has been said, Bryce, we thought it was a more meaningful metric just because of the outliers that you would have when you look at the mean.

And there are several different ways to do the mean. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Yes. That makes sense. Second question, just around the concept of the broken out private loan portfolio now. I think in the past, you guys have talked about a 50-50 split on the high side in terms of the lower middle market portfolio and then what was the middle market portfolio. Can you help us think about what that split will look like between the 3 groups now in terms of fair value of the portfolio?

Yes. I think on the high side, I grouped middle market and private loan in the same basket. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Okay. And are they -- can you talk a little bit about -- I assume the private loans are originated in a bit of the same way that the lower middle market loans are or am I thinking about that ...

Got you. I mean, what's happening -- it really is kind of a third category because on the syndicated side, you're going to have an agent, they're going to attempt to make it as broadly syndicated as they can. You don't really know who's in the deal with you and the agent really has a lot of control. On the other hand, these are typically rated by the rating agencies. They're audited. There's all kinds of information prepared on the investments, et cetera, from a diligence standpoint. Then, on the lower middle market is the polar opposite and it's just self-originated. We do -- we have to do everything ourselves unrated. And there's an emerging class, at least for us in the middle where it's -- I'd characterize it more as a club deal, right? It's a handful of letters. It's kind of like the banks used to do with 3 or 4 bags or however many were clubbed together and do a finance thing. It is -- it truly is a category in the middle because it is not widely syndicated. It's typically not rated. You can't get a price for it, typically, on market or Bloomberg. And it's highly illiquid, yet, there typically is an agent bank or one of the lender's agent team that deal and there's several participants. So as we thought about it, it really didn't fit either category. We really liked the category. We wanted to increase our exposure to it and we thought like it was time to kind of break it out. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Okay. And so that, you guys -- are some of those investments in that private loan portfolio, were you guys active agents in some of those or are you typically just part of the group?

Dwayne, why don't you answer that?

Bryce, it's a good question. I think today, it has been, us, more as a participant. But one of the things that's been said, we find that market very attractive. One of the things that we'd like to see over time as we continue to look for debt investments that have a higher yield and are more proprietary in nature is the opportunity for us to originate and syndicate and be the agent as opposed to a participant, and we expect that'll happen over the next 3 to 4 quarters.

Yes. And as we think about that role, Bryce, which I think we can easily do, it could carry with it broker-dealer registration and some compliance issues that we don't -- we're not quite ready for. So right now, we're content to be a significant participant but not necessarily be the agent.

[Operator Instructions] And our next question comes from the line of Robert Dodd with Raymond James. Robert J. Dodd - Raymond James & Associates, Inc., Research Division: Questions about the environment, not so much sort of competitive but first, on the lower middle market. I mean, we're hearing expectations that M&A activity is going to pick up in the back half of this year. Obviously, that's not necessarily the kind of thing that drives your originations, but is it going to be the kind of thing where we could expect you to be maybe a seller of companies in the second half -- or rather the companies to be sellers of themselves? And you're benefiting from it in the second path of the year. You think that's going to be a meaningful development for you this year? Not necessarily a negative net originations. I'm not talking about that.

Sure. Yes, I think that -- one thing that we've noticed is, are bigger companies tend to be more popular candidates for inbound calls from kind of the smaller sponsors, et cetera? And as we increase our exposure to the larger under the lower middle market, I would expect that there were would be more activity. It's not necessarily that we or our management teams would be the catalyst for the activity, but if someone calls and puts in attractive price/structure on the table, and our -- most importantly, our management team is interested, then we're definitely interested. So yes, I think so but again, not as much because you're hearing a lot more proxy activity, et cetera. For us, it's just more the larger companies we're seeing are generating a lot more inbound unsolicited interest. Robert J. Dodd - Raymond James & Associates, Inc., Research Division: Okay. Then a kind of a follow-up to that, you mentioned that the frothiness, when we get the middle market portfolio in the upper end when obviously it's marked at above cost. I mean, it's done very well. It's performing well. And some of the valuations out in the -- in the for the upper end loans seem to be getting arguably a little rich. I mean, walk is the talk process for you right now as to whether you're going to be a net seller of those ones.

Yes. And so in the middle market portfolio, there's really a couple of different issues. As it relates to appreciation, these loans will -- they kind of get call constrained. They're only going to appreciate up to what they can be called at. So callable at 101 within a year, it's not going to trade above 101, realistically, or not for very long or not very much. And so they've been getting originated at 99 and trade up to par, par and a half, something like that. So that's kind -- when you look at $4 million of appreciation on a $400 million portfolio, that's the 1% that you're seeing. So that -- there's a limit to that. And frankly, structures are weakening and the prepayment penalties are weakening. The duration is shorter, et cetera. So I see less of an opportunity for continued appreciation there. On the other hand, spreads are dropping, yields are dropping. It's pretty -- it's really quite dramatic right now out there. The better companies that did a financing in the fourth quarter of last year are repricing, refinancing now. And even in the first quarter, they're coming back. It's pretty striking. And so the outlook is not particularly good for if you have a bunch of capital to deploy in what we're characterizing as the middle market. The spreads are really coming down and participants in that market are having to either accept lower yields are go down the balance sheet to maintain the same returns.

Our next question comes from the line of Vernon Plack with BB&T Capital Markets. Vernon C. Plack - BB&T Capital Markets, Research Division: I noticed that the average annual effective yield on the middle market portfolio was -- went down from 8.8 to 8.2, it was 8.8 last quarter. Was that the result of a -- or did the breakout of the private loan portfolio impact that number?

I say it was a combination of the two. I mean, some of it was definitely movement of the -- some of those investments to the private loan portfolio, but you're also has been said seeing that the rates in that market continue to drop on a quarter-over-quarter basis. So it would be a combination of the two, Vernon. Vernon C. Plack - BB&T Capital Markets, Research Division: Okay. And I noticed that -- and you may have mentioned this, that your marketable securities and idles funds investments, that you had none this quarter. So just curious in terms of your thoughts there, in terms of why it is where it is.

Well, we've kind of been pretty opportunistic there and some of the marketable securities had appreciated and we sold them. We tend to like doubles and singles and that's why the weight around in it, and get real aggressive as you realize that type of appreciation. Since we did, Vernon, the senior notes within a week or 2 after the end of the quarter, you will see a lot more of that as we've had to deploy that capital.

This is Todd. I would say that at year-end, you saw a similar dynamic because we did the equity offering in December and we had to put some money to work quickly to earn a better yield and so that's a lot of the marketable securities that you're looking at...

It's a cash management tool at the end of the day?

[Operator Instructions] And our next question comes from the line of J.T. Rogers with Janney Capital Markets.

I know you've talked a little bit about it before. But I was wondering if you talk a little bit more about the lower middle market, what kind of competition you're seeing there? Are banks being more aggressive, less aggressive and sort of where you're seeing deals come from?

Yes. I mean, I would say, and I'll let Dwayne and Todd, they can provide their observations too. But when you look at our target market of 3 to 15 in EBITDA, there's going to be more competition as you go up the food chain, as you get in between 10 and 15, I think it's fair to say it's more competitive. You might see some banks coming in and being competitive. Although at the end of the day, if you're looking at senior cash flow lending, the banks really are -- don't really like that with Basel II and Basel III. They have a hard time with that in those size companies. And then when you get below 10 in EBITDA, we hardly see them at all. Unless there's a lot of asset intensity. But what they want to do is provide revolvers and maybe some leased finance plant equipment, maybe some real estate finance but they don't want to do enterprise lending or take cash flow risk and so we really don't see them there. Dwayne or Todd, do you?

Yes. I think the only thing I'd point out, J.T., is that as you heard us talk about that in the past, the solution we offer in the lower middle market really is different than most pure financial sponsors would. Most of our transactions are highly structured. They're not necessarily a change in control. They, in a lot of situations, offer us an opportunity for significant minority equity investment, but it's really a highly customized solution and that customized solution typically does not involve your competition from a traditional senior bank or commercial bank. That would be the only thing I'd add.

Okay, that's a good point. Wondering about just what you're seeing from other lenders in the market. Are there other folks out there, hear about their number of SBIC funds out there who maybe do something a little bit similar to what you do? Are they more active? Are you seeing sort of any competition? I know you guys are a little bit different, as you said.

We will get inquiries about sponsored mezzanine finance or sponsored unitranche finance. And we have noticed that, that part of the business which we're not typically active in, I mean, we'll do it but we're not particularly interested in providing a commoditized product. That's getting more competitive. The equity component that you're able to receive really isn't there anymore to any significant extent. That might have been a 12% current rate plus 2% PIK market. A few quarters ago, it may be 10 plus 2 or 12 plus 0 now, we're hearing banks. But since we're not really active in that market, we're not the best to really observe or make observations about it. But clearly, there's more competition there. I think the most popular and most competitive type of financing is providing junior capital to a sponsored deal. Do you guys agree?

Yes. The SBICs tend to club. Most of them tend to do sponsored finance and club deals together and our -- the benefit of our grassroots kind of directed origination platform is that we built it over 12-plus years and it's really hard to replicate if you're a new SBIC unless you've been doing it for 12 years. And so it's kind of a barrier to entry and it gets better every year. I don't want to kind of overstate it because we have lumpiness to our deal activity, but the platform and the network is better every year which should be on balance to create more deal flow every year.

Okay, great. Just one last question. Just -- historically, when there was a lot of frothiness in the traditional middle market, when, if ever, do you see that frothiness start creeping down into the markets you're targeting and does that ever affect what you guys are focused on? Does it affect pricing on new deals, both on the equity and debt side?

Yes. I mean, what we're seeing is that if a middle market loan is CLO eligible, it is going to be very, very competitively priced and structured, right? If it's not, it's a different world. There's virtually a fraction of the interest in it. And so we're -- in a perfect world, we will -- that's what we would focus on as a non-CLO eligible. So what we're monitoring is CLO eligibility broadening to include our types of loans and based on our research that, there have been very few CLOs in the past few years that have attempted to do that. There have been isolated instances. If that ever happened, if that ever came back, that would be not a good competitive development for us, but we don't see it happening because almost everything that goes into a CLO has to be rated by the rating agency and almost everything we do in the lower middle market is unrated. And so that's the big barrier. But if you have a credit rating even a CCC, and there's some CLO eligibility even at 5%, 3% or 5% basket or 7% or something like that, then there's just a lot more demand That's kind of how we look at it.

Sure, great. Just one follow-up to that. So what about the guy -- so CLO is obviously your driving a lot of the activity. What about sort of the guys who -- the non-CLO participants, it would make sense that they would be going, avoiding CLO eligible deals so you're pushing -- obviously the CLOs are the big driver of the frothiness but you've got everyone else's getting pushed out that market into potentially smaller market, the nonrated market.

I think that's why the sponsored finance market, the nonrated smaller sponsor finance market is more competitive. But again, that's kind of what Todd was trying to point out. Most of our competition has shown reluctance to be the sponsor, right? Write a big equity check to put the deal together. If it's a big deal, to go find co-investors. It's just a lot of work. It's a completely different model than having a sponsors spend 6 months on a deal. And there are sponsors here in town that we know well to do 1 deal year and they've got, I don't know, 15, 20, 25 guys working on it. So all your work's done and they just -- they bid out the participation. And so that's a much more popular model rather than ours which is, go out find a deal, diligence it yourself and everything. I mean, we hire the legal, we hire the accounting, we perform the operational diligence, we structure it. We do all the work and not too many people are passed. They aren't staffed to do it. They don't have the experience to do it.

It sounds like this is -- I guess historically when markets were frothy, you all -- you continued to see -- you really didn't see anybody moving on to this market just because they're unable to?

I would say the best analogy was there are a couple of hedge funds that moved into the -- our regional area that deployed a bunch of capital in the 1 '06, '07 partnering, Todd? And they were kind of a flash in the pan.

The 2 that he is talking about are gone.

Yes. And then we had an -- they probably took some small deals that we had an opportunity to buy back at the discount. So it just -- yes, that kind of thing happens and probably, there's more family-office activity. There's a lot of wealth down here and companies or families want to create their own. So they don't want to be promoted. They want to -- they don't want to be LPs. They want to find their own opportunities. So yes, there's always going to be some competition. But we want to be the ones that can -- they have the broadest array of solutions that can act very quickly, that can play whatever role is needed and just offer a highly customized situation. So we don't see a lot of that. On any given thing, we might though see some competition, but we'll see. Anyone that is just kind of taken our entire business model, kind of replicate it.

I'm showing no further questions in the queue at this. I'd like to turn the conference back to management for any final remarks.

Great. well, we appreciate everyone attending. We appreciate all the continued support of our shareholders and look forward to talking to you again in August. Bye.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.