Welcome to Monroe Capital Corporation’s Fourth Quarter and Full Year 2019 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 potentials, operating results or cash flows.

Although we believe these statements are reasonable based on management’s estimates, assumptions and projections as of today, March 4, 2020, these statements are not guarantees of future performance. Further, time-sensitive information may no longer be accurate as of the time of any replay or listening.

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

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

business services, healthcare, technology, media, software, specialty finance, real estate, and of course, the middle market private equity community.

Across the Monroe platform, we evaluated approximately 2,040 investment opportunities in 2019 that were originated by our team and we closed and funded 90 of these investments, 50 of which were to new borrowers.

This large and diverse pipeline of opportunities allows us to remain extremely selective in the deals we close in our funds, and as a result, we invest only in what we believe are the strongest borrowers, and we structure our deals to provide us with covenants and monitoring tools necessary to protect our investments.

On average, the Monroe platform closes approximately 2.5% of the new investment opportunities we evaluate in a given year, which affords us the luxury of being highly selective in our investment decisions.

Specific to our portfolio, as we disclosed in our earnings release and 10-K, in January of 2020, an arbitrator issued an award in favor of one of our borrowers, the estate of Rockdale Blackhawk, in a pending legal proceeding between the estate and the national insurance carrier.

The lenders to Rockdale, including MRCC, will share in the proceeds of this arbitration award with the estate. The exact amount of the award has yet to be finalized because attorneys’ fees, interests, and certain other amounts included as part of this award still need to be determined and finalized.

We expect this to resolve over the next few quarters, but based on this award, we expect proceeds to exceed the cost basis of our outstanding loan balances to Rockdale. We believe this to be a very positive development and something that we have discussed with you on previously quarterly calls.

Accordingly, at the end of the fourth quarter, a fair value mark of our holdings in Rockdale has increased. During the fourth quarter, our portfolio decreased by $41.3 million on a net basis.

This decline was attributable to $83.5 million of pay downs and pay-offs on existing deals, partially offset by portfolio growth of $42.2 million during the quarter. Approximately $36.3 million of these new loan fundings was attributable to existing portfolio company expansion.

As we said in the prior quarter conference call, we expect to see a decrease in our portfolio during the fourth quarter as we anticipated several pay-offs in the ordinary course just after the end of the third quarter, which have occurred.

At the end of the fourth quarter, our per share NAV was $12.20 per share, a 1% decline from the end of the prior quarter. Monroe Capital has a greater than 15-year operating history in direct lending and over that period of time, investors have enjoyed very low defaults and strong recoveries in Monroe Capital direct loans.

While we believe that many of our recent unrealized mark-to-market declines are related to specific idiosyncratic credit issues with a select few borrowers, our senior management team is continuing to spend a significant amount of time analyzing these credits and focusing on our workout and collection strategies.

We are very focused on realizing the highest possible recoveries on the assets that have been marked. The recent Rockdale Blackhawk arbitrator's award is a good example of that effort.

MRCCL enjoys a very strong strategic advantage in being affiliated with the best-in-class middle market private credit asset management firm with over $9 billion in assets under management and over 125 employees as of January 1, 2020.

Monroe Capital will continue to divulge whatever resources are necessary to generate acceptable levels of adjusted net investment income and improve NAV performance of MRCC going forward. I am now going to turn the call over to Aaron, who is going to walk through with you our financial results..

Thank you, Ted. During the quarter, we funded a total of $42.2 million in investments consisting of $5.5 million in loans to new borrowers, $23.7 million in new fundings to existing borrowers, and $13 million in fundings under existing revolving lines of credit, and existing delayed draw term loans.

This growth was offset by partial sales and repayments on portfolio assets, which aggregated $83.5 million during the quarter. At December 31, we had total borrowings of $404.3 million, including $180.3 million outstanding under our revolving credit facility, $109 million of our 2023 notes, and SBA debentures payable of $115 million.

Any future portfolio growth will predominantly be funded by the substantial availability remaining under our revolving credit facility and the un-invested cash held in our SBIC subsidiary.

Since quarter-end, we have made significant progress in investing a portion of the un-invested cash in the SBIC subsidiary, which totaled $27.4 million at the end of the quarter. Turning to our results.

For the quarter ended December 31, adjusted net investment income or non-GAAP measure was $7.7 million or $0.37 per share, an increase from the prior quarters adjusted net investment income of $7.2 million or $0.35 per share. At this level, per share adjusted NII covered our quarterly dividend of $0.35 per share.

As of December 31, our net asset value was $249.4 million, which was down slightly from the $252.4 million in net asset value as of September 30. Our NAV per share decreased 1% from $12.34 per share at September 30 to $12.20 per share as of December 31. This decrease was primarily a result of unrealized mark-to-market valuation adjustments.

Looking to our statement of operations, total investment income increased during the quarter, primarily as a result of an increase in fee income, principally due to a success fee realized upon the payoff of our investment in Tap room gaming.

Interest income declined during the quarter, driven by our lower average portfolio balance, decreases in LIBOR, and a reduction in LIBOR spread in the portfolio due to repayments of higher yielding assets during the quarter. During the fourth quarter, we did not put any additional positions on non-accrual status.

Moving over to the expense side, total expenses for the quarter increased slightly primarily driven by an increase in net incentive fees. In many prior quarters, we voluntarily waived incentive fees to ensure dividend coverage. This was not necessary during the fourth quarter as adjusted NII exceeded the dividend on its own.

Interest and other debt financing expenses also declined during the quarter as a result of a reduction in our borrowings, due to the smaller average portfolio balance in the quarter. Regarding liquidity, as of December 31, we had approximately $75 million of capacity under our revolving credit facility.

At the end of the quarter, our regulatory leverage was approximately 1.16 debt-to-equity, a decrease from the regulatory leverage of nearly 1.3 at the end of the prior quarter. The current level of regulatory leverage is within the targeted leverage range we have guided you to on prior calls.

We do expect some net portfolio growth in the first quarter, which could result in a higher level of regulatory leverage going forward as we reinvest a portion of the fourth quarter repayments in the first quarter of 2020.

As of December 31, The SOF had investments in 64 different borrowers aggregating $239.8 million at fair value with a weighted average interest rate of approximately 7%. The SOF had borrowings under its non-recourse credit facility of 142, excuse me $147.2 million and $22.8 million of available capacity under this credit facility.

At this level of funding, the equity in the SOF is currently generating a dividend yield of over 11% to MRCC and our JV partner. Regarding Rockdale Blackhawk as Ted discussed, there was a pending confidential and private arbitration of an accounts receivable claim with the national insurance carrier with a material amount in dispute.

That claim serves as collateral for the MRCC loan to Rockdale Blackhawk. The underlying arbitration proceedings were completed in mid-August and final trial briefs were due and submitted to the arbitrator in late September. An award was issued in January 2020.

As Ted stated earlier in the call, there is still some amount of uncertainty over the exact amount that will be payable to the estate and available to the lenders, but the initial award was very positive and should result in a substantial recovery for MRCC and the other lenders to Rockdale in excess of the cost basis of our outstanding loan balances due to the lenders right to receive excess proceeds pursuant to the terms of a sharing agreement between the lenders and the estate.

If there are any updates that could have a material effect on the value of this position, either positive or negative, we will update the shareholders at the appropriate time. During the quarter, we experienced our mark-to-market decline on our investment in The Worth Collection.

Headquartered in New York City, Worth is a direct-to-consumer luxury and contemporary women's apparel business. In the fourth quarter, the company experienced further declines in sales, an increased attrition of its of its sales reps.

Despite previous indications of the private equity sponsor that owns Worth would continue to support the company's liquidity, which it had done in prior quarters, the PE sponsor declined to provide further support.

As a result, there is substantial doubt about the company's ability to continue to survive as a going concern, and the current mark reflects that doubt. I will now turn the call back to Ted for some closing remarks before we open the line for questions..

Thank you, Aaron. In closing, we continue to execute on the same plan at Monroe as we had for the last 16 years, investing in origination resources to cash the widest net possible of proprietary deal flow. Being highly selective and our underwriting and maintaining a strong and active portfolio management discipline.

We are entering 2020 with continued caution and discipline recognizing that our overall firm and platform is one of the largest and most stable in the U.S. and lower middle market private credit space. That gives us the ability to be selectively competitive when the right situation presents itself.

It also gives us the ability to pass when we believe the situation is not right, which will be more and more important in the coming year as we are confronted with market challenges and uncertainty.

We continue to believe that Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders and other investors for the following reasons.

Our stock pays a high currency dividend rate, our dividend is fully supported by consistently adjusted net investment income coverage for the last 23 straight quarters, and we have a very shareholder friendly external adviser management agreement in place and that limits incentive fees payable in periods where there was any material decline in our net asset value and base management fees had been reduced at higher leverage points.

And lastly, we were affiliated with the best-in-class external manager with offices throughout the U.S. over 125 employees and approximately $9.2 billion in assets under management as of January 1, 2020. Thank you all very much for your time today. And with that, I'm going to ask the operator to open the call for questions..

Thank you. [Operator Instructions] And our first question is from Bob Napoli with William Blair. Please go ahead..

Thank you and good morning. Just to add with the virus, coronavirus out there, I guess, did you have – what investments do you have or do you have investments that are affected by the travel industry and obviously this could become potentially a broader macro effect although it doesn't seem to have in the U.S.

quite yet, but I was just curious as you look at your borrower base, who is at – most at risk for areas that are most susceptible to the virus currently?.

Good question. Thank you, Bob. I anticipated that question and we have done a pretty intensive review of our portfolio over the last several weeks as I hope most private credit managers have.

We do not have very much if any exposure in the travel, leisure, aircraft, transportation space, so I think from a portfolio standpoint, I think we’re in pretty good shape on that. You know, I’m more concerned about the tangential effects of it, and I don’t think we’re – you know we’re in a position to know yet.

What’s happening? I mean, I was in the Europe last week, and I will tell you that I was at the largest private equity conference in the world in Berlin and there were no Asian participants there and there were no Italian participants there. In Chicago, the Housewares Trade Association was canceled, which was roughly about 50,000 people.

So, I think that there is a lot of general concern in the market today, and as long as, you know, we don’t panic and that, you know, we focus on the facts, you know, hopefully this will be a Q1 and Q2 issue and everybody can get back to business, you know, in Q2. But, you know, we need more information there.

All I can tell you is that from a portfolio standpoint, the MRCC portfolio, as well as Monroe Capital is in relatively good shape and not at risk..

Great, thank you. I second the motion on the first and second quarter affects, hopefully.

Just on Rockdale Blackhawk, when do you get paid? And, you know, how – I mean did you have the right up in the quarter? Is that a conservative? Is there more potential write-up from that? Or is there some risk to that amount?.

Yes. So, here is what I can tell you. You know the challenge is that – we’re being as transparent as we can because we’re under some confidentiality arrangements right now with the arbitration procedure.

I anticipate that that may change in the future, and if it does change, then we’ll be able to say more on it, but what I can tell you is that the example of the recovery in this case is a marked asset and we spoke on previous calls to you and other members of the analyst community that, you know, we don’t cut and run as a firm on our credits.

Now, we may take marks, and, you know, we try to be as transparent as we can with you and our public shareholders on the marks.

Just because we take marks that doesn't believe – that doesn't mean that we believe that the assets are not collectible at full value or at a higher level than the marks and that’s a very important distinction because over the last several quarters, you know, like others, we’ve taken some marks in certain industries.

We’ve spent over a year with a significant amount of effort of senior management and our portfolio management team and our legal counsel and experts and others in pursuing this claim because we knew and we thought we were a winner on this just as, you know, we may believe we are in other claims within our portfolio.

But until it actually converts, you know, there is a limit to what we can do and say to the community. So, I’m asking, you know, the community to just understand that that’s our business; that’s what we do; that’s what we’re good at and that’s what we’re going to continue to do with all of the marks that we have in our portfolio.

And it wouldn’t surprise me to come to you on future calls and be able to talk about other credits and resolutions of other credits, but on this particular one what I can tell you today is that we received a very favorable ruling in the arbitration.

We expect recoveries to be substantially in excess of our cost basis, and that its going to play out over the next couple of quarters is my guess because there are – as part of the arbitration, we were awarded reimbursement of certain costs and expenses and those need to be determined and finally agreed to and that’s our part of the order.

So, I’m asking you to be patient with us on this and Aaron and I will be back to you as soon as we possibly can..

Thank you. Last question for me, just the – your confidence level in being able to continue to cover the dividend and maintain the dividend.

You have a 13% dividend yield and a 0% interest rate market if you would, and you've done a good job maintaining that dividend to this point, is it, you know, the book value you need to be able to maintain, obviously, the book value to be able to continue to support that dividend, so just some thoughts around that big picture question if you would?.

Yes, listen, obviously, I can’t predict the future, but I’m telling you on this particular point, you know, we feel good about where we are with the company. We’re going to collect a bunch of money on Rockdale. We’ve got a bunch on money that has been deployed from our SBIC sub.

We’ve got a lot of headroom in our credit facilities, so, you know, I think we’re – this is a really good development and I think we’re going to be humming along here..

Alright. Thank you. Appreciate it..

Thank you. Our next question comes from Tim Hayes with B. Riley FBR. .

Hi, good morning, guys. Thanks for taking the questions.

My first one is just a follow-up on Bob's last question there, and, you know, upon redeploying the proceeds from Rockdale and for your loan repayments, you know, how close do you think that will put you to consistently covering the dividend with adjusted NII [signs foregoing] incentive fees?.

Yes, thanks Tim. This is Aaron. So, good question. All I can say to you is that we’re very focused in it. We feel good about our ability to continue to deploy assets at a level that supports our current NII. If that changes, we’ll certainly let you know, but, you know, getting cash back on this non-accrual asset that’s substantial.

It’s pretty meaningful in our ability to do that. If you look at it, you know, versus our NAV, there’s a fair amount of capital tied up in this, so when we can get that cash back to work on an accrual basis, that’s very favorable. .

And, you know, obviously the near-term outlook probably little bit more uncertain just given, you know, the fears around coronavirus and the volatility in the markets, but, you know, how long do you think it will take you to redeploy that capital given, you know, the pipeline you have in front of you? And, you know, just as a follow-up to that and on the coronavirus, you know, do you see near term volume falling off given the uncertainty? And, you know, are you seeing any changes in demand from your portfolio companies or perspective portfolio companies currently?.

Good question, Tim. I’ll take that. This is Ted. We have over $1 billion in pipeline right now in the firm. Now, we’ve got – you know as a firm, we managed $9.2 billion of assets. You know the BDC is obviously much smaller. I don’t see any issue in being able to redeploy assets as they come due or as prepayments happened with the BDC.

So, from an MRCC standpoint, you know, I think we’re going to be in really good shape here over the next three to six months. Now obviously, the market in general, coronavirus virus is going to have an effect as I told you in my earlier remarks, but I don't see that impacting our ability to deploy capital in the near term..

Okay. Got it. That’s helpful.

And then, you know, your stock currently trading at about 87% of NAV and a 13.2% dividend yield, you know, you just de-levered a good amount this quarter, so I'm just curious as to how you think about potentially allocating capital towards stock buybacks at these levels?.

You know and that’s a good question too. We really haven’t had a chance to dig into that at the Board level, obviously, we talked about everything.

I think that you’ll see over the next near term here our Number 1 goal is going to be deploy capital in good deals, and, you know, we think that we’ve got a positive arbitrage in deploying capital in good deals, and you know, that’s what we’re very, very focused on doing..

Got it, okay.

And then, just one more for me, would you be able to disclose if you have it in front of you that is the average leverage multiple LTV and/or interest coverage on debt portfolio companies?.

I would tell you I don’t have that information in front of me, but from a market standpoint, as I mentioned in my earlier remarks, there’s a – generally and I’m speaking for the general market now, there is a different level of leverage in the upper middle market and the lower middle market.

Upper middle market today is close to around six terms of leverage and in the lower middle market, it's closer to 4.5 terms in the neighborhood, and you know, from a coverage standpoint, we’re – you know we’re similarly situated where we got a better margin of coverage in the lower middle market and, you know, that's why we like to play in that market..

I guess then – I don’t know, again, I know you don’t have the exact data in front of you, but would you be able to provide a high level touch on just how those metrics have trended over the past year whether they’ve been stable? Or have you seen them kind of creep up a bit?.

Yes, sure. Again, in general speaking, what I can tell you is that the – it’s moved a little bit over the last year or so, 18 months. If you look at the larger market, that market has probably moved half a turn to almost a full turn.

You know we’re seeing today, 6 to 7 times leverages is pretty common in the larger middle market space and we used to see around 4 turns in the lower middle market space and that market today is probably closer to 4.5 turns and up to 5 turns. So, that's I think a good flavor.

Now, if you ask me how does that compare to the last cycle we are in, that I thought was the most frothy cycle in my career? In 2007, you know, we were probably at 3.5 to 4 turns of leverage in the lower middle market, so we’re probably up about a full turn in the lower end of middle market and we’re probably up closer to almost 2 turns in the higher end of the middle market..

I would guess though, Ted, that coverage’s were probably not as different back then because the general level of rates going pre-cycle were quite a bit higher than where we are today..

Yes, from a coverage standpoint, you’re right..

Right..

Yes, makes sense. Okay, got it. I appreciate the color there..

Yes, and I guess the last comment to your question on the stock is I think our stock price is too low, so that's a separate comment..

Understood. Thanks guys..

Thank you. Our next question comes from Christopher Nolan with Ladenburg Thalmann..

Hi, guys. Ted, congratulations on growing Monroe Capital to 9.2 billion, that’s impressive. .

Thank you, Chris..

Rockdale, hold on a second, my headset.

Hello?.

We’re here, Chris..

Okay, great.

On Rockdale, the fair value on that increased $19 million from about $9 million last quarter given that this was December 30, and the court adjudicator was announced in January 2020, what was the cause of this increase in fair value?.

Yes, great question, Chris, and it’s something that, you know, we have to be really thoughtful of that when we have information, it comes post quarter end because as you pointed out and you’re correct, you know, the valuations are as of 12/31.

Clearly, we've been saying for some period of time that as this extended on, we felt that bolstered our position and based on all the reads we got from all of the legal advice we were getting, we felt like as time went on that that increased the probability that we would have a positive resolution.

And so, the mark at 12/31 reflects a higher probability of a positive resolution. It does not necessarily incorporate what we believe the total recovery to be because that was not [renewable] at 12/31..

Got it.

The second question sort of relates to Ted’s earlier comment on tangential exposure to the coronavirus, what happens if your portfolio companies start having a working capital shortage because of supply chain issues and so forth? Who will step up? Will it be the PE sponsor? Will it be the lenders such as yourself? How does that work out?.

Good question. I will tell you – that’s probably one of the best questions because what happens when you have a – something like a coronavirus, an issue, it doesn't really translate into a P&L issue right away for most borrowers.

It translates into a liquidity issue for the borrowers, and the reason why its translates into a liquidity issue is that sales go down for a very short period time, revenues come down, receivables come down, inventory tends to come down, particularly companies that are heavy in the manufacturing business and payables tend to extend.

So, what happens, you get a working capital squeeze in these companies and they need cash. So, our portfolio is primarily driven by business services, software, medical, you know, reimbursements, things that are not the subject of a working capital or liquidity squeeze.

Companies that are much more susceptible to that or companies that are manufacturing or heavily importing.

You know, we purposefully over the last several years, rotated our borrower base into less of a manufacturing and importing and, you know, dependent on heavy metals or oil and gas, things that are more cyclical, so, we feel we’re in a pretty good position with the MRCC portfolio.

You question was more of a general nature and I will tell you that when that happens and there’s liquidity squeeze, what generally happens is that if the company is within their leverage covenants then very often the lender may extend additional credit within the leverage guideline covenants.

However, if the company is at its leverage guideline covenants or at where they intended to be then the private equity firm may have to step up in a short period of time and provide some type of interim bridge that is fully reimbursable when, you know, normal working capital comes back. So, that’s how to answer your question..

Great. Thanks for taking my questions and I’ll follow-up offline..

Thank you. Our next question comes from Robert Dodd with Raymond James..

Hi, guys and congratulations on the quarter.

A couple of house – sort of housekeeping ones first and then the bigger picture question, on Rockdale and I know it’s under confidentiality etcetera, but would an arbitration settlement – would that constitute fee income to you or would that go to a realized gain depending on what it is ultimately?.

Yes, it’s a good question. We’re still examining all of that and how it will flow through.

It most likely would not be considered fee income, it most will be considered a real – a realized gain, and there will probably be some potential for other income over time depending on what elements of the settlement and how that plays out through what we are owed.

So, there is some accrual of interest, for example, that will be calculated that is not currently accrued in our P&L. And so, that could be an interesting income metric, but we’ll try our best once this is settled and we have more to say to try to break out for people exactly the components so that it's very clear as to what's flowing through where..

Alright..

Yes, just to be clear, Robert, that’s a great question, you know, on something like this.

remember, we’re in a business of charging interest, current interest, accrued interest, default interest, fee income, so there’s a member of different line items here that Aaron will make more clear as time goes on, but, you know, one of the things we’re waiting for right now is the arbitrator to rule and a number of our additional fees and expenses.

So, until that happens, I really can’t give you much more guidance other than it's a very positive development and it’s going to be really good for MRCC..

Yes, understood and exactly that point.

I mean, it’s obviously been going on a while now and I would imagine there’s some catch-up income that’s going to flush as well, then on the fee income in the quarter, which was very high and doesn’t look its prepayment income so far as I can tell from the filings, so can you give us any color on what the source of that was this quarter?.

Yes, sure. So, you’re right. It wasn’t necessarily prepayment fee; it was related to a prepayment though.

So, we had an investment in a company called Tap room Gaming and as a part of our investment, we had structured something called a success fee that would be based on the value of the company upon a sale and repayment of our loan, for the value of the company on the repayment of our loan.

And so, that occurred in the quarter and most of the fee income in the quarter was associated with that. Now, you say it was very high in the quarter. It’s certainly higher than it’s been in recent quarters, but it is not inconsistent with levels we’ve had in previous years.

So, definitely higher than the last couple of quarters, but not what I would consider extremely high versus what we’ve seen historically..

Yes, two things on that too, Robert, is that historically, you know, in periods of, you know, heavy refinanced activity, we tend to see more prepayment income, and as Aaron mentioned, in the last couple of quarters, we just haven't seen a lot of prepayment income.

If you go back a couple of years, you know, you used to see a fair amount of prepayment income, you know, in our portfolio, so that's one area, but the things that I think you is not really understood and not really easily manageable by focusing your business is that we play in the lower middle market and Tap room Gaming is a good example of deals that we have in our portfolio that we have success fees and way to create additional return that, you know, we can’t book because it hasn’t occurred yet, but a number of deals in our portfolio because we plan this non-sponsored small end of the market, we’ve created additional opportunities to make income from the portfolio when and if, you know, the companies pay refinance or sell.

And the Tap room Gaming was an excellent example of a deal where we structured a success fee as opposed to a warrant or as opposed to equity in the company, and then when the deal was refinanced or sold, you know, we got the benefit.

Now, a lot of those are episodic, but when you’ve got a portfolio, the size of our portfolio, you know, we expect that over time those things are going to happen.

So, I just want to make sure that, you know, you understand that and the community understands that this is something that, you know, will be coming back to you with hopefully in the future with other instances..

Yes, understood, Ted. I mean yes, in your lower middle market coupon, I know OID are not the only sources of income that you can generate from a portfolio company.

On the – the last one for me and its back to the virus, but a secondary effect so to speak, LIBOR, obviously, I mean the Fed cut, 50 basis points, you mentioned LIBOR force in your prepared comments, can you give us any more color of, you know, where the average flow is? How much of the – how many of them are in play today so to speak since obviously LIBOR has moved now? And how much protection you’ve got within that portfolio for additional LIBOR moves if the Fed moves again at some point?.

Yes, a good question actually. So, in our deals and that you have to understand how financial institutions work. We value a short lesson on this quickly.

Banks and insurance companies are very much tied to cost of funds and as the cost of funds go down, you know, this 50 basis point cut this week was a very negative effect on most banks and insurance companies.

In our business, private credit business, particularly Monroe and MRCC in the lower middle market, we have LIBOR floors in virtually every deal we have. We set those LIBOR floors at usually where LIBOR is. So, if LIBOR is a point in the quarter or a point whatever it maybe, we tend to set our floors at that level.

So, if you look at our portfolio, we do deals, we tend to set somewhere between a point and a point and a quarter with our LIBOR floors and to the extent that LIBOR tends to move much more, we don’t see a lot of exposure in our asset spreads with LIBOR floors..

Appreciate that, thank you..

Thank you. Our next question comes from Chris Kotowski with Oppenheimer..

Yes, most of mine have been asked, but just a little bit more clarification on maybe the capacity in the SBIC subsidiary. You said there's $27 million of cash and $56 million of – or $57 million of leverageable capital.

Does that mean you would like, first, use the cash and then there are further debentures that you can draw? Or how would that work and flow through your financials?.

Yes, I’m sorry if we somehow confused on that. So no, there's $27 million of cash at December 31 that’s investable. There’s no more debentures that’s available. So, that’s the maximum amount of cash that’s available to investment in the SBIC subsidiary.

We wouldn’t necessarily expect to invest all of that because we have some delayed draw term loan exposure in the SBIC subsidiary that we need to reserve some cash for in case we get a draw, but we do have the ability to substantially increase our investments in the SBIC by use of at least a portion of that $27 million of cash, but there is no additional capital available in the SBIC sub..

Okay. and then, just, you know, obviously, this quarter the – I guess I wanted to get Ted to clarify again a little bit, I mean this quarter we saw a bit of a decline in the investments.

The language in your opening comments I would say was cautionary, but then I also heard you say that, you know, with $9 billion of AUM and $1 billion in pipeline that there should not be any problem in maintaining the BDCs, you know, investment portfolio.

So, you know, does that mean one should expect to see kind of this quarter’s decline in the total investments, you know made up in coming quarters?.

So, again a good question. We had a high level of prepayment activity in the fourth quarter that we anticipated. We had a number of companies that were being sold. So, we kind of gave you some heads up I think in our last quarterly call in the third quarter that we are expecting to see there.

We don't see the same prepayment activity coming this quarter. We’ve got a nice pipeline. We’re putting money to work.

I think that you can anticipate more of a normalized deployment from us now, you know the nice thing about having a very large platform as we’ve got a very large pipeline always, but again I try to give you some cautionary words only that we’re trying to be careful too.

Fourth quarter, the market was running pretty hot and we made a decision as a firm to be thoughtful and that chased the market. You know, when you’ve got a large firm, you got the ability to make those decisions if you see that the market is running a little too hot.

I think with the coronavirus and some of the other things that we’re facing currently in the market, we don't see the same level of hotness right now, and I think we’re going to get back to business..

And I would just add one thing, which is, one thing we’ve been consistent on when we’ve talk about leverage in the portfolio is that, you know the leverage targets that we think about are directly related to what we’re doing on the portfolio side, that, you can't live on a vacuum and just say we’re going to be at a certain leverage point because it depends on the perceived risk of the assets you’re putting on and the more conservative portfolio that we see, the more likely we will be willing to be willing to be slightly higher on leverage.

And we over the last couple of years have really pushed the portfolio more and more to straight, first thing senior secured loans, which is in part why our yield has come down, of course other competitor pressures in LIBOR that have also contributed to the yield declines, but it’s also a shift into a more defensive portfolio, which can take a little bit more leverage, which we did purposefully to take advantage of what we thought was a better positioning in a late cycle to be a little bit more leverage and a little less risky portfolio.

And so, that’s always part of the thinking as well.

So, look what we said was we thought we were going to get a bunch of prepayments that we knew about, we allowed the portfolio to leverage to go a little higher than we would have wanted otherwise at the end of last quarter and that’s moderated here in the first quarter and it’s gotten probably a little bit on the lower end where we thought leverage would be based on the portfolio mix, and we have the ability to consider taking it up a little from here and the final level where we go we’ll have to do of course with a what we see in terms of opportunities, but also as we assess the portfolio mix in terms of risk..

Okay.

And then last for me is, there was a mark on a company called Forman Mills, it’s still on accrual, but I think it’s about 70%, 72% of cost now, is there any color you can give us on that?.

Yes. Sure. So, Forman Mills is a name we’re obviously monitoring very heavily as we do with all of our names were particularly names that are marked below par. So, what’s really happened with Forman Mills and Forman Mills is in the general low price retail segment, it’s a sponsor owned business.

The company had some challenges with regards to some of its internal systems and some inventory purchases that were ill-conceived, they’ve, I think really put the company back in a position to start growing again.

They feel good about their prospects given their customer base, but as a result of some of their issues, they needed some additional capital, and so what you're seeing in the market is really more about some working capital that was provided to the company by both us and the sponsor as a loan.

So, what you didn't see was a major shift in terms of the enterprise value of this company, which you just saw was a higher loan balance, which is what contributed to the decline in the mark, but based on everything we’re seeing with the right levels of inventory because they were not in a good position with regards to inventory and some positional support of their factors, we would expect to see revenue and EBITDA improvements over the prior year.

So, we continue to think that the trajectory here looks positive, which is why at this point the company is still on accrual status. It really just still expects to get a recovery here with regards to both our par amount as well as all of our interest..

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

Thank you. And our next question is from Chris York of JMP Securities..

Hi Ted, hi Aaron, thanks for taking my questions.

First is on Rockdale and I recognize you are limited on what you can provide us, but you do have a loan here that is not accruing interest and it’s material to earnings, so do you expect this investment to return to an accrual post the close of the legal proceeding?.

No. Chris what will happen with this is, once everything is concluded, we expect to receive a cash payment for the loan and any other settlements that we get and we’d expect to redeploy that in earning assets.

There is no situation where this loan starts then paying us interest again because there is no real ongoing operations at Rockdale, so it’s more about a recovery of our loan and so hopefully additional recoveries as you can see from the mark and then redeploying that cash that’s the expectation..

Got it. I'm a little confused that makes a lot of sense.

Elaborating a little bit on balance sheet leverage and I know it depends on the portfolio and risk, but are you still targeting a operating regulatory leverage ratio of 1.25 to 1.3 times longer term?.

We still think that that’s consistent with what we would expect here, anywhere between [1.2 and 1.3] is sort of a reasonable range for regulatory leverage based on what we see in the portfolio mix, that’s correct..

Perfect. And then Ted last question here is little bit on strategy, as you said in your prepared remarks, Monroe is focused on the lower middle market and I think the market generally things that Monroe is a leader in the lower middle.

That said, the platform has achieved strong growth in assets under management and we’ve seen Monroe compete in some more traditional and larger middle market deals.

So, why should investors not think that your growth is leading to a drift in style?.

Good question, Chris. We listen, I can't tell you that it’s not the case. We’ve grown our portfolio significantly.

We’re about a $10 billion player today in the market Monroe Capital is, and what we’ve been able to do is, we’ve done it in a unique way, as opposed to go up-market like others have and compete against some of the much larger asset management platforms.

What we’ve done is, we’ve expanded our platform, and we’ve gotten wider and deeper with new products.

As we mentioned in the prepared remarks, we’ve developed more of a niche focus and specialty finance and software and technology and healthcare areas where we think we can make a difference on a proprietary basis and we’ve hired professionals into those areas that are knowledgeable with deep context and relationships so that we can pull transactions from the market in these various niches.

So, if you look across our platform, we’ve, couple of years ago, we were probably at the Monroe level, we are probably somewhere around an average EBITDA of 16 million, 17 million EBITDA, you know today we’re probably close to 19 million average EBITDA and that’s across the entire platform of over 500 companies.

So, we’ve been sticking to our knitting.

We're obviously getting involved in a few larger deals because some of our competitors are inviting us into some of the larger deals because we may bring a certain expertise or add a certain amount of value, but our core originations, if you look at the 50 deals that we mentioned, that Aaron mentioned in his remarks earlier, those 50 deals which are directly originated transactions are in the core lower end of the middle market.

Now, we have an active CLO business as well at the firm. We manage over $3.5 billion of CLO's and that CLO business does play in the upper end of the middle market, but that’s more of a different business that’s more unique, that business has been growing and will continue to grow aggressively.

We’ve got one of the top weighted – top decile performing CLO businesses in the entire market. So that market I anticipate and that business will continue to grow. I like the lower middle market.

I think we’ve created a brand and I think we're probably the largest player in that space and we’re going to continue to take advantage of the goodwill, the trade and the brand that we’ve built in that space and that’s where you will see MRCC play..

And I’ll just add one thing Chris.

I mean, when you think about our focus on the lower middle market it’s more important to think about what we like about the lower middle market and what we like about that space is deals that still have covenants in good structure like the leverage attachment point that Ted referred to earlier and so those are the things that are motion are most important to us and those are the things you're seeing go out of a lot of the larger middle market deals, but if we see a deal in the larger part of the middle market slightly higher EBITDA, but it has the features we like in the lower middle market, conservative leverage, good sponsorship, low loan to value, and covenants will consider doing those deals even if they might be slightly higher than what we typically do in terms of EBITDA..

Perfect. That's it from me. Thank you for the insight and the context..

Thanks, Chris..

Thank you. And we have a follow-up from Robert Dodd with Raymond James..

Hi guys, just one more question on the dividend, obviously this year you covered the dividend in fact slightly over in the dividend and on a quarter-by-quarter basis, you either waived or this quarter didn't waive in order to cover more than cover the dividend.

And when we look forward, should we kind of expect the same pattern that you will do whatever is necessary.

I think you said in your prepared remarks to cover the dividend on a quarterly basis or evaluate what you may or may not need to do based on what you expect to do for the full year because obviously with Rockdale proceeds coming back maybe some catch up income from there, the dynamics might be a little different about full year versus quarter-to-quarter earnings?.

Good question, Robert. I can tell you that we’ve shown you through many years of performance that management at Monroe Capital Corporation is very, very focused on maximizing value and creating value for our shareholders. That historical focus is not going to change in the future.

We're going to do everything we possibly can to create value and maximize value for our shareholders..

Understood. Thank you..

Thank you. And this ends our Q&A session for today. I would like to turn the call back to Ted Koenig for his final thoughts..

Okay. Thank you very much everyone. Lots of questions today, which I thought were good and hopefully you’ve got a better feel now from a strategic focus and where we are, what we are trying to do with Monroe and where we're going.

You know for us a lot of this is just business as usual, there’s a lot of noise in the market whether it’s Rockdale Blackhawk, whether it’s the presidential elections, whether it’s Forman Mills or whether it’s coronavirus, I can tell you that we’re very, very focused on doing what we do best, which is invest on capital and earn interest and fees and get our capital back, and you know particularly the last piece of this is getting our capital back.

The Rockdale Blackhawk example, I think is a very good factual experience for all of us that we are very focused and irrespective of what our marks are and what the carrying value of our loans are because we’re focused on getting our capital back and all of it back.

So, with that, I want to thank you for joining us, I want to thank Aaron and our finance team, and I want to thank our legal team, I want to thank all financial reporting teams here at Monroe, and Investor Relations for maintaining relationships, and for doing everything that we do here to exemplify a first-class private credit organization, and we anticipate adding and improving to that in the year 2020 and we look forward to talking to you all on our next call.

So, thank you and have a good day..

And with that, ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect..