Monroe Capital Corp (MRCC) 2018 Q1 法說會逐字稿

Welcome to Monroe Capital Corporation's First Quarter 2018 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, May 9, 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 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.

Good morning, 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 first quarter 2018 earnings press release, and filed our 10-Q with the SEC. We are very pleased to have announced another solid quarter of financial results. For the quarter, we generated adjusted net investment income of $0.42 per share, exceeding our first quarter dividend of $0.35 per share. This represents the 16th consecutive quarter we have covered our dividend with adjusted net investment income.

We're very proud to have been able to maintain a $0.35 per share dividend fully covered by adjusted NII, without any reduction in our dividend since our IPO in late 2012. This is a testament to our unique origination capabilities and our credit, underwriting and portfolio management process.

Our book value per share during the quarter decreased by 2% to $13.49 per share, as of March 31, primarily due to negative net unrealized mark-to-market valuation adjustments during the quarter on the same 2 investment names that we discussed with you last quarter.

During the quarter, we experienced a decrease in the fair value of our position in TPP Operating Inc. Despite all of TPP management's efforts, TPP has not been able to pursue a strategy that generates significant free cash flow in the near term. MRCC management has made the decision to curtail funding additional dollars into this investment.

As a result, the prospects for significant recovery on this loan look challenging. And thus, it has been written down to a valuation of $3.6 million in the aggregate. We expect to fully resolve the TPP situation in the second quarter, as we are currently pursuing a variety of options to do so.

Also during the first quarter, we had an additional write-down on our equity holding 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 year-end, our investment portfolio had a fair value of $496 million, a slight increase from the prior quarter-end and was invested in 72 companies across 23 different industry classifications. Our largest position represented 4.2% of the portfolio and our 10 largest positions were 33% of the portfolio.

Our portfolio is heavily concentrated in senior secured loans, in particular, first-lien secured loans. 94% of our portfolio consists of secured loans and approximately 86% is first lien secured. 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 of 2017. And as of the end of the first quarter, we had grown the investment portfolio within the joint venture to $58.2 million at fair value with a weighted average yield of approximately 7.4%.

During the quarter, we closed the leverage facility for the JV, which increased the investment capacity of the fund to nearly $200 million. As of quarter-end, the joint venture had debt outstanding on its leverage facility of $20.3 million at a rate of 4.5% or LIBOR plus 2.25%.

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 $112.8 million outstanding in fixed rate debt from our SBA debentures, which will allow us significant interest rate arbitrage on any increase in LIBOR in the future. Currently, we continue to maintain approximately $0.40 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.

But for the 2 minor negative unrealized mark-to-market valuation adjustments, we are very, very pleased with the results of the first quarter.

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 and, during the quarter, we funded a total of $16.8 million in loan investments, which was due to 1 new deal and several add-on and revolver fundings on existing deals.

Additionally, we funded a net $6.2 million to the joint venture. This growth was offset by sales and complete repayments on 1 deal and partial repayments on other portfolio assets, which aggregated $16.1 million during the quarter.

At March 31, we had total borrowings of $125.6 million under our revolving credit facility, and SBA debentures payable of $112.8 million. The increase in SBA debentures and borrowings under the revolver are the result of portfolio growth during the quarter.

As of March 31, our net asset value was $273 million, which was down from the $278.7 million in net asset value as of December 31. Our NAV per share decreased from $13.77 per share at December 31 to $13.49 per share as of March 31, as Ted has mentioned, a decrease of approximately 2%. This decrease was primarily as a result of unrealized mark-to-market valuation adjustments on 2 isolated investments, 1 on equity that we received for free in connection with a senior secured loan and 1 on a credit that has been in the portfolio for several years and has underperformed to plan.

Turning to our results for the quarter ended March 31, adjusted net investment income, a non-GAAP measure, was $8.5 million or $0.42 per share, an increase of $1.5 million or $0.07 per share when compared to the prior quarter. At this level, per share adjusted NII comfortably exceeded our quarterly dividend of $0.35 per share.

Looking to our statements of operations, total investment income for the quarter was $15 million compared to $13.4 million in the prior quarter. The increase in total investment income for the quarter was a result of the following: one, a significant portion of last quarter's strong portfolio growth occurred near the end of the quarter, resulting in limited contribution to last quarter's investment income; two, due to pay down activity in the quarter, MRCC realized an increase in fee income when compared to the prior quarter; three, short-term interest rates have increased during the quarter with 1 month LIBOR increasing by approximately 30 basis points; and four, we had an increase in accretion of discounts into interest income on our portfolio during the quarter, primarily as a result of the acquisition of a position at a discount in late 2017.

Moving over to the expense side, total expenses for the quarter of $6.5 million included $2.7 million of interest and other debt financing expenses, $2.2 million in base management fees, $0.8 million in incentive fees and $0.9 million in general, administrative and other expenses. Total expenses increased just slightly by $0.1 million during the quarter, primarily driven by an increase in interest expense driven by a higher average debt balance during the quarter, partially offset by a decrease in incentive fees during the quarter.

During the first 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 $1.1 million in additional incentive fees paid during the quarter. As for our liquidity, as of March 31, we had approximately $74.4 million of capacity under our revolving credit facility and had access to $2.2 million of additional SBA debentures.

As of March 31, the JV with National Life had made investments in 17 different borrowing -- borrowers, aggregating $58.2 million of fair value, with a weighted average interest rate of approximately 7.4%. We had borrowings under our nonrecourse JV credit facility of $20.3 million. We would expect the JV to continue to grow over the next few quarters.

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

Thanks, Aaron. Since going public with our IPO in 2012, we have generated a 43% cash-on-cash return for our shareholders, based on changes in NAV and dividends paid since our IPO, assuming no reinvestments of dividends. Based on the closing market price of our shares on May 8, investors that purchased stock in our IPO in 2012 have received a 37% cash-on-cash return, assuming no reinvestment of dividends. On an annualized basis, this represents approximately a 7.4% 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 the elite group of BDCs that have delivered this level of performance for shareholders.

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 senior secured loan joint venture.

We believe that Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders and other investors for the following reasons: one, our stock is currently trading at a discount to book value and pays a current dividend rate of around 11%; two, our dividend is fully supported by consistent adjusted net investment income coverage for the last 16 straight quarters; three, we have a very shareholder friendly external advisor management agreement in place that limits incentive management fees payable in periods where there was any material decline in our net asset value; and four, we are affiliated with a best-in-class external manager, with 7 offices located throughout the U.S, almost 100 employees and approximately $5.5 billion in assets under management.

As I said earlier, we are pleased with the quarter. Thank you all for your time today. And with that, I'm going to ask the operator to open the call for questions.

(Operator Instructions) And our first question comes from Tim Hayes from B. Riley FBR.

With regard to investment yields, can you just help us understand how much of the increase there was due to you deploying more capital and having a little bit higher leverage versus higher interest rates? And then, if any of that was offset by spread compression?

Most of the increase is really due to the fact we continue to put money to work in the JV, which helps yield and also there's been a general increase in the portfolio. And then, of course, LIBOR is up about 30 basis points. On a weighted average basis, that all impacts.

But when you look at the total investment income, you need to look at the categories and you'll see that there's other things that are also involved with that, including the limitation on incentive fees, on the expense side and on the income side, things like fee income and discount accretion, which is a lot of what's impacted the performance in the portfolio this period. So it's a combination of really everything.

Okay, understood. And to that point, would you say that the $0.42 quarterly adjusted NII number reflects the true earnings power of the portfolio? Or obviously some of the line items between fee income and discount accretion is going to be lumpy quarter-to-quarter, but was there anything there that was specifically outsized that maybe we should look to moderate going forward?

Right. So, we don't ever give any specific guidance, but I'll point you to a few things. One that we already mentioned, which is, we had the incentive fee limitation in the quarter, which is probably around $0.05 of the total NII. And so, it will determine -- in future quarters, that will be determined by NAV performance, whether that reoccurs or doesn't reoccur.

So that's something you want to look to for sure. That's the 1 thing I can definitely point you to that needs to be examined. And I would just leave it at that. That's the biggest mover that is subject to NAV performance in the future.

Okay, that's helpful. And then, a few quarters have gone by since you completed your last capital raise and you still sit at a relatively conservative regulatory leverage ratio. And so, just wondering how you see that trending over the next few quarters? And then with the passing of lower asset coverage, just how much higher you could expect to potentially take that?

Well, I'll start by answering the question about where we see leverage going in the near future. And then, I'll let Ted talk a little bit about the leverage ratio increase. We do -- we would like to see our leverage increase. And we are working on continuing to build the portfolio.

So we've always said in the past, based on the old leverage limit that we were targeting a regulatory leverage anywhere from 0.7% to 0.8%, nothing's really changed for that target. So we'd like to see our portfolio, before we have the implementation of the leverage increase, we'd like to see the portfolio get to that, sort of, leverage over time and we're working towards that.

So we will continue to try to deploy assets and put leverage to work in order to get the leverage up and we hope to see that trend up over time to a reasonable level. I'll let Ted address sort of, what's -- what the regulatory -- change in regulator -- regulations and where we see leverage going.

Just to repeat a couple things that Aaron mentioned and stress. The things that really affected, I think, this quarter was the incentive fee limitation. We did have some pay down activity, which created some fee income in the quarter, where we didn't have it in the last quarter. And then, we had some accretion into discounts, into interest income on a position that we acquired at a discount. So I think that we had some items this quarter that we didn't have in prior quarters.

On the leverage item, as Aaron mentioned, we're going to try and manage to a higher regulatory leverage. We think that's in the best interest of the company and our shareholders. And obviously, as time goes on, we're going to continue to look at ways to maximize value for shareholders. One of them is we have an approval from our board to increase our overall leverage to 2:1 from 1:1 and currently we have a proposal in our proxy. And June 20, we anticipate that getting voted on and right now we're waiting and we'll take that under advisement.

And next question comes from the line of Bob Napoli from William Blair.

Bob Napoli from William Blair. Follow up on that, Ted, the -- and Aaron, so do you expect that the target leverage ratio will go to something like 1.5x? And what do you think is going to happen with the industry, as companies -- BDCs move up that target leverage ratio? Do you think it's going to get competed away in lower yields, do you think ROEs are going to go up? What -- so what do you think your new target leverage would be? And then, what do you think is going to happen in the industry?

So you asked 2 questions. One, what are we going to do and then you asked about the industry. So first, let me talk about MRCC.

MRCC is going to attempt to slowly move our own regulatory leverage levels higher. To the extent we get approval, remember that just because you get approval doesn't mean that we're going to take to leverage high. We still have to work through our portfolio. We have to work with our existing lenders. And we have to do what is in the best interest of our shareholders to maximize overall ROE. So we're going to be looking at that.

I will tell you that we're probably at a level today that we have room to move higher. And then, depending upon where we go will be determined by what our portfolio is. We're not going to take leverage up on subordinated debt, on junior debt, and on senior debt. We're going to focus on probably more safety in our assets to the extent our leverage goes higher.

But as we mentioned in our prepared remarks, we already have a 94% portfolio of senior secured loans. So I think we're in a pretty good position vis-a-vis the rest of the industry. So that relates to MRCC.

With respect to the industry, I think, each BDC is going to have to make a call based upon how it operates. Some of the BDCs focus on very, very senior secured loan assets. And those BDCs, I think, can probably afford to take their leverage levels up.

But far and away, the majority of the BDCs don't have senior secured loan assets only. And I think it's going to be a questionable decision, but each of the BDCs determine whether that leverage goes up or not. Because, when you leverage junior-lien assets, I think, you're taking a much more magnified risk.

So I think this is going to be, Bob, really an individual decision. And it's going to be a stylistic decision, based upon how the individual asset management firm decides they want to manage their BDC.

That's very helpful. The -- to follow up, just on credit, now your 4 -- rated 4 or 5 assets were $34 million in the first quarter, up from $18 million. Is that all tied to the TPP and Rockdale or what was the move in the 4 or 5s?

Yes, predominately that's what that is. I mean, we moved TPP down and Rockdale has been moved to a 4. And that's the big movers in that category. We just thought it was appropriate given that while we still feel pretty good about the debt in Rockdale and it's -- we still think there's a lot of assets covering that name, we just think given the fact that we've had to reverse so much of the equity value that it was appropriate to monitor it and list it as a 4.

As I've said in the past, we tend to generally be more quick to move something down than up, and this is one we just felt, given all the noise, it was appropriate to call it a 4 and monitor it as such and we've been monitoring it that way for some time anyway.

Last question. The new originations in the quarter were weak, only $18 million. And I know with that origination machine you have there, Ted, that's -- I mean it can be lumpy by quarter. But is there something -- was there something going on, is it the competition, is there less demand or was it just a weird quarter?

Yes, it's not anything to do with our machine. I will tell you that our machine has -- we've looked at as many deals as we have in prior quarters. The main driver seems to be that the market is challenging. There's lots of players -- a lot of players with capital to deploy, aggressive structures, high leverage levels and looser documentation and structures.

And unlike other firms, we've been doing this now for 17 years. And if we don't see transactions that we feel fit the risk return parameters of how we underwrite and how we want to build our portfolio, we're going to step back.

And I think that the first quarter was a perfect example of the fact that, notwithstanding there's plenty of deals in the market, we chose voluntarily to step back a little bit and take our foot off the gas and let some of our competitors take some of the higher leveraged, lower priced deals with probably the less structure than we would like to see.

And I will just add -- Bob, I was just going to add, we had a pretty good fourth quarter ramp. And as you probably know in prior periods, we tend to see a lot more activity in the fourth quarter and stuff tends to move back and then the first quarter is usually a little lighter. So it's pretty consistent also on that basis.

And our next question comes from the line of Leslie Vandegrift from Raymond James.

Just a quick question on the prepayments and accelerated OID in the quarter. We talked about it in the prepared remarks being a little bit higher than normal, which ones were the accelerated OIDs attached to, which investments?

Yes, a lot of it was related to the Gibson, the Gibson first lien paper that we own, that was a lot of it.

Okay. And then, it was a good quarter in the SLF. Again, is the outlook there for that growth kind of the same pace for the year? And then, as other BDCs start to use extended leverage, they've talked about moving into higher quality but lower yielding loans. Does that create more competition for the SLF type assets?

So I tend to caution trying to forecast future growth in the SLF, based on current period growth. I think, it's difficult to say. As we see good deals that make sense, we approve them and they get funded in the SLF. And so, I don't really want to guide in terms of pace. So -- but we've had a nice ramp and we'd expect the SLF to continue to ramp nicely.

As to your second question, I can't speak to all the other BDCs, I'll let Ted to talk about some of that. But as for us, the SLF is really meant to capture a different part of the market than what we're originating directly ourselves. And so, the SLF is really capturing more of a club and small syndicated middle market business for us. And we continue to expect to see opportunities there to put money to work in the SLF. And we don't see that changing.

The increase in the leverage, should we pursue using all -- some of that as we go forward past the 1:1. We'll allow the BDC to participate in Monroe agented loans that today we've been passing on because the yield is too low, that's the expectation and that's how we would expect to use excess leverage over time in the first lien side. I don't know, Ted if you had anything to add.

No, I think that's accurate. The SLF really allows us to entertain a larger target market of deals. That's really why we did it. And it allows our shareholders to get the benefit of a larger subset of the market.

But to the extent we're able to bring our regulatory leverage up, I think that BDC will be able to participate and take advantage of more of the transactions that the Monroe Capital platform produces, which will be a big advantage for our shareholders.

Okay. And then, on the liability structures, I see in there on April 25, you guys amended the revolver. Was any of that amendment to do with increasing leverage possibly? And if not, do you have to increase either the revolver or any of your other liabilities out in order to utilize any leverage above 1:1?

The amendment was solely related to getting a little more capacity under the facility in terms of advanced rates. There are certain loan assets that were not eligible that became eligible with the amendment. We did not address the leverage issue in the credit facility, but you're accurate in pointing out that our leverage facility today does not allow us to access regulatory leverage significantly above the current 1:1 area.

So if we wanted to do that and as we pursue that, we'll have to either amend our credit facility or refinance it in order to access that leverage. So that's an accurate statement and this amendment did not address that.

Okay. And then, on just expenses, if you -- again, I know you guys are lower levered now, but eventually, if you did get over the 1:1, as the portfolio grows and the asset base gets materially larger, should shareholders expect to see some benefits of scale to some of the expense lines? I mean, obviously, interest income -- or interest expense would go up, but just a bit of scale there on the others.

Yes. I mean, I think, the answer is generally, yes. I mean, if you look at the expenses as a percentage of assets, as the assets go up, we would not expect a $1 for $1 increase in expenses. So I think there will be some benefits of scale.

There is -- there's not a lot of added expense from growing a portfolio other than things like valuation costs and, of course, the leverage associated with it. So we would expect there to be some economies of scale in growing the portfolio, when you consider expenses as a percent of assets.

Okay. And then, last question off of the regulatory leverage issue. I know you've almost used up the current allotment for SBIC debentures for you guys. Have you -- have any update on wanting to apply for or obtain approval for more SBIC debentures since you're not at the limit yet?

Yes, I'll take that, Leslie. We are, as a firm, at our limit. So while the BDC vehicle may not be at a limit, we know we're at our aggregate limit at Monroe Capital. We have 2 other SBA funds. So until 1 or both of those other funds become resolved, we're pretty much at our limit for a total SBA debenture leverage.

And our next question comes from the line of Chris Kotowski from Oppenheimer.

I was trying to re-read your Note 6 on the incentive fee limitation. I'm trying to think exactly how it works. But I guess the question is if your NAV stays -- let's just for a hypothetical say it stays flat the next couple of quarters, does the limitation -- will that limit the incentive fee you can pick until you've kind of lapped to where that the NAV has dropped? Or have you calculated when you would be eligible to earn the full incentive fee again?

Right. Let me try to explain it. The easiest way to describe limitation is part one incentive fees become limited to the extent that the MRCC's incentive fees for the last 11 quarters exceed 20% of GAAP earnings, excluding incentive fees over the last 12 quarters.

So if we had additional unrealized losses in future quarters, incentive fees could [want] to be -- again be limited. But if we continue to cover our dividend in the second quarter with NII and there are no significant additional net losses on the portfolio, there would be no additional limitation on incentive fees. That's how it works.

Okay. So next quarter it should -- if the NAV stays flat, you're eligible for the full incentive.

By and large, yes.

Yes, okay. And then, another one, I mean it's recent news after the quarter, Gibson filed for bankruptcy. I don't know to what extent you can comment on it, but has that impacted the valuation or ability to collect on that asset?

I can't comment on it very specifically, but I will tell you just that the fact that Gibson filed for bankruptcy did not come as a great surprise to us and was not something that we were -- I wouldn't say we necessarily knew it would happen when we purchased the bond, but we knew it was a distinct possibility.

And so, the purchase of the note or the loan of Gibson was based on an expectation of what we believe the total enterprise value of Gibson can be. And so, we knew that was a possibility when we made the investment and it doesn't impact what we expect our realization to be on the name in a negative way.

And our next question comes the line of Christopher Nolan from Ladenburg Thalmann.

On the incentive fee, if NAV stays flat, is there a catch up, should we expect a --?

No, there's no catch up.

Unfortunately the answer is no.

On the leverage, I know you guys are being cautious in terms of guiding for higher leverage, but do you think that your regulatory leverage levels will go above 1:1?

I think the answer is, our expectation is that they will at some point. When that occurs, I can't answer. We are building in the flexibility to do that. And we'll make the decision to take the leverage up above 1:1 on a regulatory basis, if the opportunity in the marketplace we think is attractive for shareholders and can drive good ROE for shareholders, that's the consideration that we're preparing for.

And so, we wouldn't have gone out -- I shouldn't say that -- we might have gone out to get it with the Board, even if we didn't expect to use it just in terms of having relative safety of never having a risk of violating that asset coverage.

But I do think that our expectation is that we'll be able to drive regulatory leverage above 1:1. I just can't guide you as to when. Because what we won't do is push the leverage up just for the sake of growing the asset base. We'll push the leverage up if we can generate good risk adjusted returns and continue to generate good ROE for shareholders and that will be the governor on leverage increasing.

The other thing too Chris, is remember, this is not a unilateral decision on our part. We've got a bank group, a lender group and the lender group's going to have to get comfortable with this whole concept as well. We're at the very early innings of this whole BDC leverage limitation increase. So there's going to be a process here that that's going to have to go through.

Yes, and that brings up an interesting point. How much does the position of the rating agencies leverage play into your decision making? I mean, I know that you guys don't have investment grade rating, but at the same time, it might be something....

Yes, I mean it's something that we're going to continue to talk to our constituents here. One is our directors, we've done. our shareholders we're approaching. We're going to talk to our bank lenders and we're going to talk to the rating agencies just to make sure that we understand all the ramifications.

And also so these constituents understand how we manage our business because, again, I think we manage our business differently than some of the other BDCs. We're focused on the lower part of the market. We're focused on very senior secured top of the capital stack debt. So I think that this all will work itself out here over the next several quarters.

All right, final question. Assuming that you do increase leverage incrementally, any change to your capital structure? I know you're relying on bank revolvers for the most part and SBIC lending, any change to that?

Yes, I'll start, Ted. We'll take a look at all of our options. I think, it's pretty clear that it'll be very difficult to get a lot of leverage above the 1:1 with just the use of a revolving credit facility.

So we'll look at all of our options at the time and look at the market opportunities and decide whether leverage availability to us through other means makes sense given the portfolio and where the portfolio is headed and whether we can still generate the appropriate ROE for shareholders.

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

Just curious, touching a little bit on one of your answers to Leslie's questions. You'd have to basically amend the revolver in the event you are permitted to go above 1:1. Have you guys already had discussions with your bank lenders about this or is that jumping the gun a bit?

So listen, we're in the market all the time. We've got many, many banks across all of our funds that we work with and talk to. So we're always having a dialogue with all of our lenders about what's going on in the market.

And so there's been some informal discussions, but nothing formal. We haven't made a proposal. We haven't gone and asked the lenders officially to make a change yet. We're weighing all our options. We're not close to 1:1 on a regulatory basis today. So we've got plenty of room to grow. And we'll approach it at the appropriate time and determine, sort of, what's the best course of action to get our leverage facility in a place where we could access the leverage.

I will tell you -- the only thing I will tell you definitively is I believe we can do that. I don't think it'll be something that we're unable to do with lenders. It's just it'll be a question of whether we can do it with the existing facility or whether we'll need to get a different facility in order to access that leverage.

Got it. Okay and kind of staying with that theme a little, Aaron, there has been one thing that I've heard across the board, which is that the banks are looking at this idiosyncratically on a case by case basis and are largely amenable to this.

And then, we have S&P, which, kind of, made a blanket statement on the whole sector. And they've made that statement despite there being economic leverage through JVs and SBICs anyway.

Just curious, you and Ted, both of you are you, kind of, your opinion on why that was viewed so differently to have the leverage on balance sheet as opposed to off by the rating agencies, but the banks are seemingly okay with it for the most part?

I think that some of the comments may have been premature. I think that you're going to have to really wait, I think, the next couple quarters and see how this plays out. Because there's already a disparity of view among certain rating agencies and I think some of the ones that came out early may have done so without adequately thinking through the ramifications.

And the fact that some of these -- as you mentioned, some of these indirect leverage facilities already exist with joint ventures and with SBIC funds, I think that as time goes on, provided that the BDCs are responsible and the asset managers are responsible and focus on high quality senior secured loan assets, I don't think there's going to be a big issue with increasing leverage on a marginal basis.

It's just that to do something across the board with loan managers that don't have very, very high percentages of senior secured first-lien loan assets, that's what is going to scare, I think, the rating agencies.

I'll just add, I would expect the rating agencies over time to act like they act in other corporate borrowers. I mean investment grade corporate borrowers today have the ability to go out and do high yield bonds and leverage up their balance sheets. And they aren't downgraded just because they have the ability to do that; they are downgraded based on what they do.

And so my expectation, as Ted mentioned, over a longer period of time is the rating agencies will take a look and see what management teams are doing and what choices they're making and make a determination of the appropriate ratings based on that, just like they do for corporate borrowers. To me that makes the most sense. And I hope and I believe over time that will be the outcome.

Got it. Those are great points guys. And in terms of, assuming you do get the approval, are these most likely to be loans that would fit in the SLF? Are these loans that what you would normally put on balance sheet, but would just pass over because of price? I'm just trying to just kind of hone in on more of the details on what exactly would kind of be a good fit in the post 1:1 world, so to speak?

Let me make a couple clarifications of your question. One is that we have the approval from the board and then we have a shareholder vote in order to accelerate that approval upon their positive vote. The loans that sit in the SLF are not subject to the regulatory cap. So the SLF is exempted from regulatory leverage.

So what we would expect is that we'd be able to take advantage of the increased leverage by looking at loans on our own balance sheet that are loans that we're generating from our own platform today. I'll let you, Ted, add to that.

No, I think that's a -- I think Aaron covered the question fine.

Okay, Got it. I just wanted to just clarify if they'd be Monroe originations or more the lightly syndicated type stuff that you might be putting in the SLF at some time? That's all.

Okay. I understand the question better. And I think it's a combination. I think, predominately Monroe origination.

Okay, got it. All right. So there'd be very little, if any, sort of cov light type issuances that you'd put on balance sheet then?

I think that's accurate (inaudible).

That's probably true. But yes, based on past history, Chris, I think, that's accurate.

Got it. Okay. And last one from me, if I may, just in terms of the pipeline for the next quarter or 2 quarters, I'm just wondering what you're seeing versus -- new money versus incumbent borrowers for your current pipeline?

I will tell you. I looked at the pipeline as of Monday this week and we're running about 3:1 new borrowers to existing. So there's been an increase in deal flow. And again, it's going to really be dependent on us at Monroe if we can get the right risk adjusted returns, the right covenants, the right documentation. That's going to drive our activity going forward.

Thank you, and I'm showing no further questions at this time. I would now like to turn the call back over to Ted Koenig for further remarks.

Thank you very much. I appreciate everyone joining us on the call this morning. We appreciate the support of the community. We're very pleased with the quarter and we're going to continue to work hard and do what we've done over the last 17 years, which is try to find the best risk adjusted returns we can for our shareholders and not get caught up in some of the market frenzy.

So we appreciate it. We'll talk to you all again next quarter. And to the extent anybody has any individual questions, feel free to contact either Aaron or myself. Thanks again for the call. And with that, I think we'll end it today.

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