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

Bob Napoli - William Blair Leslie Vandegrift - Raymond James Christopher Nolan - Ladenburg Thalmann Chris Kotowski - Oppenheimer Christopher Testa - National Securities Chris York - JMP Securities.

Welcome to Monroe Capital Corporation’s Fourth Quarter and Full Year 2017 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 reasonably based on management's estimates, assumptions and projections as of today, March 15, 2018, 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 call today. I'm with Aaron Peck, our CFO and Chief Investment Officer. Last evening, we issued our fourth quarter and full year 2017 earnings press release and filed our 10-K with the SEC. We are very pleased to have announced another consistent quarter of financial results for the quarter.

We generated adjusted net investment income of $0.35 per share equal to our fourth quarter dividend of $0.35 per share.

This represents the 15th consecutive quarter we have covered our dividend with adjusted net investment income in an environment when many of our peers have announced challenging net income performance and cuts to their dividends, we are very proud to have been able to maintain a $0.35 per share dividend, fully covered by adjusted NII.

This is a testament to our unique origination capabilities and careful credit underwriting process. Our book value per share during the quarter decreased slightly by 1.7% to $13.77 per share as of December 31, primarily due to negative net unrealized mark-to-market valuation adjustments during the quarter.

More specifically, our NAV decreased from $283.5 million at September 30th to $278.7 million at December 31st. During the quarter we experienced a decrease in the fair value of our equity in Rockdale Blackhawk.

As a reminder, we received this equity in Rockdale for free as part of a senior secured debt financing, and therefore, did not make any cash investment in the equity. As well we had an additional write-down on our debt holding in TPP Operating, Inc. as we have failed to see any material our performance improvements in that borrower.

At year-end, our investment portfolio had a fair value of $494.1 million, an increase of $63 million from the prior quarter end and was invested in 72 companies across 23 different industry classifications. Our largest position represented 4.4% of the portfolio and our 10 largest positions were 31% of the portfolio.

Our portfolio was heavily concentrated in senior secured loans in particular first lien secured loans, 95% of our portfolio consists of secured loans and approximately 87% is first lien secured loans. We are very pleased with the construction, diversity and the senior secured nature of our investment portfolio at this point in the credit cycle.

We launched our 50-50 joint venture with National Life Group in November last year and as of the end of the fourth quarter we had grown the investment portfolio within the joint venture to $29.1 million at fair value. As a reminder, National Life and MRCC have each committed $50 million, $50 million in equity capital for a total of $100 million.

Once leveraged, this new fund should have close to $300 million of capital available to invest in secured middle-market loans without any increase in MRCC’s regulatory leverage level. We expect to have access to attractive bank leverage to the joint venture by the end of Q1, which will help to increase substantially the ROI in this venture.

As you will see in the 10-K disclosure, existing portfolio had a grossly yield of approximately 7.1% as of year-end. We expect substantial growth in the portfolio over the next several quarters.

As we have discussed in the past, MRCC is well-positioned for future interest rate increases, most all of our portfolio is invested in floating rate debt with rate floors, given the current LIBOR level we have surpassed the level of the LIBOR floors on virtually all of our loans, and therefore, we believe MRCC is situated to meaningfully benefit from any increase in short-term interest rates going forward.

In addition, we have $109.5 million outstanding in fixed rate debt from our SBA debentures, which will allow us significant interest rate arbitrage in any increase in LIBOR in the future.

Currently, we continue to maintain approximately $0.33 per share of undistributed net investment income, which in our view provides a nice cushion to our ability to maintain a consistent quarterly dividend payment to our shareholders without returning capital.

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 continued to grow in the quarter and as of December 31st the portfolio was at $494.1 million at fair value, an increase of approximately $63 million since the prior quarter end.

During the quarter we funded a total of $85.8 million, which was due to nine new deals and several add-on and revolver fundings on existing deals. Additionally, we funded a total of $9.5 million to the joint venture.

This growth in the portfolio was offset by sales and complete prepayments on four deals and partial repayments on other portfolio assets, which aggregated $29.0 million during the quarter. At December 31st we had total borrowings of $117.1 million under our revolving credit facility and SBA debentures payable of $109.5 million.

The increase in SBA debentures and borrowings under the revolver are as a result of portfolio growth during the quarter. As of December 31st, our net asset value was $278.7 million, which was down slightly from the $283.5 million in net asset value as of September 30th.

Our NAV per share decreased from $14.01 per share at September 30th to $13.77 per share as of December 31st, a slight decrease, as Ted has mentioned, of approximate 1.7%. This decrease was as a result of unrealized mark-to-market valuation adjustments on two isolated investments.

One on equity that we received for free in connection with the senior secured loan and one on the credit that has been in the portfolio for several years and that has underperformed the plan.

Turning to our results, for the quarter ended December 31st adjusted net investment income, a non-GAAP measure was $7 million or $0.35 per share, approximately unchanged when compared to the prior quarter dollar amount. At this level per share adjusted NII equaled our quarterly dividend of $0.35 per share.

Looking to our statement of operations, total investment income for the quarter was $13.4 million, compared to $13.5 million in the prior quarter. We did not see an increase in total investment income for the quarter despite the substantial increase in our portfolio for the following reasons.

One, a significant portion of our portfolio growth occurred near the end of the quarter, resulting in limited growth in investment income during the quarter associated with this asset growth.

And two, due to muted pay down activity in the quarter, MRCC realized significantly less in both fee income and gains on pay downs when compared to the prior quarter.

Moving over to the expense side, total expenses for the quarter of $6.4 million, included $2.2 million of interest in other debt financing expenses, $2.1 million in base management fees, $1.2 million in incentive fees net of a voluntary fee waiver of $58,000 and $0.9 million in general, administrative and other expenses.

Total expenses decreased $0.2 million during the quarter, primarily driven by a decrease in incentive fees, partially offset by an increase in interest expense driven by a higher average debt balance during the quarter and higher levels of LIBOR.

During the fourth quarter, our incentive fees were limited due to the total return requirement in our management agreement. Without the total return requirement you could have see approximately $0.4 million in additional incentive fees during the quarter, not factoring in any voluntary fee waivers.

As for our liquidity, As of December 31st we had approximately $83 million of capacity under our revolving credit facility and we had access to $5.5 million of additional SBA debentures.

As Ted mentioned, during the quarter we established a joint venture with National Life to invest primarily in senior secured loans, each of MRCC and National Life committed $50 million of the JV.

As of December 31st the JV had made investments in eight different borrowers, aggregating $29.1 million at fair value with a weighted average interest rate of approximately 7.1%. We would expect the JV to grow substantially over the next few quarters and access third-party leverage by the end of the first quarter.

Accessing third-party leverage will increase returns both to MRCC and its JV partner. I will now turn the call back to Ted for some closing remarks, before we open the lines for questions..

Thanks, Aaron. As we have discussed in the past, since going public with our BDC -- with our IPO of our BDC in 2012, we've generated a 43% cash on cash return for our shareholders based on changes in NAV and dividends paid, assuming no reinvestment of dividends.

Based on the closing market price of our shares on March 14th investors have purchased stock in our IPO have received the 36% cash and cash return, assuming no reinvestment of dividends. On an annualized basis that represents approximately a 7.3% annual return since 2012.

We believe these returns compare favorably to those achieved by our peers and puts MRCC in a very small and elite group of BDCs that have delivered this level of performance for shareholders over the time period.

Based on our pipeline of both committed and anticipated deals, we expect to maintain our new investment momentum for the remainder of the year, with growth in both our core portfolio and in our new joint venture.

With our stock trading at a slight discount to book value and the dividend yield of over 10% -- 10.7% supported by adjusted net investment income and the best-in-class external manager, we believe that Monroe Capital Corporation provides a very attractive investment opportunity for our shareholders and other investors.

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

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

Thank you and good afternoon. Ted, on the TPP investment that you're making that you – that, obviously, has been challenging for you the Picture People. I mean, you have continued to put – and I know it’s a tough decision putting more money into a turnaround situation.

But, I mean, are you at the end of that, I mean, you don’t want to get caught in a situation, obviously, of throwing good money after bad and it looks like credit overall is pretty good but you keep….

Yeah..

… putting a little more money in that quarter, this quarter?.

Yeah. Yeah. So here is my take on that. I think we've got a really, really good portfolio. I think this is a deal that started out, okay, but deteriorated relatively quickly and then from a core business strategy, the management team we had wasn't figuring it out, so we replaced the management team.

We ended up going through a bankruptcy process where we did [ph] 3.63 (14:34) sale to try and salvage the business and then we brought in a new management team. And we just haven't seen the positive results that I would have expected and we are very close to the end of our rope on this.

We are exploring a couple of strategic options, I will tell you now, that none of which involve us investing any more money into the company.

So we are – I would say that we’ve tried as hard as we possibly could and we've done as much as I think we’ve could and we put a lot of firm resources on this and we're just not seeing a result commensurate with our effort.

So what we've done is we've – we are positioning the company now for some type of a strategic exit and my hope is over the next quarter or to I'll be able to report that to you..

Thank you. And one follow-up question, just on the -- what is your feel Ted for the overall economy and how you feeling about the portfolio and credit. How you guys put on a fair amount of loans this quarter.

How are you feeling about the small mid-market economic environment and then the competitive environment, I mean, your ability to put on the loans that you have when others seem to be a little more challenged?.

Yeah. I mean, the market is competitive, I would tell that. There is a lot of deals. Last year in the M&A space in 2017 that was probably the most robust year that I've seen in the last 13 year, 14 years and it's because purchase price multiples are high, so there's a lot of sellers in the market.

It's -- there's a lot of debt availability, interest rates are low. There's a lot of no new funds, private credit funds have been established in the last two years and all those funds need to get invested. So there's no shortage of liquidity in the market. The -- my general concerns relate to more risk return.

You have seen us morph our portfolio to senior secured with the top of the capital stack. If you look at our portfolio overall, our leverage attachment points are around four times, which is a very, very healthy place to be.

In the marketplace today companies are getting sold in our space in the lower part of the market anywhere from eight times or nine times to 12 times EBITDA -- adjusted EBITDA and many of our -- many of the lenders in our space are attaching at 5 turns to 5.5 turns of leverage and I'm just concerned about total leverage.

I'm also concerned about documentation, as you go up the scale in the larger market transactions right now the -- there's very little in the way covenant protection for lenders in the kind of the $40 million, $50 million EBITDA spacing up. There is virtually no covenant in the loan documentation and is not what I would consider to be lender friendly.

So the one place in the market and we play places, we've got CLOs that invest up market.

The one place I think that is the best risk adjusted return for investors today and lenders is probably the lower part of the market, because we still have covenants in all our deals, we have maintenance covenants, we have incurrence covenants, we have debt service coverage covenants, we have overall leverage covenants and our documentation hasn't changed.

So I think that in frothy markets you just have to stay true to what you do best and at Monroe that's what we've done, we had a good year last year. This year I think we will probably continue. There's been some outside influences. We have got this big tax cut that that's going to generate more free cash flow for companies.

We've got some accelerated depreciation of capital expenditures, which is going to create some more free cash flow for companies -- more free cash flow, times elevated purchase price multiples equals, higher purchase prices and I think that private equity firms are going to forced to pay up to compete with strategics and lenders are going to -- the trend is going to be to follow that upward pressure and I will tell you and I've told our analyst and our shareholders we are not going to follow that trend.

If it means we do fewer deals in 2018 so be it. My primary focus is on safety of the portfolio and in protecting our dividend..

Great. Thank you, Ted. Appreciate it..

Our next question comes from the line of Leslie Vandegrift with Raymond James. Your line is now open..

Hi. Good afternoon and thank you for taking my questions. Just a quick modeling one to start us out, on answers finance, the junior secured loans, it says it pays prime plus 7.9% but the all in rate for quarter was 9%.

Is that an area or is that a change in base rate?.

There is – so in that particular instance, there is a strange nuance, where there is an interest cap, in terms of how high it can go and it’s reach that cap. And just as you recall that’s the name that is more of a traded name.

We are not the agent on that deal and so that's not something you should expect to see in our other portfolio assets, we don't usually provide an interest rate cap. This was a restructuring asset that came out of bankruptcy and that's the way that one was structured, so that's why that we're nuances there..

Okay. That makes sense. And then you gave an outlook on TPP, but on Rockdale the rebranding to millennial fans.

What’s the outlook there that part of the strategy and what do we see from that over the next year?.

Yeah. Sure.

The rebranding was because they -- over the last couple years had acquired a couple of additional brands that were actually growing very nicely and continue to grow and so I think there -- the view of management was that overtime Rockdale will become a smaller and smaller percentage of the business, although it's still fairly substantial today and so that was the reason for the rebranding.

It's hard to say with Rockdale.

I think the game plan has always been for the last 18 months is to try to get the company right size on their expense side and to get it pointed in a reasonably positive direction on the revenue side, so that it could consider its strategic options and I think that that situation continues to be the goal of the company.

And I think you know from prior calls we are a participant again in that deal with one other -- at this point one other lender who is the control participant and I can't necessarily get into their head as to exactly what they expect to do, but my expectation is that there is a strategic outcome coming for millennial or/Rockdale here in the next couple of quarters.

That would be my best guess..

Okay.

And then, on – I know that the fee income and gains were lower this quarter, but the outlook for 2018, I know other funds, we still see in a prepayment rate, do you see that continuing on and do you see fee income coming from that?.

Yeah. I mean, it’s very difficult for us to predict, what will happen with repayments and prepayment fees and things of that nature. So we tend not to guide too terribly much on that, because we just don't know. It would be a guess. You are correct that we saw fewer prepayment fees and prepayment gains.

As you may recall the prepayment gain comes as we amortize upfront fees into the – into income and any unamortized OID that exists when the deal is repaid flips into income to the prepayment gain and so both of those are tied very heavily to prepayments.

The fee income part of it is tied to prepayment penalties and so that's more variable as to when the asset was originated and if it was a legacy asset that was from the very beginning of our BDC. It’s more likely to not have a prepayment fee and if it’s a more reason asset, it is more likely to have a prepayment fee.

And the same is true for prepayment gains as it amortizes OID into income, the farther along we get unless that’s left to amortize in and so it really just depends on what vintage of assets get repaid and so that's why it's a very difficult to predict.

As Ted alluded to earlier, the market is competitive and we've done a lot of really good deals and a lot of those companies are companies that could choose to find a new partner or that probably slightly lower pricing if they are willing to bear a prepayment penalty.

But some are very happy staying with us, because we are good partners to them and some have prepaid us and some do. So, again, impossible for us to predict and I really, frankly, unfortunately can't guide you on that..

Yeah. Leslie, I would tell you, the only the best indication I can give you is that in a rising rate environment there are fewer prepayments and I believe that we are in 2018 a rising interest rate environment..

Okay. And then, one the last question, so the new unconsolidated funds, a good amount already put into there in the first quarter – fourth quarter ’17, but the first quarter it was ramping up.

You mentioned in your prepared remarks $300 million of expected total capital once it’s levered up, is that something do you have a timeline on that or just getting going over 2018 and that’s a long-term target?.

We will wrap it as quickly as we see good opportunities, good risk-adjusted pricing for the JV. And so how long it will take, really is subject to somewhat to what we see in the market for available good deal that makes sense.

We're not on a timeline that specific because we are -- we never want to be in a position where we are making concessions to do deal that we would -- don't want to do because we are trying to meet a timeline.

So the best answer I can give you is, as soon as it makes sense on a risk-adjusted basis is when we'll get to that target amount and it could be by the end of the year and it could be in 2019 and I really just don't know.

We are seeing reasonable amount of deal flow now that makes sense and as long as we are seeing good deals at reasonable pricing and our – and as long as our JV partner agrees with those deals and so far it's been a very good partnership.

We will ramp it as it make sense and so we would expect to see it continue to grow throughout the year and I think the best estimate will be sort of what you see quarter-to-quarter will be the best predictor of future quarters and with a fair amount of variability depending on the market, so unfortunately I can’t guide you..

It’s not a short-term project for us Leslie. This is something that we undertook and it's a little rare. This is a 50-50 joint venture. I mean most of them in the market are 80-20 and we did this because this is a long-term strategic relationship for the firm and it takes us two years to do it, so be it..

All right. Well, thank you for taking my questions. Good afternoon..

Thanks..

Our next question comes from line of Christopher Nolan with Ladenburg Thalmann. Your line is now open..

Hi, guys.

On the SLF, given that, it’s – if I understand correctly a 7% yield, is it fair to say that these are middle-market type of investments?.

It’s fair to say that. Yeah, these are middle-market. They tend to be more traditional middle-market. So I would say that. We focus as a company less than 30 million EBITDA, generally Monroe for our direct originated funds.

I think that this is probably in the neighborhood of $20 million to $50 million, it’s probably the range of EBITDA size companies that you will see in the joint venture..

Got you. And then because is it fair to look at the – there are effectively like a second lien type of investment because you're investing in equity and the SLF venture, which is then levered with the bank debt.

So Monroe's position effect would be subordinate to the bank debt on the SLF, is that fair way to look at?.

That’s not how I would look at it. Our current portfolio in the core portfolio is a bunch of first lien assets that we have a bank facility to leverage and this is a very much there same thing. We have a joint venture where we are putting assets and we are using bank levers to leverage those first lien assets.

So I don't view it as the second lien investment, just like I don't view our equity in Monroe as a second lien investment..

Got you. Okay.

And then does the JV partner have any priority in terms of repayment over Monroe or is it pari-passu?.

Everything is even. There is no priority. There is no preference. Everything is 50-50, right down to the middle of the place..

Got you.

And how about management fees, I mean, are those?.

There are no management fees. There are no management fees paid by the JV to any party..

Got you. Okay. Great.

And just switch over to debt, are you guys planning to continue to incrementally rely on the credit facility and SBA or is there thoughts of putting in some fixed debt in the capital structure for the BDC?.

We are going to continue to rely on our credit facilities currently with ING, as well as the SBA. But I will tell you that Aaron is always looking at options to make our capital structure more efficient and we had the opportunity to do things several years ago and I think we did not and it was a good business decision not to.

So as the market opportunities present themselves. We will look at that Chris and then we will make a decision..

Got you. And can you remind me, your SBA limit is technically $150 million but you are currently funded for $115 million.

Is that fair way to look at that?.

Yeah. So the limit for the BDC in terms of debentures based on the current rules in the SBA is $115 million, 1-1-5..

Okay. Okay..

So the balance we were at at the end of year of $109.5 million, means that we have about $5.5 million of additional debentures available and then we will have reached the cap with SBA at this time..

Got it. Okay. Great..

Yeah..

Thank you for that clarification. That’s it from me. Thanks guys..

Thanks, Chris..

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

Yeah. Good afternoon. Wonder if – a couple of follow-up questions on the senior loan fund and it says in the schedule of investments $9.5 million is your cost and then on page F-34 of the K it says $19 million was funded, so that makes sense, because it’s a 50-50 JV.

But then it says total assets at year-end were $41.6 million and then on the next page it tells us that the fair value on the schedule of investments of the SLF was $29.1 million.

So can you just square all those numbers what?.

Yeah. And I didn’t get every number you mentioned. But there is couple different things at work in the JV. We can also talk about this offline afterwards. I can help clarify anybody who needs more. But there is a couple different things at work that create some confusion.

One is that, while we did a significant amount of assets in the JV at the end of the quarter, not all had been funded. So some of those were unsettled trades where we had agreed to purchase a piece of debt and hadn't quite close yet. So that's part of the issue.

So if you look at the members capital account of $19.3 on page F-36, half of that is the $9.1 of our capital in the JV. And so if you look on the balance sheet you got $29 million of investment in fair value. Those will include investments that are under payable for open trades.

So you can see not a lot of that actually closed of the investment at the end of period and those are still – that’s why the investment and interest income in the JV which you see below is very small, because we still have a lot of investments that were to be close.

The other thing that's likely at work in some of the numbers that may become confusion for you is, principal amounts versus cost -- versus fair value. So fair value all the assets based on where they are trading.

Typically that fair value will be somewhere cost and principal amount on a weighted average basis and so cost is usually last and on a newly originate assets fair value could be anywhere from at par to slightly less, 99.5, par and a half.

So it really just depends as you look at that asset so sometimes that create some of the confusion as well when you look at sort of the dollar amounts in the JV..

Okay.

And then you mentioned that you anticipated closing the bank credit facility by the end of this quarter and I'm wondering can you give us any indication what the pricing on that might run?.

Well, we haven’t announced anything publicly, but if you look at where the market is for these sorts of assets, you can typically see pricing around LIBOR+ 2.25 to 2.5. So you should expected to be in that range..

Okay.

And then, so if I model this I should just assume $2 dollars of leverage for $3 -- every $3 of assets, yield at 7% and cost at L+ 2.5% something like that?.

I don’t want to give you too much modeling guidance. The 7.1% is what we have put in the JV to-date. You are – where the JV winds up in terms of a total yield, will depend on the market and where we see opportunity sets. So I'm not forecasting for anyone that that is the right way to model it out.

As for the leverage, it will depend on the assets and so we have said that we think on average we should be able to leverage this facility at around 2:1 and that's true. Some of it will have to do a timing of when we will be at 2:1.

So credit facilities have certain requirements in terms of diversification and size and so it's possible that if we close the facility before the end of the quarter that we may not be at 2:1 leverage at the end of the quarter because we may not have reached all the diversity requirements to get to that point.

But I think it is a safe assumption based on our bet on the mix of assets – based on what we've seen to-date that we ought to be in a position to leverage this thing around 2:1 on a longer-term basis..

Okay.

And then last you mentioned -- in your prepared remarks you mentioned the write-down of the equity of Rockdale, is there -- if you can say, is there any concern about their capacity to service the debt or I see there are -- it didn't look like there were any really significant marks on the debt part of that holding?.

Right. So as we have talked about in the past the company has -- is going through a bit of a transition of its business and it continues to look at all options. The company has significant assets.

And so – the one of the reasons the debt continues to be marked where it is, is that it’s fairly we believe at least today based on what we know that it's fairly well asset covered and so we do think that over the -- over the longer term period the company will be able to service the debt and we believe there's no value to cover the debt and we still believe there is equity value and so that the valuation providers had have look at this.

But it is a fluid situation and there is a lot of professional spend a lot of time trying to help the company get positioned and right-sized and it gets liquidity position improved and lots of other nuances that could -- and the outcome of that could be very positive, could be neutral. I mean, it all just depends on the outcome.

And so we continue to be optimistic about where our investment at Rockdale will end up.

But the valuations at the end of the year reflect our -- the best guess of us and our valuation providers as to what we believe the value is of the equity and as I said, on the debt, which you are right, is it goes to par because we believe at this point it is asset covered..

Yeah. Okay. That's it for me. Thank you..

Yeah. Thank you, Chris..

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

Hi. Good afternoon, Ted and Aaron. Thanks for taking my questions. Just curious, I know this has been uncharacteristic except the past quarters, I have two quarters or so.

But with the stock continuing to trade at now discount, has been there been any internal discussions around implementing a repurchase program?.

That's something that we talk about at the Board from time to time and I'm sure that if the stock continues to in the place it is, that discussion will come up again at the Board. I don’t frankly understand. I'm not a great stock market picker. I don’t understand why the stock is trading where it is.

But we will just – we will deal with that as time goes on..

Okay. Got it.

And to the extent that you could elaborate, Ted, I am just curious, what if anyone was – was there any pushback internally towards – against doing the repurchase program or was it just not believing the discount was wide enough to warrant it?.

Yeah. I mean, just the discounts more of a recent phenomenon..

Right..

And right now it's a slight discount. But let’s see what happens here as time goes on and we will make some decisions. But right now it's not something that we are -- we had contemplated today..

And also just point out that we couldn’t have really considered it up until the time of release, because we were in a fairly extended quite period between the end of the year and earnings release. So was even warrant – was even worth having a discussion on, because we weren’t in a position to do anything about it..

Got it. Okay. No. That makes sense, Aaron. Thank you. And just as you guys look at retail more broadly. I know you don’t have a ton of exposure there but a decent amount through some of the investment.

What are the – what’s the opportunity set looking like there maybe from the asset based lending prospective relative to cash flow loans and does the platform have, I guess, a large enough ABL type arm to be able to take some that opportunity in MRCC?.

Yeah. That’s a good question. We have done a fair amount actually of retail as a firm. Our roots – when we restarted the firm were back in retail lending, asset based lending. I think that as time goes on you will see us to less cash flow base lending in the space and more asset based lending.

Today we've got a few portfolio of companies that we are very focused on asset based lending. But this is space you really have to be careful. Many lenders decide that they want to be asset base lenders versus cash flow lenders in the retail space, but they're not equipped to do it.

I'm equally as concerned about liquidity, a lot of these retail-oriented companies, as I am collateral value, and that's really the big issue today, is do these companies have liquidity. You'll see that, most of the big guys that have been filing. They file, not because they have collateral value, but they don’t have liquidity.

And to the extent we do deals in this space which we are looking at now. We have got a higher bar from the liquidity standpoint than we would have in a frothy cash flow lending market..

Got it. That makes sense.

And just some additional questions on that, Ted, could you just give us an idea of how big the asset based lending arm of Monroe’s total platform is and also can you discuss just how long that liquidity issue has been persisting in the current market?.

Well, there is two questions. One is, we've been doing asset based lending growth since we started the firm in 2004. We have got a number of people in the firm that specialized in it, so it's a vertical industry, vertical for us. So it's a business that today you may constitute upwards of around 10% of our total firm assets.

The BDC is not unnecessarily track that, but as a platform, we will probably close to 10% with asset based lending and I think that will continue.

The second question that you asked was what again?.

Oh! I -- it was just how long the issue about your concerns on liquidity has persist in the current market?.

It’s funny, most people don't think about. Spend a lot of time on liquidity until they are concern about the credits and then all the sudden liquidity becomes an issue..

You are right..

You have been doing this for a while. So the last two years we have really been focused on liquidity. As we have seen the market kind of push especially into the – in the consumer retail space..

Got it. Okay. Thanks for detail..

We were one of the few firms that -- we were round pre-crisis and we watch what happen to lot of these credits in the crisis and we are trying to take lessons learned from that period of time and apply them to now..

Okay. Great. That’s very helpful. Thank you. And just couple more if I may, on the SLF. Just curious, I know, you guys have commented that how light deals are persisting in the $40 million plus EBITDA range.

Do you expect that that type of – and I know it’s going to negatively impact kind of your growth at the SLF given that you are making some kind of larger EBITDA borrower loan in there?.

Yeah. It’s a great question. I think we -- as we look at the SLF, we don't necessarily make a rule that says that we won't participate in some of the covenant light deal that there in the marketplace. We prefer to do covenant loans and the par is much higher for covenant light loans.

But you're right there are some deals that trickled into the space where the SLF may on select cases consider investing in covenant light loans if they make sense for that borrower. If it's a ideal that we can get comfortable with that we and usually there are sponsor deal with good sponsors that know how to operate in the space.

But it is an issue in the SLF that we have -- be very mindful of the covenant light loans that are making their way in some of the opportunities set for that fund. It's not the preponderance of what we are seeing.

That market is much heavier in the broadly syndicated market and in a very large part of the middle-market which tend to be a coupon that are sort of below the rate that we've been considering for the SLF, but there are cases where we have seen some loans in the covenant light they sort of trickle into the SLF opportunity set and on a very select basis we will consider it..

Got it.

And when you are talking about loans that you would consider in that Aaron, I am assuming you just mean sponsor backed, good sponsor and just very low leverage and not a very cyclical type of industry?.

Correct. It’s usually something that’s low loan to value with a good quality sponsor in a space they have expertise in. That’s correct. Those are the sorts of opportunities we will consider..

Okay. Great. That’s all for me. Thanks for taking my questions guys..

Thanks, Chris..

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

Hey, guys. I guess I am the fifth consecutive Chris here to ask questions..

Yeah. That’s a new record I think, five, four Chris..

I think it is..

Four Chris’..

Yes. Indeed. And so I was going to ask on some question on ABL, which you already said is a familiar product at the platform and then you did expand in that group last year. But I have a couple follow-ups.

So I am curious whether National Credit Center was an ABL deal and then should some of that which was a sizable deal find the home on Monroe's balance sheet?.

Good question. National Credit Center was not an ABL deal and so it was an enterprise that plays in cash flow deal. As for where it’s going to wind up when we report our next quarter, you'll see where it wind up. Unfortunately, we don't disclose deals that closed at the post quarter end. I don’t remember when that deal closed.

But it not an ABL deal, we....

You got….

But we do, Chris, until that point we do look at ABL deals in the specialty finance sector. That is a part of what we do. So we also will consider ABL deal. It’s usually typically SPV financing to financial companies and so that would be something we consider in the BDC if it make sense an ABL deal to financial..

Okay. And then another way of maybe asking question out, Ted, you framed it with ABL 10% the platform. But I believe you are in the market or maybe even closed a special fit fund earlier this year, so does that increase the likelihood for deals potentially finding a way into Monroe's portfolio..

Yeah. That's a – actually a pretty good observation, Chris, that proves you are – you are actually – you are reading the market information. We are – we went to market, we just started going to market with our special situations fund. That fund will be predominately asset-backed and asset-focused and we have not had a first close on that fund yet.

I anticipate we will have a first close sometime in the next quarter or to and as we do transactions there some of those transactions, because we have got exemptive relief we will find the way if there are appropriate for the -- for MRCC into MRCC’s portfolio..

Great. Makes a lot of sense. Switching gears but staying on strategy a little bit. You have occasionally partnered with banks across the country with some of your unitranche transactions.

I'm curious whether you've noticed any changes in behavior, maybe interest among any banks as a result of an improved bank lending environment and their desire to partner?.

Yeah. There has always been. That's a good question that we get as well from others. There is always been a desire to partner. The issue has been banks right -- from a regulatory standpoint banks have the ability to do cash flow enterprise loans. So nothing has really changed there.

It's just that the banks have a bucket for that and the challenge is that many of the banks have their buckets full. So if those buckets empty from time to time those buckets can be replenished and many of the banks unfortunately have been operating with four full buckets in that space.

So the regulatory changes that were announced just recently this week unfortunately don't affect the buckets. They affect other things about when banks are designated as SIFIs or what they can do versus trading or not trading, but ultimately the credit part of the banks are run by the regulators, not by Congress. And I think banks do have an appetite.

They will continue to have an appetite for leveraged loans albeit at lower leverage rates than the market is currently ascribing. So my estimation is we will continue to do transactions with banks that have appetites for this and that have the bucket availability to do these transactions..

Great. Thanks. That’s great color. That’s it for me. Thanks for taking this Chris's questions..

Thanks, Chris..

And we have follow-up question from the line of Christopher Nolan with Ladenburg Thalmann. Your line is now open..

Hey. Chris number six on the call..

Yes..

I know everyone asked you about we are in the credit cycle but how – I mean, can you give a little color in terms of what sort of thinking process you guys go through in terms of evaluating investment. Obviously, where we are in the credit cycle is one. But all these industries are also have different cycles.

And just trying to get a sense as to how you guys are -- when you have a deal come up, do you evaluate where the industry is, its cycle, I mean, can you give us like a quick rundown on your thinking process or not?.

Yeah. I mean, I and I will tell you that, people ask about cycles all the time, every time I go to a conference, that's one of the questions. And if you are a high yield loan trader or if you were a broadly syndicated loan manager, you probably start there with the credit cycle and then move down. We don’t start there.

We start at the, actually, the opposite end, because we play in the middle-market and particularly the lower middle-market, credit cycle is not a prime driver of our analysis. The first thing we do is we look at the company.

We look at the specific company in the specific company dynamic which is where their revenues come from, how diversified is their customer base, how sticky are they, how important are they to their customers, is there a spot in the market for the company, is management good, what's happened over the last several years, how does the company performed over a cycle, what happened in the last credit cycle to this company and then we look from the company we expand out to other companies in that industry.

So we'll look at what the industry is comprised of, where does this company stand in relation to its peers, is it a good competitors or not good competitors, or value-added players or not a value added player. Then we will look at the supplier base and their ability to manage their cost structure for their products. We look at their overhead.

We will do some reference calls and we will really focus on a bottoms up analysis and we will do our own internal modeling about where we think the company is going to be, given the competitive dynamics in its industry that it plays in and then we will do some outside work with their financial statements cash flow and we will do some independent valuation work with some third parties.

And then once all that is done and we look at where the company is, where the industry is. We will look at general trends, business trends and if everything lines up in a positive parallel analytic environment, we will get involved with an investment. But we are not focused and we do not focused day-to-day on macro trends.

It’s nice to talk about at conferences. But ultimately if you're doing – if we are doing our jobs properly as credit managers we are focused on each individual company in our portfolio, and Aaron mentioned, we have got over 72 companies in our portfolio specific portfolio.

We have got account managers that are -- their sole job is to watch the financial metrics, as well as the industry dynamics of each one of those 72 companies..

Yeah. Just to add, one of the reasons we don't focus too much on macro is we are debt guys. We hope for the best but we prepare for the worst.

And so we assume every time we underwrite a deal that the credit cycle will end tomorrow and we underwrite with the mindset of, how well this company do if that happens and we spend less time predicting when it will happen and just assume it will and underwrite with that in mind..

That’s great color. Okay. Great. Thanks for the answer..

Thanks, Chris..

I am not showing any further questions in queue in at this time. I would like to turn the call back to management for any closing remarks..

Thank you all for joining us this afternoon and we look forward to a solid 2018 and I wish everyone good luck on your NCAA pics. That is preoccupied most of our office this morning and hopefully you all got your pics in. So have a good day and we will speak to you again soon..

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..