Ted Koenig - Chief Executive Officer Aaron Peck - CFO and Chief Investment Officer.

Bob Napoli - William Blair Mickey Schleien - Ladenburg Chris York - JMP Securities Bryce Rowe - Baird Christopher Testa - National Securities.

Good morning, and welcome to Monroe Capital Corporation's first quarter 2016 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 and cash flows.

Although we believe these statements are reasonable, based on management's estimates, assumptions and projections as of today, May 11, 2016, 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, uncertainty and 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..

Hello. 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. Last evening, we issued our first quarter 2016 earnings press release and filed our 10-Q with the SEC.

I will provide an 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 to have announced another very strong quarter of financial results.

For the quarter, we generated adjusted net investment income of $0.47 per share, comfortably covering our first quarter dividend of $0.35 per share. This represents the eight consecutive quarter, we have fully covered our dividend.

Our consistent dividend coverage continues to separate us from the pack of the BDCs that have either cut their dividends, or have been unable to generate net investment income in excess of their most recent dividend, or are covering their dividends artificially by temporarily reducing their management fees.

Our book value per share increased substantially to $14.45 per share as of March 31st, a $0.26 per share increase from the book value per share at December 31st. The increase in per share book value is the result of our earnings in excess of dividends paid as well as the net increased valuation of our portfolio during the quarter.

The fourth quarter of 2015 and the first quarter of 2016 were challenging for some BDCs experiencing credit write-downs realized and unrealized losses and in several cases, double-digit percentage declines in per share NAV.

Many BDCs have exposure to Oil and Gas Exploration and Metals and Mining companies, which have experienced severe financial distress. We have none of that direct exposure, zero. We don't have exposure in those industries for two major reasons which we have discussed on prior calls.

The first reason is that we have an extraordinary origination engine, which provides us a very large pipeline of opportunities to choose from when selecting which deals to close and which deals to pass on. In 2015 alone, we looked at approximately 1,700 potential transactions.

When we have a high level of unique and proprietary deal flow, we can afford to be very selective and we are. The second reason is the strength and experience of our credit and underwriting team.

This experienced team picks up the very best transactions with the very best management teams among the approximately 1,700 plus deals we see each year and those are the ones we close and fund. Another explanation for NAV write-downs experienced by our peers is related to position in the capital stack.

Our portfolio was heavily concentrated in senior secured loans, in particular first lien secured loans. 94% of our portfolio is secured loans and over 75% is first lien secured.

BDCs that have a significant amount of their investments in second lien and unsecured mezz loans are much more likely to take markdowns in their portfolios have experienced losses when the economy takes a negative turn.

As you may recall, last quarter, we told you that we expect it to be one of the first groups to be able to access additional SBA debentures under the increase in the family of funds cap on SBA-guaranteed debentures from $225 million to $350 million for an affiliated manager group of SBICs.

As we announced a couple of weeks ago, MRCC was recently approved for $75 million in additional SBA debentures. These additional low-cost SBA debentures offer a real tangible benefit that will allow us to continue to profitably grow our portfolio.

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 remains stable during the quarter and we have continued to generate high-yielding opportunities, which has allowed us to maintain a high level of weighted average yield in the portfolio.

As of March 31st, the portfolio was at $343.5 million at fair value, a slight increase of approximately $2.4 million since the prior quarter end. At March 31st, we had total borrowings of $134.7 million under our revolving credit facility and SBA debentures payable of $40 million.

The increase in outstandings under the revolver are the result of portfolio growth at our BDC parent company. This portfolio growth was offset by deals that repaid in our SBIC subsidiary during the period, which explains why we had a significant restricted cash balance of $14.7 million as of March 31st.

We would expect to invest that restricted cash in SBIC eligible deals within the next several quarters.

As of March 31st, our net asset value was $187.9 million, which increased from the $184.5 million in net asset value as of December 31st, primarily as a result of increases in the market value of our portfolio and in earnings in excess of dividends paid during the quarter.

On a per-share basis, our NAV per share increased from $14.19 at December 31st to $14.45 per share as of March 31st. Turning to our results. For the quarter ended March 31st, adjusted net investment income, a non-GAAP measure was $6.1 million, or $0.47 per share, an increase of $0.07 per share when compared to the prior quarter.

At this level, we continue to comfortably cover our quarterly dividend of $0.35 per share. The increase in adjusted -- in per share adjusted NII from the fourth quarter was primarily due to the increase in dividend income in the quarter.

The increase in dividend income during the quarter was due to substantial distributions from our equity stake in Rockdale Blackhawk. Based on the company’s performance, we expect this level of dividend income could recur in successive quarters as long as we continue to hold the equity and the company performance remains strong.

We acknowledge that if this investment were to be sold in the future, we would not be able to easily replace this level of dividend income.

If you backed out all of the distributions from Rockdale Blackhawk during the quarter from adjusted NII, our adjusted NII without Rockdale Blackhawk distribution would still cover the dividend of $0.35 per share in the quarter.

Separately, if you were to strip out fee income and paydown gains from adjusted NII, our per share core net investment income was higher than the prior quarter and comfortably covered the dividend.

Additionally, this quarter we generated net income of $7.9 million, or approximately $0.61 per share, a significant increase from the net income in the prior quarter of $0.33 per share. This increase is primarily due to the increase in net realized and unrealized gains during the quarter, coupled with the strong NII performance.

Looking to our statement of operations, total investment income for the quarter was $11.5 million compared to $10.1 million in the prior quarter. The increased investment income is primarily as a result of the increase in dividend income during the quarter.

Total expenses of $5.8 million included $1.7 million of interest and other debt financing expenses, $1.5 million in base management fees, $1.7 million in incentive fees and $821,000 in general, administrative and other expenses.

Of the $1.7 million in interest and other debt financing expense, approximately $1.5 million was cash interest expense, with the remainder representing non-cash amortization of the upfront costs associated with establishing and maintaining our credit facility and our SBA debentures, as well as the interest expense associated with the secured borrowings recorded under ASC 860.

As for our liquidity, as of March 31st, we had approximately $25 million of capacity under our revolving credit facility. While our SBIC debentures were fully drawn at $40 million at the end of the quarter, we did have $14.7 million of restricted cash available for reinvestment in our SBIC subsidiary due to recent repayments.

As Ted mentioned in his remarks, MRCC was recently approved for $75 million in additional SBA debentures, which once drawn would bring MRCC to a total of $115 million in debentures. I will now turn the call back to Ted for some closing remarks before we open the line for questions..

Thank you, Aaron. The current pipeline for all of the funds at Monroe Capital continues to be very strong. Our focus on proprietary national lower middle-market origination has continued to provide our funds with unique, attractive investment opportunities with high risk adjusted returns.

We have continued to generate solid earnings and cover our dividend with real earnings at a time when many of our peers struggled to do this.

We attribute our success to a differentiated origination platform and the debt of entire Monroe Capital organization, which has supported a high effective yield and strong credit performance in our BDC portfolio.

With our stock trading at a discount to our most recent NAV, and a dividend yield around 10%, fully supported by net investment income and an increased per share book value, we believe that Monroe Capital Corporation provides one of the most attractive investment opportunities for our shareholders and other investors in the space.

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

Thank you. [Operator Instructions] And our first question comes from Bob Napoli of William Blair. Your line is open..

Thank you and nice job in the quarter. Question on Rockdale Blackhawk, Ted, I mean you guys -- that's obviously been a homerun investment for you guys to medical practices. This business is cash flowing so strongly they can pay out these dividends on a quarterly basis and you don't have control over it.

Do you have interest in selling your piece, or do you know if the private equity investors are likely to sell the business at some point in the near future?.

Hey, Bob. This is Aaron. Thanks for the question. So, Rockdale is doing exceedingly well. As you pointed out, we do not control the company or when they make distribution. The distributions the company has been making have been tax distributions. So it is not sort of just a voluntary distribution.

It's really just based on what they expect their tax to be in because we are an equity holder. We get our pro rata share of the tax distributions and we are not a tax paying entity as you know but it flows through as dividend income. And so we don't control the timing.

We -- as I said in the remarks, if they continue the way they are going, we would expect these to recur for some period of time. But it’s difficult to know how long that will continue if the company were to be sold, we would have our -- sale of our equity position and we would lose those dividends.

We will have a big recovery or big return on the equity, which we would obviously provide for shareholders. So it is not owned by a private equity firm. It’s privately owned. I think that they are going about their strategy and trying to -- continuing to try to execute.

They are executing well and it’s difficult to know what they are going to do, with regards to possibly monetizing the company in the future, we don’t -- as you said, we really don't control it. We do hear from them. We are in contact with them closely but they make independent decisions..

Okay. Thank you.

And then the SBA -- extension of the SBA, the equity do you need, the $37 million of equity to be able to fully draw the $75 million, can you over time do that from internal equity sources as some loans fall off or obviously if your stock moves up you might consider doing an equity offering to fund that? But do you need to do an equity offering to fund that or can you -- would you be able to attain those funds without doing an equity deal?.

Good question, Bob. So, we can certainly begin to capitalize that license with internally generated cash and with cash in the portfolio and with sales of certain assets that are liquid.

Over time, we would expect that we would need to consider some form of capital raise whether that would be equity if we are in a position to do equity, or some other sort of capital raise, be it a bond offering or some sort of convert.

We will look at all those options but that’s not anything we need to look at or think about in the immediate near-term. We can start capitalizing that license immediately with internal cash and we have the flexibility to do some of that immediately without a need for a capital raise..

Yes. Just a follow-up on that, Bob, I think as Aaron mentioned in our press release and in our 10-Q, we can access at least one-to-one leverage, using our own cash of $37.5 million given where we are today with the SBA. So, as time goes on over the next couple quarters, I would expect us to start utilizing this new leverage, the debentures..

Great. And then just last question, how do you guys view the economy? I know you're not in some of the sectors that have been the hardest hit but it doesn’t seem like overall the economies -- I just love your view on, by looking at your company’s, how you feel the U.S.

economy is doing?.

Good question. I get this question a lot. We’ll tell you that from our perspective, we have about 220 companies in our portfolio. And we look at this and every Monday, I go through our portfolio with our team and the one word I will use is stable. There is a number of flash points in certain industries.

Luckily, we've been able to avoid those industries and the industries that we are heavily involved in seem to be stable. And again, as the year goes on, I think we'll see more the same. I think I start to get a little more concerned when I look out into 2017 than in 2016..

Great. Appreciate it. Thank you for the comments..

And our next question comes from Mickey Schleien of Ladenburg. Your line is open..

Yes. Good afternoon, everyone. So going back to Rockdale, that's an amazing return on equity. I think you booked about $1.6 million dividend on something you valued at around $10 million.

So looking at another way, if this news is going to continue to generate dividends of that level wouldn't this thing be valued -- would the equity be valued much higher than where you haven't?.

Excellent question, Mickey. We use an independent third-party to value all of our holdings including Rockdale Blackhawk equity. And they are certainly aware of the distribution that we’ve received in and the company’s performance and this is what they believe is the fair value of our investment today.

I think it’s safe to say that if the distributions continue, or they get higher or if the company’s EBITDA performance continue to improve, I'm sure they would look again at that valuation and consider increasing in the valuation again.

And similarly, if for some reason performance went the other direction, they would I’m sure look at the valuation again and possibly reduce it.

I do think that they recognize that we don't control the investments that we are a minority holder and most normally, you would expect to get some sort of discount in the valuation for that sort of position because you might want to monetize investment when the management team doesn’t.

And you don’t always have the ability to go out and make use of sort of a high watermark on the value. So, I’m sure that’s in their thinking. I know that it’s in their thinking in terms of how they value the asset. And we will just stay tune on future valuation as the company continues to perform but it’s a fair question..

And Aaron, when you characterize that dividend as a tax payment, are you implying that this is either an S-Corp or an LLC, or something like that and these are distributions to shareholders or partners?.

That’s correct..

Okay..

That’s correct. The other 75% are largely individual holders that own the interest and so they distributions in order to make estimated tax payments..

I understand..

Based on the income, correct..

Couple portfolio questions. Can either one of you walk us through the TPP situation? This was formally a unitranche deal and now it is senior secured. It looks like you may have taken up the bank ahead of you and put in a little bit of money if I'm correct.

And I would like to understand your outlook on that?.

You are correct. We did have a bank in the first out position in front of us that we took out. We do that to control a situation when there is some stress and a potential workout.

It’s one of the provisions we put in every unitranche loans in which there is a first out so that we can make sure that the bank doesn’t have a quick trigger and do something that’s good for them with that for us.

And so in the case of picture people, we did take out the first out bank and so we are the only -- the Monroe funds are the only lender to TPP and we are also the owner of TPP at this point because the sponsor, quite a while ago handed the keys over. And so we are going through a repositioning of the company.

We brought in very capable and skilled management and a lot of advisors to help get the company in the right direction. And we feel very positive about the company’s outlook in terms of this repositioning but it is been a challenge.

And it’s been something that we try to work through but that's really most of what I can really say about TPP on an open call..

Aaron, remind me, what’s the name of operating company? I think you just mentioned it..

They do business as the picture people..

Picture people. Okay.

And then lastly just any color or update you can give us on Answers Corp and Bluestem?.

Yes. In the case of Answers, I mean that is a deal that is a somewhat syndicated market transaction. As we’ve talked about in the past, there is really not much change from prior calls. The company has seen a big change in a part of their business, which is the Answers part of the -- answers.com. They have a software business that remains stable.

We always entered this company with the view that we were covered by the value of the software business and if the Answer’s business never had trouble, if that was not something that would impact our recovery, I think in this case the market doesn't like the trends that heavily owned by CLOs.

I suspect there was concerns about downgrades for CLO holders as they did some technical selling and the company has not performed well. I mean, their answers.com part of their business has struggled.

But the other part of their business is stable and it continues to sort support our going in pieces of the software business has the value to support our loans and has a very high quality sponsor who put a lot of money in at the time we did this, the deal and continues to manage the company well. There is no liquidity concerns. There is no issues.

There is no risk that I can see today with any non-accrual or not being paid current interests or principal. Everything is going smoothly but clearly not performing at the level that was underwritten. And I think that is what has sort of led some of the technical selling in the name..

And Bluestem?.

Bluestem is more of just the market move. Second lien assets traded down for a while and Bluestem sort of has traded. There is no individual credit issues that we can perceive..

I got it. Those are all my questions today. A terrific quarter. Thank you for your time..

Thank you..

Thanks, Mickey..

Our next question comes from Chris York of JMP Securities. Your line is open..

Good morning, gentlemen and thanks for taking my questions. So, just to follow-up here on Rockdale, the maturities weighs out and the debt is marketable par.

So, if it prepays, would you expect any prepayment fees or material OID acceleration?.

Yes. I think that you could expect both, if they were to prepay. The company had pretty standard prepayment fees attached to it and we are just over a year into the investment. So, I do think there is a substantial prepayment penalty remaining on the name and there is some OID left that could flip, if it ever prepaid.

And those are both things that could occur in the future if that would happen..

Great.

And then secondly, so dividend income you already provided, the contribution was predominantly from Rockdale but was there anything else, or was dividend income all from Rockdale this quarter?.

No, we have a preferred holding, you will see in our SOI. And so it’s really -- I think we talked about in the past, company called ECA which had a structure. Our deal as a preferred for regulatory reasons, the company in the education space and it does pay a current dividend that’s attached to the preferred equity piece.

It’s pretty substantial 12% and so that’s what flows through a dividend. And you could expect that as long as the company performs that should recur because it’s a contractual dividend payment..

Great. That’s helpful. And then lastly maybe for Ted here. We know that Monroe has been successful in raising private money in similar strategies to MRCC.

So, do you expect any financial benefits to MRCC shareholders from the successful raises?.

Yes. A quick answer, yes and a longer answer is that Monroe has been very successful as a platform in raising additional capital. We recently closed on about $660 million of -- we call it our 2016 fund. We have several other funds in process.

And MRCC gets an allocable share of each of the transactions that are suitable for MRCC as we grow the other portfolios. So, one of the message is that we’ve continued to discuss here.

The reason that MRCC is such in a unique position is that while it is overall a relatively small part of the Monroe platform, roughly in the neighborhood of 10% of its total assets.

It gets a far, far disproportionate benefit from being part of the Monroe platform because it sees and has access to every single transaction that the Monroe platform is funding..

And on the cost side, Chris, there are some benefits.

For example, as more funds are added and they share valuations that reduces the per-name valuation costs and third-party valuations, it’s already getting some benefits and that will continue too at the BDC level and then there are certain other allocable expenses that get allocated that we expect some reduction associated with having more AUMs outside the BDC..

Great. That’s helpful.

And then lastly maybe some comments on the pipeline and activity post end of the first quarter?.

Yes. We’ve got a very active pipeline. At the Monroe level I can tell you that it’s about a $500 million pipeline and that is consistent quarter-to-quarter. So, MRCC will continue to see its share of deal flow here in Q2 and beyond..

As for close quarter activity, there is nothing material that’s worthy of any disclosure. We continue to be active first quarter end and continue doing the best. And you can assume we continue to try to put to work some of that restricted cash in the SBIC subsidiary..

Great. That’s it for me. Congrats on the quarter..

Thanks, Chris..

Thanks, Chris..

And our next question comes from Bryce Rowe of Baird. Your line is open..

Thank you. Just a modeling question, Aaron and Ted. You guys mentioned the additional leverage on the SBA, congratulations on that. Wanted just to understand how you think we might model out additional use of the SBA debentures, at least over the next couple quarters? You expect to draw more debentures here over the near-term..

Yes, good question, Bryce. Just on -- big picture, we’ve always said that we expect on a regulatory basis our leverage to be somewhere between 0.7 and 0.8 depending on the mix of the portfolio. We don’t change our view on that really. As for the SBIC sub, it’s difficult to predict. Obviously, we’ve seen a lot of deal flows. Some of it is eligible.

Some of it is non-eligible. We have some cash that we can put down to the sub. We would expect to put some cash down to the sub and draw on a one-to-one basis over the next couple of quarters. We are going to take our time in ramping this up and make sure we get the best assets in there, as we do with the rest of our business.

And so, I would say it’s not a raise.

We are doing just fine as we are today in terms of covering the dividend and so unlike some others that maybe feel the need to raise to do something to get to a coverage level, we can take our time and make sure we are just putting the right assets in and so, I wouldn’t expect that you want to be terribly aggressive with your expectations with regards to the ramp of the SBIC sub..

That’s great. I really appreciate it. Good quarter, guys. Thanks..

Thank you, Bryce..

Thanks, Bryce..

And our next question comes from Christopher Testa of National Securities. Your line is open..

Hey. Good morning, guys. Thanks for taking my questions. Just more on the TPP acquisition, the fair value marks improved very slightly.

Just wondering if there has been any underlying improvement at the company and would that improvement, if any has been quarter to date and your outlook on that?.

Yes. Thanks, Chris. So, yes, we did see a small pick-up in the value this quarter that was largely due to an updated forecast and better than expected sort of near-term performance. I can’t get into too many specifics but we are working on a pretty nice change and expansion of the strategy of TPP.

As you may recall from prior calls, it has historically been primarily a mall based retailer company and over time, we are looking to change that strategy and expand into non-mall related places where we can get percentage rent yields. And so that’s part of what we are doing in terms of execution and that has improved the outlook.

That strategy is starting to bear fruit and so that I think is what is reflected in the pick-up of the valuation..

Okay. Great. And we just saw some credits moved into a risk rating free a bit.

Could you just give some color on that, which companies moved in there and how concerned and if at all you are about those?.

It’s just generally big picture. We have a pretty quick trigger to move something to a three. And so, I wouldn’t necessarily panic or get terribly concerned about a big migration of names into the three category from the two category. We are very reticent to move something from a three to a two or a two to a one.

A good example is Rockdale where most people would think that ought to maybe be considered a one. We really haven’t moved it up to a one at this point just because there is really not a lot of upside in that. But there is just a couple of names that have who still feel comfortable that we are covered that we are going to have a full recovery of value.

But we’ve just been a little bit more conservative with regards to how we position them in terms of the risk rating just to make sure we are giving it a due focus and time and attention..

Got it.

And just given the comments on the pipeline and where regulatory leverage is, if you were trading at a decently sizeable discount to NAV, is this the type of environment where you would be inclined to issue equity?.

Probably not. It’s a good question. We’ve taken the position that everything we do, we are going to try and do on a non-dilutive basis. So, we’ve got some other options there going forward that are not dilutive and those are the options that we are probably going to focus on..

Right.

So it’s going to be more just ramping the increased SBA allowance that you are allowed to issue as opposed to issuing equity?.

Yes. And potentially some other things that Aaron mentioned in his remarks..

Got it. And just with the junior senior secure loans, I know you guys have done small amount of purchases recently.

Is this just opportunistic or you seeing better value there as opposed to first lien, just any thoughts on that?.

Yes. I mean I think you characterized it correctly, which is we saw some opportunistic times that we can put the money to work in names that we knew and liked in the second lien space. I wouldn’t take that to mean that we have a focus and going out doing more of that.

I think we are kind of where we want to be with regards to that mix barring any major market shift.

If we saw names that we really like, get hit really hard and we could get our hands around why and feel comfortable if there were opportunities or if the market widens and new second lien came that were really attractive yields, we might consider making an investment there.

But as we sit here today, we really are sort of where we want to be with regards to allocation in the second lien..

Got it.

And do you guys expect a pick-up in M&A activity in the second half of the year, potentially driving higher prepayments?.

Yes. I would tell you that if you look at the last 10 years as a benchmark, the third quarter is always busier than the second quarter and the fourth quarter is always busier than the third quarter. So, consistent with that I would expect a pick-up in total transaction volume related to M&A..

Got it. And last one for me just on the dividend income coming from out Rockdale.

Should we look at the -- what Rockdale threw off to you guys in the first quarter as sort of a run rate going forward or should that be much more lumpy?.

It’s a good question and it’s the one I wish I could answer. We look at it as -- we have this equity investment in Rockdale. The company’s doing exceedingly well. We expect that they are going to continue to need to make tax distributions to their shareholders and we would be the recipient of our pro rata share.

How that comes in, when that comes in, how much that looks like on a quarter-to-quarter basis is very difficult for us to predict. I would say based on what we know today, it’s probably not going to be zero but I can’t give you a lot more than that what it’s going to look like next quarter or the quarter after.

It’s really not in our control and it really has to do with how the management team there wants to look at their tax, with their tax accounts..

I think, Christopher, we’ve taken a relatively conservative position in kind of how we look at our entire equity portfolio of investments and that’s probably wise to do that in your position too over the long run. If there is something that good happens, you will hear about it from us..

Got it. Thanks, guys. That’s all for me..

I would now like to turn the conference over to Mr. Ted Koenig for closing remarks..

I want to thank everyone for joining us on the call this afternoon. We certainly appreciate your involvement and to the extend you have any further questions, as always please feel free to contact Aaron or I directly. And with that, enjoy the rest of the afternoon..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day..