Main Street Capital Corporation (MAIN) Q2 2014 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Main Street's Quarter -- Second Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded. I would now like to turn the call over to Ms. Jenny Zhou. Please go ahead, ma'am.

Thank you, Melody, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation's Second Quarter 2014 Earnings Conference Call. Joining me today on the call are Chairman, President and CEO, Vince Foster; and the 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 mainstcapital.com. A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until August 15. 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, August 8, 2014, and therefore, you are advised that time-sensitive information may no longer be accurate at 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 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 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, were derived from third-party sources and have not been independently verified. And now I'll turn the call over to Vince.

Thanks, Jenny. Thank you, all, for joining us today. I'll cover on the performance of our investment portfolio, discuss our recently announced dividend increase and conclude by commenting on our investment pipeline. Following my comments, Dwayne will cover our operating performance in more detail and comment on our second quarter financial results and originations, our current liquidity position and certain key portfolio statistics. After which, we will take your questions. We were pleased with the performance of our investment portfolio during the second quarter. Our lower middle market investments appreciated during the quarter by $11 million on a net basis, with 26 of our investments appreciating during the quarter and 6 depreciating. And our middle market, private loan and other investment assets appreciated by $0.5 million during the quarter on a net basis. We finished the quarter with a net asset value per share of $21.03, a sequential increase of $0.89 a share over the first quarter. Our lower middle market companies continue to exhibit highly conservative leverage and debt service coverage ratios, which Dwayne will cover in greater detail. Earlier this week, our board declared our fourth quarter regular monthly dividends, which represent an increased monthly payout rate to $0.17 a share or $0.51 a share for the quarter. We are very pleased to be able to provide our shareholders with an increased regular monthly dividend, which we believe reflects the strong validation of our self-sponsored lower middle market-concentrated business model. In recommending a dividend increase to our board, we take into account our projected distributable net income -- net investment income per share, which is our net investment income per share before restricted stock amortization expense and whether that per share amount exceeds the recommended dividend by at least 5%. Dwayne will discuss our board's dividends setting policy in more detail during his comments. As of June 30, we estimate that our spillover taxable income was $35 million, that's after being reduced by the $12.3 million semiannual supplemental dividend distribution we paid in late June. We continue to expect that we will pay semiannual supplemental dividends in addition to our regular monthly dividends as long as we are in a significant spillover income position. We, therefore, anticipate asking our board to declare a semiannual supplemental dividend next quarter in the range of $0.25 to $0.30 per share. Our final noteworthy item concerning our dividends is that we currently estimate that 50% of our July dividend will be taxed at the highly favorable long-term capital gain in tax rates. As of today, I will characterize our investment pipeline as more or less normal. We expect near-term originations to consist primarily of lower middle market and private loan investments as we rotate out of lower-yielding middle market loans. We continue to seek and receive significant effort and participation in our lower middle market investments, and as of quarter end, we owned an average of a 34% fully diluted equity ownership position in the 95% of these investments in which we currently have equity exposure. Our officer director group has continued to be regular purchasers of our shares, investing over $1.5 million during the second quarter. With that, I'd like to turn the call over to Dwayne Hyzak, our Chief Financial Officer and Senior Managing Director, to cover our portfolio performance in more detail.

Thanks, Vince. We are pleased to report that our operations in the second quarter generated continued growth in our recurring investment income, distributable net investment income per share, which significantly exceeded our regular monthly dividends paid for the quarter, and continued appreciation of our net asset value per share. For the second quarter, our total investment income increased by 25% over the same period in 2013 to a total of $34.9 million. This increase was primarily driven by increased amounts of interest income associated with higher levels of portfolio debt investments and increased dividend income from portfolio equity investments. Second quarter operating expenses, excluding noncash share-based compensation expense, increased by $900,000 over the same period in 2013 to a total of $10.3 million. This increase was primarily the result of a $1.1 million increase in compensation-related expenses and a $300,000 increase in other general and administrative expenses, with these increases partially offset by $400,000 of operating expenses charged to our external Investment Manager. The ratio of our total operating expenses excluding interest expense as a percentage of our average total assets was 1.6% on an annualized basis for the second quarter of 2014 compared to 1.6% for the second quarter of 2013 and 1.8% for the full year in 2013. We believe that this ratio compares very favorably to other BDCs and continues to illustrate the significant benefits associated with our efficient internally managed operating structure. Our internally managed operating structure allows us to deliver a greater portion of our 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. Our increased total investment income and the continued leverage of our efficient operating structure resulted in a 33% increase in distributable net investment income for the second quarter to a total of $24.6 million or $0.56 per share, which exceeded our monthly dividend paid -- dividends paid for the quarter by over $0.06 per share or over 12%. We recorded net unrealized appreciation of $16.5 million in the second quarter, which primarily consisted of net appreciation on the investment portfolio of $11.5 million, as Vince previously discussed, and accounting reversals of net unrealized appreciation from prior periods of $5.4 million related to portfolio exits and repayments, partially offset by $800,000 of depreciation on the SBIC debentures held by one of our wholly owned SBIC subsidiaries. Additional details for the net unrealized appreciation can be found on our earnings release. Our operating results for the second quarter resulted in a net increase in net assets from operations of $30 million or $0.68 per share. Our investment activity in the second quarter included total investments on our lower middle market portfolio of approximately $23 million, primarily as a result of our investments in 1 new portfolio company, a net increase in our middle market portfolio of approximately $75 million as we deploy the proceeds of our April follow-on equity offering and a net increase in our private loan portfolio of approximately $29 million. On the capital resources front, we improved our already-strong liquidity position and overall capitalization during the second quarter through our successful follow-on equity offering in April which generated net proceeds of approximately $140 million and a $57.5 million expansion of the commitments under our revolving credit facility in June. At quarter end, we had over $30 million of cash, $9 million of marketable securities and $250 million of unused capacity under our credit facility, providing us significant liquidity for future growth. As we discussed in our prior conference calls, during 2014, our external Investment Manager began accruing management fees related to its investment sub-advisory relationship with HMS Income Fund. And during the second quarter, this relationship generated approximately $460,000 of contribution to our net investment income. We currently project that this relationship will contribute $0.03 to $0.04 per share of net investment income in the second half of 2014. Based upon HMS Income Fund's current fund raising efforts and activities, we expect that this amount should increase over the next 12 months. As we look forward to the third quarter of 2014 and consider our current investment portfolio and our third quarter investment activity to date, we currently expect that we will generate third quarter of 2014 distributable net investment income per share in a range of approximately $0.55 to $0.57 per share, or $0.05 or $0.07 above our previously announced regular monthly dividends for the third quarter of $0.495 per share, which is consistent with our previously discussed policy of setting our regular monthly dividends at 90% to 95% of our distributable net investment income. Now let me finish with a few portfolio statistics, all as of June 30. Our investment portfolio continues to be extremely diversified with investments in 174 companies across our lower middle market, middle market and private loan portfolios. These companies are well diversified across over 50 different industries and our portfolio continues to be well diversified by end market, geography, and vintage. We believe that this diversification adds significant protections to our investment portfolio, our recurring investment income and cash flows and provides significant benefits to our shareholders. In our lower middle market portfolio, we had 62 investments representing approximately $670 million of fair value, which is approximately 27% above the cost basis of approximately $530 million. Consistent with our investment strategy, approximately 73% of our lower middle market portfolio investments at cost were in the form of secured debt investments, and approximately 85% of those debt investments held a first lien security position. The weighted average effective yield on our lower middle market portfolio debt investments was approximately 14.9%. As Vince mentioned, we continue to hold equity positions in 95% of our lower middle market portfolio companies with an average fully diluted equity ownership position of approximately 34%. We believe that these equity ownership positions provide significant value to our shareholders, and they are the primary driver behind our significant net unrealized appreciation of over $3 per share and our growing levels of dividend income. At the lower middle market portfolio level, the portfolio's median net senior debt-to-EBITDA ratio, which includes all debt through Main Street's debt position was 2.1:1. Based upon our internal investment rating system, with a rating of 1 being the highest and 5 being the lowest and with all new investments entering the rating system with an initial 3 rating, the weighted average investment rating for our lower middle market investment portfolio was 2.2 on June 30, which is unchanged from the prior quarter and prior year end. In our middle market portfolio, we had investments in 93 companies representing approximately $566 million of fair value that were generating a weighted average yield of approximately 7.5%. Our middle market portfolio investments are primarily in the form of debt investments, and approximately 92% of our middle market portfolio debt investments at cost held the first lien security position. The weighted average EBITDA for the companies in the middle market portfolio was approximately $69 million. In our private loan portfolio, we had investments in 19 companies, collectively totaling approximately $145 million in fair value. The weighted average EBITDA for the companies in the private loan portfolio was approximately $12 million. Approximately 96% of our private loan portfolio investments are in the form of debt investments, and 82% of such debt investments held the first lien security position. The weighted average annual effective yield on our private loan portfolio debt investments was approximately 11.3%. The total investment portfolio fair value at June 30 was approximately 111% of the related cost basis and we had 2 portfolio investments on nonaccrual status, which comprised approximately 1.2% of the total investment portfolio at fair value and 3.5% at cost. With that, I will now turn the call back to the operator so that we may take any questions.

[Operator Instructions] We'll go first with Christopher Nolan with MLV & Co. Christopher Nolan - MLV & Co LLC, Research Division: Vince, just to confirm that your -- you mentioned guidance of distributable net investment income of $0.55 to $0.57 in the third quarter. Did I hear that correctly?

You heard it correctly. Christopher Nolan - MLV & Co LLC, Research Division: Great. And then my follow-up question is, Vince, you mentioned that the driver for -- or you should see stronger lower middle market growth in the second half of the year. This is sort of a change from the comments I picked up during the Investor Day where it seemed like the middle market was going to be the driver. Can you give a little detail in terms of what's changed in some of the yield trends that you're seeing for lower middle market?

Sure. Yes. We had an Investor Day in early June and at that point in time, we were taking the proceeds of our follow-on offering and putting them to work as quickly as we reasonably could in the middle market loans, more liquid investments, which we intend -- which is kind of following the pattern that we did last year, which we intend to rotate out of and into lower middle market, private loan investments as they become available. And my comments were that in the near term, we expect to see a fair amount of that rotation simply because, I think, we've got 3 lower middle market deals in documentation that are scheduled to close the next couple of weeks. So it's real near-term visibility. And I think, Dwayne, we have a follow-on acquisition of one of the existing portfolios. So we've been very busy in August documenting those deals, and that's really the genesis for the comment.

We'll go next with Bryce Rowe with Robert W. Baird. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Dwayne, just wanted to get a little clarity on the increase in compensation expense from first quarter to second quarter. I think it increased, as you said, well over $1 million. And so just -- I just wanted to get some maybe color behind the increase. And what do you kind of expect, from a go-forward basis, in terms of a run rate?

Sure. That's a great question, and I'm happy to provide some additional details. So when you look at the variation quarter-to-quarter in our compensation expense, the largest variable there is going to be the bonuses that we have on an incentive basis. And when you look at our results in Q1 versus Q2, when you look at the performance, particularly, when you look at absorbing the additional shares that we issued in our April follow-on equity offering, the performance in Q2 was significantly better than Q1 and as a result, we had a -- about $1 million -- just under $1.3 million of additional compensation accruals for that incentive accrual, whereas in the first quarter, you didn't have any significant accruals there. So that's the biggest driver. I think when you look forward to Q3 and Q4, I think you won't see an accrual as large as that. But if we do have continued good performance, you would see some accrual on the incentive side.

And Bryce, just to put it in perspective, we now have accrued on the books incentive comp expense at the end of Q2, being halfway through the year, almost exactly what we had this time last year. And last year, we started out accruing more slowly in the first quarter, kind of caught up in the second quarter. So really, there's no change midyear-over-midyear. Bryce W. Rowe - Robert W. Baird & Co. Incorporated, Research Division: Okay, that's helpful. And then a follow-up -- unrelated follow-up. Dwayne, as you guys are seeing increasingly more dividend income coming into the revenue stream from those equity investments and significant increase here this quarter over previous quarters, just maybe if you guys could comment on the granularity of these equity dividends? Whether you're seeing more dividends from more companies? Or is it more kind of, company-specific, lumpier in nature?

Yes, I'll start off overall, Dwayne, and -- I mean, Bryce, then Dwayne can get into the granularity as he sees appropriate. But in general, we have a lot of companies that have been in the portfolio 6, 8, 10, 12 years. They've delevered and they're producing, if not the same amount of free cash flow on unlevered basis, they've actually grown organically. And so we're simply seeing dividends from those companies take the place of principal repayments on debt or interest income. There's a couple of notable examples where I think one of the companies is generating dividend income to us, what Dwayne is -- I forget the quarter. It's a pretty large amount.

Yes. You had -- you have 1 investment that's generating about $1 million of dividend income. But when you look at the portfolio, Bryce, we've got, rough numbers, over 20 different companies that are generating dividend income in the lower middle market. So while we do have one company that's performing exceptionally well, that has really no debt on its balance sheet, so all of its free cash flow goes out to the shareholders in the form of dividends or distributions. There are a number of companies that are contributing to that growth in the dividend income that we're seeing from the lower middle market companies.

And the other thing to keep in mind is that when we -- we strive to invest in LLCs, and when we do that, the tax payments that would normally go to the state federal governments, if you're a C corp, go to the shareholders if you're an LLC. And for accounting purposes, that shows up as dividend income. And as we transact more heavily weighted into LLCs, that will drive dividend income as well.

Our next question comes from Robert Dodd with Raymond James. Robert J. Dodd - Raymond James & Associates, Inc., Research Division: On a question of demand, I mean, you say the lower middle market's starting to pick up. You've got a few specific deals closing in the near term, and we've heard anecdotally from other lower middle market players that the pickup, that's mainly driven by private equity M&A and the fact that they've got funds to deploy, which isn't really the core market that you guys [indiscernible]. You are the sponsor in the lower middle market in most cases. So what's -- can you give us any more color on what's, right now, driving some of the pickup? Obviously, it's not a tax-season thing or anything like that, but is there any particular theme that's driving more activity in that part of the market that you operate in?

No, not really. With us, Robert, it continues to be how many deals we kill in diligence, and it's kind of as simple as that. We can be working on 10 and close none of them. We can be working on 10 and close 10 of them. And we've -- we just we killed a lot of deals so far this year, and we're fortunate now to have several that have made it all the way through into documentation. It can be items like liability insurance issues or management compensation issues or reps and warranties or whatever. And that's really what we struggle with in terms of trying to predict what amount of backlog makes it into closed deals. It's really not -- we're not working with any sponsors, per se, in the traditional sense, that are notable. We will work with some small sponsors. We'll work with some high-net-worth individuals, we'll work with some family offices. But when we do, it tends to be -- we're kind of co-owning the company's equity and we are providing a debt. But we don't see more or less activity there. It's really idiosyncratic vis-à-vis the company, and we're pretty rigorous in diligence. We do it ourselves, we don't really outsource it. And if we're not comfortable, we don't close. We try not to fall in love. Dwayne, would you...

No, I think you covered it.

We'll go next to Vernon Plack with BB&T Capital Markets. Vernon C. Plack - BB&T Capital Markets, Research Division: Vince, can you -- regarding the lower middle market, can you tell me what differences you're seeing today in terms of in pricing terms and structure versus 12 months ago?

Yes, I can try. I mean, what the -- any differences that we're seeing are going to relate to -- we're -- while our average EBITDA currently is maybe...

About 5 -- $5 million [ph] .

$5 million for the 62 companies, we're not -- the deals we're working on, Vernon, might be $8 million, $10 million, $12 million, $7 million, something like that. But as we go up the food chain, as I've commented in the past, that's when you're going to have more competition. And I -- the competition we're seeing comes from -- and which means you're going to transact at a higher EBITDA multiple, right? I mean, if you're going to get a company now, there's some competition. We're not going to be able to buy it 4x to 5x, it will be 5x to 6x or maybe higher, and which we're okay with because it's a higher-quality company. The types of competition we see are -- the companies we're looking at evolve to be a platform to us. It's an add-on to a smaller private equity firm's existing portfolio company with respect to which it has a buy-and-build strategy. It's got to do something to exit. We don't underwrite to exit. We underwrite because it's a good company. And when we get in a bidding contest, we will generally lose because the strategics have an advantage over the financials because the strategic -- and they'll -- they won't think twice about paying 8x for one of these companies. We haven't gone there yet. We'd rather kind of sit on the sidelines and find an opportunity where we don't have that type of competition. Vernon C. Plack - BB&T Capital Markets, Research Division: Okay. And Vince, given all your experience in the energy industry, I'm just -- I am curious, in the lower middle market, where are the best places to put capital in the energy industry today?

We really like maintenance, inspection, pipeline integrity. More and more stuff's going in the ground. It's getting older and older. People don't know where it is. It's getting damaged with continued underground construction. So we love any of that stuff because you can be agnostic as to which actual infrastructure du jour is going to be successful because it all needs to be maintained. So we really like that. Any time we can kind of get recurring revenue as opposed to contract-by-contract type revenue. But we're seeing more activity, specifically in the region, in the petrochemical space. We're seeing more interest in plants that were kind of orphaned. The plants are getting expanded. And if you have a smaller plant that's really too small for other strategics, or maybe it's MLP-qualified but it's really too small, we're starting to take a look at some of those opportunities, which is pretty exciting.

We'll go next to Doug Mewhirter with SunTrust.

Could you give a -- just maybe a breakdown of your total -- I mean, you gave the -- sort of a net increase in your investments. Do you have like an inflow and an outflow number for the -- for your portfolio this quarter?

Well, yes. For -- we have that for lower middle market because we do consider that meaningful. You have originations and you have companies that get sold or you have companies that are delevering with respect to your debt. With respect to our middle market investments, we don't provide that because we don't consider it meaningful. For example, we might really like a debt opportunity and ask for an allocation of $15 million and get $3 million, in which case, we'll sell it. And we don't -- so we don't really track that. It's there but it's kind of noise. But Dwayne does have that for the lower middle market and private loans, I believe.

Yes. When -- Doug, when you look at the lower middle market, we -- if you get through the press release, you'll see that we give the specific total gross originations and then the cash that came back. And that's how you -- you'll see that in the bullet point with just over $23 million of cash outflow and then $21 million of cash coming back. And that's disclosed in -- on the private loans, we had $29 million of outflows and just under $1 million of repayments.

Okay. Okay, I found it. And just a very quick numbers follow-up question, just a clarification on the model. So the -- your HMS Income Fund is accounted for on the line item that's expenses reimbursed to fully the Investment Manager? Or is that aggregated into another line?

It shows up in 2 places. So one place is the line that you referenced where we have the expenses that we charge to the External Investment Manager. In addition to that, if the External Investment Manager is profitable, which it was in the quarter and there'll be a footnote on our 10-Q that gives you the details, then the after-tax net income will be dividended up to the parent. So you'll have dividend income. So this quarter, you had about $400,000 of expenses that were charged to the External Investment Manager and then you have about $60,000 in this quarter that was recorded as dividend income for the parent from the operations of the External Investment Manager.

Great. And that would be under affiliate -- under the affiliate investments line?

No, it would be under the control investments. If...

[Operator Instructions] We'll go next to Mickey Schleien with Ladenburg Thalmann. Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division: Vince and Dwayne, it's interesting times. We've seen multiples -- M&A multiples increase pretty dramatically over the last few quarters. And I'm just curious as to your thoughts of how that's affecting the portfolio, particularly the lower middle market portfolio because you have owners of these businesses who may be incentivized to sell, but I'd like to hear your thoughts on that. And at the same time, it might be making it more difficult to -- for you to find deals that are interesting. And I'm sort of struggling with how that's going to affect the LMM business.

Sure. So I -- we kind of see -- it's kind of bimodal, if you will. We see 2 different types of companies. There's the kind of company out there that generates $4 million EBITDA and kind of always has, and there's very little growth associated with it. It might be the local landfill where the amount of garbage is associated with the population and the population's stable. It's just not going to grow. Now those kinds of companies, because of their size, are going to go for pretty modest multiple. For example, you take a $4 million software-as-a-service company that's growing rapidly. What we're seeing is the $4 million is not keeping the larger firms away, and that company will go for 8x or 9x. So if it's in a sexy industry with a lot of growth characteristics, then it goes for a big number, and we typically shy away and would rather work on the former than the latter. And the same is true, Mickey, in our portfolio where we have a couple of exits. One in particular, we're benefiting from that because it's now in a very hot industry and we're going to be the beneficiary of a -- potentially, a double-digit multiple on the exit when we came in at 4x. And so that's kind of how we're seeing the world. If you're fortunate enough to own those, they're attracting a lot of interest. If you're unfortunate enough to have a growth mandate and you're chasing those companies, you really have to pay up.

And Mickey, I think we've talked about this in prior calls and conversations, but I think one of the things that's always important to note is that a lot of our -- the co-owners of our companies, which is the management team, one of the reasons they transact with us is because they want a long-term partner. So they're less inclined to have a scenario where they're trying to flip the investment like a typical private equity group would because they've got a end-of-fund life. We have the benefit of not having end-of-fund life and neither do the management teams that we partner with. So when we've got a good investment, we're typically going to be inclined to hold it for a longer-term, and our management team has that same view, which is why they transacted with us in the first place. And that's why you see less of an impact on our portfolio companies when you look at that in comparison to our traditional private equity model. Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division: Got it. Just a couple of quick follow-ups. We've seen the more liquid markets back up in the last 10 days or so, you're looking at a BBB spread. I'm just curious, well, they might be too early, but are you seeing any impact yet on either the middle market or lower middle market terms? And then my other follow-up was with respect to refinancing risk. When you look at the vintages of the more liquid paper in your portfolio, how would you characterize the remaining refinancing risk?

Yes. Mickey, I'm going to refer that to Nick Meserve, our Managing Director that runs our middle market portfolio. And Nick, why don't you talk about what you're seeing, particularly the last 10 days.

I think in the first part of it, the market obviously has turned off -- turned down probably a good 0.25 to 0.5 points in the last 10 days or 14 days on the liquid loan side. The high-yielding's seen even more. It's probably down more like 1 point to 1.5 points. I think in July, it was down 1.5%. Big outflow this past week in the high-yield mutual funds. And so you've really seen that flow-through a little bit in the secondary but not that much. There really hasn't been that much trading activity. Where we start to see it in the primary deals, on new issue deals, the terms are going to widen out a little bit. And I think, for where we are, I think it's a good opportunity for us to kind of add to the portfolio, recycle some lower-yielding names, and there's some newer names that are in the primary. They're coming out at a little higher terms. And the second part of your question was on the... Mickey M. Schleien - Ladenburg Thalmann & Co. Inc., Research Division: Refinancing risk.

The recycling of the parent portfolio. Generically, this portfolio is not that old. I think we probably turn it around 20% to 25% a year if not higher. There's not a lot of old deals from 2010, '11 that are still kind of existing. And so there's not a big opportunity there for yield compression on the older deals we're cycling through.

Our next question comes from Merrill Ross with Wunderlich Securities.

This is a really small question, but I think, Vince, you mentioned that the July dividend was particularly tax efficient. I wasn't sure why that was.

Well, it’s because capital gains flow through and qualified dividends flow through to our taxpaying shareholders. So individuals would be taxed at roughly 20% instead of roughly 40%. So we attempt to be as tax efficient as we can. And the reason it happened in July is because of the tax rules, you have to absorb all of your spillover from the prior year, which, the way we configure our spillover, it's all ordinary income before you can start passing through capital gains. And it took us almost 6 months to eat through our spillover, which is all ordinary. So now during the second half year, you'll see some capital gains flow-through, and it just began in July. So that's kind of the technical reason. Give me a call in the office and I'll try to take you through it. It's kind of complicated, but that's the reason.

We'll go next to Christopher Nolan with MLV & Co. for a follow-up. Christopher Nolan - MLV & Co LLC, Research Division: Could you give a little detail if -- what's your next plan in terms of capital management? I mean, you did the April follow-on raise. Is there any plans in terms of taking -- raising debt or anything along those lines? Or have the capital markets shift altered those plans?

Well, yes. I mean, I guess we have a couple of views on that. The first is, we did -- the timing of the last equity raise was because unless we get this BDC-modernization legislation passed, which hopefully it will at some point, our shelf goes down once a year. And you're at the risk of an SEC comment on the new shelf where you could be out of the capital markets, debt or equity, for an uncontrollable amount of time. And all it takes is some turnover in terms of your reviewer and you could be out 1 month, 2 months, et cetera. So we went ahead -- our shelf is going to go down at the end of April. We went ahead and did an equity issuance while we still had a shelf. That's why we did it. Not because we had a critical need for the money then, but we did not want to be out of money, because we're a couple of phone calls away from needing money. The second view is that while we don't foresee an equity raise this year, again, we're a couple of phone calls away. If we see a couple of nice deals and we make it through diligence, then that could change. So we're going to be -- you're going to see us raise equity when we really need the money. We don't want to get too far out in our -- on our line of credit with the banks. I would say, our diagnostic would be if we're drawn 60%, 65%, 70% on our line of credit, you could expect an equity raise. And we're down in the 50s now. Right, Dwayne?

That's correct.

And secondarily, we're not going to be without a shelf if we can help it. And it'll -- and absent the legislation, simplifying this, we can be like other issuers. It goes down every May.

And we have no further questions in the queue at this time.

Great. Well, I want to thank everyone for joining us and absent something highly unusual, we'll talk to you again in -- on November.

And ladies and gentlemen, this concludes today's Main Street Second Quarter Earnings Conference Call. If you'd like to listen to the replay of today's conference, please dial (719) 457-0820 and enter the pass code 3913959. The conference center would like to thank you for your participation. You may now disconnect.