Monroe Capital Corporation (MRCC) Q3 2017 Earnings Report, Transcript and Summary

Welcome to the Monroe Capital Corporation Third Quarter 2017 Earnings Conference Call. Before we begin, I would like to take a moment and 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 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.

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 continue to announce challenging net investment income performance and cuts to their dividend, we are very proud to have been able to maintain and continue a $0.35 per share dividend fully covered by adjusted NII. This was 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 30th, primarily due to unrealized 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 30th to $283.5 million at September 30th. During the quarter, our portfolio company Fabco was sold for 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 investments 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 pay-downs 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 MRCCs senior loan fund one, nationalized MRCC and 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, $92.1 million outstanding in fixed rates debt from our SBA debentures at very favorable rates, which will allow us significant interest rate arbitrage and 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, provide 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 continues to grow in the quarter. However, due to prepayments near the end of the quarter, as of September 30th, 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 funding in the prepayments of approximately $23 million. During the third quarter, we funded a total of $54.2 million, which was due to six new deals, and several add-on and revolver fundings on existing deals. This growth was offset by sales and complete prepayments on eight deals and partial repayments on other portfolio assets, which aggregated $69 million during the quarter. At September 30th, we had total borrowing 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 in borrowings under the revolver as the result of the prepayments near the end of the quarter. As of September 30th, our net asset value was $283.5 million, which was relatively unchanged from the $284.3 million in net asset value as of June 30th. Our NAV per share decreased slightly from $14.05 per share at June 30th to $14.01 per share as of September 30th. Turning to our results, for the quarter ended September 30th, adjusted net investment income, a non-GAAP measure, was $7 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 yields. 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 increase $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 the 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 raised $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 30th, 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've recovered in excess of our stated mark on Fabco in a termination of debt investments, and our investments in Rockdale Blackhawk equity has increased in the quarter. So since going public with our IPO in 2012, we have generated 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 7th, investors have purchased stock in our IPO preceding the 41% cash on cash return, again assuming no reinvestment of dividends. On an annualized basis, this represents approximately 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 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 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’ve concluded my prepared remarks and I’m going to ask the operator to open the call for questions.

Certainly [Operator Instructions]. And our first question comes from Chris Kotowski of Oppenheimer. Your line is open.

I wonder if you could talk a little bit more about the senior loan fund. Will it co-invest in similar loans as BDC itself, or will they be more as nationally syndicated? And then I’m curious and 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 an as you go basis, or is this a vehicle in which you could theoretically retain earnings overtime and build up values overtime?

So we’ll invest in the similar type of assets that the BDC invest in. It will be focused on mostly middle market loans, secured middle market loans. We’ll take advantage of some of the substantial club deal opportunities that we originate through our capital market function here. So a lot of what we’ll be doing, we’ll be partnering with other lenders that were close within the market. And we’ll also be able to invest in some of the more syndicated larger middle market deals. It is not likely to invest in the broadest -- most broadly syndicated loan markets, because that market is mostly LIBOR plus 250 to 350 market and that’s not a place that makes sense for this loan fund. The one key distinguishing feature for these loan funds is that they can’t co-invest with other Monroe fund, that’s a regulation by the SEC. But yes, we’ve really careful about understanding what that co-investment means. It means that we really can't see the agent negotiating the credit facility and then co-invest amongst all the funds. But it can invest alongside other Monroe fund in deals that are more club deals, or deals where Monroe is not the principal agent. So as for yield, 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 to invest in 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 pretty attractive low double-digit ROE is our expectation on the vehicle. And we are expecting that the loans fund we’ll payout on a quarterly basis to the BDC all of its earnings, so it will be creating NII that will be available for distribution. Does that cover all your question, Chris?

Yes, thank you. That’s it for me.

And our next question comes from Robert Dodd of Raymond James. Your line is open.

So just a quick follow up on that one. When we say it’ll payout all of its earnings, will it be paying out all of its NII or all of its GAAP earnings on a quarterly basis?

It's more of an NII function than a GAAP function.

I mean, they’re paying permanent yields on what its earnings, and then it will pay it up to BDC for our portion and that will be going to our NII and then therefore be available for distribution.

And then just on Rockdale, obviously, mark up in the quarter, 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 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 nice gain there. Can you give us any color on how the business is doing, in general, on what the review process you're going through, 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. There 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 mark up 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 need. And in doings so, we were awarded more equity in the company in injunction with that funding. So the increasing value is more of a 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 taking mark up in the enterprise value. In fact, there was no mark up in the enterprise value in this period. So that’s really what has gone on there with the rest of the market 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 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 its strategic review of its business and is existing of less profitable businesses in growth in the profitable areas, and hope to be in a position to get to a point where they have stability in their EBITDA and their valuation. And then at that point, may consider a monetization of the company. But there is no current thought process around that that I'm aware of.

And then if I can just flip back to the SLS again real quick. Obviously, I can see how this could be accretive long-term. Initially, obviously, it's going to have some internal expenses, and it would be levied an issue. What’s the -- and it’s hard to put timeframe to and I understand. But what’s your current expectation, do you think the four -- 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 interest?

Very good question and very good points, all, you’re right. It will take us some time to get a material ramp. We see deals and we approve deals. They take some time to close. We do have a pretty substantial deal flow engine in our capital market 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, that the 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 as 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 months to 18 months is my best guess, and hopefully sooner. But that’s internally how we think about it but that’s a 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 and our competitors have done this. And for us, it was really about finding the right partner, from a cultural fit and someone that we can grow with. I mean, if you noticed our joint venture, our senior secured joint venture is much different than 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 interest 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 all I think you should look at this.

Actually, I appreciate that and I didn’t notice the 50-50. And on that, obviously, that does -- I don’t know National Life very well. 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 speaking [indiscernible] but can you talk to -- 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 were highly likely to do other things with across our Monroe capital platform. And that’s even more important as far as I’m 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. Your line is open.

Just to 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.

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 got lots of things in our laboratory here that we're 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, from me -- it needed to be a cultural fit as opposed 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 any of our regulatory leverage baskets. So when compared to a regular loan opportunity in Monroe that might earn double-digit ROE that would be with using up some of the leverage available. So, if you think about when we get to -- we haven't changed our view as to where we want to run at 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 else being equal, according to the math, it should be accretive.

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 according at least to several of your competitors. Do you view the competitive environment as difficult? Are you going to be able to get to your leverage where you wanted 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 on prior calls. The market is competitive, that’s the fact. There is many new platforms that have come into the market. There is a lots of private equity platforms that have established debt arms. There is a number of hedge fund to funds that have established credit platforms. There is some key fund-to-funds that have established the credit platform. The difference is that we have a strong platform. We have longstanding relationships in the industry. We have a brand name. We have a company, I think, that really stands for something and is 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 longstanding 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 these new platforms and all the new money that has come into the space. So the short answer to your question is I’m 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’d like to be at. Again, this is a long-term risk. 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 is a quarter or two quarters where we haven’t seen the right types of transactions or the right risk adjusted returns, we’re 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 fund-raise. 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 and some of the shareholder.

And our next question comes from Christopher Testa, National Securities. Your line is open.

Just curious, first, what was the $15.8 million reclassification from senior secured into [Unicom]?

So sometimes what we’ll do Chris is we’ll close a deal on senior secured basis that includes revolving credit facility. And running a lot of revolver for us is not as particularly 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 with a couple of deals that we funded. And during the quarter, we sold off the revolver, I think, in most cases we adjust the revolver. Occasionally, we’ll sell them for term loan, but in this case, I think it was just revolver. 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 lasted out loan.

And just and the SLS, punching a little bit on what Rob was speaking about. And you 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 is no fees. There is no difference in economics. It's really just heads up partnership. And it really doesn’t matter if you’re a 50-50 or an 80-20 with regards to that. You’re dollar -- wherever dollars you have into these JVs, the ROEs -- the ROE on those dollars. The difference here though is that this is clearly not just compliance, Chris. Some of those JVs that are 85% to 87%, the insurance Company doesn’t have a lot of skin in the game. And so here we’ve got an 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 that we originate and they like our credit process. And the fact that they want to put a significant amount of capital at work with us, I think, it’s 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 is -- 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 tough from your prospective 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 compliance trade. This is a long-term desire to do business together. And I think that the nicest thing about it from a shareholders 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 what that will mean is that over the long-term, not only will 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.

And just if I look at the retains in sales of this quarter, clearly it was extremely high -- much higher than past quarters. But if I add up the prepayment fees, as well as the OIB 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.

So remember part of the prepayment was the sale of Fabco, because we sold Fabco at a realized loss [indiscernible] but there were no fees associated with that. And then that was a pretty big chunk of capital. But there are no carryovers or anything like that. It’s just different deals or different stages of their lifecycle. And so some of the deals that paid off this quarter been in the portfolio longer. And some of it was just sale -- and so that lower prepayment penalties, if any. And then some it was those revolver sales that we made, which we made intentionally. They weren’t repayments as much as up-selling the first out revolver, which also doesn’t have an immediate fee impact but it does improve our spread on a go forward basis, but there is nothing nuance other than that. There is no carry forward or anything in that fees.

I think, you have to look at this, Chris, is more episodic. I mean, we're going to have some quarters where there is this higher prepayment activity than others. Here, as Aaron mentioned, we encouraged it. We had very, very favorable results on our Fabco exit at a very, very high multiple of earnings, because we're 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 access. 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.

And last one for me, obviously, you guys have really ramped up the FDA debenture available to you. It’s not conceivable that you’ll max out at 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 our optimized leverage with our revolver. But all things are on the table. And we talk to all the parties out there and look at what are the best executions out there in terms of folks issuing paper and we’ll be opportunistic when the time comes and determine what we think is in the best interest to shareholders at that time. But there is nothing specific on the horizon and there is 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 [indiscernible] from Meijer. Your line is open.

Ted, this is just a bigger strategic question. When I read through the house tax bill, and it shows that the numbers that 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 or that amount. So when I back into it, it looks like total debt to EBITDA of 3.5 times, 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 300 companies and I realized not all of them were 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 an equity or preferred stock? Is there an opportunity with preferred stock to be put in these companies to fill that gap? And then the second question is, as you think that that will impact enterprise values, going forward? And I realized that this isn’t law yet, but looks like it’s coming down the pipe?

And I will tell you that I’ve probably gotten half of dozen calls from the media, whether it’s the New York Times or The Journal, or Bloomberg or S&P, asking the same types of questions. And I think 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 the M&A doesn’t really change materially due to tax considerations, because everyone has to play with the same rules. So I think that we're seeing generally this quarter, I think, a slower quarter philosophically than we’ve seen the last three years in the fourth quarter only because there is a lot of discussion and concern about potential tax cuts that may or may not occur in 2018. Number three, and the last point that I’ll make is with respect to MRCC and our portfolio, specifically. Our average weighted average leverage attachment points across our entire portfolio is around 3.8 times 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 four turns of leverage in all of our companies to start. And then associated with that is that there is a lots of capital that’s waiting right now on the sidelines in the way of proffered stock and equity to fill this void. The PE industry seems to be spared under this current proposal with any tax on carries interests. And there has been a lot of capital that’s been raised in the PE industry, and those players that full industry, I think is looking at this very favorably as to potential to actually put more capital to work in a typical capital structure than they’ve 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 next two 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 -- private to public, PE to PE, generational transfers, sibling transfers, management buy-outs. There tends to be little bit installation in the middle market, particularly the lower middle market than you see in 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 couple of things Ted said. The 3.8 times leverage is across the Monroe platform for starting leverage on average. It’s not specific to BDC. We haven't actually disclosed anywhere to the 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, put my CFO head…

And you don’t have to disclose this if you don’t want to. But then the 38, that’s across the platform, which is your exposure. The additional total debt interest bearing debt in the whole deal there might be second lien behind you. Could that -- is that a lot more or little more, or are you just 38 straight up and then the rest of its sponsor or equity?

We looked 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 is an anecdote. We don’t see a tonnage in your capital in the form of indebtedness behind just on deals. Generally, in our space, there tends to be a lot more equity. As you move up the food chain into the larger EBITDA size companies, $50 million and over, you tend to see more junior capital in the form of indebtedness.

So, if it does become long, we’re just looking at how this is going to be affected. Just from a rough parameter, we could assume the total debt across the platform would be roughly 38 and run the free cash flow exposure there, if there is interest denial.

I think I will just 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’re enacted. And I don’t imagine we’ll change much of what we do in the way how we do business.

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 muddling around at 0% to 1% or 2%?

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

And I’m showing no further questions, at this time. I would now like to turn the call back to Ted Koenig for closing remarks.

I want to thank you all for being in 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 then we’ll let you know that we continue to be very focused and vigilant in our business. And we look forward to speaking to you again 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 looming 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.