Monroe Capital Corp (MRCC) 2015 Q4 法說會逐字稿

Good morning, and welcome to Monroe Capital Corporation's fourth-quarter and full-year 2015 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 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, March 4, 2016, these statements are not guarantees of future performance.

Further, time sensitive information may no longer be accurate as of the time of any replay or listening. Actual results may differ materially as a result of risks, uncertainty, 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.

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

Thank you to everyone who has joined us on our earnings call today.

I'm joined by Aaron Peck, our CFO and Chief Investment Officer. This morning, we issued our fourth quarter and full year 2015 earnings press release, and filed our 10-K with the SEC. I will provide an overview of the quarter and full year, before turning the call over to Aaron to go through the results in more detail. He will then turn the call back to me to provide some closing remarks.

We are very pleased to have announced another strong quarter of financial results. For the quarter, we generated adjusted net investment income of $0.40 per share, comfortably covering our fourth-quarter dividend of $0.35 per share. This represents the seventh consecutive quarter we have covered our dividend. Our consistent dividend coverage continues to separate us from the pack of the BDCs that have either cut their dividends, or have been unable to generate net investment income in excess of their most recent dividend.

Our book value per share was stable, at $14.19 per share as of December 31, a $0.02 per share decrease from the book value per share at September 30, partly as a result of some negative marks due to current market conditions. This was a $0.14 per share increase, however, over our book value per share at December 31, 2014, of $14.05 per share.

The fourth quarter and full year 2015 has been very challenging for many of our BDC peers. Most of our peers have announced major credit write-downs, both realized and unrealized losses, and large, and in several cases double-digit percentage, declines in per share NAV for the full year.

For a number of these peers, these losses are a result of weak origination and/or poor credit underwriting. Many BDCs have large exposures to oil and gas exploration, and metals and mining companies, which have experienced significant and severe financial distress. We have none of that direct exposure, zero, and that is not by accident.

We don't have those exposures for two major reasons. The first reason is, we have an extraordinary origination engine, which provides us a large pipeline of opportunities to choose from, when selecting which deals to close and which deals to pass on. We looked at over 4,000 potential deals since the BDC launched in late 2012, and in 2015 alone, we looked at approximately 1,700 potential transactions. One, we have a high level of unique and proprietary deal flow, we can afford to be very selective.

The second reason is the strength and experience of our credit and underwriting team. We have been in this business at Monroe for the last 15 years, on a continuous basis, through good times and bad times. This experienced team picks up the very best transactions among the approximately 1,700 deals we see each year, and those are the ones we close and fund.

We have avoided these particular industries, because companies in these industries make for bad credit risks. By their very nature, they are cyclical businesses and cyclical industries. A Company with financial performance that is highly leveraged and correlated to commodity prices has risks that really can't be underwritten or mitigated by good credit skills. We cannot predict commodity prices, so we cannot underwrite that risk when looking at a lending opportunity. So at Monroe, we stay away. We always have.

The other explanation for the major NAV write-downs experienced by our peers is related to position in the capital stack. Our portfolio is heavily concentrated in senior secured loans, in particular first lien secured loans. 94.5% of our portfolio is secured loans, and over 75% is first lien secured loans. BDCs that have a significant amount of their investments in second lien and unsecured mezzanine loans, like many do today, are much more likely, all other things being equal, to take major mark-downs in their portfolios in times like this, and major losses in their portfolios when the economy takes a negative turn.

The last thing I would like to discuss before I turn the call over to Aaron is what we believe are the salient points you should be thinking about, when considering an investment in MRCC. The investment thesis is as follows. MRCC is a Best-in-Class BDC, with a strong credit platform and a focus on the top of the capital stack, providing a fully covered 11% dividend with a stable NAV performance.

We strongly believe the current stock price presents an attractive entry point for investors, as the stock's current 90% of NAV valuation is heavily discounted by historic standards, due to current overall market conditions. And those concerned about the credit cycle should receive downside protection and comfort from Monroe's senior secured loan portfolio. In addition, MRCC maintains a shareholder-friendly structure, strong asset quality, and scale through the resources of Monroe Capital, an award winning leader in middle market lending, with nine offices located throughout the US and Canada.

More specifically, here are the top five reasons to consider an investment in MRCC. Number one, we offer a strong dividend coverage from our largely senior secured first lien portfolio, which should create confidence for investors owning this name in a volatile credit environment. We have paid dividends for 12 consecutive quarters, each quarter since our IPO in late 2012. The current annual cash dividend is 11%.

One of MRCC's consistent strengths is its strong dividend coverage, which in the most recent quarter, was approximately 114% when calculated with adjusted NII. It is among the best covered dividends in the entire BDC industry. With many BDCs realizing losses and reducing the size of their interest earning portfolios, MRCC's stability and dividend coverage are unique and distinguishable in this industry.

Reason number two: MRCC's focus on the top end of the capital structure, with first lien loans, continues to be a benefit, as our per share NAV increased year over year, as our portfolio was relatively stable, and our earnings in excess of dividends led to NAV growth. NAV increased from $14.05 per share as of December 31, 2014, to $14.19 per share as of December 31, 2015, when a great majority of the other BDCs experienced negative NAV trends in the last year.

In fact, of the 30 other BDCs that we track that have reported earnings so far in this fourth quarter, 25 of those BDCs have reported a decrease in per share NAV since the end of 2014. MRCC has zero exposure to commodities, metals, mining, and oil and gas exploration industries, all of which have suffered declines.

Reason number three: MRCC investors benefit from Monroe Capital's Best-in-Class platform to source attractive and proprietary deal flow. Monroe Capital specializes in lending to both private equity sponsored and non-sponsored companies in the lower end of the middle market, with EBITDA in the range of $3 million to $30 million. This segment of the market is not competitive with most of the larger BDCs, and is highly fragmented.

In 2015, Monroe Capital reviewed over 1,700 investment opportunities generated by its 18 new business origination professionals, located throughout nine offices in the US and Canada. Of those, MRCC invested in 24 new loan transactions in 2015, a testament to the selectivity and credit-focused nature of the Monroe Capital Management team.

Reason number four: MRCC investors benefit from Monroe Capital's award winning investment platform. Monroe Capital has been recognized by Global M&A Network as the 2015, 2014, and 2013 small middle markets lender of the year. By Private Debt Investor, as the 2015 lower middle market lender of the year, the 2014 senior lender of the year, and the 2013 unitranche lender of the year and finally, the US Small Business Administration, as the 2015 small business investment company of the year.

Reason number five: the recent increase in the family of funds cap on SBICs has the potential to materially benefit MRCC. This year's omnibus bill, passed by Congress on December 18, 2015, included several stipulations that will benefit BDCs, including an expansion to the small business investment company program. One change comes with increasing the family of funds cap on SBA guaranteed [imbentures], from $225 million to $350 million, for an affiliated group of SBICs. As SBA guaranteed debentures do not count against the BDC regulatory leverage limitation of one to one, this additional capacity could materially benefit a BDC that is able to receive an increase in its debenture cap.

MRCC has recently submitted a commitment application to the SBA, for an $80 million increase in additional SBA debentures, which would allow MRCC to grow its portfolio significantly. There is no assurance that the SBA will grant this request, or the time period in which this request will be granted. However, we believe that MRCC's solid track record of performance, and Monroe Capital's recognition as the SBIC of the year by the SBA in 2015, makes MRCC's SBIC sub a very good candidate to receive these additional debentures.

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 we have continued to generate high yielding opportunities, which has allowed us to maintain a high level of weighted average yield in the portfolio. As of December 31, the portfolio was at $341.1 million at fair value, an increase of approximately $11 million since the prior-quarter end.

At December 31, we had total borrowings of $123.7 million under our revolving credit facility, and SBA debentures payable of $40 million. The increase in outstandings under the revolver are the result of portfolio growth.

During the quarter, we also announced an amendment on our credit facility, which increased the capacity under our revolver to $160 million, a $25 million increase, and increased the accordion feature of the credit facility to $300 million, to allow for future growth. We reduced pricing on the facility by 25 basis points, and extended the maturity by three additional years. As of December 31, our net asset value was $184.5 million, which increased slightly from the $179.9 million in net asset value as of September 30, primarily as a result of capital raises under our ATM program during the quarter.

On a per share basis, our NAV per share was stable, decreasing very slightly from $14.21 at September 30, to $14.19 per share as of December 31. When compared to December 31, 2014, our NAV per share increased by $0.14 per share. As Ted mentioned in his remarks, we are one of a very small group of BDCs that can point to per share NAV growth in 2015. On an NAV basis, including dividends but not assuming reinvestment, we returned approximately 11% to shareholders during 2015, a record we are very proud of in a challenging market environment.

Turning to our results for the quarter ended December 31, adjusted net investment income, a non-GAAP measure, was $5.1 million, or $0.40 per share, an increase of $0.05 per share when compared to the prior quarter. At this level, we continue to comfortably cover our quarterly continued of $0.35 per share. Additionally, this quarter, we generated net income of $4.2 million, or approximately $0.33 per share, a decrease from the net income in the prior quarter of $0.38 per share.

The increase in per share adjusted NII from the third quarter was primarily due to the increase in interest and dividend income in the quarter, as the portfolio continued to grow, as well as the increase in prepayment fees and pay-down gains during the quarter, as repayment activity in the prior quarter was minimal. Stripping out fee income and pay-down gains, our per share core net investment income was still higher than the prior quarter, and covered the dividend.

As we have discussed in prior calls, we generally have a robust level of prepayment activity in the portfolio, which is additive to earnings and returns. But quarter to quarter, this activity can be volatile and unpredictable. While the fourth-quarter prepayment activity was greater than the prior quarter, it was still lower than our recent historical average level. Looking to our statement of operations, total investment income for the quarter was $10.1 million, compared to $9.2 million in the prior quarter. The increase in investment income is primarily as a result of the growth in the portfolio, as well as increased prepayment fees and pay-down gains.

Total expenses of $5.1 million included $1.6 million of interest and other debt financing expenses, $1.5 million in base management fees, $1.3 million in incentive fees, and $755,000 in general, administrative and other expenses. Of the $1.6 million in interest and other debt financing expense, approximately $1.4 million was cash interest expense, with the remainder representing non-cash amortization of the upfront costs associated with establishing our credit facility and our SBA debentures, as well as the interest expense associated with the secured borrowings under ASC-860.

As for our liquidity, as of December 31, we had approximately $36 million of capacity under our revolving credit facility. While our SBIC debentures were fully drawn at $40 million at the end of the quarter, we did have $8.6 million of restricted cash available in our SBIC subsidiary, due to recent repayments. As Ted mentioned in his remarks, Congress passed a bill in December of 2015 which increases the family of funds limit on SBA debentures from $225 million to $350 million.

As SBA debentures are disregarded for the purposes of a BDC's leverage test, this additional capacity could materially benefit a BDC that is able to receive an increase in its debenture cap. MRCC recently submitted its commitment application to the SBA for $80 million in additional SBA debentures, which, if approved, would bring MRCC to a total of $120 million in debentures. While there is no assurance that the SBA will grant this request, our manager, which was named as the 2015 SBIC of the year, has a very strong track record, which we believe makes our SBIC a very good candidate to receive additional debenture capacity.

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

Thanks, Aaron.

In 2015, we provided investors an 11% return, based on the growth of our NAV and dividends paid to stockholders. We believe this puts MRCC in a very small and select group of BDCs that have delivered this level of performance for its shareholders. We cannot reconcile this performance as to how our stock traded at the end of 2015, or in early 2016. This makes no sense to me and us. We are comfortably covering our dividend with NII. We have grown our per share NAV since the beginning of 2015, and paid out $1.40 in dividends in 2015.

On every single metric under our control, we have delivered for shareholders, and we intend to continue to do so. With our stock trading at a 10% discount to our most recent NAV, and a dividend yield around 11%, fully supported by net investment income, and a stable book value, we believe that Monroe Capital Corporation provides a very attractive investment opportunity for shareholders and other investors.

Thank you all for your time today. We appreciate you joining us on this call. And with that, I'm going to ask the operator to open the call for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

Good morning, Ted and Aaron. First, congratulations on a very good year. I completely agree with your remarks regarding your performance relative to most of the BDCs that I cover.

I wanted to first ask about the third SBIC license. If you were fortunate enough to be approved, could you give us an idea of how much total leverage you would be willing to run the balance sheet at?

Sure. Mickey, we've always focused more on the regulatory leverage side. And so, when we think about leverage, we are comfortable going above one to one, on a total leverage basis. And we look at regulatory leverage anywhere from 0.7 to 0.8, depending on the mix of the portfolio. And that's really where we focus.

Thank you. Couple more questions. The Rockdale Blackhawk equity was marked up pretty significantly in the quarter. What drove that? And was that valued by a third party, or did you guys value it yourself?

I'll answer the second question first. It was 100% valued by a third party, as was every asset on our balance sheet, and has been done so on a quarterly basis. As you can imagine, I can't get into a lot of specifics as to an individual credit. But the reason that it was marked up is because the Company is executing very well on its plans, and continues to grow its EBITDA performance and its valuation.

Okay. Just a couple more. On the other hand, TPP acquisition, and the unitranche loans at TPP, and the Rocket Dog Junior were marked down. Was that in relation to wider spreads? Or are there issues at these companies that you're dealing with?

Yes, good question. As you probably recall, TPP and Rocket Dog are two of our names that have had some challenges that we've talked about in prior calls, as well. TPP had a fairly difficult fourth quarter. We're working on a strategy for that name, to improve its cash flow and its performance, and we're hoping that, in the future, we can see a turnaround in that.

But it's subject to what was a very weak mall-based retail environment in the fourth quarter, and unfortunately, that's where that company is located, in the malls. Rocket Dog is a pretty small holding at this point. I think it's just, the turnaround there has just been a little slower than we anticipated, but we still have good hope for that company to recover, and to generate some value for us in the future.

Okay, and my last question, just curious how Landpoint is doing. Its mark has not deteriorated. And if I recall correctly, they do surveys for oil and gas companies. So what are they doing that is insulating them from all the havoc that we're seeing in that sector?

Yes, so Landpoint is a surveying company, and they do have a number of oil and gas related clients, but they're not 100% oil and gas. They have exposure to other parts of the general market, general commercial construction and civil construction. And they have been undergoing a strategy to expand that part of their business over the last year or two. And so while they certainly have seen declines in their oil and gas pipeline related surveying work, and their oil and gas exploration and production work, it hasn't gone away.

There's a several quarter lag, in some cases several year lag, between the time a well is drilled and the time that it's finally connected to the pipeline. And so they still have some work that's coming, as a result of that. And the most important reason that that name wasn't marked down heavily is because of the way that we structured that loan.

As Ted talked about in his remarks, we've always shied away with companies that have exposure to commodities, and oil and gas prices, and so we structured that loan in way that we knew we could withstand any movement in commodity prices. And so we had a very, very low leveraged loan when we started with them. The leverage has increased slightly, of course, as their performance has deteriorated slightly due to the oil and gas declines.

But our total leverage on that name is still in the mid-2's, on the 2 times leverage basis. So very comfortable that they're able to service all their debt, and the management is very strong there. They're taking market share in all sectors, and they're continuing to grow. And so we're very comfortable that we're in a very good position with regards to that name.

Thank you for that, Aaron. And again, congratulations on a good year, Ted and Aaron.

Thanks, Mickey.

And (multiple speakers) for all my questions.

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

Thank you. I'll second the motion on, congratulations on a nice job. Ted, the -- looking for some comments, from your viewpoint, on how the economy is doing, as it relates to your portfolio, as we look out into credit performance in 2016? You seem to be in some of the right places where the economy is doing better, not so much in industrial, obviously not oil and gas. But I was wondering, I'd like to get some comments on where you think the economic outlook is?

That's always a hard question, Bob, because it's a crystal ball. The good thing is that we've got a little over 200 companies in our portfolio here at Monroe, so it gives us some insight into the overall economy. And I will tell you that the place where we play primarily is in that $3 million to $25 million EBITDA size company, probably average somewhere in the $5 million to $15 million EBITDA size company, generally. And that space has been the most resilient part of the overall economy in this current cycle, as it was in the last cycle.

There's no -- it's not a secret why we play in this space, and why I'm very focused on this sub-$20 million EBITDA area, this market segment. In the crisis years, 2007, 2008, 2009, that was the area that suffered the least. And the reason why it suffers the least is because very few of the revenues in companies in that segment are generated by export sales, or by overseas relationships with vendors or customers, suppliers or distribution channels. We tend to finance US concentric companies that have US concentric suppliers and distribution channels.

And we tend to stay away, as I mentioned in my remarks, from industries that are highly correlated with commodity prices, or with agriculture, or with things that the weather can affect, or things that are extracted from the ground, in terms of minerals, things that tend to be very focused on cyclical economic swings. So I will tell you, while I am not bullish on the large cap market, I'm not bullish on the -- necessarily, the retail segment of our economy, I'm not bullish on the oil and gas materials, mining, minerals extraction.

I am relatively happy with lower middle market companies that have a reason to exist, and have been around through several cycles, and have a diversified customer base, and generate decent cash flow. Those companies are going to be around. And of the nine offices that we have, and almost 20 originators, when I talk to them weekly, about were -- what ponds and what pools we should be fishing in, that's where I tell them to fish. Because I think that in 2016, we're going to have another extraordinary year at Monroe in that space.

Great. That's very helpful. Just one more question. The Blackhawk investment, that -- obviously, you guys have a good one there. But just some thoughts on equity, on how much equity you would like to hold? Are you -- is there any increased focus, at the margin, on having more equity investments tied to your debt? Or -- and then how long would you hold an investment like Blackhawk, and not sell the equity?

Sure. So we're focused, as you know, primarily on debt. That's what we do. We're a middle market lender.

There will be times where, due to opportunity, we will have the ability to either get equity as a part of our investment, or purchase, at a very low price, a little bit of equity in conjunction with our investment. It's not something that we've increased our focus on. It's not something that we lead with. It's not our primary focus. And so we don't have a predisposition to increasing our equity investments.

The reason our equity investments have increased is because of valuation. It's not because of a change in focus. So that's the answer to the first part of the question.

As for the plans with this particular investment, we're not a majority owner. We don't control what the Company does or doesn't do, and it's not a liquid Company. So it's not like it would be easy for us to find someone to buy our equity, if we chose to monetize it.

As it is, in this particular instance, we think there's material upside to our valuation long-term, and so I really don't have any interest in selling our equity today, even if there was a buyer for that. But we will end up monetizing that equity when the Company decides it's time for them to monetize their equity, or bring on a strategic partner, or sell to a private equity investor or a strategic. While we're certainly involved with the company, and they talk to us regularly, we're more of a passenger than a driver on that car.

Great. Thank you.

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

Good afternoon, Ted and Aaron. So we recently heard a large BDC state their desire to be more active in ABL deals to traditional retailers. Now, you guys entered this space last year, along with consumer products. So I'd like to get an update on the progress you've made in the vertical, and the opportunity you guys see there?

Yes, I also believe -- obviously, that's why we're in it -- is that there's an opportunity in the space. The retail market is undergoing a significant change here in the US.

Brick and mortar retailers, for all practical purposes, have trended lower, year over year, in the last couple years. And that's because of the increased competition from the online retailers, and the non-brick and mortar providers of consumer goods. So whenever that happens, there's going to be a change that takes place.

I've been following this space quite a bit. We've been doing this business since 2000. And you guys may not recall, but from about 2000 to about 2004, we ran a lending group that focused on lending to retailers, and that was about 15 years ago. And we did probably a dozen different loans to retailers, and I really stopped doing that around 2004, 2005, because I didn't believe the risk/return in that space justified the investment. Now, there's been lots of consolidation in that space, in the lending space.

You've got a couple of very, very large lenders that are focused on the investment grade aspect of the retail space, and you've got many other players that have left the space entirely. Now, this is an area that is a very, very, very difficult area to lend into. You need lots of experience. You need lots of expertise. You need to understand appraisals, need to understand liquidations, you need to understand how retail and consumer goods get sold in a consumer liquidation process.

Otherwise, you're going to get hurt, and lots of lenders have gotten hurt in this space over the years. We have that expertise. We did that, as I said, about 15 years ago, and we hired what I consider to be a couple guys that are as good as anyone in this space, in terms of generating opportunities, and in terms of understanding how to structure and win these deals. We have a Best-in-Class platform, when it comes to credit and underwriting, and our loss history is enviable for everybody in this industry.

So I think when you combine the Monroe historical experience in the space with our strong, strong credit skills, and what's going on in the economy in general, I think there's going to be a lot of opportunity in this space. The challenge is going to be only picking the ones that are in the fairway. And that's what I'm focused on, and not taking undue risk here in this space, which others will.

Makes a lot of sense. Thanks for all that color. Switching gears, so looks like a couple of the unitranche loans that we've already talked about were marked down a little bit. And I'm curious, are you guys worried, in the event of bankruptcy, how the court would rule on any of your agreement among lenders?

The short answer is no. I'm not worried. There were some of these loans that have been marked down, but a lot of these loans are marked due to either some performance -- a couple of them are performance issues that Aaron mentioned. But mostly, we're in a general market here, where we've seen lower discount rates, more stress generally. So what we do with our portfolio is, we get 100% of our portfolio reviewed, every quarter by a third party, several third parties, unlike some of our peers.

We don't rotate. We don't pick and choose certain names. We have 100% of our portfolio reviewed. So you're going to see some volatility, quarter to quarter, in the unrealized mark-downs.

Now, what you asked about specifically is the bankruptcy court. We've been in bankruptcy in a number of cases. We've been in bankruptcy in -- over the years, in first lien. We've been in bankruptcy in second lien. We've been in bankruptcy in unitranche.

We probably do more unitranche than any other player in our space. As I said, we've been doing this for 15 years. We think we've got a pretty good formula. It's been blessed, and it hasn't been affected in several bankruptcies that we've been involved in and we think we've got a pretty good formula for how to attack this.

We tend to control the credit in all these aspects. We tend to be the agent. We tend to determine what kind of reserves. We tend to determine how we run the bankruptcy, and we're the senior secured lender.

So other than normal bankruptcy risks, like whether you're unsecured, whether you've got first day orders, whether you've got cash collateral discussions, all those impact every bankruptcy there is. And as the senior secured creditor here in the first position, not the unitranche lender in the second position, we feel we're in a pretty darn good position, with respect to our documentation and the bankruptcy law process.

I'll just add one other thing, Chris, which is, when you think about first out, last out loans, in the larger part of the market, you're probably used to seeing guys push first out leverage to 3 and 4 times, and have small last out leverage behind that, a couple of turns. That's not traditionally and typically how our unitranche first outs are structured. We're usually much more conservative, in terms of the first out leverage. It averages between 1 and 2 times, in most cases, at the time we originate the loan.

And so we're not talking about a first out lender that's as close to potential impairment when trouble happens. And we're also talking about first out lenders that have normally received significant amortization, and have gotten much lower, in terms of their attachment point. So we're usually pretty aligned with our first out lenders, in situations where they're stressed, and we usually control, and they just come along for the ride.

Makes sense, yes, that clarification and distinction makes a big difference. Lastly, so it looked like balance sheet leverage in the -- were relatively unchanged during the quarter. But hoping if you could provide us an update on how you were thinking about balance sheet leverage and liquidity, in the current environment? And then, the potential desire for additional equity, in excess of just using the ATM?

Yes, so -- and I mentioned this a little bit earlier. We tend to think about leverage on a regulatory basis. And we tend to think of leverage as a target between 0.7 to 0.8, on a regulatory basis, depending on the mix of the portfolio.

One of the reasons we don't focus as much on the total leverage is because we know, based on the number of SBA debentures that will be available to us in the future, that that non-regulatory, that book leverage number, is never going to get so high that it gets to a point where we would have concern. We'd be comfortable with our portfolio mix of having total leverage, if there was no regulatory caps, well above 1 to 1. The SBA itself provides 2 to 1 debt to equity leverage on loans, and we think that's perfectly acceptable leverage. And so we could never really get to two to one leverage, on a book basis, in our portfolio.

So we're not at all concerned about where our leverage would go, in terms of total leverage. We're focused more on making sure there's enough buffer between our regulatory leverage and the cap, so that we have room for whatever might happen in the future, with regards to market movements and unrealized marks, and things like that.

We like to keep a buffer there, so that we can control our own destiny. That's really what we're focused on, when we think about leverage.

Now, for your other question about capital raising, clearly, we have tons of opportunities, and the BDC is very close to capacity today. And so we would love to be in a fortunate enough position so that we could go out and accretively raise equity, both through the ATM and through an underwritten offering. As everyone knows by looking at our stock price today, we're not there, and I don't know when we will be there.

We think we should be there, but we're not. And so when the stock gets to a healthy premium to book value, which we hope is sooner than later, we certainly would consider equity raises outside of the ATM. But with our stock trading below NAV today, which we all scratch our heads at here, we're out of the equity market today.

Great. That's it from me. Thanks, Aaron and Ted, and congrats again on a good year and all the lending accolades.

Thanks, Chris.

Thank you. Our next question comes from the line of Bryce Rowe with Baird. Your line is open.

Thanks. Good afternoon. Wanted just to clarify, on the SBA request for additional commitments. Ted and Aaron, do you guys have three licenses, in fact, in the Monroe family? And so the question is, did you apply for a third license? And if not, just curious, did other parts of Monroe, the Monroe organization, also request commitments? Thanks.

Thanks, Bryce. We do, in fact, have three licenses in the Monroe family. One license is a license that we obtained several years ago, and that, right now, is full up, with $150 million of debentures. And then we had a second license and a third license.

The second and third were split evenly between the BDC and another fund. What we did is, we made application only for $80 million thus far, for the BDC sub. So we did not make any other applications, at this time, for additional SBA debentures.

Our view is, right now, we were SBIC of the year last year. We believe we have Best-in-Class performance with our BDC. And we wanted to take advantage of that, and make application, now that we were able to, for additional SBA debentures in the BDC SBIC. And we did that, as I mentioned in my remarks, and we made an application for an additional $80 million of debentures.

That's helpful, Ted. And just a follow-up to that. Have you had some interaction with folks at the SBA? And have they given you any indication, in terms of timing? Is it a three month process? Six month process? What are your expectations?

I will tell you that we made the application. We have not received any response back on the application yet, which is very typical. And I will also tell you that we are the absolute first applicant for the increase in the SBA debentures. So right now, the process has no historical precedent at the SBA.

I think that they're -- over at the SBA, they're determining how they're going to run this process, and what they're going to do. So I can't give you, unfortunately, any real guidance on how long it may take, or when it may be done. But I will tell you that I hope it's soon. But all I can tell you is that, based on past experience, we're dealing with the SBA, and they move at their own pace. But we're the first in line, which is the good thing.

Understood. All right. That's helpful. Thanks, Ted.

Thank you. Our next question comes from the line of Christopher Nolan with FBR and Company. Your line is open.

Hey, guys. Aaron, what was the yield on new investments, please?

I'm looking to see. I don't know if we typically disclose that. So it's not an item that we disclose. I'll tell you that it tends to be somewhat flat. I think it was somewhat flat the last quarter. It's going to be high single-, low double-digit kind of yields is what you'd expect.

I think it's reasonable that you would expect that the loans that we make today are, by a margin, a lower yield than the loans we made when we launched the BDC. Because in that market, we were able to really drive higher yields. But the loans that we're making now are supportive of our core NII, and don't dilute at that.

And so you could go through and look at the new names and origination in the fourth quarter. It was a handful of names. I'm just looking at the new names. One was 10%, the other was 10%. They tend to be around 10% and change, if you just look at them.

Yes, okay, great. And then as a follow-up, during 2015, it looks like junior secured loans was a category of lending that really jumped a lot. Given all the turmoil that was happening in the market during 2015, what was the thinking behind going down the capital stack, in terms of increasing exposure to them?

Yes, I think that we looked at -- first of all, we're a credit shop, right? So everything we do is based, first and foremost, on what credit risks are we taking, and are we comfortable with the risk-reward of that credit risk? And so we look all across the market all the time, and have access to both originated assets, as well as assets that are available in the club deal market, as well as the syndicated market.

So originally, when we put some money to work in junior secured, it was because we had raised some capital through the last underwritten offering last year. And we're looking for ways to get take that capital to work fairly quickly, and we found some opportunities in the market that we liked, that we knew that we could underwrite through our process, that we thought were good risks. And so at that time, the yield on first lien liquid assets was not high enough, and we didn't think correctly priced. But we did think there were opportunities, in the second lien market, to buy some really nice assets.

We don't go out and buy the market. We go out and buy individual credits, and we found credits we liked.

Now, you will note that some of those names have taken some unrealized marks, since the time that we put them on the books. And we certainly aren't happy about that, but we don't look at that as an answer. We look at it as an opportunity. And so as we go forward, we look at all those names, and when there is dislocation, we selectively will look to potentially add to those portfolios. And you may see some of that in the future.

But the thinking was, is it the very best credit for the return? And does it meet our investment thesis? And the answer for those names was, yes, it does. And it wasn't taking us up to an unreasonable level of second lien exposure, overall, for the portfolio.

Yes, and Christopher, one other comment on that is that we manage this -- our business here for the long term, and for the long-term benefit of the shareholders. I don't manage this on a quarter-to-quarter basis, based on marks. In Q3 and Q4, second lien paper gapped, and it gapped out unreasonably. So what we did is, we did, on an opportunistic basis, we took advantage of some of those gaps, and some names that we knew and understood and liked.

To the extent that happens again in 2016, I would do the same thing. It's just a function of the opportunity, quarter to quarter, and what happens with the overall market.

If you look back at Q4, just for an example, first lien liquid names traded down from the 98 to 99, to 95, 96. And that happened because, all of a sudden, the CLO market went away in late Q4, and those names weren't worth any less. They were actually just as good as they were the quarter before. But 4 or 5 points of value were able to be picked up by investors that were sophisticated, and we did the same thing in the second lien market, in Q3 and Q4.

And then as a follow-up to Chris York's question, on debt leverage, when you're talking about the 0.7 to 0.8 range -- correct me if I'm wrong. But in the past, you hedged a little bit, saying you could go up to 0.85, if the book is a little bit more weighted to senior secured loans. The fact that you're not talking about a 0.85, should we be looking at that in terms of, you're seeing more opportunities in the junior secured second lien?

Yes, good question. The answer is, the only reason I'm not talking about 0.85 is because we've already made a slightly larger bet in the junior secured market than we had. So it isn't a signal that we're going to necessarily do anything different, going forward.

It's just, as you pointed out, our second lien exposure has grown. So as it grew a little bit this year, the top end of that range, I took down a little. If we put on a lot more first lien opportunities in the future, we might then talk about 0.85 again, depending on what we see in the horizon, what we see in the economy, what we see in the finance market.

The good news is, for us, we have a really nice bank facility, led by ING. We just re-did it, to push out the maturity longer. And so people worry about -- we expanded this, and put an accordion is that's large, so we've got room to grow with it. And so sometimes, when people get worried about those facilities, what they worry about is that they'll have a maturity at a time when things are not going as well in the general economy, in the level of loan trading. And so they don't want to get too high on their leverage, because they might have a maturity.

For us, that's not an issue. We have got a long tail on our maturity there, and so we have got some flexibility. So I wouldn't read too much into the fact that I'm not saying 0.85, and I'm saying 0.8 now. It's really more a consequence of where the portfolio is today, but that could change.

Okay. Thanks for taking the questions.

Thanks, Chris.

Thank you. And our last question comes from the line of Christopher Testa with National Securities. Your line is open.

Good afternoon, Aaron and Ted. Thanks for taking my questions.

Just with the unitranche portfolio, it shrank pretty significantly this year, the originations were light. I just wanted to know if that's more of a concerted effort on your part, or whether the volume is just light there? I know it's a sponsor finance instrument, mostly. And if the structure there is reflective of the market conditions, or whether sponsors are still wanting too much leverage?

Couple of questions embedded in there, Christopher. So there's plenty of opportunities for us that we're looking at. The challenge is, again, Aaron mentioned, we tend to be very credit focused. The market took up leverage a little bit in Q2, Q3 last year, and we just didn't want to play at some of the leverage levels in the unitranche.

In Q4, we saw the leverage stabilize, and in the first quarter this year, we're seeing it actually reverse and come down. So I would anticipate that you'll see probably more unitranche. But again, our job is to make money for shareholders, and we do that depending upon where we are in the current credit cycle, and where the market is pegging risk return. So I tell you, hang loose on that, more to come.

Okay. And I noticed you opened another office up in Toronto. I was just wondering if you could give any color on whether there's any specific verticals that that office will focus on? Just any thoughts there?

As you know, as I mentioned of before, we have several verticals throughout the firm. We have a strong healthcare. We have a strong media and telecom. We have a strong retail -- ABL retail business that we've developed, and we have a strong media vertical, as well. In addition to that, we have nine overall offices. Toronto, specifically, is a great market for middle market and lower middle market. And we anticipate utilizing that office now, and selling all of our verticals through that office, in Toronto and throughout Canada.

Got it. I just wasn't sure if there was a specific focus for that one. And just shifting to the vertical, I know you guys have the bulk of the portfolio in healthcare. Just I've seen a lot of credits at other lenders in healthcare get either marked down, or experience some problems with reimbursement risk. How much of the healthcare portfolio would you characterize as having some sort of reimbursement risk to it?

Good question. I think the reality is, in the healthcare market, a lot of the healthcare segment has reimbursement risk. I think the key to reimbursement risk is having professionals in your verticals that specialize in healthcare, and know how to analyze and think about the reimbursement risk element. It is, by far, the number one underwrite that we go through, when we think about a deal. And we almost always go out and commission some sort of reimbursement study, with some of the experts out there that know how to look and think about reimbursement.

And so it is a big focus of the underwrite. Now, having said that, not every piece of healthcare deal that we'll do will have that sort of exposure. But it's very credit specific.

And the funny thing about healthcare, there's some industries that, when you think about that industry, all the companies in an industry are very similar. Healthcare is not one of those industries. Healthcare could be behavioral health. It can be hospital based. It can lab services. It can be technology that's around healthcare.

And so it's a very broad category. And it's -- and even though we have a big exposure there, it's pretty diversified amongst types of companies in that industry, and it's actually still lower than healthcare is, in terms of its percentage of our GDP in the economy. So it is an area we like.

It is an area that we think is important. It is an area that we think has a lot of safety, because demand never goes away for healthcare. But the things you're thinking about are the things that I can assure you we think about, and [perseverate] over each time we look at a deal. And reimbursement's a big part of that assessment, and it's a big part of the risk we price.

Great. And just last one for me would just be, given the earnings have -- you've really out-earned the dividend, on an adjusted NII basis. What level would you have to get at, ex -- I guess you would call lumpy fees that are embedded in there, before you think of increasing distributions?

It's a great question. It's a question that our Board and Management discuss each and every quarter when we meet, which is, what is our earning outlook? Where are our earnings today? What's the long-term plan? And what do want to do with the dividend?

And it's true that we earned a $0.40, on adjusted NII basis, this quarter, and we're paying a $0.35 dividend. I think that, when we think about our business, we think about our core income. And we think about, what is something we can bank on? What's money in the bank for us, on a quarter-to-quarter basis?

And we think about the dividend based on that. And we'll look, at the end of the year, as to whether there's additional income that we want to distribute or not distribute. But we are not looking at $0.40, when we think about our run rate for what we do. Because, as you could tell by what we've disclosed, our core income is closer to $0.36.

And so that's really what we think about, when we think about our earning potential in the portfolio. We don't want to ever rely on -- and I don't think you should be relying on, when you're thinking about our name -- those higher prepayment fees, and fees, and things like that.

We're really thinking about $0.36. And so when we look at a dividend of $0.35, we're glad we can cover it with all the extra stuff that we do in the quarter, and we do have those, from quarter to quarter. But we're really focused on that core income, and that was $0.36 in the quarter, and that's what we think about when we think about the earning assets of the portfolio, and their return. And that's what we think you should be focused on.

Great. Thanks for taking my questions, and congrats on a great year.

Thanks, Chris.

Thank you. And this concludes our Q&A session for today. I would now like to turn the call back over to Ted Koenig for closing remarks.

Good. Thank you all for taking the call this afternoon. As Aaron mentioned, we focus our business here, long term, for the benefit of our shareholders. Short term, we want to make sure that we're covering our dividends with core earnings. And as Aaron said, we focus on $0.36 as our core earnings, and that's what, quarter to quarter, we manage our business to. The rest of the stuff that comes in may or may not happen. It's highly episodic, and we don't count on that to run our business.

So in 2015, we provided our investors with an 11% return, based on growth of our NAV and dividends paid to our stockholders. We believe this puts us in a very small and elite group of just a couple of BDCs that have delivered to this level of performance for shareholders. As I told you earlier, I can't reconcile our performance to the stock price in 2015, and I probably won't be able to do it in 2016.

This makes no sense to me, but all we can focus here on is our business and in fact, we're comfortably covering our dividend. We've grown our per share NAV, year over year. We paid out $1.40 in dividends in 2015. So every metric under our control, we've delivered on, and we intend to continue to do so, and that's important.

With our stock trading at a 10% discount to our most recent NAV, and a dividend yield of around 11%, fully supported by net investment income, a solid book value, I believe that Monroe Capital provides a very attractive investment opportunity for our shareholders and other investors. We greatly appreciate all of you that take the time to cover us, and talk to us from time to time. I hope that we're able to add a little value in how you look at the middle market, and understand, particularly, the lower middle market, since it's highly fragmented.

So with that, I'll thank you for all your time today. I want to wish you an enjoyable weekend, and we'll speak to you again next quarter.

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