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

Bob Napoli - William Blair Chris Kotowski - Oppenheimer Mickey Schleien - Ladenburg Bryce Rowe - Baird Chris York - JMP Securities Christopher Testa - National Securities Christopher Nolan - FBR & Company Robert Dodd - Raymond James Merrill Ross - Wunderlich.

Welcome to Monroe Capital Corporation’s Third 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 or cash flows.

Although we believe these statements are reasonable based on management’s estimates, assumptions and projections as of today, November 8, 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 from results of risks, uncertainties 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..

Thank you everyone who has joined our earnings call today. I am joined by Aaron Peck, our CFO and Chief Investment Officer. Last evening, we issued our third 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 strong quarter of financial results. For the quarter, we generated adjusted net income of $0.37 per share covering our third quarter dividend of $0.35 per share.

This represents the 10th consecutive quarter we have fully covered our dividend. We are particularly pleased that we are able to cover our dividend in the quarter despite raising additional equity capital of approximately $53 million of net proceeds.

Given the natural lag associated with putting capital to work after an equity raise, we are pleased that our net investment income still outperformed our dividend run-rate.

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 decreased slightly to $14.42 per share as of September 30, an $0.08 per share decrease from the book value per share at June 30.

The slight decrease in book value per share is primarily the result of net unrealized mark-to-market decreases in the value of certain assets in the portfolio offset by the book value accretion associated with our accretive capital raise during the quarter.

Despite the small reduction in per share book value during the quarter when compared to our book value per share at the end of 2014, our book – our per-share book value has increased significantly. We believe we are one of a very small group of BDCs that can demonstrate per-share book value in both 2015 and 2016.

Our relative NAV stability is due in part to our senior position in the capital stack of our borrowers. Our portfolio was heavily concentrated in secured senior loans, in particular first lien secured loans. 94% of our portfolio consists of secured loans and approximately 78% is first lien secured.

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

As we previously announced, we were pleased to price an accretive equity offering on July 20 which raised net proceeds of approximately $53 million.

As with past offerings, we first applied the proceeds to reduce outstandings under our credit facility and have begun to redraw the capital over time to fund deals both at the BDC parent as well as in our SBIC subsidiary. As you may recall from our last call, we also increased our SBA debenture commitments with the SBA by $75 million.

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 grew during the quarter and we have continued to generate a sufficient amount of opportunities to allow us to maintain a high level of weighted average yield in the portfolio. As of September 30, the portfolio was at $377 million at fair value, an increase of $34 million from the prior quarter end.

At September 30, we had total borrowings of $104.5 million under our revolving credit facility and SBA debentures payable of $40 million. As of September 30, our net asset value was $239 million, which increased from the $188.7 million in net asset value as of June 30 primarily as a result of the capital raise we completed during the quarter.

On a per share basis, our NAV decreased slightly from $14.50 per share at June 30 to $14.42 per share as of September 30 primarily as a result of net unrealized mark-to-market decreases in the fair value of certain assets in the portfolio.

Turning to our results for the third quarter, adjusted net investment income, a non-GAAP measure was $5.8 million or $0.37 per share, a decrease of $0.06 per share when compared to the prior quarter. We are very pleased to have covered the dividend of $0.35 per share despite having completed a capital raise during the quarter.

Most of the asset growth during the quarter came near the end of the quarter and therefore we did not recognize significant interest income in the quarter associated with this portfolio growth.

We have continued to grow the portfolio after quarter end and expect to recognize additional interest income associated with the new assets we have closed into the portfolio. During the quarter, we also experienced a lower amount of fee income than in prior quarters as prepayment activity was more muted than in prior quarters.

This also contributed to our decrease in per share adjusted NII from the second quarter. Dividend income during the quarter from our equity stake in Rockdale Blackhawk also increased slightly when compared to the prior quarter.

As we have discussed in the past, we expect that we could continue to receive significant dividend income from Rockdale in future quarters as long as we continue to hold the equity and the company performance remains strong.

These distributions are difficult to predict, are out of our control and can be lumpy and 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.

As for our core net investment income during the quarter, if you were to strip out fee income and pay-down gains from adjusted NII, our per share core net investment income was approximately $0.35 per share covering the dividend.

Additionally, this quarter we generated net income of $3.6 million or approximately $0.23 per share, a decrease from the net income in the prior quarter of $0.41 per share. This decrease is primarily due to an increase in net unrealized mark-to-market losses during the quarter.

Looking to our statement of operations, total investment income for the quarter was $11.1 million flat from the prior quarter.

Total expenses of $5.6 million included $1.5 million of interest and other debt financing expenses, $1.6 million in base management fees, $1.2 million in incentive fees and $863,000 in general, administrative and other expenses. We also accrued excise taxes of approximately $342,000 in the quarter.

As you know, we have significant amount of undistributed or spillover income from prior quarter’s net investment income that has not yet been distributed. If we choose not to distribute all this income, we will be required to pay excise taxes as we have done in prior years.

Our Board of Directors will likely make a final decision regarding disturbing some of this income and/or paying excise taxes in January. We have accrued an excise tax expense based on the expectation that at least a portion of our spillover income will be retained. However, this decision will not be final until early next year.

As for our liquidity, as of September 30, we had approximately $55 million of capacity under our revolving credit facility. We had $40 million in SBIC debentures drawn at the end of the quarter and $2.2 million of restricted cash available for reinvestment in our SBIC subsidiary due to recent repayments.

As we have disclosed in prior calls, MRCC was approved for $75 million in additional SBA debentures which once drawn would bring MRCC to a total of $115 million in debentures. As of September 30, none of the additional $75 million in SBA debentures had been drawn.

As with prior capital raises, we initially used the net proceeds of the recent equity offering to pay down our revolving credit facility and have begun to redraw on the facility to grow the portfolio.

We would expect to continue to redraw on the facility to make investments in the next several months, both at that BDC parent company as well as in our SBIC subsidiary with respect to the additional debentures. I will now turn the call back to Ted for some closing remarks before we open the line for questions..

Thanks Aaron. The current pipeline for all of our funds at Monroe continues to be 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 struggle to do this.

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

Given the $53 million of new equity capital raised, our quarter end capacity of $55 million on our revolving credit facility and our $75 million in committed and un-drawn SBA debentures, MRCC has plenty of capital and capacity to grow our company profitably.

With our stock trading at a dividend yield around 10% now, fully supported by net investment income and a stable per share book value, we believe that Monroe Capital Corporation provides one of the most attractive and stable investment opportunities for our shareholders and other investors. Thank you all for your time today.

And with that, I am going to ask the operator to open the call for questions..

[Operator Instructions] Our first question comes from the line of Bob Napoli of William Blair. Your line is now open. .

Thank you. Good morning.

Just a question on credit and are you seeing any – Ted, any changes in your view of the trends in the portfolio, the economy as it’s affecting your portfolio, just some thoughts around credit, your comfort with credit, would be helpful?.

Yes. Thanks for the call Bob and the question. Not really, I will tell you that we have got over 200 companies throughout our platform and we monitor those companies very, very carefully.

The BDC only has – Aaron, what’s the total number of our portfolio of companies?.

About 62..

62, so the BDC is roughly 25% of our total portfolio as a company. And most of the stress that we have seen in the market has come from isolated segments in retail, in oil and gas, commodity level pricing based companies and we don’t have really any of those in our portfolio in the BDC.

So I think if I look at the BDC today, I am very bullish on we have got one company that’s non-performing and non-accrual and hat’s the Picture People. We have talked about that in the prior calls, but with the exception of that one particular company, I like where we are, I like the credit and I like the performance, so....

Great.

Then just, are you putting on any transitory loans or are these all core loans that you are adding?.

Good question, Bob. No, as usual, we selectively put on what I call some transitional or transitory loans and we have put on a few to-date. In this quarter, look to the first lien loans that are sort of anything sort of under 8%, most of those would be loans that would be considered transitory.

I am happy if you want to go through them specifically after the call and sort of highlight for you the ones that are what I consider transitory, but we are doing some of that and we will continue to look at those types of assets. I don’t want people to be too – don’t necessarily assume that an 8% loan is a transitory asset though.

There are a couple that we closed into SBIC sub that our Monroe agented deals, because those still are accretive with that excess leverage that we get through the SBIC subsidiary. But I am happy to identify some of them with you offline if you like after..

What percentage of your loans are shared with other Monroe entities?.

It’s – of the ones that are Monroe agented deals, it’s nearly 100%..

If you recall Bob, we have an allocation policy at the firm where each of our funds has access to the entire Monroe originated transaction pool and then those transactions get allocated based upon available capital of each fund.

So the BDC, while may be substantially smaller and account for roughly 10% of the overall Monroe assets under management, gets a favorable allocation of every transaction that the Monroe platform generates..

So are the 62 loans that you have Aaron, how many of those also are allocated within other Monroe entities?.

I am trying to think off the top of my head, I think Rocket Dog is the one that is only in the BDC. There is a second lien called Mud Pie that is only in the BDC. And I am trying to think that maybe it. I can follow-up with you after, but it’s a small number..

Okay. So it allows you to be pretty incredibly diversified, I guess in the BDC, which is nice. And just last question.

The SBIC for what timeframe would you expect to borrow the additional $75 million?.

Yes. It’s a good question Bob and it’s always a difficult one to answer, because we are – its long-term capital, so we are very patient with putting it to work and it’s got to be just the right asset that fits the SBIC subsidiary.

So I haven’t been able to guide anyone too specifically on that other than to say, I don’t think it will be something that will happen within one or two quarters. It’s probably something beyond that, but certainly I would hope within three to four quarters, we would have all the debentures drawn..

Great. Thank you. I appreciate it..

Our next question comes from Chris Kotowski with Oppenheimer. Your line is now open..

Yes.

I mean so far you haven’t had any realized losses, but TPP I guess is in bankruptcy and should we expect those losses to become realized, if you can comment on that or is that still – or do you retain a claim that could be recovered over time?.

Yes. Chris, thanks for the question. TPP is a transaction that we placed on non-accrual. The company filed for bankruptcy. What’s happened since then is that, last Friday, we were successful in credit bidding our debt for the company and now we control the company.

We have retained new members of new management and we have a turnaround strategy that we have been working on now for six months. And we are about to implement it now that we control the company. And we feel very comfortable that our turnaround strategy will work and that we expect to hopefully receive a recovery on that claim..

Okay, excellent.

And then secondly, on your approach to funding the SBIC, I mean could you in theory just draw your revolver down by $37.5 million and fund the whole thing or would you do it in a more modular fashion that as things pay down, can you pop capital in there in $5 million or $10 million or $15 million chunks?.

Yes. Good question, Chris. We are able to fund down there as much as we need. It’s not an issue with regards to freeing up the capital. We absolutely have borrowing base capacity to be able to generate the cash we need to fund the SBIC subsidiary as deals come into the subsidiary that are appropriate, that we want to close.

And that’s how we will handle it as they come in. So it’s not an issue with regards to having the available equity capital today to fund the entire commitment. The issue is really just making sure we are finding the right loans that we think are good value, good returning loans that are SBIC eligible and funding them when they are ready to close.

And we have got a number in our pipeline currently that we are on deep underwriting on. And should they all close, we would expect to fund a significant amount down there and we will be set up and ready to do that in terms of cash..

Okay.

And you can fund it then I guess is on a just-in-time kind of basis as opposed to having to pre-fund the whole thing?.

Correct. We can generally do that..

Yes. As a follow-up to that question Chris, we are in a unique position. MRCC is in a very unique position. We have the luxury of being able to fund transactions at the parent company or at the SBIC sub. And the only constraint we have is credit. Our platform is a credit-first, no-loss platform.

So, instead of being aggressive in the market right now, as I mentioned on prior calls, we are being careful and we are allowing our origination platform to do what it does best and originate a wide swap of transactions and we are being very selective about what we bring into the firm..

Okay, alright. Great. That’s it from me. Thank you..

Thanks, Chris..

Our next question comes from Mickey Schleien with Ladenburg. Your line is now open..

Yes, good afternoon or good morning depending on where you are. Ted and Aaron, just to follow-up on TPP, remind me, most of those points of sales are in malls.

Is that correct, shopping malls? Is that correct?.

That’s not correct actually. Part of our strategy here in our turnaround strategy that we have now implemented is this company historically had most of its locations in malls, in some of the first tier, second tier malls throughout the country. Now a minority of their locations are in the malls.

What we’ve done is we’ve repositioned the company, and we have now put most of their locations in either Walmart stores, Buy Buy Baby stores or Sears stores. And the great benefit of that is now we have gone to a variable cost model for fixed cost on rent.

The mall stores were all fixed-cost rent stores, and the Walmart stores, the Buy Buy Baby stores and the Sears stores are all variable-cost rent stores or percentage rent. And we think that over a reasonable period of time, we’re going to see some positive results in terms of cash flow and profitability for this company going forward..

Ted, are there other channels like JCPenney, for example, where you could still expand that business into?.

We are very much looking at other channels right now.

Based on the success we have had at Walmart and Buy Buy Babys and the Sears, we are having discussions with other channels and we have got some other ideas even outside the channels, those distribution channels more on a direct basis with schools and charitable organizations and other parties from time to time that we think is ripe to expand the business.

So we have got lots of – the good news, we’ve had several months to spend time in doing some deep analytics and retaining some outside professionals to assist us in coming up with a strategy. And we think we have got some good strategy in place. Now it’s just the time to implement this and execute..

I understand. So, that sounds like something that you will probably own for a couple of years as it turns around.

Would you agree with that?.

Yes, I would say that, that’s probably a likely scenario that it’s going take us a couple of years to turn it around, but I would hope to be able to see results and see income grow proportionately over that period of time..

Okay. And switching gears, Ted, there is this amazing compression in spreads as everyone searches for yield and we certainly saw that in the middle and latter part of this year. And it’s still going on in the fourth calendar quarter.

So I have two questions related to that, is – are you willing to run the BDC at total leverage above 1x debt to equity? That’s total, including the SBA. And also any insight into repayment or re-pricing pressure this quarter given that we are almost halfway through? And that’s it for me..

Okay. Answer to your general statements on spread compression, it’s been happening in the market throughout the calendar year 2016. We’re a little more insulated from that in the lower part of the market. The companies that are $15 million, $20 million EBITDA and less have fewer options.

There’s no real, I call it, recreational refinancing where rates come down by 25, 30 basis points. People will recreational refinance their debt structures, although there is obviously more competition in the space. The answer to your first question is yes. We are willing to run the BDC at more than 1:1 debt leverage.

And you recall that we have not only the leverage from our credit facility with ING, and we have talked about that, where we like to be in the 75% to 80% range there, plus or minus. But we also have the SBIC leverage that does not count against our regulatory leverage. And we’re very willing to use that.

We have – if you look in the past, we haven’t used that aggressively. And I anticipate we will continue to use that aggressively, and that’s a huge advantage for the MRCC platform, that we have $75 million of unused capacity there that we can selectively utilize. So that’s the answer to your first question.

And on your second question on this overall spread compression and have we seen anything in the quarter, I think we haven’t seen it yet. We haven’t seen refinances. Now remember, all of our deals that we write have yield maintenance or prepayment penalties.

And when we write a 5-year deal, which is our typical deal, our typical prepayment penalties are 105, 104, 103, 102, 101. So it usually is non-economic for a company to do a refi with us in the first or second year after the transaction is closed.

So we have not seen, in specific answer to your question, any refinances this quarter, and we monitor that relatively carefully. Our portfolio management associates monitor the companies for refinance activities, and I don’t see a lot of that across our portfolio today..

Okay, that’s very helpful. I appreciate your time, Ted and Aaron. Thank you..

Our next question comes from Bryce Rowe with Baird. Your line is now open..

Thank you. Ted and Aaron just wanted to follow-up on the spillover conversation.

Aaron, do you have a fixed spillover number for us as of third quarter?.

Yes, let me grab that for you. But it hasn’t changed materially from the last quarter given the current level of NII. So we do have a fair amount of undistributed income. I am just looking at the number now..

Alright. And while you look at that, do you expect.....

It’s about – it’s right about $12 million..

$12 million?.

Yes..

Okay.

And do you expect another excise accrual in the fourth quarter?.

I don’t want to necessarily forecast anything. The reality is that we are going to know in January.

And so by the time we report our fourth quarter, we will be there, paid a substantial amount of dividend and accrued for it – or excuse me, of tax and accrued for it or not, but based on where things are today, I think it’s reasonable to assume that we are going to continue to have excise tax accrual..

Okay. And then a question on Rockdale Blackhawk, I know you guys have answered this in the past in the – necessarily control whether or not a company is owed or timing of a potential sale. But any insight into the timing of a potential sale would be helpful.

And I know you engaged what the dividend is going to be every quarter, but as it’s been relatively consistent over the last three quarters, would you at least over the near term expect that relative level of consistency?.

Yes, it’s a great question. And I wish I could give you a lot of clarity on it. Unfortunately, I can’t. Let me go through some of your questions on it. As for potential sale timing, I don’t have a good answer for that. We are in very close contact with management. I think they are looking at all of their options.

I am sure they are speaking to professionals in the market that are familiar with the healthcare space and where valuations are. And I think they are still executing on their business plan and their growth plan.

They have executed beautifully up until now and they continue to have opportunities to grow their platform, hire new doctors bring on additional hospitals, expand the footprint and continue down the path. And they are continuing to execute that way. So unfortunately, I don’t have a lot of clarity for you in terms of timing.

I do know that the management team is thinking about that option. It’s not something foreign to them. It’s not something they haven’t considered. So, I would expect that at some time in – I don’t know if it’s in the next 6 months, 1 year, 18 months, I do think that there is an exit at some point and this is not a 5-year hold would be my best guess.

As for the level of dividend, again, very difficult to determine, the company has mostly been making tax distributions, which to us come as a dividend since we’re past serenity. And so for the management team, it’s not really about dividends and making money. It’s more about covering their taxes.

And as you know, folks go through the year with their tax plaintiffs and make an assessment as to where things are and there is true-ups as the year goes on and they reassess and sometimes that means they had to pay more in the fourth quarter, sometimes that means they had to pay less in the fourth quarter.

And so we are really in a little bit in the dark today as to what we could expect in terms of taxable distributions, which would come to us as distributions, regular dividend here in the fourth quarter. And unfortunately, I just don’t have any answer for you on that. I wish that I did..

That’s fair.

And then one last one, I don’t know if – maybe I missed, but Mickey asked about prepayment activity thus far in the fourth quarter, I am just curious, if you have seen any level of prepayment thus far?.

Great. So and what Ted answered was more about whether we have seen any refinance activity where people have gone out and prepaid us in exchange for earning a lower rate with a competitor and the answer to that was we have not seen that really in the quarter.

Other than that, I don’t really give a lot of guidance as to sort of what’s happened in our quarter other than to say we have not seen generally a high level of prepayment at this time..

Great. Thank you..

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

Thanks for taking my question guys.

Aaron or Ted, maybe could you elaborate on and maybe quantify the portfolio growth you said you achieved in your prepared remarks in the current quarter?.

Unfortunately Chris, I can’t give you a lot of guidance in terms of what we have done to-date since quarter end. I think if we wanted to make an announcement like that, that’s some thing we would probably do closer to the end of the quarter and then we may contemplate that and we will have to take a look at that.

But I don’t like, even though this is a public call, because not everyone gets on this call, I don’t like to make any real disclosures that haven’t been publicly announced through a press release..

Understood. And then may be taking a step back and thinking about bigger picture items, how would you characterize the investment environment today in the lower middle market.

And then where are you guys seeing the best risk adjusted returns in your opportunity set for the BDC?.

Let me take a stab at that. General market, we will start with that. I continue to be very bullish on the lower part of the middle market for investing. If you recall, this space historically has been dominated by the regional banks. And we are a transactional finance business, as most of our peers, industry peers are. So we are financing transactions.

The transactional finance business has been ceded by the regional banks to the non-bank financial players, because of regulations, because of scrutiny, because of capital requirements, lots of things that Dodd-Frank has done that you can read about.

Other places have effected what the banks can do, so what’s happened is that in the lower part of the middle market, the non-banks, BDCs, funds and others have really taken up the slack. I told people I do a lot of speaking of this in this area. We have been doing this business now for almost 17 years.

So in the period of kind of 2002 to 2007, probably 80% of the business that was done in the transactional finance area was done by banks and 20% was done by non-banks. And today I think it’s been reversed, 80% of that business is being done by non-banks and 20% is being done by banks from where I sit.

So that’s the answer I guess to your first question. The second question is where is the best opportunities, the best opportunities are relationship transactions that we have with sponsors and transactions we do with non-sponsored companies.

And the non-sponsored companies that we do business with tend to pay somewhere near 100 basis points more in rates and somewhere near 50 basis points more in fees to us.

And when you look at that 100 basis points in rates and you assume that we are operating at somewhere near one to one leverage overall, that’s a couple of hundred basis points of net returns to our shareholders annually that we are able to generate over and above a sponsored transaction.

And when you look at our platform, we tend to do somewhere, depending upon the year, 70% or so sponsored transactions and another 30% non-sponsored transactions.

So when you look at that breakdown in the proprietary flow of sponsored transactions and our general industry coverage, with five industry verticals and our geographic coverage with eight offices, origination offices, throughout the U.S, we are seeing more than our fair share of these transactions that I call right in the sweet spot of what we want to do..

That color is very helpful and actually dovetails quite nicely to my follow-up.

So Ted, maybe has there been any expansion at the platform of Monroe that could benefit the BDC in terms of the flow sectors or products?.

Yes. We have done a significant amount. I mean the one thing that you can continue to expect from Monroe is you can continue to expect that we are going to engineer and reengineer ways to profitably invest dollars in this middle market.

And if you look at last year, we opened up an office in Toronto, which is our eighth office and all of our offices are staffed by full-time origination professionals. We opened up two new industry verticals in the last 12 months.

One was retail ABL finance, because I believe that the same thing that happened to the banks and the cash flow and enterprise value transactions, with increased scrutiny and regulatory risk, is now happening in the retail segment, where retail businesses that are generally asset based borrowers are going to find it more difficult, from a regulatory standpoint, to work with the banking sector to the extent they are not performing at acceptable levels.

So we have opened up a retail asset based lending segment and staffed that with industry professionals. And also this year, we have established a specialty finance vertical for consumer, small business and other particular areas of specialty finance where we see significant growth opportunities..

That’s good. That’s what I thought. Okay.

And then last caution here maybe for actually two for Aaron, I know it’s small, but G&A was up year-over-year and quarter-over-quarter, were there any one-timers in there?.

It’s a good question.

I mean I think there is just some regular way expenses associated with things like updating some of our shelf filings and our regular legal work, so I don’t know that there is any trend I would take out of the G&A per se, but there wasn’t anything that I would call out as one-time, but it tends to be a little bit up and down quarter-to-quarter..

Okay.

And then lastly, maybe given your comments on refi activity in this quarter and maybe lower muted repayment activity, should we expect kind of another quarter here in Q4 of muted one-time prepayment in acceleration of OID fee income?.

Hard to say, I mean as you guys probably remember from prior years, we see in the fourth quarter, when we see refinance activity, it’s usually very late in the quarter. Because most people are setting a deadline to do some sort of transaction that comes before year end, and we tend to be very busy in late December with closing new deals.

And so are others who might be seeking to refinance us or close on M&A transaction that will pass off. So while we have said that so far this quarter, it’s been relatively muted, that’s not surprising at all.

We would expect any – if we were going to have any sort of pronounced activity, we would expect to be in the last couple of weeks in the year, because that’s usually where it shows up. So it ends up being unfortunately a little bit of a surprise to us as well. We don’t always get a lot of advance notice.

Sometimes we do, but sometimes we don’t, depends on if it’s a regular refi or some sort of strategic transaction that might involve M&A..

Interesting, that’s helpful. That’s it for me. Thanks guys..

Thanks Chris..

Our next question comes from Christopher Testa with National Securities. Your line is now open..

Hi, Aaron. Hi, Ted. Thanks for taking my questions.

Just a question on the unitranche portfolio, the originations there has just been light, is this a product that’s more just kind of involved kind of the upper middle market and is not as much in demand with the sponsors kind of in the lower middle market?.

No, not at all, I think don’t take away any assumptions, because of the lightness in the quarter. I mean we have got probably 15 transactions right now that we are in diligence on, that we are signed up, that we are proceeding towards a close as a firm. And probably 75% of those transactions are unitranche transactions.

So I would – it’s more just a quarter-over-quarter situation. So I wouldn’t, Chris, take anything away from that..

Chris, I think it’s also more of a definitional issue. So the way that we characterize loans from the BDC is, if we’ve sold the first out, we call them unitranche in the BDC. And if we haven’t sold the first out and have retained the whole piece, we call them unitranche – excuse me we call them first lien senior secured.

And so we have been doing the last first out selling because we have been able to generate the yields we need and the high-quality assets we want in regular rate senior secured loans.

And one of the reasons that we make that differentiation is because in the larger market, unitranche usually means a deal that may be 5, 5.5, 6, 6.5x levered plus, which differs from senior secured for us.

The deals that we are calling unitranche are not nearly that heavily leveraged and so they really do fit kind of in that definition of senior secured. But usually, they are the entire balance sheet for these borrowers. There usually isn’t mezz behind them when we are involved with a direct deal.

The attachment points are usually much lower, maybe 3, 3.5, 4, 4.75x for our borrowers, which is more in keeping historically with what people call regular rate senior secured first lien loans..

That’s great color.

And just on the unrealized marks during the quarter, how much are those were technical mark-to-market versus idiosyncratic issues in the portfolio?.

Good question. I would tell you that most of the movement in the quarter was not general market trends, but was related to TPP taking a mark this quarter. That was the predominance of it. So we didn’t see general spread widening really impacting the valuations across the board. A few were up, a few were down a little bit here and there.

Most of it was specific to TPP with the predominance of the markdown..

Got it.

And what would you guys characterize as the best channel for you now in terms of opportunity set whether it’s retail, ABL kind of non-sponsored, your specialty finance vertical, where are you seeing the best risk reward right now?.

That’s a tough question. Last year, Chris, our platform generated 1,700 deal opportunities that we looked at across all industries, all verticals. The BDC portfolio, as we talked about, has about 62 borrowers in it. Our overall portfolio, I think, has about 220 borrowers in it.

And I will tell you that our biggest concentrations in the portfolio are either in health care services or in business services. So those are the two biggest concentrations. Now we are in all 30 Moody’s industry classes, but those tend to be our biggest concentrations today..

Got it.

And just curious how much of the portfolio are you the sole lender to the portfolio companies in?.

The predominant portion of that, we will sell off occasionally a piece where we want to generate an increased yield, as Aaron said, in unitranche transactions, where we may sell a first out to drive more return to our OPs or to our shareholders. But our platform has grown more about $4 billion today in AUMs across our platform.

That allows us to hold upwards of about $150 million per transaction across our platform. There is very, very, very few transactions that were involved in terms of agenting that are greater than or would approach that $150 million number.

So we’re in a unique position where we can control our destiny in the market pretty much with picking the deals we want, the best deals with the best management teams and then being able to write a check to cover the entire transaction and then allocate it across the firm’s AUMs, including the public company, MRCC..

The only exception to that is those transitory assets we talked about before, where those tend to be buying into semi-liquid club transactions. But other than that, that’s typically where the agent were holding it all..

Yes. And just dovetailing off your comments, Ted, with – you guys are up to $4 billion plus in AUM, which is great. And your ability to co-invest, obviously, is a benefit.

Is that at all, I guess, changing your opportunity set towards potentially making loans to larger EBITDA borrowers? Are you seeing any opportunities there or is the goal to just strictly stay kind of lower middle market?.

Yes – no, it’s the latter. I mean, we have grown our business and our portfolio over the years by being better at what we do and kind of doing what we do very well. And if you look our market share has grown and is continuing to grow. We are predominantly – we play in that sub-$30 million EBITDA sized company.

And if you look at our portfolio, it’s generally between $5 million and $15 million EBITDA, and that’s an area where we believe we can create a differentiated return for our LPs and our shareholders, and we can create alpha in that market.

So what we’ve continued to do, if you look at – over the last several, several years, we’ve continued to expand our product offering in that space as opposed to going outside of that space. We have developed a healthcare vertical. We have developed a media vertical, a technology vertical, a retail ABL vertical, a specialty finance vertical.

So, we are attacking that market and we are expanding kind of the market in our market share in places where we can create the most alpha..

Great. Thanks. That’s all for me. Thank you..

Our next question comes from Christopher Nolan with FBR & Company. Your line is now open..

Hey, guys.

On your earlier comments, Ted about – or Aaron about considering the dividend in the first quarter given that your core EPS just fully covers the dividend, how much incremental portfolio asset growth would you look forward to consider an increase?.

Okay. So I want to make it clear what we talked about, because I didn’t discuss at all an increase in the dividend. What I was reflecting was whether we decide to pay excise taxes for some or all of the spillover income or whether the board will continue to consider a special dividend in January to avoid some of the excise tax issue.

And so that’s a question that we’ll continue to look at and ask ourselves as we go through the end of the fourth quarter and into January in consultation with the board. I haven’t made any comments about the possibility or consideration of an increase in the dividend rate on a quarterly basis, although we’ll continue to monitor.

And if we see the portfolio grow as we expect it will in the quarter and we see significant performance in our core net investment income with some room where we feel comfortable, that’s certainly I’m sure the board would consider.

It’s something the board challenges the management on that we discuss each and every quarter when considering the level of dividend to pay in the quarter..

Okay, thanks for the clarification, Aaron..

Yes, thanks, Chris..

Our next question comes from Robert Dodd with Raymond James. Your line is now open..

Hi, guys. Going back to the prepayment activity, etcetera and you haven’t seen very much and you have given a lot of color on this already, but you normally get if I am remembering a 30 to 45 days notice of – if activity is going to take place.

I mean, we are starting to get into that window where if it’s going to happen at all this year, you should be hearing about it. Is it – do you expect it to be even more delayed given, obviously, election day today. I already voted, early voting. Yes, love it. Or – and then the potential for a late rise.

I mean, are there just incremental uncertainties this year that are reflecting that timing?.

Yes, it’s a good question. A lot of people have asked that previous to this call to me as well in terms of whether we expect the election to be influencing people’s decisions around whether or not to refinance or – and I will just – I will comment on a couple of things you said.

We don’t actually get the sort of notice you’ve described all the time for refinance activity. I mean, there’s certainly a time where companies are out and they have to be beginning that process. But – and if someone is looking to lower their rates, normally, we will get notice like that. They will come to ask us.

They will ask us if we can lower the rate to the cheapest option for them to get a lower rate. And we do get those increase from time to time, but the refinance activity, we tend to see often, especially around the end of the year is more related to M&A activity.

And that is one in which we don’t always get advanced notice, that we don’t get this sort of 30 to 45-day visibility that you might be describing. I mean, we are lending to these smaller companies that are $5 million to $30 million of EBITDA. Oftentimes, they are the ones being acquired rather than being the acquirer.

And oftentimes, we don’t know we are getting paid off on a deal, sometimes until maybe a week to 10 days before. So we don’t get a lot of visibility. I’m not seeing any specific discussion from borrowers around thinking about the election with regards to what they might want to do with their capital structure. That’s as much color as I have on that..

Okay. Just not really a follow-up on that one, but what’s the – what proportion of your company you have board observation rights? Because, obviously, if we are observing the board, you would know about M&A activity in advance as well.

But – or more of the point, which proportion of your companies do you not have board observation rights to monitor kind of general activities?.

Yes. In general, Bob, if we have a mezzanine piece of paper or a significant equity in the company, we will have an observation right. But most of our loans are first-lien secured loans and in most of those cases, we do not have board observation rights..

Got it.

Second one for me, on Rockdale Blackhawk and somebody asked this question, obviously it’s taxable distribution may show us that it did step up Q3 versus Q2, the implication there if it’s a formula driven taxable distribution being that business has picked up for Rockdale and so far in Q3 versus Q2, I mean is that you are seeing improving trends there and if that’s the case, wouldn’t it be reasonable to presume that, that taxable distribution potentially would pick up in the fourth quarter as well?.

The answer to your question is a logical person would reach that conclusion. However, we have seen the taxable disruptions go up and go down and go back up. And so I think a lot of it has to do with the assessment of the tax professionals in that organization about what they are seeing and what they are expecting.

And I can’t speak if there are specific tax professionals in there and how they look at this. But if you think about it like have the distribution in maybe the next quarter that will determine may be we distributed a little too much, maybe overestimated what the run rate was and maybe then it will decrease. And then maybe they will true it up again.

And so generally, I would say what you are saying is to makes sense and it’s correct, which is if you see taxable distributions coming in and going up, it usually comforts to some performance in the company and the company is performing exceedingly well.

But I would be remiss to tell you that you should make the assumption that we are going to see more taxable distribution or even the same level of taxable distribution in the fourth quarter, because frankly I really don’t know.

And their historical trend to payments have not given me any visibility that would tell me that there is any sort of easily predictable logic based on what we would normally expect..

Okay, got it.

One final one if I can on the special dividend question, obviously spillover rules being what they are, you can run up to given your share count now about 16.5 million of spillover before your give or take that before you hand essentially gets forced by IRS or etcetera, etcetera, so I mean what’s your comfort level on running that spillover up, how comfortable are you with it getting towards the effective limits, I mean they are not strictly limits, but before you think that you have to act, obviously it’s the Board decision to manage that to give you a little bit of cushion versus all?.

Right. It’s a very good question and it’s one that we are looking at very carefully and closely, as we get into the fourth quarter. The good news is that we have a little bit of time. And we get a little bit of clarity.

We will be in a position before the end of January when we kind of had to make a decision here, where we will have some better idea about where the fourth quarter is coming in, what the spillover aggregation looks like. I don’t think we are the sort of management team that runs anything very, very close to a limit.

So I think you can assume that we are going to make sure we have some buffer between what we need to do and what we will do. And so we will take a look. As you could probably imagine, based on the performance this quarter, we didn’t add substantially to our spillover this quarter. And so we are not – it didn’t get us a lot closer to the line.

And the amount we have accumulated, we have accumulated over at 10-quarter sort of timeframe. And so I don’t know that – I have to run the numbers. But I don’t know that I would expect to see us get particularly close to the limit that you have just described.

But we will know a lot of better as we get closer to the end of the year and we will make a decision with the Board at that time..

Okay, got it. Thank you. I appreciate it. Congratulations guys..

Thanks Bob..

Our next question comes from Merrill Ross with Wunderlich. Your line is now open..

I am sorry that’s been answered..

Hi Merrill..

Hi. My question was asked and answered..

Okay. Thanks very much Merrill..

Thank you..

I am showing no further questions in queue at this time. I would like to turn the call back to Mr. Koenig for closing remarks..

Well, I just want to thank everybody for being on the call today. We appreciate the time and attention that you provide to us and we will continue to answer your questions whether it’s in this type of format or you can always feel free to call Aaron or I. And we are happy to speak to you. Good luck to all of you. Good luck to all of us.

And get out and vote today. So have a nice day, everyone..

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