Welcome to the Monroe Capital Corporation's Second Quarter 2020 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, particularly in light of COVID-19 pandemic. Although, we believe these statements are reasonable based on management's estimates, assumptions and projections as of today, August 6, 2020, these statements are not guarantees of future performance. Further, time-sensitive information may no longer be accurate at any time of any replay or listening. Actual results may differ materially as a result of risks, uncertainties or other factors, including, but not limited to the risk factors described from time to time in the company's filings with SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements. I'd now like to turn the call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation. Please go ahead.

Good morning and thank you to everyone who has joined us on our call today. Welcome to our second quarter 2020 earnings conference call. I am joined by Aaron Peck, our CFO and Chief Investment Officer. Last evening, we issued our second quarter 2020 earnings press release and filed our 10-Q with the SEC. First and foremost, we hope you and your families remain healthy and safe. We are pleased that despite the continued economic and public health challenges associated with the ongoing COVID-19 pandemic, we were able to generate record net investment income and increased NAV performance during the second quarter of 2020. The continued uncertainty associated with the COVID-19 pandemic has created concerns related to the economy as well as specific unanticipated challenges for many companies due to business interruptions and a slowdown in business activity. This uncertainty has caused volatility across the financial markets over the past several months. The government stimulus has buoyed the financial markets during the second quarter with the S&P 500 erasing nearly all of the 20% decline experienced in the first quarter. Price increases were also seen in traded credit investments as the S&P/LSTA Leveraged Loan Index, which finished the first quarter down approximately 14% in market value rebounded and was up approximately 8% during the second quarter. The uncertainty that caused many of our portfolio companies across our platform to be focused on their own liquidity, as evidenced by the wave of revolver draws requested that we saw during March, waned considerably after April. We are back to way near normal on portfolio company revolver draws. The Monroe funds, including MRCC have met all borrower revolver draw requests, and we believe that we have the appropriate liquidity to meet any future requests across all of our funds. As we discussed on…

Thank you, Ted. During the quarter, we funded a total of $10.3 million in investments, which solely consisted of new fundings to existing borrowers, including $9 million in revolver draws, and $1.3 million in add-ons and delayed draw fundings. As we discussed earlier in the call, many of our borrowers drew on their revolvers in order to increase liquidity on their balance sheets, due to the uncertainty related to COVID-19. This portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $42.3 million during the quarter, including proceeds from the Rockdale settlement and partial sales and pay downs. At June 30th, we had total borrowings of $370 million, including $146 million outstanding on our revolving credit facility, $109 million of our 2023 notes and SBA debentures payable of $115 million. Our outstandings under our revolver decreased by approximately $45 million during the quarter, as we were focused on the reduction in our leverage during the period. Any future portfolio growth revolver draws or advances to existing borrowers will predominantly be funded by the $109 million of availability remaining under our ING-led revolving credit facility, subject to borrowing base capacity and the uninvested cash held in our SBIC subsidiary. Turning to our results, for the quarter ended June 30th, adjusted net investment income, a non-GAAP measure was $12.8 million or $0.62 per share a substantial increase from the prior quarter’s adjusted net investment income of $6.8 million or $0.33 per share. The increase was primarily as a result of the recognition of previously unaccrued interest and fees received on Rockdale Blackhawk of $0.36 per share, which was previously recorded as part of our mark-to-market gain on our investment in Rockdale. In June, the company received $33.1 million in proceeds from the Rockdale matter, of which $19.5 million was…

Thank you, Aaron. In closing, we continue to find ourselves in an unprecedented economic environment, which is likely to cause rising default rates and the potential for recession. Despite these challenges, we remain optimistic about our investment portfolio and our prospects, similar to what we saw in growth of the firm after the great recession of 2008 and 2009. The key is our conservative underwriting, a purposeful defensive portfolio and our access to a large and experienced portfolio management team with experience managing through multiple economic cycles. We have a defensively positioned portfolio with solid loan documentation and a lot of control over our own destiny in terms of risk management. As such, we continue to believe the Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders. Our dividend is fully covered by net investment income, and we have sufficient liquidity to selectively play offense in this market. We are committed to navigating successfully through this economic period and are confident that we have the skills and experience necessary to maximize returns for all of our lending partners, bondholders, JV partners, and shareholders. We believe that MRCC is affiliated with a best-in-class external manager, which has decades of experience, approximately 125 highly skilled employees and approximately $9.3 billion in assets under management, which provides us the infrastructure and stability in times like these. It also provides us an opportunity for MRCC to outperform. We would like to thank our shareholders for their loyalty and confidence. I would also like to thank the entire team at Monroe Capital organization for their hard work and dedication. Thank you all for your time today, and that concludes our prepared remarks. I am going to ask the operator to open the call now for questions.

[Operator Instructions] Our first question is from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead, sir.

Hey guys, Ted, how much is the escrow outstanding for Rockdale?

I will tell you, I believe it's $1.8 million for us, for MRCC, the escrow is larger, but that relates to other firms, but the MRCC portion is $1.8 million.

And that's a fair value. So that's our expectation of recovery.

Got you. And by the way, great job on Rockdale. I guess strategy wise, is the strategy still to further pay down revolver debt and lower the leverage ratios? I know it's below your targeted range, but what's the leverage strategy going forward?

Good question, Chris. We're at where I think we want to be today. We're – on leverage, I know we've talked to – Aaron has talked in the past about guiding to a 1.2 times to 1.3 times, we're about a 1.1 times leverage today. So we don't have any qualms about taking it up a little bit higher, but that's going to be dependent on market opportunities and what we see. We've got the capacity for growth, we just want to make sure we're being thoughtful in how we grow.

I’d also add, Chris, the portfolio naturally has some repayments that come in, even in this environment and because the market opportunities out there are attractive, we will have a significant opportunity to reinvest as well, as things come in, even staying within the leverage limitation. So we're hopeful that we'll be able to move some of the – up with the market as we see repayments.

Great. Final question. Any other material recoveries in your non-accrual list, which compared to Rockdale or anything similar?

Nothing that comes to mind today, but I told you on the call and prior calls, we're very committed to recovering marked loans. One of the ways that good asset management firms differentiate themselves is by recovering on loans that – very often, we don't have control over the mark process, we've got a pretty robust third-party evaluation process that we go through as well as internally. But what we do have some control over is the methods and the effort, and how we strategize in recovering proceeds. So, well on from time-to-time, I'm concerned with marks, I'm not overly focused because I know what we're doing internally, and I know the companies, and I know that the strategies that we have in place to collect our dollars are sound and generally are fruitful.

Great. That's it for me guys. Thank you.

Thanks, Chris.

[Operator Instructions] And our next question is from the line of Tim Hayes with B. Riley. Please go ahead.

Hey, afternoon guys. Hope you're doing well. My first question here, I just [Technical Difficulty] the investment opportunity here and your appetite to invest that you have brought down leverage a little bit. I know you're being prudent with investment now, but [Technical Difficulty] activity picking up relative to this quarter, going – given the opportunities you're seeing? And maybe if you could talk about pipeline, give us color on what you're looking at now, or is it more firstly and focused, as mostly structured vehicles [Technical Difficulty] compared to what you were seeing eight months ago?

Probably, a good question, Tim. You traded in and out a little bit, so I heard most of it. But your question relates about mostly the investment opportunity set. And I will tell you that we've got a strong pipeline, we did a number of add-on transactions across the firm in the last quarter. The private equity platform transactions were down, but we're seeing more and more rescue type capital opportunities and add-on deals for portfolio companies that are seeking to take advantage of the market. That seems to be where most of the deals are coming from today. What's interesting is that we're seeing leverage come down a half a turn to a turn over the last eight months or so, as you said, and we're seeing pricing from 100 basis points to 150 basis points at least. So I expect that the vintage of assets that are going to come on in our portfolio will be very – will be accretive to both investment returns, as well as overall leverage levels going forward. As Aaron mentioned, we're going to be selective only because when times like this, it's very hard to confirm, in some industries projected financial performance and add backs and things like that. So we're being a little more conservative when it comes to focusing on projected results and projected add backs. We're being very diligent on historical results impact with COVID and there's a number of industries that have actually done quite well during COVID and those tend to be companies that are involved in supply, logistics, technology, software and that's where we're going to really focus more on our efforts. So I would expect that you'll see performance from Monroe, not only at MRCC, but across all of our funds, look similar to the vintage of 2011, 2012, when we came out of the crisis, financial crisis. And there were some liquidity constraints in the market. And we're able as a liquidity provider to take those opportunities and use them to our advantage and be a good partner to clients, companies, private equity firms, but get paid fairly for doing that.

Thanks for that, Ted, that's some good color. And I just want to confirm, the color you provided about kind of leverage levels and spreads, is that just on the lower middle market portfolio you're talking right now?

Yes, that's primarily lower middle markets. Upper middle market has moved as well, but we're still seeing high leverage rates. In upper middle market, we've seen pricing expand a little bit. The challenge is that the upper middle market is really competing for deals with the high yield market and the investment grade market today. And the investment grade market and high yield market have been very, very strong still because of the investors thirst for yield. When you've got 10-year treasuries hovering around 50 basis points, it creates a lot of pressure for those investment grade purchasers. So I like the overall risk return in the lower part of the middle market right now because I think we're getting paid better for taking the same kind of economic risks.

Right. Got it. Okay. And then, I don't know if you have these stats in front of you here, but would you be able to disclose the average LTV or leverage multiples on the lower middle market debt portfolio?

Yes. We don't have updated stats that we provide for the portfolio specifically. But what we can tell you is kind of where things looked when we started on these loans sort of where Monroe or originates middle market loans and the BDC, MRCC would have a similar starting stats. And so typically you'll see our portfolio around 4 to 4.5 times EBITDA on a leverage basis, when we're starting in a new transaction. And it's typically, just a hair below 50% loan-to-value on that basis, on a weighted average basis across the Monroe portfolios. And I wouldn't expect MRC’s portfolio to be markedly different for the lower middle market direct loans that we do in the portfolio.

Okay. Got it. And then you mentioned, I think you have about $109 million of capacity on your revolver. Can you just – would you be able to disclose your borrowing base and how much of the capacity that you have access to at this point?

Yes, it’s difficult to disclose that. First of all, we don't disclose it. Second of all, it moves, right. So if you may have a certain amount on your borrowing base today, that's available based on the current assets, but if you originate an asset, it expands your borrowing base. And so it's a bit of a moving target all the time. But we have capacity today. We have significant room on the borrowing base today. We're not near the full borrowing base capacity today. But we're really more focused on the overall leverage in the portfolio and the borrowing base is not posing an issue today.

Okay. And I just – just on your comment on how that can move around a bit. Just curious if you'd seen a, whether it's significant amount of assets or maybe just a modest amount fallout and the borrowing base is leverage multiples have either increased or credits have been added to nonaccrual or is that just not really been an issue for you guys?

Yes, I mean, you're not really seeing a major change in – that was your ability as a result of COVID-19 right now. We're monitoring that very carefully but now we're managing through pretty well. And the borrowing base is continuing to be pretty solid. And we haven't seen a lot of things fallout.

Got it, got it. Okay, great. Thanks for taking my questions.

Thanks Tim.

And I'm showing no further questions at this time. I'd like to turn the call back to our presenters for closing remarks.

Thank you very much. We appreciate all of you joining us today, and we look forward to speaking to you again in the coming months. And anyone, to the extent you have any questions as always, please feel free to reach out to Aaron directly with any of your individual questions, but with that stay safe and we'll speak to you soon. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Have a wonderful day. You may all disconnect.