Monroe Capital Corp (MRCC) 2014 Q1 法說會逐字稿

Good afternoon and welcome to Monroe Capital Corporation's first-quarter 2014 earnings conference call.

Before we begin, I would like to take a moment to remind your listeners that remarks made during this call today may contain certain forward-looking statements including statements regarding our goals, strategies, beliefs, future potential, operating results or cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions, and projections as of today, May 12, 2014, 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 risk, uncertainty, or other factors, including but not limited to, the factors described from time to time in the Company's filings with the SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements.

As a reminder, today's call is being recorded.

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

Good afternoon and thank you to everyone who has joined us on our earnings call today. I'm joined by Aaron Peck, our Chief Financial Officer and Chief Investment Officer.

Earlier today we issued our first-quarter press release and filed our 10-Q with the SEC. I will provide you a brief overview of the quarter before turning the call over to Aaron to go through the financial results in more detail. He will then turn the call back to me and I will update you on current market conditions for our business.

As in the past, we have provided an update on the Company's asset growth to demonstrate the progress we have made since our IPO in October 2012. As you can see in the bar graphs attached to our press release, on a par value basis, we have more than tripled the size of our investment portfolio, growing from $67.6 million at the time of our IPO to approximately $226 million as of March 31, 2014.

We have grown the number of unique portfolio companies as well, from 15 at launch to 43 as of the end of March. We have continued to be focused on safety and security with approximately 88% of our assets representing senior secured first lien and senior secured unitranche loans as of March 31, 2014.

As we have previously announced, during the quarter, we received approval from the SBA for our SBIC subsidiary license. Subsequently, on April 24, we received a commitment letter from the SBA for SBA guaranteed debentures, which will allow us to start assessing for leverage in our SBIC subsidiary at a one-to-one debt to equity basis.

As we have discussed, we believe that the SBIC subsidiary license will provide an opportunity to grow the portfolio and generate additional returns for our investors which should be a huge positive and create real value for our shareholders.

We have filed an exemptive relief application with the SEC, which, once approved, will allow us to disregard the SBA leverage and the asset coverage test. All other things being equal over time, this should have a materially positive impact on our net investment income per share.

Turning now to our results for the quarter ended March 31, 2014. Adjusted net investment income, a non-GAAP measure, was $3.2 million or $0.33 per share, an increase of $0.02 per share when compared to the fourth quarter of 2013.

Net investment income was $3.1 million or $0.32 per share, flat when compared to the prior quarter. Additionally, we generated net income of $3.7 million or approximately $0.38 per share, up from the $0.25 per share of net income in the fourth quarter.

Our book value per share at March 31 was $13.99 per share, up $0.07 when compared to the book value per share at December 31, primarily as a result of the net increase in the fair value of our portfolio and a reduction in shares outstanding as a result of previously announced share repurchase plan.

I am now going to turn the call over to Aaron who is going to discuss the financial results in more detail.

Thank you, Ted.

Our investment portfolio continues to grow and aggregated $224.7 million at fair value as of March 31, 2014, an increase of approximately $16.8 million from the prior quarter end. We had total borrowings of $94.5 million at quarter end under our revolving credit facility.

As of March 31, 2014, our net asset value was $135.1 million, which declined from the $138.1 million in book value as of December 31. This decrease in book value was primarily due to share repurchases under our previously announced share repurchase plan, offset by the increase in the fair value of our portfolio. As a result, net asset value per share increased from $13.92 at December 31, 2013, to $13.99 per share as of March 31.

Looking to our statement of operations, total investment income for the quarter was $6.5 million, compared to $6.4 million in the prior quarter. Total expenses of $3.4 million included $967,000 of interest and other debt financing expenses, $953,000 in base management fees, $917,000 in incentive fees, and $549,000 in general, administrative, and other expenses.

Of the $967,000 in interest and other debt financing expense, approximately $701,000 was cash interest expense, with the remainder representing non-cash amortization of the costs associated with establishing our credit facility and the interest expense associated with the secured borrowings recorded under ASC860. We also had a net gain on investments in secured borrowings of approximately $538,000 in the quarter, most of which represented net unrealized gains.

Turning towards the portfolio, approximately 46% of our investments represented senior secured loans, 42% represented unitranche or one-stop loans, 12% were junior secured loans and equity co-investments represented approximately 0.5%.

As we discussed on our last earnings call, closed deal volume was reasonably slow in the first quarter when compared to prior quarters. The second quarter, however, has seen a substantial pickup in deal closings, which should result in further growth in optimization of the portfolio.

I will now turn the call back to Ted for some closing remarks before we open the line for questions.

Thank you, Aaron.

As Aaron just mentioned, we remain focused on growing and optimizing our portfolio for the measurable future and on increasing our per share net investment income. The addition of our recently licensed SBIC subsidiary should provide us ample liquidity to grow the portfolio and should help to grow our net investment income over time.

The second quarter is proving to be a much more active quarter for us in terms of new deal originations, which should result in portfolio growth and continued portfolio optimization. As we discussed in our last quarterly call, we are singularly focused on growing our net investment income per share for our shareholders.

We remain very bullish on the Company's prospects and we believe that our manager's extensive investment in high quality origination and underwriting staff, located throughout the country, will continue to provide the Company with unique, high quality, high yielding investment opportunities.

With a greater than 10% dividend yield and a stock price trading below our book value per share, we believe that Monroe Capital Corporation provides a very attractive investment opportunity for investors and is significantly undervalued today. Thank you all for your time.

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

(Operator Instructions)

Our first question comes from the line of John Hecht of Stephens. Your line is open. Please go ahead.

Thank you very much. First question: What was the level of pre-pay or non-interest-related income accruals this quarter?

I'm sorry, John, you broke up a little. Were you asking about the breakout of the income?

Yes, pre-pay and other type of fee-related income.

Sure. I can help you with that. So, you'll find most of this on page 10 of the 10-Q. And the components of income this quarter: pre-payment fees and amendment fees aggregated $198,000 in the quarter, which is down significantly from the prior quarter. We had a gain and loss on paydowns associated with income of about $228,000. And there was about $161,000, which represented amortization of a discount -- associated discount accretion, basically, on the loan portfolio. And about $130,000 represented PIK income. The rest -- $5.8 million -- was your standard cash interest income.

Okay. And I wonder if you could give us an update on what you guys perceive as the placeholder investments, and what the yield is there, and maybe give us some commentary on what you're seeing in terms of yields in the marketplace for new investments?

Sure. When you look at our schedule of investments, you can look basically in the senior secured loan portion of it, and look at the loans that are yielding sort of sub-8%. And you could assume those loans are loans that we hold for short to intermediate term, which are candidates for sale as we look to continue to optimize the portfolio. So, that's a good place to start -- is the loans that sort of fall in that 8% and less cash rate on the senior secured portion of our table.

And what about comments on the marketplace?

On the markets, John, I will tell you that the markets continue to be competitive across the board. The most aggressive part of the market today is still the larger deal size -- $40 million to $50 million EBITDA market size transaction and up.

There's been some downward pressure on coupon, increased leverage, and loan covenants in the traditional middle market. But as you step down into the true middle market, and more importantly, the place where we play, which is the lower end of the middle market where we compete, we've seen some increased competition. But, again, it's been mostly regional names. They are not national players, and our market is significantly less competitive and a little bit more fragmented. We continue to retain our discipline, which has resulted in lower fundings in Q1 than I would like personally, but I think that, given our pipeline, you're going to see some really neat things from us in quarter two.

Okay. Great. Thanks very much.

Thank you. Our next question comes from the line of Bob Napoli of William Blair. Your line is open. Please go ahead.

Thank you. Good afternoon. So, I guess the fee income that you laid out, Aaron, and the normal interest income of $5.8 million -- would you view those as reasonable yields for a quarter -- reasonable levels, or is the fee income above normal? I know it's lumpy in nature, but obviously you're going to have some fee income on a, pretty much, recurring basis. So, is this normal -- the $5.8 million is about an 11% yield, 10.9%, something like that.

Yes, good question, Bob. It's difficult to say at this moment because we've only had so many quarters of life, but it's definitely -- we had much more fee-related income in the fourth quarter than this quarter. This is not an aggressive quarter for us, in terms of what we'd expect in terms of fee income.

As you know, a big part of what we do results in fee income. We keep very tight covenants. We work closely with our borrowers to make sure they stay in compliance; and when they don't, we usually get some yield enhancement out of it. And so, we take that a lot of different ways.

And so, I can't say to you: Take this quarter, and use it every quarter going forward. I think that the level of interest income is a good starting place. We would expect to generate that going forward and higher, as we continue to optimize. And we always expect several cents per share of fee income in a quarter. And I can't tell you what it's going to look like in the second quarter, but this seems like as reasonable place to start as any.

Okay. So, you're close to earning your dividend in this quarter, if those things were to hold true and the portfolio quality obviously holds up.

Bob, if you're a golfer, we're a short putt away from doing that right now.

But I miss those, so -- (laughter)

Well, Ted makes them.

Not too many of them.

Let's see -- just your -- the leverage that you have today, and you said you've had a very strong quarter. Are we going to see more optimization this quarter? What would be the maximum level of leverage that you're comfortable with, until you get the approval on that SBIC to exclude the SBIC debt and you start drawing down that debt?

As we've talked about in the past, Bob, we've always said that our leverage target is directly related to how the portfolio is skewing. And what we have found in recent quarters is that we're skewing to more senior secured loans; and so, you're seeing that portion of the portfolio grow, and because of that, we've been able to feel comfortable moving up the leverage limits a little bit.

So, I think, all things being equal -- the portfolio stays similarly designed as it is today -- you could see the leverage, disregarding the SBIC stuff, being up around the 80% leverage limit. That's kind of where we're comfortable. Given what the portfolio looks like today, that's where we'd expect it to be -- pushing to that level.

It's always going to be related to how the portfolio mix. If we saw greater opportunities in [last-outs] and down into junior secured, we might take it down to that more 70% to 75% leverage limit. But as we continue to see really great opportunities to get our target yields in higher-quality senior secured assets, than we can tweak it up just a little bit, as we've described.

The pick-up in the second quarter -- what's the mix? Is there more unitranche or --?

No, you saw the portfolio move more towards senior secured non-unitranche in the quarter -- just a little bit.

Would you expect that in the second quarter?

I think you can expect, Bob, to continue the trend that you're seeing in the last quarter.

All right. Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Mickey Schleien of Ladenburg. Your line is open. Please go ahead.

Good afternoon, Ted and Aaron. I wanted to start by asking about the SBIC legislation. With the CDO's office -- the CDO's analysis of the potential impact -- it looks like that's dead on arrival. Assuming that that's not going to work out, what is your view then on allocating capital between the BDC and your private funds, with respect to the SBIC license?

Well, I'm not smart enough to tell you what's going to happen with the SBIC legislation. I've been involved in a couple of committees there, and there's lots of discussion going on, and there's some compromise discussions going on right now. So, we'll see what happens. I don't think it's dead on arrival yet.

With respect to how we're operating our Business, it really hasn't changed. We allocate, Mickey, internally here pretty much on a pro-rata basis throughout our Firm on opportunities. One of our challenges is that we're going to continue to optimize the portfolio of the BDC, and we've done a pretty good job over the last quarter in rotating out of some of the lower yielding and adding some of the higher yielding, and I think you'll see us do that again in Q2. So, specifically, we're going to continue to allocate BDC, SBIC assets based on pro rata, and where we have capital available.

So, within the entire Monroe platform, I'm assuming there's plenty of deal flow that would qualify for the SBIC. Is that correct?

Yes, that's correct, but remember: Until the law changes, Mickey, we're only allowed $225 million of SBA debentures, and we already have $150 million outstanding in a prior SBA/SBIC vehicle.

I'm aware of that. I'm talking about the incremental [$75 million], and you've already answered that question. Now, the BDC has a funding commitment for $20 million. It would seem that you could do that pretty quickly, or am I missing something?

You're right, Mickey, but remember: That $20 million is based on the 1 to 1 leverage that we're granted by the SBA initially, which is where you start with them.

Right.

Right. [They're worth a lot], Mickey, in a reasonably finite period of time here, as we get some transactions booked, and as the SBA comes in and does an audit. Just like our prior vehicle, you start at 1 to 1, and then it goes to 2 to 1.

Okay. So, I want to go back to couple previous questions. It sounds like, right now, you're seeing the sweet spot between senior secured, unitranche and subdebt, is really in the senior secured market. And you said you expect the portfolio to continue to skew that way in the second quarter. Did I hear that correctly?

Yes, I think what you heard us say is that in the first -- the top of the capital structure, whether it's senior secured or unitranche loans, we've been doing a fair amount there and we've got a very, very active pipeline. We're continuing -- as you saw, the manager hired a fellow in New York recently named Lee Stern. Lee Stern has a long, long history of doing mezzanine debt for GSO and for KKR and a few other shops. So, we're going to make a continued push for junior capital.

So, my bet is that you'll see more junior transactions in the vehicle towards the latter part of the year, if I was a betting man. I will tell you that our pipeline now is as good as it's ever been in our history, and we're going to take advantage of that for the public company here and continue to grow to the extent we can. And then towards the latter part of the year, we're going to take advantage of the full Monroe platform, and my guess is that you'll see some of the 88% senior secured number in our portfolio today probably come down a bit. That's what I would guess.

I'll just add to that. We also have some sort of what I call second-tier optimization opportunities in the portfolio. What I mean by that is: We have a portfolio of junior secured loans that is about $26 million, $27 million today, and some of those loans are candidates to be sold down the road as some of those great mezzanine opportunities become available or second-lien opportunities from our originated pipeline, because most of these loans are somewhat liquid as well.

So, you'll see the first spot for optimization is that sort of sub-8% senior secured part of the portfolio, but the sort of second-level opportunity is in some of the more liquid, second-lien opportunities as we continue to try to move the portfolio yield up. So, there's ways to also get access to some pretty interesting paper that we originate, and not measurably take up some of the percentages that Ted talked about.

Understand. My last question is related to the share repurchases. If I'm doing the math correctly, and if I heard you correctly, it looks like they're actually slightly dilutive. Is that correct?

No, definitely not.

No, the share repurchases have created a nice, accretive value for our shareholders.

So, share repurchases reduce your book value for us, but not your book value per share. That's probably what you heard.

Okay. That's -- all right. I missed -- all right. That's what I didn't hear correctly.

Yes, so, it increases measurably our book value per share.

Right. So, your -- and I see on the cover of the Q that you're still buying shares, right?

You can tell if you do the math that we probably bought another 90,000 shares between 3/31 and May 9.

Okay. Thanks for your time.

We like the value, Mickey, of our shares.

I'm sorry?

I said we like the value of our shares.

I understand. I appreciate your time this afternoon. Thank you.

Thanks, Mickey.

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

Thank you. Good afternoon. Just a follow-up on some of your last comments there, Ted and Aaron, about the stock being undervalued. You guys have done a good job in growing the investment portfolio since IPO, and you're now at a point where you're closer to being fully deployed from a capital perspective. Obviously recognize that there's still some optimization to go here, but just wanted to get your thoughts on the potential for [gross] capital, and what your appetite is for being able to raise capital, again, below book value. Essentially, will you raise capital below book value again?

Good question. We are very focused, and I told you this on the last call, of increasing our net investment income here, and we're very focused on increasing the value of our shares for our shareholders. So, right now, we're focused inwardly on making sure that we drive as much net income as we can, and that you guys do your jobs with your respective clients and get the word out from a Company standpoint.

Because I'm very active in this market. I talk to just about everybody in the -- both in the public and the private side. And when you put our numbers up side by side and our growth story and our -- the ability of our earning potential with the SBIC license and with some of the activities that we're doing as a manager, I like where we sit right now in terms of growing our net income and growing our share price.

That's helpful. Thank you, Ted.

Then, Aaron, just a housekeeping question on the SBIC. Just to be clear: Obviously, you've gotten the commitment from the SBIC for the debentures. Do you have any investments sitting in the SBIC at this point?

Yes. It's disclosed in our Q. We have funded a couple of assets -- two assets down into the subsidiary in the quarter. And so, they're sitting down there now. And then, we have the ability to access leverage down there over time and grow that.

But, yes, you'll see that there's about $8.9 million in par value of investments sitting in the subsidiary. You could find that in the notes to the schedule of investments.

Thank you. Appreciate it.

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

Hey, guys. Either for Ted or Aaron: The comments earlier talk about increasing the debt-to-equity leverage threshold to 0.8. Once the SBIC comes in, would that be pulled back a little bit, or do you see that as a steady state?

Again, as Aaron mentioned, you have to look at that in connection with the portfolio. It's hard to look at that number on a stand-alone basis. In your business, you have to look at risk/reward. There's very few BDCs in the market today that have an 88% senior secured investment portfolio.

So, when you look at that from a risk level basis, we feel that we're well within the -- kind of the risk curve of where we should be, to optimize the value of our net income for our shareholders. Now, at the end of the year, to the extent that moves down somewhat, I would expect that that leverage rate may drop on a related pro-rata basis.

And then your question as -- we don't -- we look at that ratio without regard to the SBIC debt, which is not consolidated as part of the asset coverage [debt]. So, to that extent that that's the way we're looking at it -- we're just thinking about the leverage at the parent, not at the sub.

Understood. And as a follow-up, if I understood you correctly in the comments earlier, you seemed to imply that later in the year we could see the portion of senior secured loans declining relative to more junior transactions, such as mezzanine. And so, given that, if I understood you correctly, wouldn't that imply that your debt-to-equity ratio would actually go down towards the end of the year?

It could happen. I said it could happen, Chris. The question is: We're doing lots of interesting things at the manager level to continue to build out what I think is the deepest and widest platform in our space. So, to the extent that we do more junior capital -- and it may not be mezzanine; it may be second lien -- it may impact the yield. Right now I think on an effective basis, we're close to 11%. So, that's a heck of a yield for a senior -- for 88% senior secured investment portfolio.

Said another way: We're going to migrate to wherever we see the best risk/reward opportunity in the portfolio. Ted, I think, is just setting the table for the fact that we've added some really high-quality staff that are going to generate some really interesting opportunities for us, and we'll move the portfolio to the best risk/reward. And we'll move the leverage -- we'll turn that dial commensurate with the risk we're taking.

And all we're starting to say is at 88% senior, we think getting up to the 80%-ish leverage limit makes sense, and if we started to see that number go down to 85% or 80% senior or 75% senior, then maybe a little less leverage will make sense. I do think you'll continue to see us having a pretty good chunk of our portfolio in senior secured notes.

For planning purposes, Christopher, I know where you're going. I think where we're at and where we're talking about is a good place to be. It can only get better, to the extent we do some more junior capital transactions.

Got you. Final question: The proxy just issued a couple weeks ago has a resolution to -- approval to sell shares below NAV. I know you commented earlier to Bryce that you would focus on net II and increasing the share price, but by putting this question in the proxy, should we interpret that as you're considering doing an equity raise sometime in calendar 2014?

We put that in the proxy for the same reason most of our brethren do, and the reason to have it is: We've all lived through the crisis last time around. When we went through the financial crisis last time around, all the BDCs traded down, and the opportunities in the marketplace were astounding. And Monroe -- at the manager level, we didn't have a BDC, but we had funds. And we absolutely had some of the best years of performance during that period because we had dry powder, and we had the opportunity to buy really high-quality assets at massive discounts for nothing other than the dislocation of the marketplace.

And so, BDCs tend to put that in year-in and year-out to try to get that vote, and it's very important to get it because, should we go through that sort of scenario, and we see just phenomenal opportunities to buy discounted assets from folks that are blowing up for fund reasons, for redemption reasons, you want to have the ability to drive access capital in that sort of scenario. But, we -- as Ted said earlier, our focus now is not on raising capital dilutively. Our focus now, and what we'd expect to occur, is that we continue to optimize the portfolio, grow our NII, and hopefully see the results of that in the stock price.

I think that, building on that is: You're going to see both Aaron and myself on the road for the next 60 days, and hopefully we'll have the opportunity to visit with each of you who cover us, as well as some of your clients, and talk about our Company because, from my standpoint, we're not -- our story is too good to keep amongst ourselves. We need to do a better job of getting our story out and what we're doing on the public side.

Great. Thanks for answering my questions.

Thanks, Chris.

Thank you. Our next question comes from the line of Andrew Kerai of National Securities. Your line is open. Please go ahead.

Good afternoon, and thank you for taking my questions. Just wanted to touch, if I could, on the leverage you're seeing on some of your new originations relative to the overall weighted average leverage attachment points on the rest of the book -- if you could just comment on that a little bit?

It's not a heck of a lot different, Andrew. As a Firm, we try to maintain our senior secured book somewhere between 60% and 65% of enterprise value, which generally means an attachment point of somewhere in the 3s. I think 3.5 is probably a good place, between 3.5 and maybe 3.75 on a weighted average basis. And, if anything, I think if you compare our book with other peers, I think you'll see a lower attachment point. I think you'll see a less of a leverage, and that's just -- we've been around -- I've been doing this for 20 years, and safety and security is number one.

Sure. No, certainly. Thank you.

And then, just to look at the share buyback, you had a little bit of availability left in your buyback program. Now, just weighing the expected return on a marginal buyback versus your outlook for growth in terms of the yields that you're seeing in the market, how do you think about that here, given that the share price still trades at a pretty sizable discount to net asset value at this time?

Andrew, it's a great question, and one unfortunately I can't give you a lot of help on because I really can't guide the market as to what we're going to do out in the future. I well tell you that we look at all the things you talked about. We look at the accretion associated with buying stock below book. We consider the lost opportunity cost of investing that capital in our own stock versus going out and buying loans in the marketplace.

We're always refining that analysis and that thought pattern, and it's something that we think about a lot, and we'll continue to. And that's really all I can tell you about it. I can't give you any sort of real guidance outside of that.

I don't expect our stock to stay where it is, Andrew; not once people really understand the portfolio and the quality of the yield. If you look at what's happened here in this quarter, which I anticipate will continue, the quality of our yield is solid. It's not from one-off transactions like lots of our peers.

Sure. Certainly. Fair enough. Thank you.

And then, Ted, if I could just -- you had commented earlier on the call -- when you look at your steady-state NII, with some of the SBA funding here, as well as the continued migration to higher-yielding assets, would you maybe be able to share what, with $75 million of SBA debt available between roughly two licenses -- of course, the first one with the $150 million in it -- what you've assumed in the public -- in the SBIC and the public BDC versus the third license that you have?

We're always looking at that internally. And as I said last time on the call, number-one consideration here is safety/security.

Number two is we try to be fair. And we've got a duty here to be fair to our public shareholders, and we have a duty to be fair to our institutional shareholders. So, I think you'll continue to see us act consistent in that manner, and treat everybody on a fair basis. But as I mentioned on the call as well, we are very focused on growing our NII; and if you look at the last two quarters, there's a nice trend line there.

Great. Certainly. Thank you for taking my questions.

Thanks, Andrew.

Thank you. Our next question is a follow-up from the line of Bob Napoli of William Blair. Your line is open. Please go ahead.

Thanks. Just quickly on the credit: What are you seeing in your businesses today? Your level 3s are up a little bit. How do you see the economy performing today, and what are you seeing out of your companies?

We've got an interesting perspective, Bob, in that, company-wide, we've got 175 portfolio companies right now, and I expect that number to grow significantly here in the next year. The public Company only represents about 13% or 14% of our total assets under management as a Firm. And I will tell you that I don't see a ton of growth on a company-by-company basis. Portfolio Company basis: I see a lot of stability though, and we see quality earnings.

In other words, we don't see earnings being created -- manufactured like we did a couple years ago through cost cutting. I think it's a competitive market, both -- obviously for lenders but also, if I look at our various companies in the verticals, we don't see a huge amount of growth. I don't see a lot of gross margin expansion, but we see quality, quality earnings, which is what I'm focused on. And if you go across the board, the two things that we really look at, and I look at internally here on a calendar-by-calendar quarter basis, is quality of our borrowers, our Company's performance, but also activity in the market. And I will tell you that Q1 -- and I said it on our last call -- Q1 market was slow. It was probably slower than it should be, given the environment for transactions.

And I will tell you that Q2 has increased in activity substantially. There's much more new money transactions happening; not only the refinance transactions and the dividend type transactions, but there's, more importantly, if I look at our portfolio of pipeline, we probably have 50%, 60% of our portfolio pipeline right now in new money transactions, which is very significant for Q2. That bodes well for the rest of the year.

I can't tell you that that's transitive to the entire industry because I look at folks that focus on the larger end of the middle market, and I don't see that same activity in new money transactions. But in our space on a national basis, whether it's on the west coast or the southeast or the midwest, there's definitely an uptick in the market on transactional volume.

When you say new money, Ted, are you referring to that these are new loans to Monroe, or are you referring to the type of capital -- it's not M&A or --?

I'm referring, Bob, to -- when I say new money, I mean new transaction -- buy-out transactions. Refi transactions and dividend transactions tend to be just refi-ing one lender from another. New money transactions is really what you want to focus -- what I focus on from an overall market standpoint. Those are growth transactions. That's growth capital -- growth expansion.

You're going to see an announcement that we're going to make here very shortly of a growth transaction. We refinanced a company and we closed today, and we've essentially gone to one of our borrowers who was growing and we gave them substantially more capital to grow their business. And that's a great example of how -- of our platform -- how Monroe can come in and do a transaction for a company that's performing very, very well. And as they continue to grow, we can step up with them, and we can grow with that borrower, and you'll see a press release on that first thing in the morning.

Okay. Thank you. That's helpful.

Then just, Aaron, you gave out a number of PIK income. Is that normal PIK income?

Yes. (multiple speakers) Yes.

Is it an unusual level of PIK income?

That's normal. As you go through our schedule of investments, you'll see we've added a couple of investments that have some sweeteners basically through PIK interest. We don't do much in the way of straight PIK notes, but you'll see, as you go through the portfolio, we've got some deals where we've got some excess income in the form of PIK.

Bob, you asked originally a little bit about the portfolio, specifically quality in the portfolio, and you talked about the level 3 assets.

Yes.

I just want to make a statement about that. We are very quick to move something to a 3. And so, you'll see, as you go through the portfolio, that we don't have a lot of assets that are marked down, but we do have a couple assets that got added to level 3 in terms of our risk [pricing]. What we do is we go out and we focus a lot more on those, and we're very hands-on, and we go into those companies and we fix them, and we make sure that their sponsors when there are sponsors, or their owners are doing the right things to fix the company when things are going sideways.

And so, we did have a couple of names that performed not to our expectation, and we have done a lot to improve what's happening there. And we'll usually take an increase in pricing, and we increase our monitoring level. And we're very high-touch lenders, especially when a company isn't doing what they said they're going to do.

And so, it's a normal process for us to see some assets wind up in the 3 category. We usually end up making excess return on assets when they move to a 3 category. So, it's not such a bad thing.

That's generally -- increased monitoring -- that's something internal, more so than external. We've got a [very, very deep portfolio management team and] we move things here because we want that extra monitoring because, remember, at the end of the day, we have a credit-first shop. We're not a yield-first shop like some of the other players in our space.

Then, last question: Your unrealized gains in the quarter -- with an equity portfolio, I think there was one small equity write-up, but then there were some others by loan. What's causing those unrealized gains?

It's really just sort of a netting of all of our portfolio. It's not any one thing. We had some loans that closed near the end of the fourth quarter last year, and they have since seen a couple-point markup from cost to sort of close to par from our external third-party valuation firm. And it's not any one loan that's been marked up in a big way. It's just a bunch of little loans being marked up a point here or there, netted with some loans that got marked down a couple points here and there.

So, it's not any one trend; it's just a general -- we do very high-quality, high-coupon loans. And as we live with them for a quarter or two, the history so far has been that the independent valuation firms tend to mark them up a point or two closer to par.

Okay. Thank you.

Thank you. Ladies and gentlemen, that does conclude our Q&A session. I'd like to turn the conference back over to Mr. Ted Koenig for any closing remarks.

Thanks, everyone, for joining us this afternoon. We certainly appreciate all of your support.

You guys have taken the time to dig in. And I continue to believe that once someone takes the time to dig in, and they'll see the differentiating factors with our Company versus the others. The space now, with 43 BDCs, is becoming a little more crowded, and I think it's up to us internally here at Monroe, and helped by the analyst community, to help differentiate one platform from another, and show the earnings power that one platform can deliver versus another.

So, with that, we appreciate your efforts, and we will be in touch, as I mentioned, over the next 60 days on a follow-up because you'll see us on the road here for the next two, three months. So, thanks, everyone, and have a nice day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.