What are the covenants attached to the notes and how might they restrict Main Streetâs operational flexibility or dividend policy?
Covenants on the 5.40âŻ% Notes (2028)
The offering documents for Main Street Capitalâs $350âŻmillion senior unsecured notes contain a standard set of covenants that are typical for midâcap public offerings. The key covenants that investors should watch are:
| Covenant | What it prohibits / limits | Practical effect |
|---|---|---|
| Leverage Ratio (DebtâtoâEBITDA) Cap | The company may not let its senior secured debt (including the new notes) exceed a specified multiple of EBITDA (generally 4â5Ă for a company of Mainâs size). | Limits the amount of additional borrowing the company can take on without either repaying or refinancing a portion of the existing notes. This constrains aggressive acquisition financing or largeâscale leverageâbuyout activity. |
| Net Worth / Tangible NetâAsset Test | The firm must maintain a minimum netâtangibleâasset level (or a minimum netâworth ratio) throughout the life of the notes. | Prevents the company from eroding its balanceâsheet cushion through heavy dividend payouts or share repurchases that would erode equity. |
| Dividend/Distribution Restriction | Dividends, share repurchases, or other distributions are limited to a percentage of net income (typically 30â40âŻ% of net earnings) and/or must be capped at a fixed dollar amount per quarter. The covenant may also require that any distribution be made after satisfying a âcashâflow coverageâ test (e.g., operating cash flow must exceed a multiple of the quarterly dividend). | Directly caps the amount of cash that can be returned to shareholders, forcing Main to retain more earnings to satisfy the test. This curtails any âheroâtypeâ dividend hikes and ties dividend growth to sustainable cash generation. |
| Restricted Asset Sales | Proceeds from any asset sale above a threshold (e.g., $25âŻmillion) must be used first to repay a portion of the notes or to maintain compliance with the leverage and netâworth covenants. | Limits the ability to monetize a nonâcore asset and reâinvest the proceeds in new opportunities unless the proceeds are first used to shore up the balance sheet. |
| ChangeâofâControl / Merger Restrictions | The company may not consummate a merger, consolidation, or âchangeâofâcontrolâ transaction without prior consent of a majority of noteholders. | Prevents a takeover that could jeopardize the noteholdersâ seniority without a formal waiver, thereby protecting the noteâs credit profile. |
Implications for operational flexibility and dividend policy
Operational Flexibility â The leverage and netâworth covenants act as a ceiling on how much additional debt Main can raise and how quickly it can expand its balance sheet. Any strategic acquisition, especially if financed with leverage, will have to be sized to keep the debtâtoâEBITDA ratio under the covenant limit or will require a waiver from the trustee, which can be costly and timeâconsuming. Likewise, the assetâsale restriction forces any large disposition to be primarily used to reduce leverage rather than fund growth initiatives. Consequently, management may need to prioritize organic growth and carefully time any largeâscale transactions.
Dividend Policy â The explicit dividendâcoverage test and the cap on percentageâofâearnings distributions directly limit how much cash can be paid out to shareholders. Even if earnings rise, the company cannot increase the dividend above the allowable percentage without violating the covenant. This creates a predictable dividend floor but caps upside for incomeâfocused investors. If Mainâs operating cash flow dips (e.g., a slowerâthanâexpected loanâportfolio growth), the dividend could be forced lower, potentially pressuring the stock price.
Trading Implications
Because the covenants tie cash distribution and leverage to measurable financial thresholds, the credit profile of the 5.40âŻ% notes is relatively stable, keeping yields anchored near the coupon level (5.40âŻ%). However, any surprise on the leverageâratio sideâe.g., a higherâthanâexpected increase in the portfolioâs creditârisk or a dip in operating cash flowâcould trigger covenantâbreach risk, which would be priced into the spread. Traders should monitor: (i) Mainâs quarterly netâincome and cashâflow coverage ratios, (ii) any announcements of largeâscale acquisitions or asset sales, and (iii) dividend announcements. A breach or waiver request would be a bearish catalyst (potentially widening the spread), whereas consistent compliance with the covenants (especially a strong dividendâcoverage ratio) would support the stockâs relative stability and make the 5.40âŻ% notes a viable benchmark for fixedâincome allocation.