Main Street Capital Corporation (MAIN) Q2 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Main Street Capital Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Jenny Zhou. Thank you. You may begin.

Thank you, Matt, and good morning, everyone. Thanks for joining us for the Main Street Capital Corporation second quarter 2015 earnings conference call. Joining me today on the call are Chairman, President and CEO, Vince Foster; Chief Operating Officer, Dwayne Hyzak; and Chief Financial Officer, Brent Smith. Main Street issued a press release yesterday afternoon that details the Company's second quarter 2015 financial and operating results. This document is available on the Investor Relations section of the Company's website at mainstreetcapital.com. A replay of today's call will be available beginning about an hour after the completion of the call and will remain available until August 14. 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 Internet webcast that can be accessed from the Company's webpage. Please note that information reported on this call speaks only of today, August 7, 2015, 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 was derived from third-party sources and have not been independently verified. And now, I'll turn the call over to Vince.

Thanks, Jenny, and thank you all for joining us today. I will comment on the performance of our investment portfolio, discuss our recent dividend increase and conclude by commenting on our investment pipeline. Following my comments, Dwayne and Brent will cover our operating performance in more detail and comment on our second quarter financial results and originations, recent announcements, our current liquidity position and certain key portfolio statistics, after which, we will take your questions. We were pleased with our operating performance during the second quarter. Our lower middle market investments are primary area of focus appreciated by $16.7 million on a net basis, with 22 of our investments appreciating during the quarter and 7 depreciating. Our middle market loans appreciated by $100,000 during the quarter on a net basis, and our private loans depreciated by $5.9 million during the quarter. Lastly, our investment in our External Investment Manager and our other investment assets appreciated by $3.4 million on a net basis during the quarter. We finished the quarter with a net asset value per share of $21.84, a sequential decrease of $0.03 per share over the first quarter. However, excluding the impact of the 27.5 cent per share semi-annual dividend we paid in June, our net asset value per share increased $0.24 during the second quarter. Our lower middle market companies with nearly $125 million of cash on their balance sheets collectively continue to exhibit highly conservative leverage ratios, which Dwayne will cover in greater detail. Earlier this week, our Board declared an increase in our regular monthly dividends for the fourth quarter to $0.18 a share in each of October, November and December, our second dividend increase this year. The ex dates for these dividends are September 17, October 19, and November 18 respectively. These dividends represent an increase of 6% over the monthly payout of $0.17 per share during the fourth quarter of last year. 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 undistributed taxable income position. We began the third quarter of 2015 with roughly the same dollar amount of undistributed taxable income that we enjoyed at the end of calendar year '14. We therefore anticipate asking our Board in October to declare a semiannual supplemental dividend payable in December of 27.5 cents a share. As of today, I characterized our investment pipeline as about average posturing us to achieve our combined lower middle market in private loan origination target of $250 million to $300 million for calendar 2015. We continue to seek and receive significant equity participation in our lower middle market investments and as of quarter end, we owned an average of a 36% fully diluted equity ownership position in the 96% of these investments in which we currently have equity exposure. After having our shelf registration statement declared effective in mid-July, we obtained Board approval for an ATM or At The Money offering program earlier this week. While we have not definitively decided to launch the program, we wanted the flexibility to be able to do so. Our sole rationale for considering this is to be able to more effectively accommodate current and prospective institutional shareholders who have had difficulty participating in our historical overnight follow-on offerings. Our officer director group has continued to be regular purchasers of our shares, investing approximately $1.1 million during the second quarter. And with that, I'd like to turn the call over to Dwayne Hyzak, our Chief Operating Officer and Senior Managing Director to cover our portfolio performance in more detail.

Thanks, Vince, and good morning, everyone. We are pleased to report another quarter during which we generated distributable net investment income in excess of our recurring monthly dividends and continued net appreciation in our investment portfolio. As we’ve discussed in prior quarters, we believe that the primary driver of our success continues to be our focus on the underserved, lower middle market and specifically, our investment strategy of investing in both the debt and equity in the lower middle market and acting as a sponsor and a partner to the management teams of our lower middle market portfolio companies and not just as a financing source. We believe that our lower middle market equity investments provide significant value to our shareholders and this value is primarily provided in two ways. First, these lower middle market equity investments are the primary driver behind our significant, net unrealized appreciation of greater than $150 over $3 per share in our lower middle market portfolio, another primary driver behind our long-term growth in net asset value per share. We believe that it is important to note that this unrealized appreciation is well diversified across our lower middle market portfolio with 41 of our 66 lower middle market equity investments having appreciation as of June 30 with a median appreciation of approximately $4 million. Second, these equity investments also support growth in our realized income, and therefore our total dividends paid to our shareholders through the dividend income we received from these investments and the periodic gains realized upon the exit of these investments. Our dividend income from these lower middle market equity investments is also well diversified across the lower middle market portfolio with 30 companies or approximately 77% of our investments in flow through entities for tax purposes contributing to our dividend income. We believe that this diversity is very important when analyzing the dividend income, net appreciation and realized gains from our lower middle market equity investments and we believe that this diversity provides support for the strength of our historical performance and visibility to the recurring nature of these benefits in the future. We are pleased that since the end of the second quarter, we have already announced another favorable exit of one of our long-term lower middle market equity investments for a $6 million realized gain and as discussed on our prior conference calls over the last few quarters, we continue to have ongoing exit activity discussions given the nature of our large and diversified lower middle market portfolio and the current robust nature of the M&A market. Now turning specifically to our investment portfolio at quarter end and our investment activity in the second quarter, we are pleased to report that our overall portfolio performance remains strong and the portfolio continues to improve on its diversification each quarter by issuer, industry, end-markets, geography, and vintage. Our investment activity in the second quarter included total investments in our lower middle market portfolio of approximately $36 million primarily as a result of our investment in one new portfolio company which after aggregate repayments on debt investments and return of the invested equity capital, resulted in a net increase in our lower middle market portfolio of approximately $17 million. We also had a net increase in our middle market portfolio of approximately $23 million and a net decrease in our private loan portfolio of approximately $9 million. As a result, at June 30, we had investments in 190 portfolio companies, that are in more than 50 different industries across the lower middle market, middle market and private loan components of our investment portfolio. The largest portfolio company investment is approximately 2.5% of our total investment income and approximately 2.4% of our total portfolio with the majority of our portfolio investments representing less than 1% of our income and our assets. The diversification of our investment portfolio continues to improve as we grow the portfolio and we believe that this diversification provides significant benefits to our shareholders. Additional details on our investment portfolio at quarter end are included in the press release that we issued yesterday, but I'll touch on a few highlights. Our lower middle market portfolio included investments in 69 companies at quarter end, representing approximately $809 million of fair value, which is greater than 23% above the cost basis. Consistent with our investment strategy, approximately 70% of our lower middle market portfolio at cost was in the form of secured debt investments, and approximately 90% of those debt investments held a first-lien security position. As Vince mentioned, we hold equity positions in 96% of our lower middle market portfolio companies with an average fully diluted equity ownership position of approximately 36%. At the lower middle market portfolio level, the portfolio is median net senior debt-to-EBITDA ratio was a conservative 1.7 to 1, or 2.0 to 1 including portfolio company debt which is junior in priority to our debt position. As a complement to our lower middle market portfolio, in our middle market portfolio, we had investments in 85 companies representing approximately $657 million of fair value and in our private loan portfolio; we had investments in 36 companies representing approximately $236 million in fair value. Our middle markets and private loan investments provide significant portfolio diversification and generate additional net investment income to fund our dividends. The total investment portfolio at fair value at June 30 was approximately 109% of the related cost basis, and we had four investments on non-accrual status, which comprise approximately 0.3% of the total investment portfolio at fair value and 3.1% at cost. In summary, Main Street's investment portfolio continues to perform at a high-level and continues to deliver upon our long-term goals of sustaining and growing our dividends as well as generating meaningful growth in our net asset value per share. With that, I will now turn the call over to Brent to cover our financial results and liquidity position.

Thanks, Dwayne. We are pleased to report that our total investment income increased by 18% for the second quarter over the same period in 2014 to a total of $41.3 million. Interest income increased by approximately $4.8 million and fee income increased by approximately $1.7 million when compared to the prior year. The net amount of non-recurring or one-time income-related amounts were consistent with the second quarter of 2014. This quarter included decreased interest income of $1.1 million related to accelerated prepayments or repricing activity offset by increased fee income of $1.2 million relating to such activity and other one-time transactions. Second quarter 2015 operating expenses, excluding non-cash share-based compensation expense increased by $2.1 million over the second quarter of the prior year to a total of $12.4 million. The increase is primarily the result of a $2.2 million increase in interest expense due to issuance of our investment-grade notes in November 2014, and approximately $0.6 million relating to compensation and other general and administrative expenses. These increases were partially offset by an increase of $0.7 million in the cost allocated to our external investment manager. The ratio of our total operating expenses, excluding interest expense as a percentage of our average total assets, which we believe is a key metric in evaluating our operating efficiency was 1.4% on an annualized basis for the second quarter and continues to compare very favorably to other BDCs and other investment options. Our increased total investment income and the continued leverage of our efficient operating structure resulted in 18% increase in distributable net investment income for the second quarter of 2015 to a total of $28.9 million or $0.58 per share, exceeding our recurring monthly dividends paid for the quarter by over 10%. Our external investment managers’ relationship with the HMS Income Fund benefited our net investment income by $1.7 million in the second quarter of 2016. Through a $1.2 million reduction of our operating expenses for cost we charged to the external investment manager for services we provided to it and $0.5 million of dividend income from the external investment manager. Based on the HMS Income Fund's current fund-raising efforts and activities, we currently project this relationship will contribute approximately $0.03 to $0.04 per share of net investment income per quarter during the second half of 2015. We recorded a net realized loss of $5.6 million during the second quarter, primarily relating to the sale and restructuring of certain middle market and private loan debt investments. And as Vince discussed, we recorded net unrealized appreciation on the investment portfolio of $14.3 million in the second quarter, primarily relating to $16.7 million appreciation on our lower middle market portfolio and $5.1 million of appreciation relating to our External Investment Manager, partially offset by unrealized depreciation on our private loan portfolio and other portfolio. Additional details for the change in our net unrealized appreciation can be found in our earnings release. Our operating results for the second quarter of 2015 resulted in a 36% increase in net increase in net assets of $40.8 million or $0.82 per share. On the capital resources front, our liquidity and overall capitalization remains strong. At the end of the second quarter, we had $41.6 million of cash, $8.9 million of marketable securities, and $371.5 million of unused capacity under our credit facility. Today we have approximately $43 million of cash, $9 million of marketable securities, and $300 million of unused capacity under our credit facility. As we look forward to the third quarter of 2015, we currently expect that we will generate third quarter 2015 distributable net investment income of $0.56 to $0.58 per share. This estimate is 3.5 cents to 5.5 cents per share above our previously announced dividends for the third quarter of $0.525 per share. And will result in the third quarter dividend payment at less than 95% of our expected third quarter distributable net investment income. With that, I will now turn the call back over to the operator, so we can take any questions.

[Operator Instructions] Our first question comes from the line of Robert Dodd from Raymond James. Please proceed with your question.

Hi guys. First one, on the – great color on the contribution of the appreciation on that you ever have broadly that is coming from the lower middle market portfolio and the median on the appreciation. You didn’t give us a median or kind of concentration metric though for the dividend income from 30 companies that are contributing. Can you tell us, give us a ballpark like 50% of the dividend comes from ten companies, 15 companies, I mean, can you give us a kind of metric on how concentrated that is given you gave us a concentration for the appreciation side?

Yes, Robert, thanks for the question. When you look at it – I don’t have an exact number for you, but I would say that your metric of 50% of the total dividend income from the lower middle market coming from the top 10 companies is a pretty good metric and we can get that number and provide additional details on it next quarter. But, with the companies that do well do generate higher levels of dividend income and appreciation which is why we thought the median numbers of better metric than an average number. But, similar to the diversity, we see any appreciation, we do believe that the dividend income is well diversified which we obviously think is a big positive.

Rob, as we discussed in the past about close to 80% of our equity investments are deliberately structured as investments in flow through LLCs for tax purposes and we have a contractual right for dividends at a minimum equal to a normal tax rate times tax when it come times our percentage. And so, it’s much more broadly base and you would think as results of the tax-related distributions.

Got it. And then just, second one, obviously, another realized gain already in the third quarter, we are hearing the valuations and you’ve talked about it before the Analyst Day and in prior calls that valuations in some segments in the lower middle market, very healthy, let’s put that way, so, can you give us any color on how broad is the discussion among obviously managers not necessarily you driving of basically selling out. I mean, this is still very focused to a few companies in highly valued sub-sectors? Or is that spreading with multiples generally in the lower middle market seem to be getting…

It’s kind of all over the board, Robert. I mean, there is one catalyst is, the investment banker, the investment banking community is calling on our companies kind of independent of us informing them of the valuations they can obtain, should they choose to sell. It’s a no interest to a lot of them. It is of some interest to some of them and that is happening and that’s probably 10% of our portfolio that kind of gets regularly solicited by intermediaries saying, you know, you maybe eligible to get a double-digit EBITDA multiple for your company, that type of thing. And so, that’s part of accounts, but I would say, it’s about 10% when you agree Dwayne?

I agree.

And the exit that we had was a mid-teen EBITDA multiple, I mean, we’ve never seen anything like it. But if you are in an attractive sector that certain private equity firms have targeted, they are out they are transacting at really multiples that are almost higher than you see in terms of the public company terms. And you are seeing public companies pay higher than the multiples they are trading at for companies that has a lot of strategic value to them, it’s pretty amazing.

Got it, thank you. And then, one final one if I can, I got to ask obviously, energy exposure indirect exposure to taxes with oil getting back down low, I mean, any changes or noticing any impacts on the energy services side or anything like that? Or was it in fact, you are switching now and starting to look at more opportunities on that side?

Well, it’s a pretty dynamic situation, I think, things are pretty – things were kind of stabilizing prior to the most recent leg down in at least oil prices and we’ll have to kind of wait and see if that stays, what impact that might have, but the way we are managing the portfolio now, it takes some discipline, but if we see an opportunity in the energy space, generally, we are telling our guys that you have to someone’s got to get off the bus to make room for the new passenger. You are going to have to let one go and maybe take a loss if you want to add to the energy exposure. So, while we’d like to add to it just opportunistically, for various reasons including the banks and our credit facility et cetera they don’t want to see any more energy exposure than we have. So we are being pretty discipline about it. We are watching it carefully. We do benefit particularly in the lower middle market from not having, I mean from being the lender and we have a lot more flexibility that way. But we are really not in any significant jeopardy of having a third-party lender cut-off liquidity and us having to respond toward to get blocked or anything like that. It’s much like how the recession was with the overall portfolio we really benefit from being the lender and having very low reliance on third-party financing. So, basically what’s happening is the energy exposure that we have is absorbing a lot of the appreciation that naturally occurs in the rest of the portfolio and fortunately, we are still able to eek out net appreciation which is what happened in the second quarter and we – based on how we see things right now, we continue to expect that to be the case. Would you add anything?

I think you covered it well.

Okay, perfect. Thanks a lot.

Thanks, Robert.

Our next question comes from the line of Bryce Rowe from Robert W. Baird. Please proceed with your question.

Thank you. I wanted to – Vince or Dwayne, just wanted to ask about ongoing yield compression within the lower middle market and obviously any of the one line you closed this quarter came at a lower yield, but just wanted to get a sense for – if you are continuing to see or if you are starting to see a slowing in yield compression with spreads having widened out here recently?

You are talking the lower middle market, Bryce, I am sorry, just want to…?

That’s right.

Okay, sure. Yes, I mean, I think the way to look at it, our average EBITDA which is probably pretty close to median EBITDA in the lower middle market it’s a $6 million size company. And what we are seeing in the market is, historically that size company had limited access to less expensive senior cash flow financing. Maybe the top quartile of those companies that were of interest to sponsors could access that type of financing. What we are seeing now is probably the second quartile if there is reasonable growth prospects with respect to the business and we see the sponsors moving into the – maybe the second quartile and they are bringing with them access to senior cash flow financing. The cheaper financing is generally hard to get unless a sponsor comes in, generally in change control transaction, it puts a bunch of equity it. Right, that’s the kind of the catalyst for it. So we are seeing the change in the market is the second quartile companies are now having access to that company. The third quartile companies and fourth quartile companies, and I am ranking in terms of growth prospects continue to not really have that access and that’s kind of been where we’ve been transacting, but, in a competitive process, if we want to engage in the second quartile or first quartile company in terms of growth, those yields are coming down to the high single-digit and that’s kind of the reality that we are seeing. We were just discussing that the other day.

I think it’s important to note that, when we do, except a lower yield on debt, Bryce, it’s going to be in conjunction with an opportunity on the equity side that we really like. I don’t think you’d see us do a lower middle market deal debt only and chase the yield down. But if we are really excited about the company and the equity opportunity that’s what you’ll see as except a yield that maybe lower than we would have done a couple of years ago.

The most recent one I think that you are referring to, that had somewhat of a lower yield at this floating rate that it was about a $15 million EBITDA company roughly. So it was a much larger company. It had gone through a process to attract the sponsor and while the process was successful in generating bids, they were inadequate from the owner’s standpoint and so we came in a with a non-control recap to get him partial liquidity and so what drove that is really – it almost had triple the EBITDA of our normal company. But we like the company, we like the situation. Again it wasn’t sponsored to other than us being the sponsor if you will. And, we like the asset; we like the management, so we went ahead and did that opportunistically. That’s kind of our type to deal where if the sponsors weren’t able to deliver the result that the seller wanted. We came in and provided a customized solution.

Yes, got it. Okay. And then, on a different topic, Vince, we’ve seen some movement with the SBA legislation through the House. Just wanted and since you are on kind of the forefront of any kind of movements from an SBA perspective, wanted to just get any update that you have of potential movement here this year with the family of funds or the leverage piece?

Well, I got a in-depth briefing from our lobby just two days ago when the Senate was adjourning they come back I think on September 9 and what’s happening in the Senate is the activity is in the small business committee, the small business committee, because of kind of a domino effect of one member left and then his committee vacancy ended up being filled by a small business committee person that left the vacancy in the small business committee, et cetera, et cetera, when the smoke cleared, we have a new – we have new leadership at least in terms of the ranking member, the small business committee and so, what we are trying to do is, achieve a by-partisan movement of the legislation out of the small business committee and there is a little bit of work to do in terms of achieving that. It’s not so much that 7A – excuse me, that the SBIC bill is controversial. It’s – to achieve a by-partisan solution we might need to attach some other legislation with it and it could kind of get bogged down and that’s kind of where the discussion is. I know that’s very granular, but there is a lot of activity and hopefully when they come back at September, there can be a resolution in terms of moving our bill through, whether it’s with a companion bill or not. So that’s kind of what’s happening. So there is a lot going on real-time.

Yes, okay. Thank you. I appreciate it.

Sure.

Our next question comes from the line of Douglas Mewhirter from SunTrust. Please proceed with your question.

Hi, this is actually Messiah [Ph] on for Doug. I was wondering if you could give us a little more detail on your pipeline into the third quarter.

Sure. Our pipeline is – doesn’t have a lot of volatility in it in terms of the companies we are looking at. We’ve got four lower middle market teams and again, I am focused on lower middle market pipeline right now. The lower middle market teams divide up the country, each of them is always looking at a pipeline, if each is looking at three deals we have 12 deals we are looking at. Where the uncertainty comes in, in terms of handicapping what actually gets closed and booked is trying to handicap the diligence process which of those 12 transactions make it through diligence, documentation, et cetera. This is an unaudited environment. You never know what the diligence is going to produce and you never know the counterparty is going to be reasonable in terms of the pretty tough documentation we insist on. Sometimes they go over 12; we can see we go 12 for 12. I kind of handicap at about a 75% kill rate during diligence and if we can deliver 25% of that backlog in terms of completed deals, that’s kind of how I handicap, but that’s about what we normally do, but it could easily be none and it could easily be more. But in terms of the dozen or so prospects that we kind of chronically seek, that’s about all the teams can handle. They are busy or not there in the field, trying to get these things done and it’s kind of business as usual which is why I think we are approximately on target on a year-to-date basis, our backlog is about – our pipeline is about average and that’s why I made the comment about hitting our target. We are not going to probably exceed it, we probably not going to fall short of it.

Okay, I understand, and then, I was wondering, so net originations seems to be for the overall portfolio seems a little light in the quarter. Would you say like that’s sort of timing and when you are able to get all that due diligence documentation done…

Yes, absolutely, it’s – we really don’t have any visibility as to a given quarter what we are going to originate, particularly in the lower middle market. It’s you get involved in vacations in the summer and all kinds of subs. So, we don’t really get too worried about a life quarter here or there. We can have a lower middle market go a year without originating and another one end up having four, five deals get done. So, but we do think on an annual basis, we are comfortable forecasting an amount and again, I think we are on track to do on an annual basis. But it doesn’t quarterize itself very well, it never has.

Okay, great. Understand. Well, thank you for taking my questions.

Sure. Thank you.

Our next question comes from the line of Christopher Nolan from MLV & Company. Please proceed with your question.

Hey guys.

Hey Chris.

Hey, Chris.

A quick question on the, Brent, what is the spillover income?

It’s approximately $39 million, and again,

Great, is it there is …

Again Chris, just to clarify, spillover is a tax term and when you try to estimate what it is, we haven’t most of the lower middle market companies haven’t given us K-1s yet, but a lot of them have it yet for calendar 2014, so which are rough estimate in terms of – where you are for 2015. So 39, it could be, with this I wouldn’t be too precise there. But that’s our best estimate.

Great. And then Vince, on the capital management focus, is given the shelf offering, is the plan to do a institutional debt offering sometime in the second half of the year? What are the thoughts around that?

No, we did the institutional – we did the investment grade debt offering, just because we wanted to get ourselves introduced to the market and the market introduce to ourselves and we learned a lot. Most importantly, you really want to do a quarter billion dollar deal or more because of various indices that they have and the way the managers could evaluate it et cetera. So, the lesson learned is, we probably won’t do that again until we have a quarter million dollar type of need, a quarter billion dollar type of need and in the near term, it’s very expensive, because it’s a couple of 100 basis points more expensive or higher 250 basis points right now higher than our revolver. So, I don’t expect we do anything absent something really strange the last half of this year. We will be able to call our baby bonds on the fifth anniversary which is probably 2.5 years from now?

April of 2018.

Yes, so, that’s upcoming – that’s an upcoming need, so, there will probably be a catalyst for something like that. So, it’s – we deliberately have a lot of excess capacity in our revolver. We continue to grow that. We continue to add banks. So that’s the primary funding source and then the SBA program, there is a good shot that it gets expanded as well and we’d obviously try to use that. So, I don’t see much near term need to issue term debt. I do – with respect to the ATM that I made reference to, several institutions have told us, particularly we are starting to be owned in Canada and in Europe by these institutions and they can’t, because of time zone changes and other regulatory issues, they can’t – you can’t call them to do an overnight deal at 4:00 PM Central Time. They can’t respond to it. And, so, we try to figure out a way we can use the shelf, allow them to do their work and try to provide a vehicle other than that overnight offering to what – to provide them the equity exposure that you are looking for. So, we are going to see how that goes. And that’s the only reason we are doing it. For some reason, that doesn’t get utilized. We’ll do another follow-on offering – follow-on equity offering as the pipeline turns at completed deals.

Great. So for the near-term, the plan is just to utilize the credit facility for incremental liquidity and so forth?

Yes.

Quick question on the new business opportunities, I know in the past calls, there is sort of been a discussion about areas that you guys might explore or enter into. Any update you could provide on that?

We have one that has been approved by our Board it’s been approved by our counterparty’s board and as of to-date it should be in front of the SEC to achieve – to get there it’s not necessarily an approval it’s kind of a negative assurance as I understand it. We run the structure by them and they say, we don’t see any issues with it and that takes a few weeks. So I would expect we – unless there is, unless something goes around with the SEC, I expect we go live with that during the third quarter and we’ll be able to talk more about it in the fourth quarter. It’s not in our next conference call, it’s not very large, but it’s very significant to our organization, because it does add another dimension to the third-party asset or it’s I won’t necessarily call third-party asset management, but dealing with another – dealing with a party other than the Heinz organization. So we are pretty excited about it.

Great, thank you for taking my questions.

In addition to the Heinz organization I should say.

Great, thank you.

Sure.

Our next question comes from the line of Vernon Plack from BB&T Capital Markets. Please proceed with your question.

Thanks very much. Most of my questions have been asked, but Vince, if you could give us your current thoughts on the BDC modernization bill, I would appreciate.

Right. So, I’ve been pretty involved to that as well, the latest update is, that – it looks like if anything is going to happen there, it’s going to come out, the relevant House sub-committee that would generate a bill that we don’t have a bill that’s been sponsored yet or proposed. But we do have a draft legislation that was a subject of a sub-committee hearing. I represented at the hearing and testified on behalf of the small business or the SBIA and provided testimony and then there were three or four other witnesses who provided testimony, you are just on there with respect to your own organization as opposed to with respect to the industry. And I – my take on the sub-committee hearing was that, there was more or less by-partisan consensus that this thing made sense, particularly the simplification part of it and the draft legislation is not much different than legislation has been proposed in prior sessions of Congress. But we have a new Congress, so we have – everything starts over again. There is some debate around a few of the more aggressive positions, such as preferred stock, such as if there is more leverage, that’s permitted, how do we go about getting – being fair to the shareholders. Is it subject to shareholder approval, is it subject to kind of a cooling off period if you will. So shareholders who invested under one statutory regime have a chance to rotate out. And if that’s the case, what do we do about the non-listed BDCs that are illiquid and how do those shareholders get a chance? That’s kind of the one sticking point and I think I might have referenced that in prior calls, and again that was discussed generally at the sub-committee hearing. So I think the committee well. The testimony was well received. It was very well attended by the members and also some members that weren’t members of the sub-committee. So I think we are all very pleased as an industry as to how it went and I expect that there will be some movement on it. But it has a long way to go.

And by long way, do you mean that, certainly not this year?

Yes, I would think that consensus would be certainly not this year, but possibly this Congress, possibly next year?

That’s great. Thanks, Vince.

Sure.

Our next question comes from the line of Mickey Schleien from Ladenburg. Please proceed with your question.

Mickey do we have you? We go on to the next one.

Okay, we’ll go on to the next one here. The next call is from the line of Christopher Testa from National Securities Corporation. Please proceed with your question.

Hi, good morning. Thank you for taking my questions. I know you touched on this a little earlier in the call, but just with the lower middle markets, middle market spread has really narrowed pretty sharply the first and second quarter of 2014. Just what do you see as kind of the catalyst that are going to turn this around? Are you starting to see more and more competition kind of pullback from the lower middle market? Just any color you could give there would be appreciated.

Well, I mean, first of all, the two are pretty largely uncorrelated. The lower middle market companies when they are out transacting, looking for debt, looking for equity, they are – they are really not eligible for an institutional placement. The larger ones if anything are eligible for maybe a group of institutions might club together, that might provide some financing, but the ones we are largely focused on are just really going to be dealing with us and to put a perspective, our average EBITDA and Nick, help me with yours, your average EBITDA in the middle market is what?

Expense close to around $96 million.

Yes, so Nick’s roughly at $100 million in terms of his portfolio average EBITDA and works six. So the two markets don’t really have anything to do at each other. So, I think, you have one is fixed, one secured, the other is floating, could be generally secured, sometimes unsecured. They are really quite a bit different and we are not really looking at in terms of convergence or not again, I think the lower middle market opportunities in terms of higher yields are going to be in the less popular transactions, the non-sponsored transactions where the company doesn’t have a lot of growth. The company smaller has less alternative to access and there is more risk associated with those companies you can get higher yield. Again, we probably been focused a lot on the second quartile type growth prospect companies. And those yields have dropped. I think our strategy is to look at companies that are more unique, have less alternatives, have fewer growth prospects and that’s kind of our strategy to kind of maintain the yield. I don’t expect – we don’t look at in terms of convergence. I am just looking at the lower middle markets yields themselves. We don’t expect them to change a lot or to continue to really kind of drop and we are managing to kind of keep them stable. And we can’t really control what the middle market yields are.

Yes, no, that’s very helpful. Thank you and just can you give any detail on the non-accruals? I know you have four companies, were there any new companies put on there?

There were no new companies. One of the non-accruals from last quarter was one of the losses in the quarter, that’s what changed from five companies on non-accrual to four companies on non-accrual. Outside of that, there was no movement.

Okay, great. And just your general thoughts on the Southwest economy given the oil price declines and lay-offs in that industry. Just general things you’ve been hearing from your clients?

It’s – we really haven’t seen a lot of evidence of a contagion coming from oil prices to other parts of the economy in the Southwest. The housing market is still reasonably strong. Employment figures are still reasonably strong. You – remember to, I kind of said this in the past, Houston is probably as – into the Houston economy and possibly Texas in general, is as interested in gas prices or more than they are in oil prices. If I sit around and talk to my energy counterparts in Houston, that much more like as we are talking about gas and base is differential based on where the gas is being produced and transportation bottleneck and stuff like that. So, we really haven’t seen a lot. Obviously, it’s going to get worse if we stay at $45 oil or wherever it is right now for a sustained period of time, because when you look at the cost of production across all the different basins, there is not too many places you can continue to produce at those prices and so, you would expect supply and demand to balance out, because – particularly, when some of these shale plays around here they have such high front-end production that you start, some people call it mining rather than producing and when you stop, the production falls out very quickly. So, I think the sense is that the low price – the care to low prices or low prices and that’s maybe how you recover from where we are. But, there is a lot that goes into it, but, as of right now, our companies don’t really impact and again, as we’ve said in the past too, our restaurant companies, our jewelry companies, our transportation companies thrive in terms of low fuel prices. So there is that counter-balance as well.

Okay, thank you. That’s all for me.

Thanks, Chris.

Okay. Our next question comes from the line of Mickey Schleien from Ladenburg. Please proceed with your question.

I think we are having some technical difficulties with Mickey here today. Mickey, if you can hear us, we’ll be available if you want us call us back after the call.

Okay, management, it looks like there is no other questions at this time. Would you like to make any closing remarks?

Yes, I thank everyone again for joining us, and we look forward to talking to you again in November.