Monroe Capital Corp (MRCC) 2017 Q4 法說會逐字稿

Welcome to Monroe Capital Corporation's Fourth Quarter and Full Year 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 reasonable based on management's estimates, assumptions and projections as of today, March 15, 2018, 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 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 the Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

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 fourth quarter and full year 2017 earnings press release and filed our 10-K with the SEC. We are very pleased to have announced another consistent quarter of financial results.

For the quarter, we generated adjusted net investment income of $0.35 per share, equal to our fourth quarter dividend of $0.35 per share. This represents the 15th consecutive quarter we have covered our dividend with adjusted net investment income. In an environment when many of our peers have announced challenging net income performance and cuts to their dividends, we're very proud to have been able to maintain a $0.35 per share dividend fully covered by adjusted NII. This is a testament to our unique origination capabilities and careful credit underwriting process.

Our book value per share during the quarter decreased slightly by 1.7% to $13.77 per share as of December 31, primarily due to negative net unrealized mark-to-market valuation adjustments during the quarter. More specifically, our NAV decreased from $283.5 million at September 30 to $278.7 million at December 31.

During the quarter, we experienced a decrease 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, did not make any cash investment in the equity.

As well we had an additional write-down on our debt holding in TPP Operating, Inc. as we have failed to see any material performance improvements in that borrower. At year-end, our investment portfolio had a fair value of $494.1 million, an increase of $63 million from the prior quarter end, and was invested in 72 companies across 23 different industry classifications.

Our largest position represented 4.4% of the portfolio and our 10 largest positions were 31% 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 loans. We are very pleased with the construction, diversity and the senior secured nature of our investment portfolio at this point in the credit cycle.

We launched our 50-50 joint venture with National Life Group in November last year. And as of the end of the fourth quarter, we had grown the investment portfolio within the joint venture to $29.1 million at fair value. As a reminder, National Life and MRCC have each committed $50 million, $5-0 million in equity capital for a total 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 expect to have access to attractive bank leverage to the joint venture by the end of Q1, which will help to increase, substantially, the ROI in this venture. As you will see in the 10-K disclosure, the existing portfolio had a gross yield of approximately 7.1% as of year-end. We expect substantial growth in the portfolio over the next several quarters.

As we have discussed in the past, MRCC is 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 situated to meaningfully benefit from any increase in short-term interest rates going forward.

In addition, we have $109.5 million outstanding in fixed-rate debt from our SBA debentures, which will allow us significant interest rate arbitrage and any increase in LIBOR in the future.

Currently, we continue to maintain approximately $0.33 per share of undistributed net investment income, which, in our view, provides a nice cushion to our ability to maintain a consistent quarterly dividend payment to our shareholders without returning capital.

I'm 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 $494.1 million at fair value, an increase of approximately $63 million since the prior quarter end. During the quarter, we funded a total of $85.8 million, which was due to 9 new deals and several add-on and revolver fundings on existing deals.

Additionally, we funded a total of $9.5 million to the joint venture. This growth in the portfolio was offset by sales and complete prepayments on 4 deals and partial repayments on other portfolio assets, which aggregated $29 million during the quarter. At December 31, we had total borrowings of $117.1 million under our revolving credit facility and SBA debentures payable of $109.5 million. The increase in SBA debentures and borrowings under the revolver are as a result of portfolio growth during the quarter.

As of December 31, our net asset value was $278.7 million, which was down slightly from the $283.5 million in net asset value as of September 30. Our NAV per share decreased from $14.01 per share at September 30 to $13.77 per share as of December 31, a slight decrease, as Ted has mentioned, of approximately 1.7%. This decrease was as a result of unrealized mark-to-market valuation adjustments on 2 isolated investments. One, on equity that we received for free in connection with a senior secured loan, and one on a credit that has been in the portfolio for several years and that has underperformed to plan.

Turning to our results. For the quarter ended December 31, adjusted net investment income, a non-GAAP measure, was $7 million or $0.35 per share, approximately unchanged 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 $13.4 million compared to $13.5 million in the prior quarter. We did not see an increase in total investment income for the quarter despite the substantial increase in our portfolio for the following reasons: one, a significant portion of our portfolio growth occurred near the end of the quarter resulting in limited growth in investment income during the quarter associated with this asset growth; and two, due to muted pay-down activity in the quarter, MRCC realized significantly less in both fee income and gains on pay downs when compared to the prior quarter.

Moving over to the expense side. Total expenses for the quarter of $6.4 million included $2.2 million of interest and other debt financing expenses, $2.1 million in base management fees, $1.2 million in incentive fees, net of a voluntary fee waiver of $58,000 and $0.9 million in general, administrative and other expenses.

Total expenses decreased $0.2 million during the quarter, primarily driven by a decrease in incentive fees, partially offset by an increase in interest expense driven by a higher average debt balance during the quarter and higher levels of LIBOR.

During the fourth quarter, our incentive fees were limited due to the total return requirement in our management agreement. Without the total return requirement, we would've seen approximately $0.4 million in additional incentive fees during the quarter, not factoring in any voluntary fee waivers.

As for our liquidity, as of December 31, we had approximately $83 million of capacity under our revolving credit facility and we had access to $5.5 million of additional SBA debentures.

As Ted mentioned, during the quarter, we established a joint venture with National Life to invest primarily in senior secured loans. Each of MRCC and National Life committed $50 million to the JV. As of December 31, the JV had made investments in 8 different borrowers, aggregating $29.1 million at fair value with a weighted average interest rate of approximately 7.1%. We would expect the JV to grow substantially over the next few quarters and access third-party leverage by the end of the first quarter. Accessing third-party leverage will increase returns both to MRCC and its JV partner.

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

Thanks, Aaron. We have discussed in the past, since going public with our IPO of our BDC in 2012, we have generated a 43% cash-on-cash return for our shareholders based on changes in NAV and dividends paid, assuming no reinvestment of dividends. Based on the closing market price of our shares on March 14, investors that purchased stock in our IPO have received a 36% cash-on-cash return, assuming no reinvestment of dividends. On an annualized basis, that represents approximately a 7.3% annual return since 2012. We believe these returns compare 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 its shareholders over the time period.

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.

With our stock trading at a slight discount to book value and at a dividend yield of over 10%, 10.7% supported by adjusted net investment income and 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'm going to ask the operator to open the call up for questions.

(Operator Instructions) Our first question comes from the line of Bob Napoli with William Blair.

Ted, on the TPP investment that you're making that you -- that obviously has been challenging for you, the Picture People. I mean, you've continued to put -- and I know it's a tough decision putting more money into a turnaround situation, but are you -- at the end of that, you don't want to get caught in a situation, obviously, of throwing good money after bad. And it looks like credit overall is pretty good, but you keep (inaudible) putting a little bit more money in that quarter -- this quarter.

Yes, yes so here's my take on that. I think we've got a really, really good portfolio. I think this is a deal that started out okay, but deteriorated relatively quickly. And then from a core business strategy, the management team we had wasn't figuring it out so we replaced the management team. We ended up going through a bankruptcy process, where we did a 363 sale to try and salvage the business, and then we brought in a new management team. And we just haven't seen the positive results that I would've expected, and we are very close to the end of our rope on this. We're exploring a couple of strategic options, I will tell you now that none of which involve us investing any more money into the company. So we're -- I would say that we've tried as hard as we possibly could, and we've done as much as I think we could, and we put a lot of firm resources on this, and we're just not seeing a result commensurate with our effort. So what we've done is, we're positioning the company now for some type of a strategic exit. And my hope is, over the next quarter or 2, I'll be able to report that to you.

And one follow-up question. Just the -- what is your feel, Ted, for the overall economy? And how you're feeling about the portfolio and credit? You guys put on a fair amount of loans this quarter. So how are you feeling about the small mid-market economic environment? And then the competitive environment, I mean your ability to put on the loans that you have when others seem to be a little more challenged.

Yes. I mean, the market is competitive, I will tell you that. There is a lot of deals. Last year, in the M&A space, in 2017, that was probably the most robust year that I've seen in the last 13, 14 years. And it's because purchase price multiples are high so there's a lot of sellers in the market. There's a lot of debt availability, interest rates are low. There's a lot of new funds, private credit funds that have been established in the last 2 years, and all those funds need to get invested. So there's no shortage of liquidity in the market. My general concerns relate to more risk return. You've seen us morph our portfolio to senior secured, we're at the top of the capital stack. If you look at our portfolio overall, our leveraged attachment points are around 4x, which is a very, very healthy place to be. In the marketplace today, companies are getting sold in our space in the lower end part of the market, anywhere from 8 or 9x to 12x EBITDA, adjusted EBITDA. And many of our -- many of the lenders in our space are attaching at 5 to 5.5 turns of leverage. And I'm just concerned about total leverage, I'm also concerned about documentation. As you go up the scale in the larger market transactions right now, there's very little in the way of covenant protection for lenders. In the kind of the $40 million, $50 million EBITDA space and up, there's virtually no covenants and the loan documentation is not what I would consider to be lender friendly. So the one place in the market -- and we play all places, because we've got CLOs that invest up market, the one place I think is the best risk-adjusted return for investors today and lenders, is probably the lower part of the market because we still have covenants in all of our deals, we have maintenance covenants, we have incurrence covenants, we have debt service coverage covenants, we have overall leverage covenants, and our documentation hasn't changed. So I think that in frothy markets, you just have to stay true to what you do best. And at Monroe, that's what we've done. We had a good year last year. This year, I think we'll probably continue. There's been some outside influences. We've got this big tax cut that -- that's going to generate more free cash flow for companies. We've got some accelerated depreciation of capital expenditures, which is going to create some more free cash flow for companies. More free cash flow times elevated purchase price multiples equals higher purchase prices. And I think that private equity firms are going to be forced to pay up to compete with strategics. And lenders are going to -- the trend is going to be to follow that upward pressure. And I will tell you and I've told our analysts and our shareholders, we're not going to follow that trend. If it means we do fewer deals in 2018, so be it. My primary focus is on safety of the portfolio and in protecting our dividend.

Our next question comes from the line of Leslie Vandegrift with Raymond James.

Just a quick modeling one to start us out. On Answers finance, the junior secured loan, it says it pays prime plus 7.9% but the all-in rate for the quarter was 9%? Is that an error or is that a change in base rate?

There is a -- so in that particular instance, there is a strange nuance where there is an interest cap in terms of how high it can go, and it's reached that cap. And just as you recall, that's a name that is more of a traded name, we're not the agent on the deal. And so that's not something you should expect to see in our other portfolio assets, we don't usually provide an interest rate cap. This was a restructuring asset that came out of a bankruptcy and that's the way that one was structured. So that's why that weird nuance is there.

Okay. That make sense. And then you gave an outlook on TPP, but on Rocket Dog, the rebranding to Millennial brands, what's the outlook there? Is that part of the strategy? And what do we see from that over the next year?

Yes. Sure. The rebranding was because they, over the last couple of years, had acquired a couple of additional brands that were actually growing very nicely and continue to grow. And so I think the view of management was that over time, Rocket Dog will become a smaller and smaller percentage of the business although it's still fairly substantial today. And so that was the reason for the rebranding. It's hard to say with Rocket Dog. I think the game plan has always been, for the last 18 months, is to try to get the company right sized on their expense side and to get it pointed in a reasonably positive direction on the revenue side, so that it could consider its strategic options, and I think that situation continues to be the goal of the company. As I think you know from prior calls, we are a participant, again, in that deal with one other at this point, one other lender who is the control participant. And I can't necessarily get into their head as to exactly what they expect to do but my expectation is that, there is a strategic outcome coming for Millennial/Rocket Dog here in the next couple of quarters. That would be my best guess.

Okay. And then on -- I know that the fee income and gains were lower this quarter. But the outlook for 2018, I know other funds, we're still seeing a higher prepayment rate, do you see that continuing on? And do you see fee income coming from that?

Yes. It's very difficult for us to predict what will happen with repayments and prepayment fees and things of that nature. So we tend not to guide too terribly much on that, because we just don't know, it would be a guess. You are correct that we saw fewer prepayment fees and prepayment gains. As you may recall, the prepayment gain comes as we amortize upfront fees into the income and any unamortized OID that exists when a deal is repaid, flips into income through the prepayment gain. And so both of those are tied very heavily to prepayments. The fee income part of it is tied to prepayment penalties. And so that's more variable as to when the asset was originated, and if it was a legacy asset that was from the very beginning of our BDC, it's more likely to not have a prepayment fee and if it's a more recent asset, it's more likely to have a prepayment fee. And the same is true prepayment gains as it amortizes OID into income, the farther along we get, the less that's left to amortize in. And so it really just depends on what vintage of assets get repaid and so that's why it's very difficult to predict.

As Ted alluded to earlier, the market is competitive. And we've done a lot of really good deals and a lot of those companies are companies that could choose to find a new partner that probably slightly lower pricing if they're willing to bear a prepayment penalty. But some are very happy staying with us because we're good partners to them. And some haven't prepaid us and some do. So again, impossible for us to predict, and I really, frankly, unfortunately, can't guide you on that.

Leslie, I will tell you, the only -- the best indication I can give you is that in a rising rate environment, there are fewer prepayments. And I believe that we are in, in 2018, a rising interest rate environment.

Okay. And then on the last question. So the new unconsolidated funds, a good amount already put into there in the first quarter -- fourth quarter '17, but the first quarter it was ramping up. You mentioned in your prepared remarks, $300 million of expected total capital, once it's levered up. Is that something -- do you have a time limit on that or just getting it going over 2018? And that's a long-term target?

We will ramp it as quickly as we see good opportunities and good risk-adjusted pricing for the JV. And so how long it will take really is subject to somewhat to what we see in the market for available good deals that make sense. We are not on a timeline that's specific because we never want to be in a position where we're making concessions to do deals that we don't want to do because we're trying to meet a timeline. So the best answer I can give you is, as soon as it makes sense on a risk-adjusted basis, is when we'll get to the target amount. And it could be by the end of the year and it could be in 2019. And I really just don't know. We are seeing reasonable amount of deal flow now that make sense and as long as we're seeing good deals at reasonable pricing and as long as our JV partner agrees with those deals, and so far it's been a very good partnership, we'll ramp it as it makes sense. And so we'd expect to see it continue to grow throughout the year. And I think the best estimate will be sort of what you see quarter-to-quarter will be the best predictor of future quarters and with a fair amount of variability depending on the market. So unfortunately, I can't guide you.

It's not a short-term project for us, Leslie. This is something that we undertook and it's a little rare. This is a 50-50 joint venture, most of them in the market are 80-20, and we did this because this is a long-term strategic relationship for the firm. And if it takes us 2 years to do it, so be it.

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann.

On the SLF, given that the -- it's a, if I understand correctly, a 7% yield, is it fair to say that these are middle-market type of investments?

It's fair to say that, yes, these are middle market. They tend to be more traditional middle market. So I would say that we focus, as a company, on less than $30 million EBITDA generally at Monroe for our direct originated funds. I think that this is probably in the neighborhood of $20 million to $50 million, is probably the range of EBITDA-sized companies that you'll see in the joint venture.

Got you. And then because -- is it fair to look at the -- these are effectively like a second lien type of investment because you're investing in equity in the SLF venture, which is then levered with bank debt. So Monroe's position in effect would be subordinate to the bank debt on the SLF. Is that a fair way to look at?

That's not how I would look at it. Our current portfolio in the core portfolio is a bunch of first-lien assets that we have a bank facility to leverage. And this is very much the same thing. We have a joint venture where we're putting assets and we're using bank leverage to leverage those first-lien assets. So I don't view it as a second-lien investment, just like I don't view our equity in Monroe as a second-lien investment.

Got you. Okay. And then, does the JV partner have any priority in terms of repayment over Monroe or is it pari-passu?

Everything is even. There is no priority, there is no preference. Everything is 50-50, right down the middle of the plate.

Got you. And what about management fees? I mean are those...

There are no management fees. There are no management fees paid by the JV to any party.

Got you. Okay, great. Just switch over to debt. Are you guys planning to continue to incrementally rely on the credit facility and the SBA? Or is there thoughts of putting in some fixed debt in the capital structure for the BDC?

We are going to continue to rely on our credit facilities currently with ING as well as the SBA. But I will tell you that Aaron is always looking at options to make our capital structure more efficient. And we had the opportunity to do things several years ago and I think we did not, and it was a good business decision not to. So as the market opportunities present themselves, we will look at that, Chris, and then we'll make a decision.

Got you. And can you remind me, your SBA limit is technically $150 million, but you're currently funded for $115 million. Is that a fair way to look at it?

No, so the limit for the BDC in terms of debenture is based on the current rules in the SBA is $115 million, 1-1-5. So the balance we were at, at the end of the year of $109.5 million means that we have about $5.5 million of additional debentures available and then we would have reached the cap with SBA at this time.

Our next question comes from the line of Chris Kotowski with Oppenheimer.

Wonder if -- a couple of follow-up questions on the senior loan fund. And it says in the schedule of investments, $9.5 million is your cost and then on Page F-34 of the K, it says, $19 million was funded, so that makes sense because it is a 50-50 JV. But then it says, total assets at year-end were $41.6 million, and then on the next page, it tells us that the fair value in the schedule of investments of the SLF was $29.1 million. So can you just square all those numbers?

Yes. I didn't catch every number you mentioned, but there's a couple of different things at work in the JV, and we can also talk about this offline afterwards, I can help clarify anybody who needs more. But there is a couple of different things at work that create some confusion. One is that while we did a significant amount of assets in the JV at the end of the quarter, not all had been funded. So some of those were unsettled trades, where we had agreed to purchase a piece of debt and it hadn't quite closed yet. So that's part of the issue. So if you look at the members' capital account of $19.3 million on Page F-36, half of that is the $9.1 million of our capital in the JV. And so if you look on the balance sheet, you've got $29 million of investments at fair values, those will include investments that are under payable for open trades. So you can see not a lot had actually closed of those investments at the end of the period. And those are still -- that's why the investment in interest income in the JV, which you see below, is very small because we still have a lot of investments that were to be closed. The other thing that's likely at work in some of the numbers that may become confusing for you, is principal amounts versus cost versus fair value. So we fair value all the assets based on where they are trading, typically, that fair value will be somewhere between cost and principal amount on a weighted-average basis. And so cost is usually less. And on a newly originated asset, fair value could be anywhere from at par to slightly less, [99.5%], 1.5 par. So it really just depends as you look at that asset so sometimes that creates some of the confusion as well when you look at sort of the dollar amounts in the JV.

Okay. And then you mentioned that you anticipated closing the bank, credit facility by the end of this quarter. And I'm wondering, can you give us any indication what the pricing on that might run?

Well, we haven't announced anything publicly. But if you look at where the market is for these sorts of assets, you can typically see pricing around LIBOR-plus 2.25% to 2.5%. So you should expect it to be in that range.

Okay. And then, so if I model this, I should just assume $2 of leverage for every $3 of assets, yield at 7% and cost at L-plus 2.50%, something like that.

I don't want to give you too much modeling guidance. The 7.1% is what we have put in the JV to date. You are -- where the JV winds up in terms of a total yield will depend on the market, and where we see opportunity sets. So I'm not forecasting for anyone that, that is the right way to model it out. As for the leverage, it'll depend on the assets. And so we have said that we think on average, we should be able to leverage this facility at around 2:1, and that's true. Some of it will have to do with timing of when we will be 2:1. So most credit facilities have certain requirements in terms of diversification and size and so it's possible that if we close a facility before the end of the quarter that we may not be at 2:1 leverage at the end of the quarter, because we may not have reached all of the diversity requirements to get to that point. But I think it is a safe assumption based on our bet on the mix of assets -- based on what we've seen to date, that we ought to be in a position to leverage this thing around 2:1 on a longer-term basis.

Okay. And then last, you mentioned in your prepared remarks, you mentioned the write down of the equity of Rockdale. Is there -- if you can say, is there any concern about their capacity to service the debt? I see they're -- it didn't look like there were any really significant marks on the debt part of that holding.

Right. As we talked about in the past, the company has -- is going through a bit of a transition of its business and it continues to look at all options. The company has significant assets. And so one of the reasons the debt continues to be marked where it is, is that it's fairly -- we believe, at least today, based on what we know, that it's fairly well asset covered. And so we do think that over the longer-term period, the company will be able to service the debt, and we believe there is enough value to cover the debt, and we still believe there is equity value, and so did the valuation providers that have looked at this. But it's a fluid situation, and there is a lot of professionals spending a lot of time, trying to help the company get positioned and right sized and it gets liquidity position improved and lots of other nuances that could -- and the outcome of that could be very positive, it could be neutral, it all just depends on the outcome. And so we continue to be optimistic about where our investment of Rockdale will end up. But the valuations at the end of the year reflect our -- the best guess of us and our evolution providers as to what we believe the value is of the equity. And as I said, on the debt, which you're right, is close to par because we believe, at this point, that it's asset covered.

Our next question comes from the line of Christopher Testa with National Securities.

Just curious, I know this has been uncharacteristic except the past 1.5 quarter or 2 quarters or so, but with the stock continuing to trade in and out of discount, has there been any internal discussions around implementing a repurchase program?

That's something that we talk about at the board from time to time. And I'm sure that if the stock continues in the place it is, that discussion will come up again at the board. I don't frankly understand, I'm not a great stock market picker. I don't understand why the stock just trading where it is. But we'll just -- we'll deal with it as time goes on.

Okay. Got it. And to the extent that you can just elaborate at all, Ted, just curious, what, if any -- was there any pushback internally towards -- against doing a repurchase program or was it just not believing the discount was wide enough to warrant it?

Yes, it's just -- the discount is more of a recent phenomenon, and right now it's a slight discount. Let's see what happens here as time goes on and we'll make some decisions. But right now, it's not something we're -- we had contemplated today.

And also, just point out that we couldn't have really considered it up until the time we released because we were in a fairly extended quiet between the end of the year and earnings release, so it wasn't even -- it wasn't even worth having a discussion on because we weren't in a position to do anything about it.

Got it. Okay. No, that make sense, Aaron. And just as you guys look at retail more broadly, I know you don't have a ton of exposure there but a decent amount through some of the investments. What are the -- what's the opportunity set looking like there maybe from the asset-based lending perspective relative to cash flow loans? And does the platform have, I guess, a large enough ABL-type arm to be able to take some of that opportunity in MRCC?

That's a good question. We have done a fair amount, actually, of retail as a firm. Our roots, when we started the firm, were back in retail lending, asset-based lending. I think that as time goes on, you're going to see us do less cash-flow based lending in this space and more asset-based lending. Today, we've got a few portfolio companies that were very focused on asset-based lending. But -- and this is a space you really have to be careful. Many lenders decide that they want to be asset-based lenders versus cash flow lenders in the retail space. But they're not equipped to do it. I'm equally as concerned about liquidity in a lot of these retail-oriented companies as I am collateral value. And that's really the big issue today is, do these companies have liquidity? You'll see that, most of the big guys that have been filing, they file not because they don't have collateral value, but they run out of liquidity. And to the extent we do deals in this space, which we are looking at now, we've got a higher bar from a liquidity standpoint than we would have in a frothy cash flow lending market.

Got it. That make sense. And just some additional questions on that, Ted. Could you just give us an idea of how big the asset-based lending arm of Monroe's total platform is? And also, can you discuss just how long that liquidity issue has been persisting in the current market?

Well, it's 2 questions. One is, we've been doing asset-based lending at Monroe since we started the firm in 2004. We've got a number of people in the firm that specialize in it. It's a vertical -- industry vertical for us. So it's a business that today may constitute upwards of around 10% of our total firm assets. The BDC may -- is not necessarily track that but as a platform, we're probably close to 10% with asset-based lending. And I think that will continue. The second question that you asked was what again?

It was just how long the issue about your concerns on liquidity has persisted in the current market?

It's funny. Most people don't think about -- spend a lot of time on liquidity until their concerned about their credits, and then all of a sudden liquidity becomes an issue. We've been doing this for a while, so the last 2 years we've really been focused on liquidity. As we've seen the market kind of push, especially into the consumer retail space. We were one of the few firms that -- we were around, precrisis and we watched what happened to a lot of these credits in the crisis, and we're trying to take lessons learned from that period of time and apply them to now.

Okay, great. That's very helpful. And just a couple more, if I may, on the SLF. Just curious, I know you guys had commented that how light deals are persisting in the $40 million-plus EBITDA range, do you expect that, that type of phenomena is going to negatively impact, kind of, your growth at the SLF given that you're making some kind of larger EBITDA borrower loans in there?

Yes. It's a great question. I think we -- as we look at the SLF, we don't necessarily make a rule that says that we won't participate in some of the covenant-light deals that are in the marketplace. We prefer to do covenant loans and the bar is much higher for covenant-light loans. But you're right, there are some deals that have trickled into this space where the SLF may, on select cases, consider investing in covenant-light loans if they make sense for that borrower. And if it's a deal that we can get comfortable with that we -- and usually they are sponsored deals with good sponsors that know how to operate in the space. But it is an issue in the SLF that we have to be very mindful of the covenant-light loans that are making their way into some of the opportunities set for that fund. It's not the preponderance of what we're seeing, that market is much heavier in the broadly syndicated market, and then the very large part of the middle market, which tend to be coupons that are sort of below the rate that we've been considering for the SLF, but there are cases where we have seen some loans in the covenant-light space sort of trickle into the SLF opportunity set. And on a very select basis, we will consider it.

Got it. And when you're talking about loans that you would consider in that, Aaron, I'm assuming you just need sponsor backed, good sponsor and just very low leverage and not a very cyclical type of industry.

Correct. It's usually something that's low loan to value with a good quality sponsor in a space they have expertise in, that's correct. Those are the sorts of opportunities we'll consider.

Our next question comes from the line of Chris York with JMP Securities.

So I was going to ask on -- some questions on ABL, which you already said, is a familiar product at the platform and then you did expand in that group last year, but I have a couple of follow-ups. So I'm curious whether National Credit Center was an ABL deal. And then should some of that, which was a sizable deal, find a home on Monroe's balance sheet?

Good question. National Credit Center was not an ABL deal. And so it was an enterprise (inaudible) cash flow deal. As for where it's going to wind up, when we report our next quarter, you'll see where it wound up. Unfortunately we don't disclose deals that close sort of post-quarter end. I don't remember when that deal closed. But it not an ABL deal. But we do, Chris -- and to that point, we do look at ABL deals in the specialty finance sector. That is a part of what we do. So we also will consider ABL deals, it's usually typically SPV financing to financial companies. And so that would be something we'd consider in the BDC if it made sense, an ABL deal too, financial.

Okay. And then another way of maybe asking a question. I know, Ted, you framed it with ABL as 10% of the platform. But I believe you were in the market or maybe even closed a special fit fund earlier this year, so does that increase the likelihood for deals potentially finding a way into Monroe's portfolio?

Yes. That's actually a pretty good observation, Chris. That proves you're actually, you're reading the market information. We went to market, we just started going to market with our special situations fund. That fund will be predominantly asset-backed and asset-focused. And we have not had a first close on that fund yet, I anticipate, we'll have a first close sometime in the next quarter or 2. And as we do transactions there, some of those transactions, because we've got exempt of relief, will find their way if they're appropriate for MRCC, into MRCC's portfolio.

Great. Makes a lot of sense. Switching gears but staying on strategy a little bit. You've occasionally partnered with banks across the country with some of your unitranche transactions. I'm curious whether you have noticed any changes in behavior or maybe interest among any banks as a result of an improved bank-lending environment and their desire to partner.

Yes. There's always been -- that's a good question that we get as well from others. There's always been a desire to partner. The issue has been, banks -- from a regulatory standpoint, banks have the ability to do cash flow enterprise loans. So nothing has really changed there, it's just that the banks have a bucket for that. And the challenge is that many of the banks have their buckets full. So as those buckets empty from time to time, those buckets can be replenished. And many of the banks, unfortunately, have been operating with full buckets in that space. So the regulatory changes that were announced just recently this week, unfortunately, don't affect the buckets, they affect other things about when banks are designated as SIFIs or what they can do versus trading or not trading. But ultimately, the credit part of the banks are run by the regulators not by Congress. And I think banks do have an appetite, they will continue to have an appetite for leverage loans albeit at lower leverage rates than the market is currently ascribing. So my estimation is, we'll continue to do transactions with banks that have appetites for this and that have the bucket availability to do these transactions.

And we have a follow-up question from the line of Christopher Nolan with Ladenburg Thalmann.

I know everyone asked you about where we are in the credit cycle, but how -- can you give a little color in terms of what sort of thinking process you guys go through in terms of evaluating investments? Obviously, where we are in the credit cycle is one, but all these industries also have different cycles. And just trying to get a sense as to how you guys are -- when you have a deal come up, do you evaluate where the industry is? Its cycle? Can you give us like a quick rundown on your thinking process on that?

Yes. I will tell you that people ask about credit cycles all the time, every time I go to a conference, that's one of the questions. And if you're a high-yield loan trader or if you're a broadly syndicated loan manager, you probably start there with the credit cycle and then move down. We don't start there. We start at the -- actually the opposite end, because we play in the middle market and particularly the lower middle market. Credit cycle is not a prime driver of our analysis. The first thing we do is we look at the company. And we look at the specific company and the specific company dynamics, which is, where their revenues comes from? How diversified is their customer base? How sticky are they? How important are they to their customers? Is there a spot in the market for the company? Is management good? What's happened over the last several years? How has the company performed over a cycle? What happened in the last credit cycle to this company? And then we look from the company, we expand out to other companies in that industry. So we'll look at what the industry is comprised of, where does this company stand in relation to its peers? Is it a good competitor? Is it a not good competitor? Is it a value-added player? Is it not a value-added player? Then we'll look at the supplier base and their ability to manage their cost structure for their products, we'll look at their overhead. We'll do some reference calls. And we'll really focus on a bottoms-up analysis then we'll do our own internal modeling about where we think the company is going to be given the competitive dynamics in the industry that it plays in. And then we'll do some outside work with their financial statements, cash flow. And we'll do some independent valuation work with some third parties.

And then once all that is done, and we look at where the company is, where the industry is, we'll look at general trends, business trends. And if everything lines up in a positive parallel analytic environment, we'll get involved with an investment. But we are not focused and we do not focus day-to-day on macro trends. It's nice to talk about at conferences. But ultimately, if we're doing our jobs properly as credit managers, we're focused on each individual company in our portfolio, and Aaron mentioned, we've got over 72 companies in our portfolio, specific portfolio. We've got account managers here that are -- their sole job is to watch the financial metrics as well as the industry dynamics of each one of those 72 companies.

Yes. Just to add, one of the reasons we don't focus too much on macros, we're debt guys, we hope for the best but we prepare for the worst. And so we assume every time we underwrite a deal that the credit side -- the credit cycle will end tomorrow. And we underwrite with the mindset of how will this company do if that happens. And we spend less time predicting when it will happen and just assume it will and underwrite with that in mind.

I'm not showing any further questions in queue at this time. I'd like to turn the call back to management for any closing remarks.

Thank you all for joining us this afternoon. We look forward to a solid 2018. And I want to wish everyone good luck on your NCAA picks, that has preoccupied most of our office this morning, and hopefully you all got your picks in. So have a good day. And we will speak to you again soon.

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.