Ted Koenig - CEO Aaron Peck - CFO & Chief Investment Officer.

Mickey Schleien - Ladenburg Thalmann Bob Napoli - William Blair Christopher Nolan - MLV & Company Bryce Rowe - Robert W. Baird.

Welcome to Monroe Capital Corporations Third Quarter 2014 Earnings Conference Call.

Before we begin, I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward-looking statements including statements regarding our goals, strategies, beliefs, future potential, operating results or cash flows.

Although we believe these statements are reasonable based on the management's estimates, assumptions and projections as of today November 10, 2014, these statements are not guarantees of future performance. Further, time sensitive information that may no longer be accurate as of the time of any replay or listening.

Actual results may differ materially as a result of risks, uncertainties or other factors including but not limited to the factors described from time to time in the company's filings with the SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements.

I will now turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation..

Good afternoon and thank you to everyone who joined us on our earnings call today. I'm joined by Aaron Peck, our CFO and Chief Investment Officer. Earlier today we issued our third quarter earnings press release and filed our 10-Q with the SEC.

I will first provide a brief overview of the quarter before turning the call over to Aaron to go through the results in more detail. He will then turn the call back to me to provide some closing remarks. We are very pleased with our financial results for the third quarter of 2014.

We generated record adjusted net investment income of $0.39 per share comfortably covering our dividend of $0.34 per share. This represents the fourth consecutive quarter of quarter-over-quarter growth in our adjusted per share net investment income and the second consecutive quarter we have covered our dividend.

I note that this was achieved primarily through core earnings, not large one-time non-recurring fees. We are pleased to be able to outrun [ph] our dividend in an environment when a large percentage of other Business Development companies have been unable to generate net investment income in excess of their most recent dividend.

Furthermore we are pleased to show continued quarter-over-quarter growth in our net investment income. Our book value per share was stable at $13.95 per share as of September 30, a small increase from the book value per share at June 30.

As in the past, we have provided an update on the company's asset growth to demonstrate the progress we have made since our IPO in October of 2012.

As you can see in the bar graphs attached to our press release, on a par value basis, we have more than tripled the size of our investment portfolio growing from $67.6 million at the time of our IPO to approximately $243.9 million as of the end of October.

We have grown the number of unique portfolio companies over this time as well from 15 at launch to 42 as of the end of October. We have continued to be focused on safety and security with approximately 93% of our assets representing first lien loans as of September 30, 2014.

I'm now going to turn the call over to Aaron, who is going to discuss the financial results in more detail..

Thank you, Ted. Our investment portfolio continues to be stable and we have continued to optimize our portfolio to increase the weighted average yield. As of September 30th, the portfolio was at $234.7 million at fair value relatively flat since the prior quarter end.

In the month of October we saw some modest portfolio growth as the principal amount of invested assets grew from $237.5 million at the end of September to 242.5 million at the end of October. At September 30, we had total borrowings of $90.8 million under our revolving credit facility and SBA debentures payable of $13.7 million.

As of September 30, 2014, our net asset value was $132.8 million which declined slightly from the $133.2 million in book value as of June 30th. This decrease in book value was primarily due to share repurchases under our previously announced share repurchase plan and net markdowns in the portfolio offset by earnings in excess of our distributions.

On a per share basis, however, our NAV per share increased slightly from $13.93 per share at June 30, 2014 to $13.95 per share as of September 30. Turning to our results for the quarter ended September 30, 2014.

Adjusted net investment income, a non-GAAP measure, was $3.7 million or $0.39 per share, an increase of $0.04 per share when compared to the second quarter of 2014. This represents the fourth consecutive quarter of growth in adjusted per share net investment income.

Net investment income was $3.8 million or $0.40 per share, an increase of $0.03 when compared to the prior quarter. At this level we are comfortably covering our dividend rate of $0.34 per share. Additionally, this quarter we generated net income of $3.4 million or approximately $0.35 per share up slightly from the net income in the second quarter.

Looking to our statement of operations, total investment income for the quarter was $7.7 million compared to $7 million in the prior quarter.

Total expenses of $3.9 million included 1.1 million of interest and other debt financing expenses, 1.1 million of base management fees, 849,000 in incentive fees and 851,000 in general administrative and other expenses.

Of the 1.1 million in interest and other debt financing expense, approximately 865,000 was cash interest expense with the remainder representing non-cash amortization of the upfront costs associated with establishing our credit facility and SBA adventures as well as the interest expense associated with the secured borrowings recording under ASC 860.

We also had a net depreciation on investments and secured borrowings of approximately $627,000 in the quarter due to some markdowns in the fair value of certain portfolio assets.

Turning to the portfolio, we've continued to skew our portfolio towards first lien lending with approximately 93% of our investments representing senior secured first lien loans. The remaining 7% of the portfolio investments were junior secured loans and equity securities.

We believe our portfolio of investments is well positioned in this current business cycle. As we've previously announced on April 24, we received a commitment letter from the SBA for SBA guaranteed debentures which allowed us to begin to access the leverage in our SBIC subsidiary.

On October 20th, we were approved to access up to an additional 20 million in SBIC debentures for a total of up to $40 million. On October 15, we were granted exempted relief from the SEC for permission to exclude the debt of our SBIC subsidiary from the 200% asset coverage test under the 1940 act.

As we've discussed, we believe that the SBIC subsidiary license will provide an opportunity to grow the portfolio and generate additional returns for investors which should be a huge positive and create real value for our shareholders. At the end of September we had drawn $13.7 million in SBIC debentures.

We have an additional 26.3 million of debentures available to fuel future growth in the SBIC subsidiary. All things being equal, over time accessing the remaining leverage in the SBIC subsidiary should have a materially and positive impact on our per share net investment income.

I will now turn the call back to Ted for some closing remarks before we open the line for questions..

Thank you, Aaron. As we have stated in the past, we remain focused on growing and optimizing our portfolio with the goal of generating a consistent high level of per share net investment income. The addition of our SBIC subsidiary has provided us with liquidity to continue to grow the portfolio and should help us to continue to achieve this goal.

The fourth quarter is a historically active quarter for us in terms of new deal originations which should result in future portfolio growth. In our last two quarterly calls, we told you that we were singularly focused on growing our per share net investment income. We have continued to demonstrate the success we have had in fulfilling that commitment.

In a very competitive market for lending today, we have been able to maintain our portfolio while growing our average effective yield from 11.1% as of June 30th to 11.3% as of September 30th.

We have steadily grown our quarterly net investment income per share up by $0.08 when compared to the fourth quarter of 2013 when many of our peers have experienced declining net investment income trends.

We attribute this to our differentiated origination platform and the depth of the entire Monroe Capital platform which has supported an increased effective yield on our portfolio at a time when many others have experienced declining yields.

As we continue to access our remaining SBIC debentures and grow our SBIC subsidiary, we expect to continue the success we have had in generating adjusted per share net investment income to continue to comfortably cover our dividend.

We remain very excited about the company's prospects; our BDC Manager has continued to invest in high quality origination and underwriting staff as well as operations and accounting personnel.

These investments will continue to provide the company with unique high quality, high-yielding investment opportunities and the personnel to help manage the growth in our platform.

With an approximate 10% dividend yield, fully supported by net investment income and a stock price trading around the book value per share, we believe Monroe Capital Corporation provides a very attractive investment opportunity for investors and continues to be significantly undervalued.

Thank you for all your time today and with that, I'm going to ask the operator to open the call for questions..

(Operator Instructions). Our first question comes from the line of Mickey Schleien of Ladenburg. Your line is open. Please go ahead..

Wanted to ask first of all top down question. Could you give us a sense of what your base case sort of general investment outlook is for 2015? I'm not talking about portfolio growth. I'm really thinking in terms of spreads and leverage and the nature of demand that you're expecting for next year..

The market in our space continues to be pretty good. We're seeing some overall compression in yields in the more, larger broadly syndicated market and certainly in the traditional middle market of companies of $25 million EBITDA and higher.

In our space, we continue to see the same type of transactions, the same types of leverage that we’re currently focused on. If you look at our portfolio today as I said earlier, we're hitting about 11% all-in weighted average return. Now we've got some higher than that and some lower.

We're also running at about 3.5 turns of leverage and like I said last quarter, we've got some higher and lower but we are very focused on maintaining the credit quality and the safety and security of the portfolio.

So while we would have liked to have grown a little faster, at this point in the cycle and throughout 2015 we’re going to be focused on measured growth and safety and security for our shareholders..

Ted, would it be fair to say that you for the most part completed rotation of lower yielding assets into higher yielding assets?.

I think so. We've done our job. We told you were we going to do that. We've got a little bit more to go, but I think for the most part, Mickey, we've done that..

Okay, and with the current business model meaning really SBIC funded investments and investments funded with the credit facility, what's the sort of maximum debt to equity that you're willing to run the company at?.

Well, we told you that last time that we want to be in generally that 75% debt to equity, so roughly if we want to run that at 0.75 you may see us go up to 0.80 or so but we'll be in that range is my guess..

Mickey, I haven't run the calculation, I probably should do that but we always target around 0.75 max in terms of the parent company and then add in the SBIC leverage. So whatever that math would work out to, that’s kind of how we do it, especially as our portfolio is skewed to more senior.

We could see ticking it up a little closer to 0.8 if we stay senior like this to the extent our credit facility will allow. That's kind of how we look at leverage here. It hasn't really changed..

Aaron, I did run the math and it looks like you get to about one-time..

That sounds about right..

And when will the Board next look at the dividend and what's your philosophy? I mean you have the luxury now of everything else remaining equal, you're out earning the dividend.

What's your philosophy by retaining spill over income?.

The company and the Board has no specific -- made no specific decision regarding future dividends, so we really can't give any specific guidance on this, but what I can tell you is that we are going to consider all the options we have with regard to undistributed income.

As you know, the undistributed income is not an issue with regards to 1940 Act Compliance. As you can maintain some spill over income for future dividend coverage.

As for our regular quarterly dividend, as I said we’ve made no specific decisions in regard to adjusting the rate at this time but we will in 2015 consider the environment and consider where we’re as we look at dividend policy..

Okay, if you were in a position to raise some equity and as you mentioned the stocks sort of flirting with book value here would you consider doing so and layering on another investment strategy that may use your non-qualified bucket? For example, Monroe just did their first CLO in quite a while.

Is that something you would consider doing in the BDC?.

I will tell you that we're considering as you may expect lots of different options and the one thing that I can assure you that Monroe has grown over the years in terms of various areas and we can continue to look at other areas for expanding the platform..

Okay. And just a couple of last ones. Your credit facility although it was repriced not too long ago, it seems to me that there may be an opportunity to reprice it again.

Is that something you're working on?.

I can't tell you what we're working on or what we’re not working on, but I will tell you that Aaron is a pretty good CFO and we're always looking at options here with respect to maintaining and managing our balance sheet..

And I'll also remind you, Mickey that if we're in a position down the road where we determine that we can raise equity and do so, there is a step down in the rates built into the credit facility for that of 25 basis points.

But we'll continue to look at the credit facility in the market for credit working constant contact with the lending universe, our current lending group as well as other lenders and we're pretty keen on what's going out there and we make use of credit across our whole platform. So we're always looking at different things..

Okay.

My last question, if I'm not mistaken I don't think you made any new equity investments in the quarter? Was that just a function of the fact that you were primarily first lien or you're just finding it harder to get terms where you can get equity co-investments or warrants or what's going on?.

Yes. I wouldn't take anything out of one quarter's opportunities. We've got a lot of stuff in the pipeline now that comes with some equity or there is an equity opportunity and those opportunities are first lien opportunities as well.

So it's really just one quarter in which nothing presented itself that had an equity piece that made sense, but I wouldn't view it as a trend or indicative of anything that’s going on with the underlying strategy. We still see plenty of opportunities to get equity as part of our facilities and invest in equity when it makes sense..

Yes. The one thing Mickey is we’re 93% in senior secured debt. We're one of the few firms that was around pre-crisis, during crisis, post crisis and I like where we sit today in terms of our overall portfolio mix..

Thank you. Our next question comes from the line of Bob Napoli of William Blair. Your line is open. Please go ahead..

Why don't we just let Mickey continue to ask questions? He was asking some good ones, but he asked most of my questions, was asking good questions but I would just maybe a little bit more on the competition side.

Ted, I know you said that you've seen more competition in the 25 million and up EBITDA market but you must be seeing somewhat more competition in your market. How long can you hold off against the increased competition? You've gone a great job obviously of maintaining yield.

And who else are you seeing competition from?.

What we're seeing is there is lots of new market entrants and a lot of these market entrants are not too dissimilar from the market entrants that we saw in '04, '05, '06. Lots of money managers, asset managers, hedge funds are getting into the credit business with a sleeve.

The differentiating factor for most of this is that you've got investment teams that are ex-Investment Bankers or private equity teams or credit, fixed income people that are getting into this business of trying to invest into this space and these people are located in New York City or they're located in San Francisco or LA or occasionally Boston and what we're seeing is a lot of inbound inquiries from a lot of these new market entrants.

It's much different than how we've run our business over the years. Our advisors, you know Monroe Capital has eight offices located throughout the country in major cities staffed by full time originators.

So I think that we see more than our fair share of deal activity in the marketplace which allows us to really drive a differentiated pipeline over some of these other entrants. For example, we looked at probably 2000 investment opportunities in the year 2014.

As a platform we probably invested in 50 of those, so a little over 2% of the transactions that we see we're investing in. We could easily take that up to 3% or 4% so I'm not worried about competition. I'm not worried about new entrants. We've built a pretty good moat around our business in terms of proprietary deal flow.

All I'm concerned about is really, some of these new entrants doing silly things and you have a whole market gets affected when non-credit people get into this space and look to grow assets under a platform and that's what I think the greatest risk is going forward into 2015 from folks currently in our industry today that have a high need to put money to work as well as some of these new market entrants that you're seeing each week announced..

Right. And then how do you feel about credit trends? Your marks look relatively stable. You did take, I guess you have three loans that have been written down somewhat.

How do you feel overall about the credit and your portfolio?.

I feel good. The credit and portfolio, even the loans that we've taken marks on, there is stories to every one of those and we're seeing positive impact in each one of those transactions. We've had one that we took a mark on we're refinanced out in the quarter and we've got positive activity going on with the others.

So in our particular portfolio I feel pretty good but again I would like to look at the market in general and I'm definitely seeing higher and higher leverage attachment points from some of our competitors and that's a troubling sign I think to me, in this market only because I watched what happened in the last cycle and it's very hard to come back in a situation where you're five, six, seven times leverage..

Thank you. Our next question comes from the line of Christopher Nolan of MLV & Company. Your line is open. Please go ahead..

How are you thinking about equity raises at this point?.

I will tell you, Chris that we do not plan to do any sort of dilutive raise. So for the near future we're focused on being patient and hoping that the continued performance of our stock will give us a lot of different options in that regard..

And Ted, on that same note, would you wait for the SBIC to be fully utilized before considering an equity raise or would you wait for the share price to be a certain percentage over NAV?.

No, I don't think I have a good answer for you on that. I think we've got some pretty good fire power in the SBA. We've got a fair amount of undrawn capital there from the debentures that we can access and we're going into our historically busy season, Q4.

So I think we've got lots of good runway and I think we'll make a good decision for whatever is in the best interest of the shareholders. Our Board is very focused on shareholder value and my guess is that we're going to continue to do our jobs here in putting capital to work on a selective basis and in good risk adjusted assets..

And final quick question Aaron, do you have handy the amount of spill over income in the quarter now?.

Yes, bear with me a second, but I think we're looking at year-to-date about 750,000 of non-distributed income so about $0.08 I think at this point, so depending on what you estimate for fourth quarter gives you a flavor for what that could grow to if we continue to perform on the same level as we are now.

You could see it getting somewhere between $0.08 and $0.10 depending on what we do in the fourth quarter, so yes that’s a pretty good estimate..

And then I guess the final question is would you consider taking on the 4% excise tax, to hold on to some of that spill over income or would the idea be as tax efficient as possible?.

Yes, we honestly haven't made a decision with regard to that. That’s a decision that we make in concert with the Board. Obviously if we stayed on a similar run-rate and we decide to pay that excise tax, we're talking about something around $40,000.

So it's not a huge number, so we'll just have to make a decision as we take a look at where we are with regards to the portfolio in the quarter and what 2015 is looking like and we'll make that decision real-time. We don't have to make a decision on the excise tax decision until the end of January..

(Operator Instructions). Our next question comes from the line of Bryce Rowe of Robert W. Baird. Your line is open. Please go ahead..

Most of the topics I had questions about were answered but did want to ask Ted about the SBA and I know you're pretty well plugged into the SBA in Washington, so any change or any change in the handicap if you will in terms of leverage limits being taken up in the access to more debentures being taken up in 2015 with the change in the senate?.

As a matter of fact I'm going to be in Washington this week meeting with the senior people at the SBA on Wednesday to talk about a variety of things. I think that what happened recently last week with the elections may have helped the cause a little bit.

I don't have a good answer for anything specific as of this moment but I'm hopeful and I think I'm seeing some positive trends that in 2015 in the not too distant future the stuff may get cleared up and resolved in a positive way for all of us..

Thank you. And with no further questions in queue, I'd like to turn the conference back over to Mr. Koenig for any closing remarks. .

Closing remarks are the same as I've given you in each one of the last three or four calls. We remain very, very focused on creating value for our shareholders. We’re very focused on increasing our net investment income.

I think we've done a reasonably good job over the last 12 months, the last four quarters and my hope and expectation is we continue to do that similar job in the next quarters to come. So thank you all for keeping an eye on us and watch for the next quarter..

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day..