Ted Koenig - President and CEO Aaron Peck - Chief Investment Officer and CFO.

Mickey Schleien - Ladenburg Thalmann & Co. Inc. Brian Hogan - William Blair & Company, L.L.C. Christopher Nolan - MLV & Company, L.L.C. Bryce Rowe - Robert W. Baird & Co. Christopher Testa - National Securities Corporation.

Good morning and welcome to Monroe Capital Corporation's Fourth Quarter and Full Year 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 management's estimates, assumptions and projections as of today March 06, 2015 these statements are not guarantees of future performance. Further, time sensitive information 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. Sir, you have the floor..

Thank you. Good morning and thank you to everyone who has joined us on our earnings call today. I'm joined by Aaron Peck, our CFO and Chief Investment Officer. Earlier today we issued our fourth quarter and full year earnings press release and filed our 10-K with the SEC.

I will first provide a brief overview of the quarter and the full year 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.

This morning we announced that our Board of Directors has declared a dividend of $0.35 per share for the first quarter of 2015 payable on March 31, to shareholders of record as of March 20. This dividend represents 3% increase in the regular dividend and is fully supported by core net investment income.

In the environment when many other the BDCs are struggling to support their dividend with NII and many of our peers have actually cut their dividend we are proud of our performance and are pleased that we can reward our shareholders with an increase in our dividend.

We are also very pleased that we have announced another record quarter of financial results. For the quarter we generated adjusted net investment income of $0.48 per share comfortably covering our fourth quarter dividend of $0.34 per share.

This represents the fifth consecutive quarter of growth in our adjusted per share net investment income and the third consecutive quarter adjusted net investment income has covered our dividend.

We are pleased to continue to out-earn our dividend in an environment when a large percentage of other BDCs have been unable to generate net investment income in excess of their most recent dividends. Furthermore, we are excited to announce the increase in our quarterly dividend to $0.35 per share.

Our book value per share increased $14.05 per share as of December 31, a $0.10 per share increase from the book value per share at September 30. We achieved all of this while continuing to be focused on safety and security with approximately 95% of our assets representing first lien senior secured loans as of December 31, 2014.

I am 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 December 31, the portfolio was at $233.5 million at fair value relatively flat since the prior quarter end.

At December 31, we had total borrowing of $82.3 million under our revolving credit facility and SBA debentures payable of $20 million. As of December 31, 2014 our net asset value was $133.7 million which increased from the $132.8 million in net asset value as of September 30, 2014.

On a per share basis, our NAV per share increased from $13.95 per share at September 30, to $14.05 per share as of December 31.

Turning to our results, for the quarter ended December 31, 2014 adjusted net investment income, a non-GAAP measure, was $4.6 million or $0.48 per share, an increase of $0.09 per share when compared to the third quarter of 2014. This represents the fifth consecutive quarter of growth in adjusted per share net investment income.

Net investment income was $4.6 million or $0.49 per share, an increase of $0.09 when compared to the prior quarter. At this level we are comfortably covering our fourth quarter dividend of $0.34 per share and our first quarter announced dividend of $0.35 per share.

Additionally, this quarter we generated net income of $4.2 million or approximately $0.44 per share up from the net income in the third quarter of $0.35 per share. Looking to our statement of operations, total investment income for the quarter was $8.6 million compared to $7.7 million in the prior quarter.

Total expenses of $4.1 million included $1.2 million of interest and other debt financing expenses, $1.1 million in base management fees, $1.1 million in incentive fees and $773,000 in general administrative and other expenses.

Of the $1.2 million in interest and other debt financing expenses, approximately $924, 000 was cash interest expense with the remainder representing non-cash amortization of the upfront costs associated with establishing our credit facility and our SBA debentures as well as the interest expense associated with the secured borrowings recorded under ASC 860.

We also had a net depreciation on investments and secured borrowings of approximately $419,000 in the quarter due to some unrealized markdowns in the fair value of certain portfolio assets.

Turning to the portfolio, we have continued to skew our portfolio towards first lien lending with approximately 95% of our investments representing senior secured first lien loans. The remaining 5% 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 per our liquidity, as of December 31, we have approximately $28 million of capacity under our revolving credit facility and $20 million in undrawn SBIC debentures to fuel future growth in the portfolio.

As we have said in prior quarters, all things being equal, over time accessing the remaining leverage in the SBIC subsidiary should have a materially 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 lines for questions..

Thanks Aaron. In our last three 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, we have been able to maintain our portfolio while growing our average effective yield from 11.3% as of September 30, to 11.6% as of December 31.

We have steadily grown our quarterly net investment income per share up by $0.17 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 and breadth of the entire Monroe Capital platform which has supported an increased effective yield on our portfolio as we continue to access our remaining leverage. We expect to continue generating adjusted per share net investment income to comfortably cover our dividend.

It is this success that has given us the confidence to increase our quarterly dividend by 3% to $0.35 per share for the first quarter of 2015. We remain very excited about our 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 continue to provide the company with unique, high quality, high-yielding investment opportunities and the personnel to help manage and grow our platform.

With a dividend yield greater than 9%, fully supported by net investment income, a stable book value, we believe that 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] And our first question is from the line of Mickey Schleien from Ladenburg. Your line is open. .

Good morning Ted and Aaron.

I have a couple of questions, one is I noticed a rotation from senior secured into unitranche and I wanted to get some color on your thoughts behind that? And also clarification because you mentioned in your remarks that 95% of the portfolio's first lien, I don’t quite remember whether that includes unitranche deals where you've sold the first-out piece?.

Sure. Thanks Mickey, it is Aaron. To answer your second question first, yes, when we talk about first lien we're talking about both senior secured first lien loans where there is no first-out as well as senior secured first lien loans where there is a first-out bank ahead of us. And so that does include both of those types.

And when you talk of the rotation into unitranche for the senior secured, we have seen a few unique deals that have rotated into the unitranche category and in certain cases it is because we've sold the first-out on a deal that was previously not that case, so post first basis we sold a small first-out piece.

And then another case is, there are some new deals in which there were first-out in front of us. So, we like the mix.

We have been, as you may recall, much more heavily weighted to unitranche earlier in our life as a public company and just the way the deal flow came into the company we have some senior secured opportunities that increased that percentage.

So over time we started to see the unitranche opportunities come back a little and we like the mix, but it is one of the ways that we can continue to generate really attractive yields in an environment where there has been some general yield suppression or not [ph].

The other thing I'll just note is, we tend to be a lot less aggressive than the broader market when you think about the first-out and last-out. When you look at the larger market, first-out will tend to be at much higher leverage point than where we see our first-outs.

So where it's much more traditional first to see a first-out lender in our deals at one or one and half times EBITDA, the broader market is much closer to two and half or three times first-out. So, we still feel that they are very safe loans and still provide us a nice yield by selling just a little piece on the first-out basis. .

Thank you for that Aaron, and just one other question.

Could you walk us through how fee income and acceleration discounts affected investment income for the quarter and what the outlook is for those trends as well?.

Yes, I can do that and I'd just like to say that we took a look at our disclosure this period and it became clear that we're going to need to do a little better job going forward to highlight this very issue, so easier for you all to find the information.

It's all publically available, but it takes a little hunting around because the 10-K doesn't give you quarterly data, it gives you annual data. So you have to go back to the 10-Q and so that's not really a good thing for you all.

In the future we're going to break this out more specifically to make this easier, but I'm happy to walk through the components of NII so that you have a better feel for it. Of the $0.49 of NII in the quarter, I would characterize approximately $0.38 as being straight head core investment income. The $0.11 additional income breaks out as follows.

Approximately $0.750 [ph] per share is related to prepayment and amendment fees and approximately $0.4 per share is associated with the gains on paydowns, which represents the unamortized portion of any OID on the loans at the time of paydown.

Now when you look at these categories for the entire year, we average approximately $0.04 per share per quarter of prepayment and amendment fees and approximately $0.250 [ph] per share per quarter of paydown gains for a total of between $0.06 and $0.07 per quarter of other income, which compares to the $0.11 for this quarter.

So, while these categories of income are a little volatile and hard to predict we do seem to produce in excess of our core interest income regularly. And while we don’t provide specific guidance on NII, hopefully this will help frame some of the components of NII, so you'll get a feel for where it goes on a quarterly basis historically.

In order to get this information yourself and I'm happy to help anyone who calls, walk through this later on how I do it, but what you would need to do is, a note through to our financials, you'd have to look at the components of income and you'll find the annual numbers there and then you have to go back to the last 10-Q and pull out the nine months data and then subtract, and I'm happy to walk anyone through that to provide all the data, and as I said going forward we'll make it a lot easier to track, so you don’t have to do that..

So, thank you for that explanation Aaron and for taking my call..

Thanks Mickey..

Thank you. Our next question comes from the line of Brian Hogan from William Blair. Your line is open..

Good morning..

Good morning, Brian..

A question on capital deployment, one the opportunities there and then with that the SBIC the $20 million, is that your first, how do you expect to deploy the SBIC, is that the first capital that is deployed or what's the order there?.

No, first of all, this is Ted. Let me talk about the opportunities set and then Aaron will I think focus on the specific question relating to the deployment of the $20 million of debentures. You know, our opportunity set generally is good and market is competitive.

And historically the first quarter is the widest quarter that we tend to experience over the last four, five years. So what's different about this year is that there is a good pipeline of M&A activity in the market. That didn’t occur last year in the first quarter.

So we're seeing a fair amount of M&A activity, which should bode well for the coming quarters. So that's the answer to your first question. The second question Aaron, focus on the SBIC specifically..

Right. So Brian, the way we think about it is, basically any deal that can fit into the SBIC subsidiary, we try to put in there and so we don’t have a specific game plan where we're saying we're going to try to fill up the SBIC purse and then use the leverage.

We are going to do both and when the deal fits the SBIC subsidiary we're going to put a piece of it in there. In some cases there'll be a piece down there and maybe a piece at the parent company because of the size of the SBIC we don't reach our maximum hold size all the time in that subsidiary. But there isn’t any specific game plan.

We're only trying to find SBIC deals first and then we'll deal with the parent company. We're looking to grow the portfolio in general and use our different sources of financing to finance that growth. And we saw modest growth in the fourth quarter and we're hopeful and expecting some growth in the first quarter and throughout the year. .

Okay and Ted, you mentioned it is competitive out there, where is the competition, is it banks or is it other, your peers, other niche vendors?.

You know, that's a good question. It's not really the banks in the transactional finance market. Banks are very competitive in the asset based lending market which is the normal commercial lines of credit, the receivable financing, inventory financing.

But when it comes to transactional financing it's really the non-bank lenders that have taken over most of that market particularly at the lower end of the middle market where there is no high yield and there is no Wall Street money center banks involved..

All right, thanks for taking my questions..

Thanks Brian..

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

Hey, guys nice quarter.

Quick question, Aaron, is it broken out in the K the amounts of loans that were sold off, I didn’t see it?.

No, you won't see that specific disclosure, but I can help you, because you can get the data if you go through and look at our portfolio one by one. We didn’t really actually sell anything off in the quarter. We just had some paydowns which is part of the reason that you'll see the prepayment income a little higher than normal.

So in the quarter we had pay off of Alliance Time, Answers Corporation, LAI International, TRICO Products, and Willbros. And then the new loans that came on in the quarter were American Community Homes, Cytovance Biologics, Incipio Technologies, Pacific Labs and TRG..

Great, my followup question for either one of you guys, given that the asset mix is sort of trending towards first lien/unitranche, where do you think we are currently in the lending cycle, the economic cycle and how is that forming how you guys strategically are trying to position the company?.

Good question Chris. I will tell you that the economic cycle looks a lot like it did in 2006-2007. You know for those of us that have been in this business for a long time multiples, purchase price multiples are high. There's lots of capital chasing deals, there's lots of debt capacity, there's lot of private equity dollars.

You know, going into 2000, 2007 as a firm platform we did the same thing. We rotated out of a lot of junior debts, mezzanine debts, second lien debt into a more senior secured position unitranche and first lien senior secured debt and we did that as a conscious defensive move in the portfolio.

And if you look at what we've done here over the last three quarters it's very much the same. So, no one, I don’t have a crystal ball that I will tell you from during this 25 years I like being at the top of the capital structure in periods of high liquidity and that’s where we are today..

Great, thank you for the answer, Ted..

Thanks Chris..

Thank you. Our next question comes from the line of Bryce Rowe from Robert W. Baird. Your line is open..

Thank you and good morning. Good quarter guys..

Thanks Bryce..

I wanted to ask a couple questions.

Number one, and kind of in light of what you just said Ted, what's the visibility for future repayment activity within the portfolio given kind the kind of the level of liquidity within the markets today?.

That's another good question. I think you'll continue to see repayment activity. You know, it's hard to tell because a lot of this is idiosyncratic to companies in terms of sales, but in the middle market, particularly the lower middle market there tends to be a high churn rate in terms of acquisition sales.

So, I think you'll continue to see some decent activity there, but I think you'll also see some new fundings, historically our business starts out slower in the first quarter and then ramps up in the second, third and fourth quarters throughout the year.

So, I fully anticipate us covering any repayment activity with new fundings and showing some nice net growth. That's our plan for the year..

Yeah, and Bryce, I'll just add, given when we launched the BDC and when we had a lot of the growth in the portfolio, if you look at our history it's expected that we see a lot of our companies prepay early, despite, regardless of what's going on in the market and we typically see our deals stay out around two years.

Now some will stay longer, some will stay shorter, but you know, the activity we've seen in prepayments is consistent with the fact that we ramped a lot of the portfolio a couple of years ago.

So a lot of those companies are reaching that natural point where they've grown enough, that they've become attractive for an acquisition or other things that have made our repayment timely and for us that's not a bad thing. We have significant prepayments out of these. We build them in.

We stay pretty tight on those because most management teams don’t think about paying off their loan when they take a loan. So they aren't as focused on those terms and that creates a lot of yield advantage for us. .

Yeah, I just want to just guide you guys to not count on that, it's very idiosyncratic and I don't know when it is going to happen. I think a better indication is our core earnings and we feel good about our core earnings and anything else there is a nice upside and you get benefit of the platform.

[Audio Gap] an opportunity to share in transactions and infrastructure that otherwise would not..

That's great and just a follow up.

So from a capital perspective, I mean obviously the stock price is now cooperating and you've got a premium to book and know that you put in place an ATM in the first quarter, wondering if you acted on the ATM? And then two, how should we think about kind of capital levels and management of the debt-to-equity ratio going forward here?.

Yeah, thanks Bryce. So we're just required to dispose of the shares from the ATM on a quarterly basis, so we will be providing an update in connection with the first quarter 10-Q filing. However, as you know we do disclose current shares outstanding on the cover of the 10-K, which we filed this morning.

The cover of the 10-K shows total shares outstanding of 9,632,361 shares, which is an increase of about 114,000 shares since the last time we reported shares outstanding on November 7. So we haven’t issued any shares since November 7, outside of the ATM, so doesn’t take a genius to figure out what we've done in the ATM thus far. It's right there.

As for how we think about it, we've always said we look at our leverage as being around, we use the SBIC leverage and then we think about parent company leverage of about 0.7 to 0.75. That's the range we think is appropriate given the mix of the portfolio today and we're continuing to speak to that leverage load..

And just to be clear that leverage, targeted leverage level it includes or excludes the SBA debentures?.

It excludes. It does not include the SBIC leverage..

Okay, thank you..

Thank you. Our next question comes from the line of Christopher Testa from National Securities. Your line is open..

Good morning Aaron and Ted, thanks for taking my questions, most of which have been answered, but I'd just like your thoughts on the unitranche, I know you've gotten some questions on that.

Are these sorts of one-off deals or is this something where you've really seen a lot of people back out of the market and are presenting more opportunities going forward this year?.

Okay, well. Just so you understand Chris and others as well, what the unitranche is, is just a transaction where we do a senior secured financing. It is no different than a senior loan opportunity.

What we do though is because of competitive pressures, because of the nature of some of these businesses where they tend to be larger EBITDA size or they're growing rapidly or they tend to be very stable EBITDA companies with good managements, the pricing for lots of these transactions is not necessarily what we would like for a standard senior secured loan.

So what we do is in order to generate some additional yield for our company we may sell off a piece of that loan to a bank. Now as Aaron mentioned earlier, we take a very conservative approach to selling off a piece of those loans, where we may do a deal of three and half turns.

I think if you look at our portfolio, our portfolio averages about three and half turns of leverage give or take. Now as a manager, I'm very focused on managing a portfolio to the last dollar, because the last dollar collectability is well risky. I'm not really focused on the first dollar, because the first dollar is an easy dollar to collect.

So in order to generate some additional return for our shareholders what we've been pretty good at doing frankly, is selling off a frontend piece of our loans or the first dollar exposure at a much, much lower rate of interest to a regulated financial institution, who can take that first dollar at a L300 or L350 or L400 level and find that a very acceptable return because they are leveraged at 10, 11, 12 times to one, whereas we're levered at less than one-to-one.

And then what we do is we pass along the savings and the incremental return to our shareholders in terms of any skim in terms of that rate differential between what we sell to our first-out person or banks and what we retain.

So when you look at our unitranche loan, look at that the same as any other senior secured loan in our portfolio, we just happen to have sold a very low-end piece in terms of low-end leverage off to someone else to increase the overall return to our shareholders..

And Chris, you can see how that plays into the numbers when you look at our effective yields on page 65 of the 10-K. So when you look at our senior secured loan portfolio, we have a contractual yield of 11.3 and we have a weighted average effective yield of 11.3.

When you look at the unitranche loans the contractual yield that the borrower is paying us is lower, it's 10.8% of the effective yield when you consider the skim interest is higher than the senior secured loan book at 12.1%, so that's sort of the numerical evidence what Ted is describing..

Yeah, now that makes sense. I appreciate the color. And on your risk ratings improved, what I know you had the risk weighted, where you stepped down about roughly 6%.

If you could just talk about any particular credits that improved, if more companies come in line with the covenants, just kind of what drove that?.

Yeah, so the portfolio is doing very well. We didn’t – it's not so much that any of the portfolio credits that were rated 3. We had one company that was rated 3 that has done very well and actually has paid out their bank loan and is ahead of us and that's why they went from a 3 to a 2 in our portfolio.

One of our other creditor was rated 3 and we weren’t happy with the way that credit was going, so we went to the management team and told them that we wanted them to find a way to get us out and they raised some capital and they took us out and we are to take some payment penalty on that.

So that's really why you saw a reduction in the number of 3 rated assets. We had no new additions to the 3 rated category and we had some come out. Generally speaking overall, even the companies that are rated 3 in every single case we're seeing material improvement in those businesses. So we feel really good about our portfolio.

We're seeing no degradation in the quality of the portfolio from last quarter to this quarter. In fact we're seeing improvement and we're hopeful that in the future you'll see this risk rating category actually improve or even more we'll go out to 3s and into 2s, but for now we take – Chris it's kind of hard to get from 3 to 2.

It's really easy to go from 2 to 3 in our minds, but to get up to back to 2 is a little trickier..

Okay, great. Thanks for taking my questions. I appreciate it..

Sure, thanks Chris..

Thank you. [Operator Instructions] And it looks like all the questions that we have in queue at this time. So I'd like to turn the call back over to the speakers for closing remarks..

Very good. Everyone thank you very much for joining us on the call today. We're excited about our fourth quarter performance and our 2014 performance and we're equally as excited about getting back at it into 2015 [Audio Gap] next call. So have a good day and enjoy the weather..

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day..