Monroe Capital Corp (MRCC) 2016 Q4 法說會逐字稿

Welcome to Monroe Capital Corporation fourth-quarter and full-year 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, March 8, 2017, 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.

Hello and 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. Last evening, we issued our fourth-quarter and full-year 2016 earnings press release and filed our 10-K with the SEC.

I will first 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 $0.35 per share, covering our fourth-quarter dividend of $0.35 per share. This represents the 11th consecutive quarter we have covered our dividend. Our book value per share increased to $14.52 per share as of December 31, a $0.10-per-share increase from the book value per share at September 30, and a $0.33-per-share increase over our per-share book value as of the end of 2015, primarily as a result of an increase in undistributed net investment income and net unrealized mark-to-market increases in the value of certain assets in our portfolio.

At year end, our highly diversified portfolio had a fair value of $412.9 million and was invested in 70 companies across 24 different industry classifications. Our largest position represented 6.6% of the portfolio and our 10 largest positions in the aggregate were 35% of the portfolio.

Our portfolio was heavily concentrated in senior secured loans, in particular, first lien secured loans. 94% of our portfolio consists of secured loans and approximately 79% is first lien secured. Over the past year, we have continued to migrate our portfolio towards first lien loans to take advantage of the better risk-adjusted returns in the senior part of the market.

MRCC is very well positioned for future interest rate increases. The vast majority of our loan portfolio is invested in floating rate debt with rate floors. Given the current LIBOR level, we have surpassed or are very, very close to the level of the LIBOR floors on many of our loans, and, therefore, we believe MRCC is well situated to meaningfully benefit from an increase in short-term interest rates going forward.

Middle market companies and private equity firms continue to look at alternative lenders such as Monroe for lending solutions. As a result, we see numerous origination opportunities across a variety of sectors. Our external manager, Monroe Capital, maintains eight origination offices throughout the US, including one in Canada, and reviewed over 2,000 unique investment opportunities last year. At the same time, we are also cognizant of a highly competitive market where new entrants, as well as other BDC managers, are being aggressive in an effort to put new assets on the books or to replace runoff.

In that vein, we continue to take a highly disciplined approach to new business. While we pass on over 90% of the investment opportunities we identify, we still have a considerable number of high-quality and attractive opportunities in our pipeline.

Our co-investment, exemptive relief from the SEC enables us to co-invest alongside the numerous private institutional funds we manage in order to provide comprehensive financial solutions to our borrowers. For example, as of today, our Monroe Capital platform manages in excess of $4 billion of assets under management.

Our disciplined underwriting and focus on credit quality has helped us deliver consistent income to our dividends -- consistent income and dividends to our shareholders. However, as a result of a heated market, our portfolio effective yield has declined minimally from 9.7% in the third quarter to 9.6% in quarter four. This, coupled with a reduction in dividend income from one of our portfolio companies that will be discussed later by Aaron, has had the result of slightly reducing our per-share net investment income in the fourth quarter.

As we continue to ramp our SBIC subsidiary this quarter and into the second quarter, our ability to access the second tier of leverage associated with the recently approved increase in our SBA debentures should positively impact our net investment income in the coming quarters. Currently, we have $0.42 per share of undistributed net investment income, which in our view, provides a significant cushion to our ability to maintain a consistent quarterly dividend payment to our shareholders without returning capital.

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

Thank you, Ted. Our investment portfolio continued to grow in the quarter, and as of December 31, the portfolio was at $412.9 million at fair value, an increase of approximately $36 million since the prior quarter end. At December 31, we had total borrowings of $129 million under our revolving credit facility and SBA debentures payable of $51.5 million. The increase in outstandings under the revolver and the increase in SBA debentures are as a result of portfolio growth.

We also recently announced an increase in capacity under our revolving credit facility to $200 million, a $40 million increase, which will support continued growth in the portfolio. As of December 3, our net asset value was $240.9 million, which increased slightly from the $239.1 million in net asset value as of September 30, primarily as a result of net unrealized mark-to-market gains in the portfolio.

Our NAV per share increased by $0.10 from $14.42 at September 30, to $14.52 per share as of December 31. When compared to December 31, 2015, our NAV increased by $0.33 on a per-share basis. On an NAV growth basis, including dividends paid but not assuming any reinvestment, we returned approximately 12% to shareholders during 2016, 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 $5.8 million, or $0.35 per share, a decrease of $0.02 per share when compared to the prior quarter. At this level, we continue to cover our quarterly dividend of $0.35 per share. For the full year ended December 31, 2016, adjusted net investment income was $23.4 million, or $1.61 per share, comfortably covering dividends paid of $1.40 per share during the year.

During the fourth quarter, we had no distributions from our investment in Rockdale Blackhawk, which had averaged $0.09 per share per quarter for the prior three quarters. As we have discussed on previous calls, while we will likely receive future equity distributions from this company, the timing and amount of these distributions are out of our control and are difficult to predict.

This, coupled with muted amounts of fee income associated with debt prepayments, have the effect of slightly reducing our net investment income in the quarter when compared to the prior quarter. We also 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 somewhat greater than the prior quarter, it was still lower than our recent historical average level. As a result of these factors, management decided to waive a small portion of the incentive fee owed to the external manager in order to earn enough adjusted net investment income to fully cover the dividend. In the fourth quarter, this waived amount was approximately $273,000.

Additionally this quarter, we generated net income of $7.5 million, or approximately $0.45 per share, an increase from the net income in the prior quarter of $0.23 per share. The increase is attributed to an increase in net unrealized mark-to-market gains in the period.

Looking to our statement of operations, total investment income for the quarter was $11.2 million compared to $11.1 million in the prior quarter. The increase in investment income is primarily as a result of the growth in the portfolio, offset by a reduction in dividend income during the period.

Total expenses of $5.9 million included $1.8 million of interest and other debt financing expenses, $1.8 million in base management fees, $1.3 million in incentive fees net of the fee waiver, and $840,000 in general administrative and other expenses. Additionally, we had approximately $250,000 of excise tax accruals in the fourth quarter.

As for our liquidity, as of December 31, we had approximately $31 million of capacity under our revolving credit facility prior to the increase in availability to $200 million. We also had access to $63.5 million of additional SBA debentures at year end. I will now turn the call back to Ted for some closing remarks before we open the line for questions.

Thank you, Aaron. In 2016 we provided our investors a 12% aggregate return based on the growth of our NAV and dividends paid to stockholders. Since going public with our IPO in 2012, we have maintained a stable book value, while generating a 38.5% cash-on-cash return for our investors, based on changes in NAV and dividends paid since our IPO, assuming no reinvestment of dividends.

Based on the closing market price of our shares on March 6, investors that purchased stock in our IPO in 2012 have received a 43% cash-on-cash return, assuming no reinvestment of dividends. On an annualized basis, this represents greater than a 10% annual return for stockholders since 2012. We believe that these returns compare very favorably to those achieved by our peers, and puts MRCC in a very small and elite group of BDCs that have delivered this level of performance for shareholders.

Recently, MRCC's external manager, Monroe Capital, was recognized as the leading lender in the lower middle market. For 2016, Monroe Capital was awarded the prestigious lower middle market lender of the year for the Americas by Private Debt Investor, or PDI, a global independent publication based in London, covering the private debt industry worldwide.

Per PDI, this award is voted on by the market, for the market. This is the fourth consecutive year that Monroe Capital has been recognized by PDI as the leading firm in the lower middle market, unitranche finance, and senior loan categories.

We attribute our success to the following. One, our differentiated sourcing platform; two, our strategic partnerships with regional middle market banks throughout the US; three, our focus on directly originated loan transactions, fully underwritten by our own internal staff and team of underwriters; our credit first, zero loss investment philosophy; five, our ability to consistently generate net income from stable cash interest income in an amount that covers our dividend; and six, our alignment of shareholder and management interest. Our priority continues to be focused on proprietary origination of new investment opportunities and credit performance. We believe these two factors will be the key differentiators in the BDC space.

In closing, we continue to cover our dividend with adjusted NII, net investment income. We have grown our per-share net asset value since the beginning of 2016 and paid out $1.40 in dividends in 2016. We have one of the most shareholder friendly fee structures in the industry. On every metric within our control, we have delivered solid value for our shareholders and we intend to continue to do so.

Based on our pipeline of both committed and anticipated deals, we expect to maintain our new investment momentum for the remainder of this quarter, as well as into the second quarter. With our stock trading at a dividend yield around 9%, fully supported by adjusted net investment income, and a stable per-share book value with a best-in-class external manager, we believe that Monroe Capital Corporation provides a very attractive investment opportunity for our shareholders and other investors. Thank you all for your time today, and with that, I am going to ask the operator to open the call for questions.

Thank you.

(Operator Instructions)

And our first question comes from Bob Napoli from William Blair. Your line is open.

Thank you. Good afternoon, Ted and Aaron, nice year and quarter. Ted, you sounded like at the margin, it's a little bit more competitive out there than it has been. Are you seeing yields come down? Is that still -- obviously, you still have a lot of activity given your comments on first-quarter and second-quarter loan growth. But is that coming on at lower yields? But does that work for you, given the SBIC expansion and your ability to increase your leverage somewhat?

Thanks, Bob. Yes, good question. I think if you look across the BDC industry, you'd be hard-pressed to say that it wasn't competitive. With the marketplace and all the money flowing into retail mutual funds and into liquid trading strategies, as well as all the new entrants into the private debt space, not to mention the increase in fundraising with the BDCs, not only traded BDCs, but there's been a proliferation of non-traded BDCs, there's lots more capital in the market chasing transactions.

And the two things I mentioned in my opening comments, one, the new managers putting money to work; and two, the existing BDCs trying to replace runoff in their portfolios due to M&A activity, has caused, I think, a little bit of a supply/demand imbalance.

Now, given that, our firm, Monroe, and our strategy at MRCC is much different than most of the other BDCs. We're not focused on buying product from others -- from other originators. We're not focused on looking to work with a lot of the Wall Street-type companies.

We have a direct origination philosophy. We have eight offices. We have 18 direct originators, full time, that work for us. We have relationships with many, if not most all, of the regional middle market banks. So while we're not immune to overall market conditions, we have a unique set of circumstances that allows us to continue to originate proprietary transactions.

As you see, we lost about one tenth of 1% of weighted average spread in the portfolio from Q4 to Q3, and our pipeline is very robust. We've got -- as I looked at it last week, probably $400 million across the platform this week in our Monday new business marketing meetings.

So I think in general, yes, I think the market is more competitive. I think that most of our peer group is going to continue to see challenges in terms of being able to continue to generate the same amount of deal flow at the same pricing levels that they did probably a year ago.

I think we've got some inherent advantages. And, again, given the size of the market we play in and the size of the capital that we have to deploy, I think we're very, very well positioned to continue to grow with the same pace and see the same results that I think our shareholders have come to expect from us.

And Bob, I'll just add to the other part of your question. You made the point in there, which is correct, which is with all of the excess SBIC leverage we have available, we're almost at that point at the end of the year where we're able to continue to grow in the SBIC sub without additional equity.

So all that would be additive and the lower level of yield still works very well in terms of its ability to be accretive to NII, because we get that extra turn of leverage without any additional equity contribution. So you're right, the fact that yields are down a little shouldn't really impact our ability to generate solid NII on a per-share basis.

Last comment, Bob, just because I know how you think, I think that we covered our dividend this quarter with adjusted NII. I think that in the coming year, it's going to continue to be a competitive market. But I would expect that without providing you with firm guidance, I would expect similar type results going forward to where we are in the fourth quarter.

Thank you. Appreciate it.

And our next question comes from Christopher Nolan from FBR & Company. Your line is open.

Ted, on your comments just now in terms of expect similar results in 2017 versus fourth quarter, are you talking about in terms of EPS or net investment income? I missed part of that.

I think it's more NII. From where I sit right now, I like where we stand. I like where our portfolio is. I like where our new business pipeline is. So I think you can expect -- I think we can expect similar stable results going forward.

Chris, this is Aaron. I think what Ted is saying is other BDCs might go out and try to grab a bunch of excess yield by doing riskier transactions in order to boost their NII; that's not our plan. Our plan is to continue to generate the same sort of assets we've been generating at similar yields and to use the extra SBIC leverage to make sure that we're covering our dividend with NII, rather than try to be aggressive to try to push it way off. That's not really in the plan for us.

Okay. Thank you. And also on Rockdale, is there something operationally going on there, because suddenly when a company -- what I've noticed over the course of the year 2016, the amount of dividends has been going down and they started off strong.

There's nothing operational there, Chris. It's all tax distribution. So they're working with their tax accountant to try to figure out the right level of distributions to cover their taxes. And so it's really nothing -- they aren't making distributions to pay themselves. They're really just doing it for tax purposes.

So there's regular adjustments in how they look at it, and I don't think -- I don't know that we're -- there's nothing operational there. Everything's going fine with the Company. At some point, we may -- we expect to see more distributions from that Company given the financial performance. We just don't know when; it's just a matter of timing for them and dealing with their own internal tax noise.

Got you. Final question. Given the originations tend to be more favoring first lien, are you seeing more and more that deal flow being SBIC eligible?

That's episodic. I can't tell you that today it's more so than it was last quarter or less so than last quarter or the year. We have a very wide funnel. We're lucky enough to be able to originate in all parts of the US from a geographic standpoint. We work with private equity firms that are mid-size, small, sponsors, non-sponsored, some private equity firms that are independent sponsors.

So for us, it's really driven by credit. That's our number one focus. So our funnel is very large, and then what we do is we prioritize the transactions based upon credit. And it just depends on the quarters.

Aaron mentioned in his remarks we have now burned through our first layer of SBA leverage pretty much, and I would expect that as we continue to make investments into the SBIC sub, we'll be able to do so without raising more equity or without pushing more equity down. So that should provide some favorable economics to our Company.

Great. Thanks for taking my questions.

And our next question comes from Mickey Schleien from Ladenburg. Your line is open.

Ted, given your history and relationships with all the regional banks that you work with, I was curious to take your temperature on whether they're gearing up for taking some business away from the BDCs in the event that regulations are decreased with the new administration. Obviously, that would require them to build up teams. So you talk to these folks a lot. Have you seen any moves on their behalf to get back into the game on a more significant level?

Yes and no, Mickey. Where banks can play today and where banks anticipate playing going forward is in the asset-based financing area. And when I say asset based, that's account receivable-based financing, inventory-based financing, real estate-based financing, formula advances against assets. Those are areas that banks receive favorable capital treatment, and those are areas that the banks are generally staffing up for today to continue to compete.

Where we play primarily at MRCC and most of our peers play is in the transactional finance area that's known at leverage lending or cash-flow-based lending. And in the leveraged lending or cash-flow-based lending, where leverage multiples, in our portfolio are in the neighborhoods of call it 3.5 turns or 4 turns, many of our peers we're seeing disclose average leverage multiples of 5 turns and sometimes more. Those are areas that banks have not historically played in and do not play in.

And I'm not seeing any preparations at all for them to consider playing in. Even in the hey days when we were conducting this business before the financial crisis, those were still not areas that the banks played in where they had very few rules before Dodd-Frank.

So I think you'll see banks expand and continue to expand in the asset-based lending area, and that's creating a challenge, I think, for those of our peers that are engaged in that line of business. But in a leveraged finance cash-flow based-area, I don't see any changes.

Appreciate that. Thank you, Ted.

And our next question comes from Chris York from JMP. Your line is open.

Good afternoon, guys, and thanks for taking my questions. For Rockdale, Aaron, how are you modeling the expectation for quarterly dividends, because it has a sizable impact on earnings as we look at 2016?

It's a great question. The answer is we're not modeling it. We have that investment, and we are seeing a nice equity value associated with the equity that we were able to obtain in making the loan with Rockdale, and we're in good connection and contact with management. But we don't make any assumption about future dividends associated with that. And so we're not modeling it and I'd encourage you to do the same.

Okay. Very helpful. And then, let's see, you have GAAP undistributed net investment income above distributions here at Q4. And you paid two consecutive quarters of excise taxes. So is it reasonable to assume the payment of this tax to continue going forward?

Great question. And one that we struggle with and wrestle with every day, which is what should we be thinking about from the future accrual for excise tax in terms of payments. I can't guide you too much because the Board makes this decision. At the end of the day, it's their decision to make. It's difficult for me to guide you in any way at this point during the year about what may happen for future excise tax accruals. We'll just have to see where things go.

The one thing that we can say is that from a management standpoint, we are always looking at what's in the best interest of the shareholders. And the best interest of the shareholders and what we consider the cost of raising new capital versus the cost of paying an excise tax to maintain that capital, because generally, there's a positive arbitrage with investing that capital. So if you look at our past history of paying the excise tax, we've made the decision internally that the cost of paying that excise tax has outweighed the cost of raising a similar new amount of capital.

Yes, that makes a lot of sense. And then maybe dovetailing that into this question here, I think shareholders will view the incentive-fee waiver quite favorably, and then reflective of good alignment of interest. But I'm curious, can investors expect this voluntary fee waiver to occur in the event there are future temporary income shortfalls, and you can look at the income shortfalls inclusive or exclusive of that excise tax.

Yes, good question. As I said, we have one of the most shareholder-friendly management fee arrangements in the industry. And I am very, very focused in running this Company on a strong alignment between shareholder interest and management interest. We can't predict future results, and we have to look at circumstances that exist from time to time as they may occur. But because of the excise fee tax that we had and as Aaron mentioned in his remarks, some unique attributes to the fourth quarter with Rockdale and muted prepayment activity, again, we thought it was the right thing to do to waive a small portion of the incentive fee and for that quarter, and we did it. Going forward, we'll have to examine the circumstances that surround each individual quarter.

Sure, makes sense. And then, Ted, you mentioned continuing origination momentum going forward in your prepared remarks, but maybe you could provide us with more specifics on what that means for investment activity post year end for the BDC, because we've seen many releases from Monroe Capital via large new investments.

Yes. Another good question. So what was responsible for a very strong first quarter for us -- you mentioned you've seen some announcements from us, you'll see more, was that normally, there's a rush to get transactions done in the end of a calendar year.

In 2016 we had some surprises in terms of the election results, I think generally. And what happened was is that transactions that were anticipated to close in 2016, some of which were by family businesses selling perhaps or individual entrepreneurs selling, there was a general feeling at the end of 2016 that tax rates may go down in 2017. And when there's a feeling that tax rates, individual and corporate tax rates, may go down or be reduced in 2017 versus 2016, that creates somewhat of an incentive for entrepreneurs to put off a transaction that would normally have occurred at year end in 2016 into 2017. So we had -- we were the beneficiary, I think as well as others from unexpected falloff or extensions in transaction, that otherwise would have closed in 2016 in 2017.

Now, for 2017, what does that mean? Anytime there's a thought process that there may be some tax revisions, and I believe certainly that there will be some tax revisions in 2017, I believe that individual tax rates will come down, as well as corporate tax rates will come down. That should spur M&A activity and transaction activity for companies that are corporate taxpayers for LLCs, that are flow-through taxpayers, and for the middle market, particularly the lower middle market.

And that's happened every time there's been a tax reduction. It's been followed by a 12-month period of increased transactional activity. So I am very bullish on our business for 2017, as well as for the transactional market.

That color is helpful. And so if we think about, you said maybe some deals close here in Q1 as a result of corporate tax reform expectations. And you had Q4 originations of, call it $51 million, net originations of $32 million, is it safe to presume both of those numbers have potential upside to be exceeded in Q1?

I don't think so. I don't think you should think way. As I mentioned in my remarks, I told you that what I think what you should anticipate is a stable, consistent level of earnings for us. Because, again, we are very focused on credit quality. As you look around the BDC universe, and I certainly focus on this quite a bit, I look at other platforms, and I'm seeing NAV erosion.

And as Aaron noted in his comments, you've seen an $0.11 increase quarter over quarter and you've seen a $0.33 increase year over year. We are very, very focused on maintaining our credit quality and our investment quality of our portfolio, and we're not going to allow a heated market to drive our activity. So from a modeling standpoint or earnings standpoint, I think you're better off to be more conservative, like we are, than less.

I'd also just say generally, Chris, people I know get the general Monroe releases about deals, which is great and there's a lot of momentum in the deal flow for Monroe. It's dangerous to try to impute anything from that into the BDC, because not every deal that we close at Monroe is going to have the commensurate yield that's high enough to be appropriate for the BDC.

And one thing we're not going to do for shareholders is just to put deals in the books just to get our AUMs up, because at the end of the day, it has to be accretive to our NII. And if you go in there and close deals that are yielding not high enough to be accretive, all you're really doing is paying management a base management fee and everything else washes out after fees and expenses.

And so, we don't want to just close deals into the BDC just to grow AUM; we want to close deals in the BDC that help maintain our yield and to be accretive to NII. So it's dangerous to look at our general originations, because you don't know where some of the deals are yielding. Others of Monroe vehicles have a lower yield threshold than the BDC does, and so just remind people of that.

Yes, both your comments are great color and helpful in thinking about the pipeline going forward. Turning maybe to portfolio companies. So in regards to CSM Bakery, we notice another BDC has investment meaningfully marked above your current mark, potentially implying conservatism for your valuation. So what inputs are going into your mark for that investment that may explain the valuation differences?

Well, I can't explain what they're doing. That's a liquid traded name, and we look at the marks on a pricing service and compare them to what we're seeing in the markets. And we mark it where it's trading on a name like that. So anybody who has the same asset that had it marked considerably higher at 12/31 may not be doing what we're doing, which is reflecting the fair market value directly as it's seen on a traded basis. There, the inputs are very easy.

Perfect. That's helpful. And then, lastly, a little bit of a follow-up. Have you added any regional banking tranche partnerships in 2016? And then do you expect to add any new partnerships going forward?

The answer is yes and yes. Today, just to give you some flavor of the depth of the platform, we have 43 different banking relationships, regional banking relationships that have credit facilities with the external manager, Monroe Capital, throughout our portfolio of various funds. So this is a very important and active area for us that we work with in partnership with many of these lending partners.

That's great. And clearly the 43 relationships are a competitive advantage. Is there any one partner that, of those 43, that you use more than any other?

No. Do you like any one of your children more than any of the others?

I don't have any children, so it doesn't apply to me today. But that's it from me.

We like all of the analysts that cover us the same. That's a different way to put it. We love them all.

Well, great, guys. Thank you very much.

And our next question comes from Leslie Vandegrift from Raymond James. Your line is open.

Hi. Good afternoon.

Hi, Leslie. How are you today?

Doing well, thank you. So a quick follow-up to one of the earlier questions, and I'm sorry if I missed this. You were talking about Rockdale, and obviously, if your adjust or if the Company itself adjusts estimates of taxable income throughout the year to figure out how much to dividend up. Now, at the end of the year, though, was that downward adjustment due to new investment that you're focusing on? Or was there a little bit more of unexpected slower performance in the fourth quarter?

I really don't think it's performance-related for Rockdale. I can't really speak for them. We don't run that Company day to day. We're not involved in their individual tax situations for the partners there. We're passive, and we just get what we get.

But we're not seeing any material things that would suggest that it was something performance related. I think it's just a matter of how they're adjusting estimates and how they're looking at tax planning. I don't have a lot more, honestly, to add about Rockdale.

You will see the equity was actually marked up a little bit during the period. If there was major financial issues that would suggest otherwise, it probably wouldn't have been marked up from a fair-value standpoint. And of course, that's all independent marks. So I wouldn't read too much into that.

I will note, though, that if you strip out the dividends from Rockdale, we had positive momentum in our core net investment income in the fourth quarter from the third.

Leslie, the one thing I will comment to you, because I think one or two others of the analysts mentioned this, what you have to understand is when you have a flow-through entity like Rockdale, what happens is during the course of the year, the Company does the best it can in a very uncertain manner to make estimated quarterly payments.

So if you go throughout the year, and a Company that's a flow-through entity makes estimated quarterly payments, it's just an estimation. At the end of the year, they take the aggregate of all those quarterly payments and it's a plug. Either they pay more or they pay less in the last quarter payment.

So what you may want to consider on this is look at the three prior quarters of estimated payments that Aaron mentioned, roughly $0.09 a share. And perhaps an explanation is the Company made estimated quarterly payments earlier in each of the quarters, and then the last quarter, they determined that based upon where their year was, they had made a sufficient amount of estimated tax payments. That's probably the most likely scenario here.

But as we said earlier, we're not expecting -- while we think it's possible and likely we'll get future distributions, we're not counting on Rockdale distributions in terms of what we're doing for adjusted NII. I would encourage everyone else to view it the same way.

Okay. All right. Thank you. And then I know you discussed the lever between building up spillover and with paying the excise tax on that, and then distributing it to investors with the cost of equity right now. What exactly was your spillover income at the end of the quarter though?

We had total per-share basis, total spillover income of about $0.42 per share. That's what's in the kitty.

Okay. All right. Perfect. Well, the rest of my questions have already been answered. Thank you.

Thanks, Leslie.

Our next question comes from Christopher Testa from National Securities. Your line is open.

Hi, Aaron. Hi, Ted, thanks for taking my questions. Just curious, obviously healthcare is a major lending vertical for you guys, and there's been so much uncertainty around potential legislation. How much is that curtailing M&A, and thus, the deal flow that you're seeing that fits in Monroe's portfolio?

Good question, Chris, thanks. I will tell you that healthcare is the single largest sector we have at Monroe Capital today from an overall AUMs. Healthcare accounts for around 13% of our overall portfolio of a little over $4 billion. It's one of the fastest growing areas, and it is, because of that uncertainty, as well as lots of demographic factors, the population is aging, it's going to continue to age.

There's lots of new technology. There's lots of behavioral-health type companies. There's a renewed interest by private equity firms in this space. So I would anticipate that 2017 will be a very strong year in the sector for financing healthcare transactions.

Got it. So it's not just the uncertainty is just curtailing all availability of use of capital in healthcare, it's just that it's just going to switch which type of healthcare you're seeing the deal flow from?

That's correct. That's exactly correct. There's going to be a migration from, call it traditional healthcare, maybe hospital services, to nontraditional, which is more behavioral-type health.

Got it. And just, obviously, retail continues to be very stressed, and I know you guys have a very strong ABL vertical. How do you weigh -- the Bank's obviously staffing up, as you had said in your remarks earlier, versus increased opportunity from increased stress in the sector where specialized firms, such as yourself, benefit from that?

That's an interesting question. The retail sector is challenged. You don't have to be a rocket scientist to pick up the paper and read about HHGregg going out, Sports Authority, BCBG this week, and others. So it's a challenge.

Banks right now are focusing at the very high end, investment-grade end and the very high quality retail segment. And what's happening is that the remainder of the retail segment is being financed by non-bank lenders that don't have the same regulatory overview and oversight that the banks have. So I would anticipate more and more the retail industry will move outside of the banking system, into the non-bank system.

Now, that said, we have a very deep understanding and knowledge base in that space with our vertical. We are being very, very cautious in going down the road and financing retailers that are not performing well due to either comp-store sales declines or liquidity concerns. Many of the retailers today are very liquidity constrained, and you're going to see more and more of that space end up in portfolios of non-bank lenders. But we're taking a very cautious approach there today.

Got it. When you say cautious approach, you're referring to both ABL and cash-flow lending in the space?

That's correct, to both.

Okay. Got it. And just a housekeeping item here, just professional fees were up a bit in the fourth quarter. Was that particularly -- was that pertaining to the restructuring of TPP and should we expect that to trend down slightly this quarter and the next?

No, it really wasn't related to an individual portfolio Company. It's really just more about the growth in assets and some legal and administrative costs. It's nothing I would say that's trend-oriented or individual investment-oriented.

Okay. Great. And just looking at obviously unitranche, you guys haven't done a lot there. I know you're seeing better risk-adjusted returns and first lien debt. Just curious what you've seen -- how much of a change you've seen in the unitranche deals that get presented to Monroe over the past year and just how aggressive sponsors are being with leverage in these.

Not a lot of change. I think that there has been more pressure on leverage. Sponsors are certainly taking advantage of the market. Private equity sponsors are certainly trying to take advantage of the market and pushing leverage higher.

I think that if you look across the portfolios of many of our peers, you'll see leverage, weighted average leverage levels have increased. I think if you look at our portfolio, we haven't really moved on weighted average leverage very much, and our plan is to try and continue to stay in that sub-4 turns of leverage, notwithstanding the market may be a little higher.

Okay. Great. That's all from me. Thanks for taking my questions.

And our next question comes from Chris Kotowski from Oppenheimer. Your line is open.

Hi. Ted touched on this earlier, but just wanted to circle back to it. Just given the flux in the tax code, my gut instinct would be that people hit the pause button. And in particular, as it relates to the deductibility of interest, and we tracked the large-cap M&A theologic numbers, and you see certainly on a quarterly basis the announced volume in the first quarter in the large cap world is way down from the prior couple quarters.

And I'm wondering, are you sensing at all a change in behavior or a pause from the middle market sponsors that you're working with to see how the tax law changes settle out?

You're asking now a very interesting question that I think is better explained by some macro issues. In our market, we have not seen a change. We've seen probably more action in the middle market, the lower middle market.

The large cap market, we have a CLO business here at Monroe that focuses on some of the large cap names, and I will tell you that you are correct. You have seen a pause and you have seen a lowering of activity in the large cap market. And that's -- there's a really easy explanation for that.

When Donald Trump was elected in November, in the three-week period of time, the 10-year Treasury rate, 10-year rate went up about 45 basis points. Since then, it's gone up higher.

What that has caused, it's caused our dollar to strengthen against all major currencies outside of the US. I was in Europe last week and I can't remember a time ever where our dollar was trading at a one-to-one equivalent level with the euro or the English -- the pound.

So what I think you're seeing is you're seeing the large cap companies, particularly very large US domestic companies that have substantial amounts of revenue overseas, and sales, foreign sales, to be challenged in the first quarter because of the strong dollar. And I think the strong dollar has really been a conundrum for some of these larger cap companies. And what that's done is it's caused a pause for a lot of the strategic M&A, because until some things shake out in the marketplace where there could be some good modeling of earnings for these larger cap companies, I think there's a general concern that sales overseas are going to be hampered in 2017 from the strong dollar.

As you know, most all of the companies that we finance in the middle market, particularly the lower middle market, are relatively not impacted by foreign exchange and by non-US based sales. So that's something that we're keeping a very close eye on.

We've adjusted our underwriting and our portfolio management for the large cap transactions to consider the effects of the stronger dollar, and we are watching that very closely for middle market companies. But we haven't noticed any real negative impact associated with that in our borrower base.

Very interesting. Thank you.

Thank you. And our next question comes from Dan Nicholas from Baird. Your line is open.

Great. Thanks, guys. Just quickly, with the upsized credit facility now and plenty of runway on the SBIC, just was hoping you could remind us where you're comfortable running balance sheet leverage, either on an all-in basis or on a statutory basis ex SBA. Thank you.

Yes, sure. Good question. So what we've always said and we continue to believe is the right level of leverage on a regulatory leverage basis is between 0.7 and 0.8, probably closer to 0.7 or 0.75 is the target. So we've got some considerable room in the base business without regard to the SBIC to grow the portfolio to get to that level, which is why you saw us take our credit facility up in terms of capacity. That's how we think about it today.

Okay. Great. Thanks, Aaron.

Thanks, Dan.

And we have a follow-up question from Christopher Nolan. Your line is open.

By the way, Aaron, it's nice to be loved. Thank you very much.

Any time.

On the TPP operating, did you guys make an incremental investment there this quarter?

Yes, you did see that occur in the fourth quarter, a small, incremental investment as the Company went through the bankruptcy and needed some money for professional fees.

And then, am I correct that the increase in the fair value for TPP simply reflects the new money going in?

Yes, so the new money went in on a senior basis, and so, yes, the net increase in the mark has to do with level of the cash structure.

Okay. So the rest of the mark remains the same?

On an aggregate basis, it's for the BDC's holdings in TPP that marks up slightly.

Thank you for taking my questions.

At this time, I'm showing no further questions.

Okay. If that's the case, thank you all for joining us today. And as we continue to do what we do best, which is manage our portfolio and look for high quality transactions to the extent anybody has any individual questions, you can feel free to reach out to Aaron. He's always willing to speak to the analyst community. Thanks and have a good day.

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