Monroe Capital Corp (MRCC) 2017 Q3 法說會逐字稿

Welcome to the Monroe Capital Corporation Third Quarter 2017 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 reasonably based on management's estimates, assumptions and projections as of today, November 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 risk, uncertainties or other factors, including, but not limited to, the factors described from time to time in the company's filings with the SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements.

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

Hello, and thank you, to everyone, who has joined us on our call today. I'm with Aaron Peck, our CFO and Chief Investment Officer.

Last evening, we issued our third quarter 2017 earnings press release and filed our 10-Q with the SEC. I will first 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 and we will ask questions.

We are very pleased to have another strong quarter of financial results. For the quarter, we generated adjusted net investment income of $0.35 per share, equal to our third quarter dividend of $0.35 per share. This represents the 14th consecutive quarter we have covered our dividend. In an environment when many of our peers continued to announce challenging net investment income performance and cuts to their dividends, we are very proud to have been able to maintain and continue a $0.35 per share dividend, fully covered by adjusted NII. This is a testament to our unique origination capabilities, our team, and our careful underwriting process.

Our book value per share during the quarter decreased very slightly to $14.01 per share as of September 30, primarily due to realized net losses during the period in excess of net unrealized mark-to-market valuation gains during the quarter. More specifically, our NAV decreased from $284.3 million at June 30 to $283.5 million at September 30.

During the quarter, our portfolio company, Fabco, was sold to a strategic acquirer. While the sale of Fabco resulted in a realized loss for MRCC on our original principal investments, it was sold at a recovery value in excess of the mark at the end of the second quarter, which created a reversal of a previous unrealized mark-to-market loss.

The quarter also saw an increase in the fair value of our equity in Rockdale Blackhawk. As a reminder, we received this equity in Rockdale for free as part of a senior secured debt financing, and, therefore, we did not make any cash investment in the equity.

At quarter end, our highly diversified portfolio had a fair value of $431.1 million, and was invested in 66 companies across 22 different industry classifications. Our largest position represented 5.8% of the portfolio and our 10 largest positions were 34% of the portfolio. Our portfolio was heavily concentrated in senior secured loans, in particular, first-lien secured loans. 95% of our portfolio consists of secured loans and approximately 87% is first-lien secured. While our portfolio balance declined from the end of the second quarter, this was primarily as a result of paydowns received near the end of the quarter. In fact, the average outstanding portfolio balance for the quarter increased from the second quarter. Aaron will provide more details about this later in the call. And since the end of the third quarter, we have added approximately $23 million of investments to the portfolio, net of prepayments.

As we announced last week, we are very excited about our new joint venture with National Life Group. With the formation of MRCC Senior Loan Fund I, National Life and MRCC have each committed $50 million in equity capital for a total investment of $100 million. Once leveraged, this new fund should have close to $300 million of capital available to invest in secured middle-market loans without any increase in MRCC's regulatory leverage level. We believe, all other things being equal, that this joint venture should be accretive to our earnings in future periods.

As we have discussed in the past, MRCC is very well positioned for future interest rate increases. Most all of our loan portfolio is invested in floating-rate debt with rate floors. Given the current LIBOR level, we have surpassed the level of the LIBOR floors on virtually all of our loans, and, therefore, we believe MRCC is well situated to meaningfully benefit from any increase in short-term interest rates going forward.

In addition, we have $92.1 million outstanding in fixed-rate debt from our SBA debentures at very favorable rates, which will allow us significant interest rate arbitrage on any increase in LIBOR in the future. Currently, we continue to maintain $0.30 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 average investment portfolio continued to grow in the quarter. However, due to prepayments near the end of the quarter, as of September 30, the portfolio was at $431.1 million at fair value, a decrease of approximately $14.4 million since the prior quarter end.

Since the end of the third quarter, we have continued to grow the portfolio and have had fundings and other prepayments of approximately $23 million. During the third quarter, we funded a total of $54.2 million, which was due to 6 new deals and several add-on and revolver fundings on existing deals. This growth was offset by sales and complete prepayments on 8 deals and partial repayments on other portfolio assets, which aggregated $69 million during the quarter.

At September 30, we had total borrowings of $60.6 million under our revolving credit facility and SBA debentures payable of $92.1 million. The increase in SBA debentures are the result of portfolio growth and the reduction of borrowings under the revolver as are the result of the prepayments near the end of the quarter.

As of September 30, our net asset value was $283.5 million, which was relatively unchanged from the $284.3 million in net asset value as of June 30. Our NAV per share decreased slightly from $14.05 per share at June 30, to $14.01 per share as of September 30.

Turning to our results for the quarter ended September 30, adjusted net investment income, a non-GAAP measure, was $7.0 million or $0.35 per share, an increase when compared to the prior quarter dollar amount. At this level, per-share adjusted NII equaled our quarterly dividend of $0.35 per share.

Looking to our statement of operations. Total investment income for the quarter was $13.5 million compared to $12.3 million in the prior quarter. The increase in investment income is primarily as a result of the growth in the size of the company's average investment portfolio during the quarter and an increase in the effective portfolio yield. During the most recent quarter, our average investment portfolio was $446 million compared to $434 million in the prior quarter.

Total expenses for the quarter of $6.6 million included $1.9 million of interest and other debt financing expenses; $2 million in base management fees; $1.7 million in incentive fees; $0.9 million in general, administrative and other expenses; and $0.1 million in excise tax accruals. Total expenses increased $0.4 million during the quarter, primarily driven by an increase in incentive fees and an accrual for excise tax, partially offset by a decrease in interest expense, driven by a lower average debt balance during the quarter and a decline in the cost of our revolving credit facility as a result of our recent capital raise.

As a reminder, during the second quarter, we waived $250,000 of incentive fees, and there was no such incentive fee waiver necessary during the third quarter.

As for our liquidity. As of September 30, we had approximately $139.4 million of capacity under our revolving credit facility. We also had access to $22.9 million of additional SBA debentures at quarter end.

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

Thanks, Aaron. So to summarize, we generated $0.35 of adjusted net investment income for the quarter. We paid our $0.35 quarterly dividend. We have no new non-accruals that have occurred in the quarter. We have recovered in excess of our stated mark on Fabco in a termination of that investment, and our investment in Rockdale Blackhawk, equity has increased in the quarter.

So since going public with our IPO in 2012, we have generated a 42% cash-on-cash return for our shareholders 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 November 7, investors that purchased stock in our IPO have received a 41% cash-on-cash return, again, assuming no reinvestment of dividends. On an annualized basis, this represents approximately a 9% annual return for stockholders since 2012.

We believe that the quarter performance and these returns compare very favorably to those achieved by our peers in the BDC industry, and puts MRCC in a very small and elite group of BDCs that have delivered this level of performance for its shareholders and continue to deliver that level of performance on a current basis.

Based on our pipeline of both committed and anticipated deals, we expect to maintain our new investment momentum for the remainder of the year, with growth in both our core portfolio and in our new joint venture. Our new MRCC Senior Loan Fund joint venture with National Life should be accretive to our shareholders over the long term.

With our stock trading at a dividend yield around 10%, fully supported by adjusted net investment income and a stable NAV, and the 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've concluded my prepared remarks, and I'm going to ask the operator to open the call for questions.

(Operator Instructions) And our first question comes from Chris Kotowski of Oppenheimer.

I wonder if you could talk a little bit more about the Senior Loan Fund. Will it coinvest in similar loans as the BDC itself? Or will they be more nationally syndicated? And then, I'm curious, what kind of net yield or net return on equity do you anticipate on your investment? And then, I guess, thirdly, do you plan to pay all that out on as-you-go basis? Or is this a vehicle in which you could theoretically retain earnings over time and kind of buildup value over time?

Good questions, Chris. This is Aaron. So it will invest in the similar type of assets that the BDC invests in. It will be focused on mostly middle-market loans, secured mid-market loans. It will take advantage of some of the substantial club deal opportunities that we originate through our capital markets function here. So a lot of what it'll be doing will be partnering with other lenders that we're close with in the market. It will also be able to invest in some of the more syndicated, larger middle-market deals. It is not likely to invest in sort of the broadest most broadly syndicated loan market, because that market is mostly LIBOR-plus 250 to 350 kind of market with -- and that's not a space that makes sense for this loan fund.

The one key to think distinguishing feature for these loans funds is that they can't coinvest with other Monroe funds, that's a regulation by the SEC. But you have to be really careful about understanding what co-investment means. It means that we really can't be the agent negotiating the credit facility and then coinvest amongst all the funds, but it can invest alongside other Monroe funds in deals that are more club deals or deals where Monroe is not the principal agent.

So as for yields, we don't really provide a forecast of ROE, but it's easy for you to do the math. I mean, we're expecting this loan fund invest and sort of deals anywhere from LIBOR plus 400 and up, and we'll get cost of leverage in the mid-LIBOR plus 200. So that will provide us a pretty attractive low double-digit ROE as our expectation on the vehicle. And we are expecting that the loan fund will pay out on a quarterly basis to the BDC all of its earning. So we will -- it will be creating NII that will be available for distribution. Does that cover all your questions Chris?

Yes, that did.

And our next question comes from Robert Dodd of Raymond James.

Just a quick follow-up on that one. When you say it will pay out all its earnings, do you mean will it be paying out all its NII or all of its GAAP earnings on a quarterly basis?

It's more of an NII function than a GAAP function. So it'll pay total yield on what it's earning, and then it'll add up to the BDC for our portion, and then it will be going to our NII and then, therefore, be available for distribution.

Got it, got it. And then just on Rockdale, obviously, marked up in the quarter. Not -- didn't pay a dividend again for a while now. I mean, can you just give us an update on, obviously, across the Monroe platform, you had a pretty big slug of that equity. So I think you have a good feel for what's going on with that business. And a lot of pent-up value, so to speak, in that equity in the sense that, obviously, you didn't pay for it, so a nice gain there. Can you give us any color on how the business is doing in general on what the review process you're are going through as to whether to keep that equity investment, dispose of it, et cetera?

Sure. All good questions. So, Rockdale has been fairly stable actually from last quarter, but hasn't been any material change. They seem to be on the same path that they were marching on in the previous quarter, which was improvement from earlier in the year. The main reason that we were able to markup the equity in the period wasn't because there was a material change in the enterprise value of Rockdale, it was more a consequence of the fact that we provided some additional liquidity to the company to help with some of their current liquidity needs, and in doing so, we were awarded more equity in the company in conjunction with that funding. So the increase in value is more of the reflection of the fact that the Monroe funds now own a larger percentage of the pie than they did in the previous quarter, rather than a big markup in the enterprise value. In fact, there was no markup value in the enterprise value of this period. So that's really what has gone on there with regards to the mark and why you see an increase in the value of the equity.

As for the other part of your question, what's the long-term plan, we still don't control Rockdale. We're still a minority investor. And so we can't necessarily drive all of the decision making, but I think our best guess at this point is that management will continue to move along its path of a strategic review of its business and its exiting of less profitable businesses and growth in the profitable areas. And hope to be in a position to get to a point where they've some stability in their EBITDA and evaluations, and then at that point may consider a monetization of the company, but there's no current thought process around that, that I'm aware of.

Okay, got it. Appreciate that. And then if I can just flip back to the SLS again, real quickly. Obviously, can see how this could be accretive long term. Initially, obviously, it's going to have some internal expenses and it won't be levered initially. What's the -- and it's hard to put time frames around that, I understand. But what's your current expectation, do you think, before it could deploy its initial equity capital stock to get leverage and start to actually really deliver an outsized rather than potentially an undersized ROE at first?

Right, very good question and very good points, all. You're right, and it will take us some time to get a material ramp. We see deals, we approve deals that take some time to close. We do have a pretty substantial deal flow engine in our capital markets function here, and so we do see a lot of opportunities, but we're very selective as we are across the platform. So it's difficult for me to give you any real guidance as to timing and milestones. We don't want to set internal milestones for funding, because we want to make sure we're just doing the best deals we can. But having said that, I think it's reasonable to assume that we should be able to put the equity to work and leverage it within 12 to 18 months, is my best guess, and hopefully, sooner. But that's sort of internally how we think about it, but as for quarter-to-quarter, difficult to estimate.

Robert, this is Ted. This is something that we've looked at for quite a while. And some of the other BDCs, our competitors, have done this. And for us, it was really about finding the right partner from a cultural fit and someone we can grow with. I mean, if you notice, our joint venture -- our senior secured joint venture is much different than the most of the market. Ours is a 50-50 joint venture. Most of the markets are 87.5-12.5 or 85-15. The joint venture that we have here really reflects the long-term desire for both firms to work together with a complete alignment of interests and grow this business. So I would tend to view this as a real long-term driver of value for MRCC, and not intended as a short-term trade, like some others may have been. That's how I think you should look at this.

Absolutely. I appreciate that. And I did notice the 50-50. And on that, obviously, that does differ. I don't know National Life very well. On -- do they bring -- I mean, and obviously, one of the 87.13 or 87.5, et cetera, one of the arguments there is many of these partners don't actually bring origination capabilities to the table. Without here speaking [about a company] can you -- does this partner actually bring realistic origination capabilities?

No. I don't think you should look at this as a realistic add to our origination capabilities. We have almost 100 employees, and we have plenty of origination capabilities within our firm. What this partner brings is a like-minded, long-term strategic partner that will highly likely to do other things with across our Monroe Capital platform. And that's even more important, as far as I am concerned, because, for us, it's very much a cultural fit, and I believe this will be the first of other things that we will be doing with National Life across our Monroe Capital platform.

And our next question comes from Bob Napoli of William Blair.

Just a follow-up on those questions, I guess, on the Senior Loan Fund. This is -- you expect this to be, Ted, incremental to return on equity above the average of the company? Is that -- or is it in line -- is this meant to add to the ability to drive ROE for Monroe, therefore, allowing the stock to trade above book value -- more above book value potentially and, obviously, that causes all good things?

Yes. The short answer to your question, Bob, is yes. We would not have done this unless we had a strong view that this would be accretive to our ROE at MRCC. We've got lots of things in our laboratory here that we are working on and this was one that we've targeted quite some time ago. And, frankly, we could have put this together sooner, but it was much more for me that needed to be a cultural fit as opposed of -- to a financial fit. So that's why we did it. We announced it now and, as I told Robert, I think you can expect this on a long-term basis to be accretive to our current ROE.

One way to think about it, Bob, is, as we said before, we're targeting low double-digit ROE. And remember, it doesn't use up any of our regulatory leverage basket. So when compared to a regular loan opportunity at Monroe that might turn a double-digit ROE that would be with using up some of the leverage available. So if you think about when we get to -- and we haven't changed our view as to where we want to run and sort of 0.7 to 0.8 regulatory leverage. So when we get to that point in the future, this won't be impacting that leverage calculation. So it should be, all things being equal, according to the math, it should be accretive.

Okay, great. That's helpful. The -- I mean, your leverage is pretty low, your regulatory leverage is pretty low and you still earned your dividend. The competitive environment is pretty difficult than -- accordingly at least to several of your competitors. And do you view the competitive environment as difficult? Are you going to be able to get your leverage where you want it to be over the next several quarters? Is the competition not too irrational to allow you to do that?

Again, Bob, I think we've talked about this in prior calls. The market is competitive. That's a fact. There's many new platforms that have come into the market. There's lots of private equity platforms that have established debt arms. There's a number of hedge fund-to-funds that have established credit performs. There's some PE fund-to-funds that have established a credit platform. The difference is that we have a strong platform. We have long-standing relationships in the industry. We have a brand name. We have a company, I think, that really stands for something and has been around for 17 years through lots of business cycles. We have a portfolio of over 300 borrowers today. So we're not trying to create a portfolio; we have a portfolio. 25% of our transactions and our deals come from within our portfolio. So I think the history that we have in the market, the long-standing franchise that we have, and the fact that we've got the same people doing the same things here at Monroe for the last 15 years, that allows us to compete very effectively with all of these new platforms and all the new money that has come into the space. So the short answer to your question is, I am very confident that we will put to work our capital that we have today over the next several quarters and that we will get to the point in 2018, where we'll be at the target leverage levels that we like to be at. Again, this is a long-term race. This isn't a sprint. We've done this as a firm for 15 years, and we don't work quarter-to-quarter here. If there's a quarter or 2 quarters where we haven't seen the right types of transactions or the right risk-adjusted returns, we are going to sit on the sidelines. We're not going to feel compelled to put money to work like other platforms just to put money to work to show that they're able to put capital in the ground to justify further fundraising. We will raise capital when we need to, when we think it's appropriate. And we'll put capital to work at a pace that we feel generates the best risk-adjusted return for our shareholders, including me, since I'm a big shareholder.

And our next question comes from Christopher Testa of National Securities.

Just curious. First, what was the $15.8 million reclassification from senior secured into unitranche?

Hang on one second. So sometimes what we'll do, Chris, is we'll close a deal on a senior secured basis -- that includes our revolving credit facility. And running a lot of revolvers for us is not typically efficient use of our cash and capital. So from time to time, we will sell off that revolver to a bank. And when we do that, we'll enter into a first out last out with the bank and that allows us to have a slightly higher yield when we do that and let the bank handle the ins and outs of the revolver. So that's really what happened this quarter. It was a couple of deals that we funded, and during the quarter we sold off the revolvers. I think in both cases, it was just the revolver. Occasionally, we'll sell a little piece of term loan, but in this case, I think it was just revolvers. So, it really doesn't materially increase our risk, because the first time it's very small, but that does require us, the way that we report, to move things from straight senior secured to unitranche because for us, unitranche represents a last out loan.

Got it, okay. And just on the SLS touching on what Roberts was speaking about they have 50-50 commitments, obviously, you guys are the ones doing the originations. Are you going to get disproportionately better economics out of this compared to National Life?

No. We're both equal partners. We both make the same return. There's no fees. There's no difference in economics . It's really just a heads-up partnership, and it really doesn't matter if you're a 50-50 or 80-20 with regards to that, your dollar -- whatever dollars you have into these JVs, the ROE is the ROE on those dollars. The difference here though is that this a clearly not just a compliance trade. Some of those JVs that are 85% or 87%, the insurance company doesn't have a lot of skin in the game. So here, we've got a new insurance partner that's very knowledgeable, that is a good partner to us, who wants to make a significant commitment to invest with us because they like the deals we originate and they like our credit process and the fact that they wanted to put a significant amount of capital to work with us I think is a testament to the quality of our platform and the deals that we can originate.

I think, Chris, just to supplement what Aaron said is that, this is not a negotiable arrangement. The SEC takes a very, very firm view on how these JVs need to be established. And there's a -- everything has to be done on a completely pro rata basis. So that's not something that's open for negotiation. I think the one thing, though, from your perspective and others that you guys should take note of is that the reason this is a 50-50 joint venture, as Aaron mentioned, it's not a compliant trade. This a long-term desire to do business together. And I think that the nicest thing about it from a shareholder standpoint is that what this signals is it signals an intention by both partners, National Life and MRCC, to expand this in the future and go deeper as the market allows us. And that we would mean is that over the long term not only would this be accretive, but I think it's got the potential to be very accretive as we continue to expand this, as National Life has expressed an interest and we certainly have an interest to grow this business.

Got it, okay. Great. And just if I look at the repayments and sales this quarter, clearly, it was extremely high much higher than past quarters. If I add up the prepayment fees as well as the OID acceleration, it was effectively unchanged from the first quarter, where repayments and sales were less than half of what they were. Just wondering if some fees carried over into the current quarter because the prepayments were late in the quarter? Just any color there is appreciated.

Yes, sure. No problem. So remember, part of the "prepayment" was the sale of Fabco. So -- and because we sold Fabco at a realized loss (inaudible) there were no fees associated with that. And then that was a pretty big chunk of capital. So -- but there are no carryovers or anything like that. It's just different deals are in different stages of their life cycle, and so some of the deals that paid off this quarter had been in the portfolio longer. And some of it was the sale -- so they had lower prepayment penalties, if any. And then some of it was those revolver sales that we made, which we made intentionally. They weren't repayments as much as us selling of the first ever revolver, which also doesn't have an immediate fee impact, although it does improve our spread on a go forward basis. But there's nothing sort of new onset others than that. There's no carryforward or anything that is fees.

I think you have to look at this, Chris, as more episodic. I mean, we're going to have some quarters where there's just higher prepayment activity than others. Here, as Aaron mentioned, we encouraged it. We got a very, very favorable result on our Fabco exit at a very, very high multiple of earnings because we were able to hold the company and position the company where it was attractive from a timing standpoint and a market standpoint to a strategic purchaser, and we do that because we've got a large staff of portfolio account officers, and special asset managers, and we can add value, and determine timing and be patient with the exits. So I think going forward, I would bet that we're not going to see as high of a level of prepayment, but again, it all depends on market.

Got it, okay. And last one for me. Obviously, you guys have really ramped-up the SBA debentures available to you. It's not inconceivable that you'll max out of that at some point soon. When that happens, are there any thoughts upon issuing more unsecured debt in terms of a baby bond subsequent to that? Or are you guys happy maybe potentially upsizing the revolver instead?

So a good question. We will look at all of the opportunities available to us at the time in terms of considering things to do for our capital structure, including the potential of issuing a bond if that's the right thing to do. I'd say we're right now focused on continuing to grow the portfolio and get closer to, sort of, our optimized leverage with our revolver. But all things are on the table, and we talk to all of the parties out there, and look at what are the best executions out there in terms of folks issuance paper. And we'll be opportunistic when the time comes, and determine what we think is in the best interest of shareholders of that time. But there's nothing specific on the horizon, and there's nothing we're considering at this moment in time definitively, but we will look at all options when the time comes.

And our next question comes from William James of (inaudible).

Ted, this is just a bigger strategic question. When I read through the House tax bill and it shows that the numbers I kind of run is at 30% of EBITDA -- interest expense to EBITDA, it looks like the proposal is to negate or disallow any interest expense over that amount. So when I kind of back into it looks like total debt to EBITDA of 3.5x. Anything over that becomes problematic, and I'm curious since that might create a free cash flow shortage, how do you plan -- well, first on the 300 companies and I realize not all of them are in the MRCC, but as you look at the entire portfolio strategically and you begin discussions with these companies looking out, how do you plan to fill -- is there going to be equity or preferred stock? Is there an opportunity with the preferred stock to be put in these companies to kind of fill that gap? And then the second question is, do you think that, that will impact enterprise values going forward? And I realize that this isn't law yet, but it do looks like it's coming down the pike.

So, William, that's a great question. And I would tell you that I've probably gotten half a dozen calls from the media, whether it's the New York Times or The Journal of Bloomberg or S&P, asking the same types of questions. And I think the -- my consistent answer is, number one, I think it's too early to really tell because things that are proposed by this administration don't necessarily always come to fruition, and even things that are proposed that people think are coming to fruition, they come to fruition differently. So that's number one. Number two is that from a market standpoint, the deal business doesn't really change other than sometimes deals get accelerated into one year versus another year for tax reasons. When tax cuts tend to be talked about, there tends to be a slower fourth quarter and deals tend to get pushed into the next year. But philosophically, M&A, the pace and rate of M&A doesn't really change materially due to tax considerations, because everyone has to play with the same rules. So I think that what we're seeing generally this quarter, I think a slower quarter philosophically than we've seen the last 3 years in the fourth quarter only because there's a lot of discussion and concern about potential tax cuts that may or may not occur in 2018.

Number 3, and the last point that I'll will make is with respect to MRCC and our portfolio specifically, our average -- weighted average leverage attachment points across our entire portfolio is around 3.8x leverage, debt. So we're not attaching like other firms at 5, 5.5, 6 turns of EBITDA from a debt standpoint. So we don't believe that we at MRCC will be significantly impacted by a change because we're less than 4 turns of leverage in all of our companies to start. And then associated with that, is that there's lots of capital that's waiting right now on the sidelines in the way of preferred stock and in equity to fill this void. The PE industry seems to be spared under this current proposal with any tax on carried interest, and there's been a lot of capital that's been raised in the PE industry. And those players -- that whole industry, I think, is looking at this very favorably as the potential to actually put more capital to work in a typical capital structure than they'd been able to do historically. So when you put all that together, I think that while there may be a quarter-to-quarter change at year end in terms of deal activity, over the long term, which is over the next 2 years, I don't think you're going to see a huge change in the pace or the amount of M&A transactions, particularly in the middle market, where we play, because you have to remember, the middle market is a place that deals get done generally for reasons. Family, public to -- private to public, PE to PE, generational transfers, sibling transfers, management buyouts, there tends to be a little more insulation in the middle market, particularly the lower middle market, than you see in kind of a broadly syndicated market. So hopefully, I've given you at least enough to think about to answer your questions.

I just need to put my CFO head on for a minute just to clarify a couple of things Ted said. The 3.8x leverage is across the Monroe platform for starting leverage on average. It's not specific to the BDC. We have not actually disclosed anywhere the BDC's leverage, but it should be consistent in terms of average starting leverage for our borrowers, and that's across the portfolio on a weighted average basis. Just put my CFO hat on.

And you don't have to disclose this if you don't want to. But then the 3.8x that's across the platform, which is your exposure, the additional total debt -- interest-bearing debt in the whole deal that's there might be a second-lien behind you. Just -- I mean, could that -- is that a lot more? Or a little more? Or are you just 3.8x straight up and then the rest of it is sponsor or equity.

Yes, we look at -- we're really focused on our exposure levels and fixed charge coverage. So as long as the company generates a sufficient amount of earnings to cover fixed charges, it's just as an anecdote. We don't see a ton of junior capital in the form of indebtedness behind us on deals. Generally, in our space, there tends to be a lot of equity. As you move up the food chain into the larger EBITDA-sized companies, $50 million and over, you tend to see more junior capital in the form of indebtedness.

Okay. So if it does become long or just kind of -- looking at how this is going to be affected just from a rough perimeter, we could assume the total debt across the platform would be roughly 3.8x and run the free cash flow exposure there if there is interest denial?

Yes. I wouldn't like just like to tell you in the future where things are going to be, but I mean today, across our entire platform, we think we attach at a very, very safe rate, and we'll deal with the new tax laws when they are enacted. And I don't imagine will change much of what we do in the way of how we do business.

Okay. And then last, quick question, when you look across the entire platform, the EBITDAs by industry, are you seeing some healthy growth rates or they just kind of muddling along at 0 to 1% or 2%?

I will tell you that across our entire platform which is the way I look at our business, what we've seen is some good EBITDA stability and some growth. We generally have not seen any trends on EBITDA declines other than perhaps in certain industries are industry-specific. I think retail has been a tough place, I think oil and gas exploration has been a tough place. Other than in certain isolated industries, I think, generally, we feel good about our entire portfolio, and we're trying to be thoughtful going forward on where we play and what industries we play in.

And I'm showing no further the question at this time. I would now like to turn the call back over to Ted Koenig for closing remarks.

I want to thank you all for being on our call today and for following us. I also want to thank our team, our management, our infrastructure for everything they do, our board. And I will let you know that we continue to be very focused and vigilant in our business and we look forward to speaking to you again on next quarter. So with that, have a nice afternoon and we will speak to you all soon. And if anyone has any further individual questions, please feel free to contact Aaron directly. He's always willing to speak to analysts and shareholders. So thanks for the call today.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.