Monroe Capital Corp (MRCC) 2016 Q3 法說會逐字稿

Welcome to Monroe Capital Corporation's third-quarter 2016 earnings conference call.

Before we begin, I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward-looking statements, including statements regarding our goals, strategies, beliefs, future potential, operating results or cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions and projections as of today November 8, 2016, these statements are not guarantees of future performance. Further time sensitive information may no longer be accurate as of the time of any replay or listening. Actual results may differ materially from results of risks, uncertainties and other factors including, but not limited to the factors described from time to time in the Company's filings with the SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements.

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

Thank you everyone who has joined our earnings call today. I'm joined by Aaron Peck, our CFO and Chief Investment Officer.

Last evening we issued our third-quarter 2016 earnings press release and filed our 10-Q with the SEC. I will provide an overview of the quarter before turning the call over to Aaron to go through the results in more detail. He will then turn the call back to me to provide some closing remarks.

We are very pleased to have announced another strong quarter of financial results. For the quarter we generated adjusted net income of $0.37 per share, covering our third-quarter dividend of $0.35 per share. This represents the 10th consecutive quarter we have fully covered our dividend. We're particularly pleased that we were able to cover our dividend in the quarter despite raising additional equity capital of approximately $53 million of net proceeds.

Given the natural lag associated with putting capital to work after an equity raise, we are pleased that our net investment income still outperformed our dividend run rate. Our consistent dividend coverage continues to separate us from the pack of the BDCs that have either cut their dividends, or have been unable to generate net investment income in excess of their most recent dividend, or are covering their dividends artificially by temporarily reducing their management fees.

Our book value per share decreased slightly to $14.42 per share as of September 30, an $0.08 per share decrease from the book value per share at June 30. The slight decrease in book value per share is primarily the result of net unrealized mark-to-market decreases in the value of certain assets in the portfolio, offset by the book value accretion associated with our accretive capital raised during the quarter.

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

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

BDCs that have a significant amount of their investments in second lien and unsecured mezzanine loans, are much more likely to take markdowns in their portfolios and experience losses when the economy takes a negative turn. As we previously announced, we were pleased to price an accretive equity offering on July 20 which raised net proceeds of approximately $53 million.

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

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

Thank you, Ted. Our investment portfolio grew during the quarter, and we have continued to generate a sufficient amount of opportunities to allow us to maintain a high level of weighted average yield in the portfolio.

As of September 30, the portfolio was at $377 million of fair value, an increase of $34 million from the prior-quarter end. At September 30, we had total borrowings of $104.5 million under our revolving credit facility, and SBA debentures payable of $40 million.

As of September 30, our net asset value was $239 million, which increased from the $188.7 million in net asset value as of June 30. Primarily as a result of the capital raise we completed during the quarter. On a per share basis, our NAV decrease slightly from $14.50 per share at June 30 to $14.42 per share as of September 30, primarily as a result of net unrealized mark-to-market decreases in the fair value of certain assets in the portfolio.

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

Most of the asset growth during the quarter came near the end of the quarter. And therefore, we did not recognize significant interest income in the quarter associated with this portfolio growth. We have continued to grow the portfolio after quarter end expect to recognize additional interest income associated with the new assets we have closed into the portfolio.

During the quarter we also experienced a lower amount of fee income than in prior quarters. As prepayment activity was more muted than in prior quarters. This also contributed to our decrease in per share adjusted NII from the second quarter.

Dividend income during the quarter from our equity stake in Rockdale Blackhawk also increased lightly when compared to the prior quarter. As we've discussed in the past, we expect that we could continue to receive significant dividend income from Rockdale in future quarters, long as we continue to hold the equity and the company performance remains strong. These distributions are difficult to predict, are out of our control, and can be lumpy, and we acknowledge that if this investment were to be sold in the future, we would not be able to easily replace this level of dividend income.

As for our core net investment income during the quarter, if you were to strip out fee income and pay-down gains from adjusted NII, our per share core net investment income was approximately $0.35 per share, covering the dividend. Additionally, this quarter we generated net income of $3.6 million or approximately $0.23 per share, a decrease from the net income in the prior quarter of $0.41 per share. This decrease is primarily due to an increase in net unrealized mark-to-market losses during the quarter.

Looking to our statement of operations, total investment income for the quarter was $11.1 million, flat from the prior quarter. Total expenses of $5.6 million included $1.5 million of interest and other debt financing expenses, $1.6 million in base management fees, $1.2 million in incentive fees, and $863,000 in general, administrative and other expenses. We also accrued excise taxes of approximately $342,000 in the quarter.

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

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

As for our liquidity, as of September 30, we had approximately $55 million of capacity under our revolving credit facility. We had $40 million in SBIC debentures drawn at the end of the quarter, and $2.2 million of restricted cash available for reinvestment in our SBIC subsidiary due to recent repayments. As we have disclosed in prior calls, MRCC was approved for $75 million in additional SBA debentures which, once strong, would bring MRCC to a total of $115 million in debentures.

As of September 30, none of the additional $75 million in SBA debentures had been drawn. As with prior capital raises, we initially used the net proceeds of the recent equity offering to pay down our revolving credit facility and have begun to redraw on the facility to grow the portfolio. We would expect to continue to redraw on the facility to make investments in the next several months, both at the BDC parent company as well as in our SBIC subsidiary with respect to the additional debentures.

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

Thanks Aaron. The current pipeline for all of our funds at Monroe continues to be strong. Our focus on proprietary national lower middle market origination has continued to provide our funds with unique attractive investment opportunities with high-risk adjusted returns. We have continued to generate solid earnings and cover our dividend with real earnings at a time when many of our peers struggle to do this.

We attribute our success to our differentiated origination platform and the depth of the entire Monroe Capital organization, which has supported a high effective yield and strong credit performance in our portfolio. Our liquidity remains very, very strong. Given the $53 million of new equity capital raised, our quarter end capacity of $55 million on our revolving credit facility, and our $75 million in committed and undrawn SBA debentures, MRCC has plenty of capital and capacity to grow our Company profitably.

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

Thank you all for your time today. With that I am going to ask the operator to open the call for questions.

(Operator Instructions)

Bob Napoli, William Blair.

Thank you, good morning. Just a question on credit. Are you seeing any, Ted, any changes in your view of the trends in the portfolio, the economy as it's affecting your portfolio? Just some thoughts around credit, your comfort with credit would be helpful.

Thanks for the call Bob and the question. Not really. I will tell you that we've got over 200 companies throughout our platform, and we monitor those companies very, very carefully. The BDC only has -- Aaron what's the total number of portfolio companies?

About 62.

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

So I think if I look at the BDC today, I am very bullish on -- we've got one company that's nonperforming and nonaccrual and that's the picture people, we've talked about in that in prior calls. But with the exception of that one particular company, I like where we are, I like the credit, and I like the performance.

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

Good question, Bob. As usual, we selectively put on what I call some transitional or transitory loans and we have put on a few to date. And this quarter look to the first lien loans that are sort of anything sort of under 8%, most of those would be loans that would be considered transitory. I'm happy if you want to go through them specifically after the call and sort of highlight for you the ones that are what I consider transitory, but we are doing some of that we'll continue to look selectively at those types of assets.

I don't want people to be too -- don't necessarily assume that an 8% loan is a transitory asset. There are a couple that we've closed into the SBIC sub that are Monroe agency deals, because those still are accretive with that excess leverage that we get through the SBIC subsidiary. But I am happy to identify some of them with you off-line if you like after.

What percentage of our loans are shared with other Monroe entities?

Of the ones that are Monroe agency deals, it's nearly 100%.

If you recall Bob, we have an allocation policy at the firm where each of our funds has access to the entire Monroe originated transaction pool, and then those transactions get allocated based upon available capital of each fund. So the BDC, while it may be substantially smaller, and account for roughly 10% of the overall Monroe assets under management, gets a favorable allocation of every transaction that the Monroe platform generates.

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

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

Okay. So it allows you to be pretty incredibly diversified, I guess within the BDC which is nice. And just last question, the SBIC, for what timeframe would you expect to borrow the additional $75 million?

That's a good question Bob and always a difficult one to answer because we are -- it's long term capital so we're very patient with putting it to work and it's got to be just the right asset that fits the SBIC subsidiary. So I haven't been able to guide anyone too specifically on that other than to say I don't think it will be something that will happen within one or two quarters, it's probably something beyond that. But certainly I would hope within three to four quarters we'd have all the debentures drawn.

Great, thank you, appreciate it.

Chris Kotowski, Oppenheimer.

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

Chris, thanks for the question. TPP is a transaction that we placed on non-accrual. The company filed for bankruptcy. What's happened since then is that last Friday we were successful in credit bidding our debt for the company, and now we control the company. We have retained new members of new management, and we have a turnaround strategy that we've been working on now for six months. And we're about to implement it now that we control the company, and we feel very comfortable that our turnaround strategy will work and that we expect to hopefully receive a recovery of that claim.

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

Good question Chris. We are able to fund down there as much as we need. It's not an issue with regards to freeing up the capital. We absolutely have borrowing base capacity to be able to generate the cash we need to fund the SBIC subsidiary as deals come into the subsidiary that are appropriate that we want to close. And that's how we will handle it as they come in.

So it's not an issue with regards to having the available equity capital today to fund the entire commitment. The issue is really just making sure we're finding the right loans that we think are good value, loans that are SBIC eligible and funding them when they are ready to close. And we've got a number in our pipeline currently that we are on deep underwriting on and should they all close, we would expect to fund a significant amount down there. We will be set up and ready to do that in terms of cash.

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

Correct. We can generally do that.

As a follow-up to that question, Chris, we're in a unique position. MRCC is in a very unique position. We have the luxury of being able to fund transactions at the parent company or at the SBIC sub, and the only constraints we have is credit.

Our platform is a credit first, no loss platform. So instead of being aggressive in the market right now, as I mentioned on prior calls, we're being careful and we are allowing our origination platform to do what it does best and originate a wide swath of transactions. And we're being very selective about what we bring into the firm.

Okay. All right. Great. That's it for me, thank you.

Thanks Chris.

Mickey Schleien, Ladenburg.

Good afternoon or good morning depending on where you are. Ted and Aaron just a follow up on TPP, remind me, most of those points of sales are in malls, is that correct -- shopping malls is that correct?

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

What we have done is we have repositioned the company, and we have now put most of their locations in either Walmart stores, Buy Buy Baby stores, or Sears stores. And the great benefit of that is now we have gone to a variable cost model for fixed costs on rent. The mall stores were all fixed cost rent stores, and the Walmart stores, the Buy Buy Baby stores, and the Sears stores are all variable cost rent stores or percentage rent, and we think that over a reasonable period of time, we're going to see some positive results in terms of cash flow and profitability for this company going forward.

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

We're very much looking at other channels right now based on the success we've had at Walmart and Buy Buy Baby's and Sears, we're having discussions with other channels, and we've got some other ideas even outside the channels. Those distribution channels more on a direct basis with schools and charitable organizations and other parties from time to time that we think is ripe to expand the business.

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

Understand. So that sounds like something that you will probably own for a couple of years as it turns around, would you agree with that?

I would say that that's probably a likely scenario that it's going to take us a couple of years to turn it around. But I would hope to be able to see results and see income grow proportionally over that period of time.

Okay. And switching gears. Ted, there is this amazing compression in spreads as everyone searches for yield, and we certainly saw that in the middle and latter part of this year and it's still going on in the fourth calendar quarter, so I have two questions related to that. Are you willing to run the BDC at total leverage above one times that equity, that's total including the SBA? And also, any insight into repayment or pricing pressure this quarter given that we're almost halfway through, and that's it for me?

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

There's no real, I call it recreational refinancing, where rates come down by 25, 30 basis points. People will recreational refinance their debt structures. Although there is obviously more competition in the space.

The answer to your first question is yes. We are willing to run the BDC at more than 1 to 1 debt leverage, and you recall that we have not only the leverage from our credit facility with ING and we've talked about that where we like to be in the 75%, 80% range there. Plus or minus.

But we also have the SBIC leverage that does not count against our regulatory leverage and we are very willing to use that. We have, if you look in the past, we have used that aggressively, and anticipate we will continue to use that aggressively and that's a huge advantage for the MRCC platform in that we have $75 million of unused capacity there that we can selectively utilize. So that's the answer to your first question.

And your second question on the overall spread compression, and have we seen anything in the quarter, I think we haven't seen it yet. We haven't seen refinances. Now remember, all of our deals that we write have yield maintenance or prepayment penalties. And when we write a five-year deal which is our typical deal, our typical prepayment penalties of 105, 104, 103, 102, 101.

So it usually is non-economic for a company to do a refi with us in the first or second year after the transaction is closed. So we have not seen in specific answer to your question, any refinances this quarter, and we monitor that relatively carefully. Our portfolio management associates monitor the companies for refinance activities and I don't see a lot of that across our portfolio today.

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

Bryce Rowe, Baird.

Thank you. Ted and Aaron, just wanted to follow up on the spillover conversation. Do you have a fixed number for us as of third quarter?

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

While you look at that, do you expect --

About $12 [million].

$12 million?

Yes.

And do you expect another accrual in the fourth quarter?

I don't want to necessarily forecast anything. The reality is, is we're going to know in January and so by the time we report our fourth quarter we will have either paid a substantial amount of dividend and accrued for it, excuse me tax and accrued for or not, but based on where things are today, I think it's reasonable to assume that we're going to continue to have excise tax accrual.

Okay. And then a question on Rockdale Blackhawk. I know you guys have answered this in the past and can't necessarily control whether or not company is or timing of a potential sale, but any insight into the timing of a potential sale would be helpful. And I know you can't gauge what the dividend is going to be every quarter, but relatively consistent over the last three quarters, would you at least over the near toward expect that relative level of consistency?

Yes. I mean it's a great question I wish I could give you a lot of clarity on it. Unfortunately, I can't. Let me go through some of your questions on it. As for potential sale timing, I don't have a good answer for that. We are in very close contact with management. I think they are looking at all their options. I'm sure they are speaking to professionals in the market that are familiar with the healthcare space and where valuations are, and I think they are still executing on their business plan and their growth plan.

They've executed beautifully up until now and they continue to have opportunities to grow their platform, hire new doctors, bring on additional hospitals, expand the footprint and continue down the path. And they're continuing to execute that way. Unfortunately I don't have a lot of clarity for you in terms of timing. I do know that the management team is thinking about that option, it's not something foreign to them. It's not something they haven't considered. So I would expect that sometime in, I don't know if it's in the next 6 months, a year, 18 months, I do think that there is an exit at some point and this is not a 5 year hold would be my best guess.

As for the level of dividend, again, very difficult to determine, the company has mostly been making tax distributions which stock comes with a dividend since we're a pass-through entity. And so for the management team it's not really about dividends and making money, it's more about covering their taxes. And as you know, folks go through the year with their tax plan and make an assessment as to where things are and there is true ups as the year goes on and they reassess and sometimes that means they have to pay more in the fourth quarter, sometimes that means they have to be pay less in the fourth quarter.

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

That's fair. And then one last one, I don't know maybe I missed it, Mickey asked about prepayment activity thus far in the fourth quarter. I'm just curious if you have seen any level of prepayment?

What Ted answered was more about whether we have seen any refinance activity where people have gone out and prepaid us in exchange for earning a lower rate with a competitor and his answer to that was we have not seen that really in the quarter. Other than that, I don't really give a lot of guidance as to what's happened in our quarter. Other than to say we have not seen generally a high level of prepayment at this time.

Great thank you.

Chris York, JMP Securities.

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

Unfortunately Chris, I can't give you a lot of guidance in terms of what we've done to date since quarter end. I think if we wanted to make an announcement like that, that's something we would probably do closer to the end of the quarter and we may contemplate that and we will have to take a look at that. But I don't like to -- even though this is a public call, because not everyone gets on this call, I don't like to make any real disclosures that haven't been publicly announced through a press release.

Understood. And then maybe taking a step back and thinking about bigger picture items. How would you characterize the investment environment today in the lower middle market, and then where are you guys seeing the best risk adjust returns in your opportunity set for the BDC?

Let me take a stab at that. The general market, we will start with that. I continue to be very bullish on the lower part of the middle market for investing.

If you recall, this space historically has been dominated by the regional banks, and we are a transactional finance business as most of our peers, industry peers are. So we're financing transactions. The transactional finance business has been ceded by the regional banks to the non-bank financial players because of regulations, because of scrutiny, because of capital requirements. Lots of things that Dodd-Frank has done that you can read about other places have affected what the banks can do.

So what's happened is that in the lower part of the middle market, the non-banks, BDCs funds and others have really taken up the slack. I tell people, I do a lot of speaking in this area. We've been doing this business now for almost 17 years.

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

The second question is where is the best opportunities? The best opportunities are relationship transactions that we have with sponsors, and transactions we do with nonsponsored companies. And the nonsponsored companies that we do business with tend to pay somewhere near 100 basis points more in rates and somewhere near 50 basis points more in fees to us.

And when you look at that 100 basis points in rates, and you assume that we're operating at somewhere near a 1 to 1 leverage overall, that's a couple hundred basis points of net return to our shareholders annually that we are able to generate over and above a sponsored transaction. And when you look at our platform, we tend to do somewhere, depending upon the year, 70% or so sponsored transactions and another 30% nonsponsored transactions.

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

Color is very helpful and actually dovetails quite nicely to my follow up. So Ted, maybe has there been any expansion at the platform of Monroe that could benefit the BDC in terms of flow sectors or products?

Yes. We have done a significant amount. The one thing that you can continue to expect from Monroe is you can continue to expect that we're going to engineer and re-engineer ways to profitably invest dollars in this middle market. And if you look at the last year, we opened up an office in Toronto which is our eighth office, and all of our offices are staffed by full-time origination professionals.

We opened up two new industry verticals in the last 12 months, one was retail ABL finance because I believe that the same thing that happened to the banks and the cash flow and enterprise value transactions with increased scrutiny and regulatory risk is now happening in the retail segment. Where retail businesses that are generally asset-based borrowers are going to find it more difficult from a regulatory standpoint to work with the banking sector to the extent they are not performing at acceptable levels.

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

That's great. That's what I thought. Okay. And then last question here maybe for actually, two, for Aaron, I know it's small but G&A was up year over year and quarter over quarter. Were there any one timers in there?

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

Okay and then last, maybe given your comments on refi activity in this quarter, maybe low or muted prepayment activity, should we expect kind of another quarter here in Q4 of muted one-time prepayment in acceleration of OID fee income?

Hard to say. As you guys probably remember from prior years, we see in the fourth quarter when we see refinance activity it's usually very late in the quarter. Because most people are setting a deadline to do some sort of transaction that comes before year end and we tend to be very busy in late December with closing new deals. And so, so are others who might be seeking to refinance us or close M&A transaction that will pass off.

So while we have said that so far this quarter it's been relatively muted, that's not surprising at all. We would expect if we were going to have any sort of pronounced activity, we would expect it to be in the last couple of weeks of the year because that's usually where it shows up, so it ends up being unfortunately a little bit of a surprise to us as well. We don't always get a lot of advanced notice. Sometimes we do but sometimes we don't, it depends on if it's a regular refi or some sort of strategic transaction that might evolve M&A.

Interesting that's helpful. That's it for me thanks guys.

Thanks Chris.

Chris Cabrera, National Securities.

Hey Aaron, hey Ted, thanks for taking my questions. Just a question on the unitranche portfolio, the originations there have just been light. Is this a product that's more just in vogue with the upper middle market and is not as much in demand with the sponsors in the lower middle market?

No. Not at all. I think don't take away any assumptions because of the lightness in the quarter. We've got probably 15 transactions right now that we are in diligence on that we're signed up on that we're proceeding towards a close as a firm, and probably 75% of those transactions are unitranche transactions. So I would -- it's more just a quarter-over-quarter situation. So I wouldn't, Chris, take anything away from there.

Chris, I think it's also more of a definitional issue. So the way that we characterize loans in the BDC is if we've sold a first out we call them unitranche in the BDC. And if we haven't sold the first half and have retained the whole piece, we call them unitranche, excuse me, we call them first-lien senior secured. And so we've been doing less first out selling because we've been able to generate the yields we need in the high quality assets we want in regular rate senior secured loans.

And one of the reasons that we make the differentiation is because in the larger market unitranche usually means a deal that may be 5, 5.5, 6, 6 times lever plus, which is different from senior secured. For us, the deals that we are calling unitranche are not nearly that heavily leveraged and so they really do fit kind of in that definition of senior secured, but usually they are the entire balance sheet for these borrowers.

There usually isn't (inaudible) behind them when we're involved with the direct deal and tax reports are usually most lower, maybe 3, 3.5, 4, 4.25 times for our borrowers, which is more in keeping historically with what people call regular rate senior secured first lien loans.

That's great color thank you. And just for the unrealized marks during the quarter, how much of those were technical mark-to-market verse idiosyncratic issues in the portfolio?

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

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

That's a tough question. Last year, Chris, our platform generated 1700 deal opportunities that we looked at across all industries, all verticals. The BDC portfolio as we talked about has about 62 borrowers in it, our overall portfolio I think has about 220 borrowers in it. And I will tell you that our biggest concentrations in the portfolio are either in healthcare, services or in business services. So those are the two biggest concentrations, now we're in all 30 industry classes, but those tend to be our biggest concentrations today.

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

The predominant portion of that. We will sell off occasionally a piece where we want to generate an increased yield, as Aaron said in the unitranche transactions, where we may sell a first out to drive more return to our LPs or to our shareholders. But our platform has grown.

We're about $4 billion today in AUMs across our platform. That allows us to hold upwards of about $150 million per transaction across our platform. There is very, very, very few transactions that we are involved in, in terms of agenting that are greater than or would approach that $150 million number.

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

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

And just dovetailing off your comments Ted, with you guys are up to $4 billion plus in AUM which it is great, and your ability to co-invest obviously is a benefit. Is that at all I guess changing your opportunity set towards potentially making loans to larger EBITDA borrowers? Are you seeing any opportunities there or is the goal to just strictly stay lower middle market?

It's the latter. We have grown our business and our portfolio over the years by being better at what we do and doing what we do very well. And if you look, our market share has grown and has continued to grow. We're predominantly, we play in that sub-$30 million EBITDA size company and if you look at our portfolio that's generally between $5 million and $15 million EBITDA. That's an area where we believe we can create a differentiated return for our LPs and our shareholders we can create alpha in that market.

So what we've continued to do if you look over the last several, several years, we've continued to expand our product offering in that space as opposed to going outside of that space. We've developed a healthcare vertical. We developed a media vertical, a technology vertical, a retail ABL vertical, a specialty finance vertical. So we are attacking that market, and we're expanding the market in our market share in places where we can create the most alpha.

Great. Thanks, that's all for me thank you.

Christopher Nolan, FBR & Company.

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

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

And so that's a question that we will continue to look at and ask ourselves as we go through the end of the fourth quarter and into January in consultation with the Board. I haven't made any comments about the possibility or consideration of an increase in the dividend rate on a quarterly basis, although we will continue to monitor and if we see the portfolio grow as we expect it will in the quarter, and we see significant performance in our core net investment income with some room where we feel comfortable, that's certainly something I am sure the Board would consider.

It's something the Board challenges management on and we discuss each and every quarter when considering the level of dividend to pay in a quarter.

Okay, thanks for the clarification Aaron.

Thanks Chris.

Robert Todd, Raymond James.

Hi guys. Going back to the prepayment activity, you haven't seen very much and you've a given a lot of color on this already, but you normally get a 30 to 45 days notice of if activity is going to take place. We're starting to get into that window where if it is going to happen at all this year you should be hearing about it.

Do you expect it be even more delayed given obviously election day today, I already voted, early voting, love it. Or and then the potential for a late rise, are there just incremental uncertainties this year that are reflecting that timing?

That's a good question. A lot of people have asked that previous to this call to me as well in terms of whether we expect the election to be influencing people's decisions around whether or not to refinance and I will just comment on a couple things you said. We don't actually get the sort of notice you've described all the time for refinance activity.

There's certainly a time where companies are out and the have to be beginning that process. And if someone is looking to lower their rate, normally we will get notified of that, that will come to us because they'll ask us if we can lower their rate, it's the cheapest option for them to get a lower rate. And we do get those increased from time to time.

But the refinance activity we tend to see often especially around the end of the year is more related to M&A activity, and that is one in which we don't always get advance notice and we don't get the sort of 30 to 45 day visibility that you might be describing. We are lending to these smaller companies that are $5 million to $30 million of EBITDA, oftentimes they are the ones being acquired rather than being the acquirer and oftentimes we don't know we're getting paid off on a deal. Sometimes until maybe a week to 10 days before.

So we don't get a lot of visibility, I'm not seeing any specific discussion from borrowers around thinking about the election with regards to what they may want to do with their capital structure. That's as much color as I have on that.

Not really a follow up on that one, but what proportion of your company has Board observation rights, because obviously if we observing the Board you'd know about M&A activity in advance as well. Which proportion of your companies do you not have Board observation rights to monitor general activities?

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

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

The answer to your question is, is a logical person would reach that conclusion. However, we have seen the taxable issuances come up and go down and go back up. And so, I think a lot of it has to do with the assessment of the tax professionals in that organization about what they are seeing, what they are expecting and I can't speak to their specific tax professionals and how they look at this.

But if you think about it, they'll have a distribution and maybe in the next quarter they will determine maybe we distributed a little too much, maybe we overestimated what the run rate was and maybe then it will decrease. And then maybe they will true it up again and so generally I'd say what you're saying makes sense and is correct, which is if you see taxable distributions coming in and going up, it usually comports to some performance in the company and the company is performing exceedingly well.

But I would be remiss to tell you that you should make the assumption that we're going to see more taxable distribution or even the same level of taxable distribution in the fourth quarter because frankly I really don't know. And their historical trends of payments have not given me any visibility that would tell me that there is any sort of easily predictable logic based on what we would normally expect.

Okay got it. One final one if I can on the special dividend question, obviously spillover rules being what they are you can run up to given your share count now about $60.5 million spillover before your -- give or take that, before your hand essentially gets forced by IRS rules et cetera.

So what's your comfort level on running that spillover up, how comfortable are you with it getting towards the effective limits? They are not strictly limits, but before you think you have to act, this is a Board decision, to manage that to give you a little bit of cushion?

Right. It's a very good question and it's one that we are looking at very carefully and closely as we get into the fourth quarter. The good news is, is that we have a little bit of time and we get a little more clarity, we will be in a position before the end of January when we kind of have to make a decision here where we'll have some better idea about where the fourth quarter is coming in, what the spillover aggregation looks like.

I don't think we are the management team that runs anything very, very close to a limit, so I think you can assume that we're going to make sure that we have some buffer between what we need to do and what we will do. And so, we'll take a look.

As you could probably imagine based on the performance this quarter, we didn't add substantially to our spillover this quarter. And so, we are not, it didn't give us a lot closer to the line. And the amount we've accumulated, we've accumulated over a 10 quarter sort of timeframe. And so I don't know that, I have to run the numbers, but I don't know that I would expect to see us get particularly close to the limit that you described. But we will know a lot better as we get closer to the end of the year and we will make a decision with the Board at that time.

Okay got it thank you. Appreciate it. Congratulations, guys.

Thanks, Bob.

Merrill Ross, Wunderlich.

My question was asked and answered?

Okay, thanks very much.

Thank you.

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

I just want to thank everybody for being on the call today. We appreciate the time and attention that you provide to us, and we will continue to answer your questions, whether it's in this type of format or you can always feel free to call Aaron or I, and we're happy to speak to you. Good luck to all of you. Good luck to all of us and get out and vote today. Have a nice day, everyone.

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