Monroe Capital (MRCC) Q2 2019 Earnings Call Transcript

Monroe Capital (MRCC -0.28%)
Q2 2019 Earnings Call
Aug 07, 2019, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Monroe Capital Corporation's second-quarter 2019 earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks during this call today may contain certain forward-looking statements, including statements regarding our goals, strategies, beliefs, future potentials operating results and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions and projections as of today, August 7th, 2019, these statements are not guarantee of future performance. Further, time-sensitive information may no longer be accurate as of time of any replay or listening.

Actual results may differ materially as a result of risks, uncertainties 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 would now like to turn the call over to Ted Koenig, chief executive officer of Monroe Capital Corporation.

Ted Koenig -- Chief Executive Officer

Good morning, and thank you to everyone who has joined us on our call today. As always, I'm joined by Aaron Peck, our CFO and chief investment officer. Last evening, we issued our second-quarter 2019 earnings press release and filed our 10-Q with the SEC. For the second quarter, we generated adjusted net investment income of $0.35 per share, in line with our quarterly dividend of $0.35 per share. This represents the 21st consecutive quarter we have covered our dividend with adjusted net investment income.

Our continued dividend coverage is a testament to the overall Monroe Capital platform, our unique origination capabilities and our credit underwriting and portfolio management process. At quarter end, our investment portfolio had a fair value of $630.8 million, a 33.9 million or 6% increase from the prior quarter end, and included investments in 87 companies across 21 different industry classifications. The increase in the size of the investment portfolio was primarily due to an increase in new deal fundings during the quarter. In the quarter, we had $60.5 million of investment fundings, partially offset by $24.7 million of sales, repayments and prepayment activity. This new deal momentum and asset growth is the direct result of our proprietary deal origination team located in multiple offices throughout the U.S.

and our broad industry vertical coverage of the following areas: business services, healthcare, technology, software, specialty finance, and of course, the middle-market PE community. As of June 30th, our largest position, not including the investments in our MRCC Senior Loan Fund joint venture, which we refer to as the SLF, represented 3.7% of the portfolio in our 10 largest positions, excluding our investments in the SLF, were 27.3% of the portfolio. Our portfolio is heavily concentrated in senior secured loans and specifically first lien secured loans. 92.9% of our portfolio consists of secured loans, and approximately 90% is first lien secured. We are pleased with the construction, diversity and the senior secured nature of our investment portfolio at this point in the credit cycle. As of the end of the second quarter, our SLF had experienced portfolio growth to $235.6 million in fair value, a 24% increase from $189.6 million at fair value at the end of the prior quarter.

Weighted average yield in the SLF portfolio declined slightly to 7.5% when compared to the end of the prior quarter. As of quarter end, the SLF had debt outstanding on its leverage facility of $143.3 million at a rate of approximately 4.8% or LIBOR plus 2.25%. We have worked purposefully to create approximately $224 million of fixed-rate longer-term liabilities going into this next credit cycle. The recent amendment and upsize of our revolving credit facility, coupled with the increase in the 2023 notes, provided us with both significant amount of additional borrowing capacity, which has helped fuel our growth and allows us the flexibility to continue to take advantage of the reduced asset coverage ratio requirements as we implement the regulatory relief from the Small Business Capital Availability Act. We have purposely positioned MRCC to be able to proactively take advantage of organic growth, as well as any inorganic growth opportunities that may be presented to us. I am now going to turn the call over to Aaron, who is going to discuss the financial results in more detail.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Thank you, Ted. During the quarter, we funded a total of $56.7 million in loan investments. Additionally, we funded $3.8 million in equity to the SLF. This growth was offset by partial sales and repayments on portfolio assets, which aggregated $24.7 million during the quarter. At June 30th, we had total borrowings of $412.6 million, including $188.6 million outstanding on our revolving credit facility, $109 million of our 2023 notes and SBA debentures payable of $115 million.

Future portfolio growth will predominantly be funded by the substantial availability remaining under our revolving credit facility and the uninvested cash held in our SBIC subsidiary. As of June 30th, our net asset value was $255.9 million, which is down slightly from the $259.1 million in net asset value as of March 31. Our NAV per share decreased 1% from $12.67 per share at March 31st to $12.52 per share as of June 30th. This decrease was primarily as a result of unrealized mark-to-market valuation adjustments. Turning to our results for the quarter ended June 30th.

Adjusted net investment income, a non-GAAP measure, was $7.1 million or $0.35 per share, consistent with the prior quarter's results. At this level, per share adjusted NII covered our quarterly dividend of $0.35 per share. Looking to our statement of operations. Total investment income for the quarter was $16.7 million, compared to $16.2 million in the prior quarter.

The increase in total investment income for the quarter was primarily as a result of an increase in interest income principally due to portfolio growth. Fee income during the quarter was below our historical average levels, driven primarily by only a small amount of prepayment activity during the quarter. Moving over to the expense side. Total expenses for the quarter of $9.6 million included $5.1 million of interest and other debt financing expenses, $2.7 million in base management fees, $0.9 million in incentive fees net of voluntary fee waivers of $0.3 million, and $0.9 million in general, administrative and other expenses. Total expenses increased by $0.5 million during the quarter, primarily driven by an increase in interest and other debt financing expenses as a result of growth in our borrowings to support the growth of the portfolio. Regarding liquidity.

As of June 30th, we had approximately $66.4 million of capacity under our revolving credit facility. As of the end of the quarter, we had fully drawn all of our 115 million in SBA debentures. As of June 30th, the SLF had investments in 63 different borrowers aggregating $235.6 million at fair value with a weighted average interest rate of approximately 7.5%. The SLF had borrowings under our nonrecourse credit facility of $143.3 million and $26.7 million of available capacity under this credit facility. At this level of funding, the equity in SLF is generating a dividend yield of approximately 10% to MRCC and our JV partner.

We would expect the SLF 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.

Ted Koenig -- Chief Executive Officer

Thanks, Aaron. Since going public with our IPO in 2012, we have generated a 48.6% cash-on-cash return for our shareholders based on changes in NAV and dividends paid since our IPO assuming no reinvestments of dividends. We believe this performance compares very favorably to our peers and puts MRCC in a small 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 continue our new investment momentum for the remainder of the year with growth in both our core portfolio and within the SLF. We continue to believe that Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders and other investors for the following reasons: No.

1, our stock pays a current dividend rate of approximately 12%. No. 2, our dividend is fully supported by a consistent adjusted net investment income coverage for the last 21 straight quarters. No.3, we have a very favorable 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 No.4, we're affiliated with a best-in-class external manager with offices located throughout the U.S.

with over 115 employees and approximately $8.2 billion in assets under management today. MRCC is one of the few BDCs that has access to distinct proprietary deal flow, which over the long term should result in differentiated returns and an increase in shareholder value. Thank you all for your time today. And with that, I'm going to ask the operator to open the call for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Tim Hayes from B. Riley FBR. Your line is open.

Tim Hayes -- B. Riley FBR -- Analyst

Hey, good morning, guys. Thanks for taking my questions. My first one here, just wondering if you can give us some of the characteristics of the new investments this quarter. And as we move into the later innings of the credit cycle, are you doing anything differently or looking at -- deal a little differently, whether it's the industries you're focusing on, maybe going -- I know you're predominantly first lien, but still kind of increasing concentration there, doing larger deals or anything with leverage multiples?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah, thanks. The deals we did in the quarter are very consistent with the types of deals we've always done. Continue to be relatively conservatively leveraged first lien deals. Predominantly sponsor-backed transactions are what we're seeing today.

As a firm, we typically are doing deals that average around 50% loan to value, between 4 and 4.25% on average multiple of EBITDA. So -- and we're not seeing any continued decline in spreads, so it's pretty consistent with the spreads that we've been seeing. So there's not really any difference in the trends of the new deals we're doing. As for things we might be doing differently as the cycle continues to extend, we've been underweighting the more cyclical borrowers for some period of time now, and that continues. We're definitely more careful about cyclicals, doing much fewer deals that -- in cyclical industries.

And when we will take on a cyclical industry, we're doing at a very conservative leverage. But that's really what we're seeing in the market today and what we've been focusing on.

Tim Hayes -- B. Riley FBR -- Analyst

OK. And then this kind of goes hand-in-hand with that. Just wondering, if we look at regulatory leverage, it shot through one times this quarter. And if we rewind the clock back a year, you were at 0.4 or 0.5, give or take, and we're targeting one times leverage.

This is a bit higher than maybe we would have expected this quarter. Just wondering if you -- what your target leverage range is now. And if you would say kind of originations over the past year have been a bit maybe less risky in certain ways than the preceding year as you've been able to take up leverage.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. No. I think if you look back, Tim, we've said for a while since the change in the rules that we intended to go above one to one. So that shouldn't be a big surprise.

Maybe the velocity with which we were able to do it is surprising to you, but it's not surprising to me because Monroe has always had a very, very active pipeline. And with the lower leverage limitations prior to the change, we were -- BDC was forced to pass on a lot of opportunities because the yield was too low to generate commensurate ROE. So I'd say what we've said for a while to investors, and I think it's consistent with what we've done, is as the additional regulatory leverage is available to us, it'll allow us to take on some of the deals that we view as slightly less risky, which, if you believe in an efficient market, which I do, also involve some deals that are slightly lower spread. But that is -- so that is consistent with what we've said, which is we intend to bring it up over one to one.

We are, I believe, taking on deals that are maybe on the margin less risky than what we had done in the past. And we continue to expect to grow our regulatory leverage over the next couple of quarters, I'd say. I don't know where we'll wind up. It really depends on how the portfolio shakes out in the new origination shakeout, but I'd say think of it as maybe up to 1.25 to 1.3 times kind of regulatory leverage as a next target.

And then we'll certainly update next quarter with what we're seeing in the pipeline and where regulatory leverage should go.

Tim Hayes -- B. Riley FBR -- Analyst

OK, got it. Thanks for the comments.

Operator

Our next question comes from Christopher Nolan from Ladenburg Thalmann. Your line is open.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Hey, guys. Aaron, the fair value in Rockdale went up a little quarter over quarter. Was that simply change in the discount rate?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

It's really in the margin, I think. It's not a particularly material change. So I wouldn't read much into it. It's just as you go through sort of a waterfall analysis and look at how things sort of play out on the valuation side, they have small shifts up and down.

So there was some, I think, in the estate some realization of certain assets in the estate, so that has something to do with it as well.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

OK. On SBA, I know that you guys have fully tapped it out. But reading the Q, it looks like the -- you can capitalize this up for $175 million in borrowings. Is that an option here? Or is there a family of funds type of thing going on?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. There's a family of funds limitation that we're at today. I think over time, we're going to look at what happens as our older SBA -- SBIC license starts to pay down debentures, and we may be able to revisit that. But for now, I would not look at us as having any near-term additional availability of debentures.

But what we really can do to help here, what we're trying to work on doing is getting some of the cash that's sitting in the SBIC today to work over the next couple of three quarters. Obviously, it's difficult to find deals in a competitive environment that are SBIC-eligible. But we're hopeful that we can find some good deals in the pipeline, and there are a couple now that look like they could qualify. And so, getting that cash to work is really going to be a good help in driving NII performance.

Because right now, we're just sitting on cash, which we could put directly into deals.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Got you. And finally, what's the spillover income for the quarter?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. Hang on, I have that right here. Today, the spillover income is approximately $9.9 million, about $0.48 a share.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Right. I'll get back to you.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Thank you, Chris.

Operator

Our next question comes from Brian Hogan from William Blair. Your line is open.

Brian Hogan -- William Blair and Company -- Analyst

A quick on Education Corporation of America. Can you give like just some color on what drove the writedown there this quarter and then the outlook for just the rest of your nonaccruals in general and the timing of the resolution?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

So yeah. I think what you have to look at there is ECA has basically been split into two investments now. So that's the confusion here. ECA had an asset that's called NECB, New England College of Business, which is a performing school that's doing OK and was a good ongoing asset.

And so, basically, through the receivership situation there, we've credited a bit some of the debt and taken over NECB. So when you look at the marks, you sort of have to look at it by combining ECA and NECB. And more or less, when you look at it that way, the valuation hasn't really changed quarter to quarter.

Brian Hogan -- William Blair and Company -- Analyst

OK. And then the outlook for resolution of nonaccruals in general timing-wise?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. I mean, we've -- the only real update I can give you, look, the ECA situation is going to be ongoing for a period of time. That's going to be extended. The Rockdale situation ought to have some resolution in the next quarter or two.

It's -- the arbitration there is happening as we speak, and we'll see -- it'll take some time for that case to get through all the arguments, and then the arbitrator has some time to make a decision on what he wants to do. So I would expect to see that resolve itself, if not in the third quarter, maybe into the early part of the fourth quarter. We'll obviously update. The other nonaccruals, just as a reminder because this is a constant source of confusion. We have a couple of names where a portion of the holding is on nonaccrual because there are situations in which we took over a piece of debt or a piece of paper that we didn't pay for as part of a restructuring.

That includes the promissory note at Curion and a third lien piece at Incipio, and those are the only parts of those that are on nonaccrual. There was really no cost associated with those two. And so, I don't know. The only time those would ever really go in accrual would be if there was a massive recovery in the business.

But because those are no cost, I mean, it doesn't make any sense to put them on accrual status. And then there's a small piece of preferred millennial brands that we don't really expect to ever see value from. Those are all the nonaccruals.

Brian Hogan -- William Blair and Company -- Analyst

And then on the competitive front, can you talk about kind of like the deal flow? How competitive is it? And then also, like quantity and the quality of the deal flow? Any changes there?

Ted Koenig -- Chief Executive Officer

Yeah, this is Ted, Brian. Maybe I'll take that one. The market is competitive. It's always been competitive.

Nothing has really changed in that regard. We're -- for us, the way we look at things is that we're competing in a competitive marketplace that everyone else is competing in. But because of the vertical businesses we have and the strength we have and the amount of direct originators and the offices, what we've tried to do is create a little bit of a differentiated model. Our platform, the Monroe platform has grown substantially. We're over 8 billion today.

Early last year, we were probably 5 billion. And it's -- the growth is primarily driven through proprietary relationship deals and deals that we have a special expertise in, whether it's specialty finance or software or technology or healthcare. And we're winning most of our fair share of those deals. In the general market with the middle market PE business, we're getting our share, but I will tell you that that share has always been a competitive process. And today, there's lots of firms in our business that have capital, and some are willing to go higher on leverage or lowering the rates.

And those are market dynamic factors that we're not going to be able to change and we're not going to be able to control. So from our standpoint, we try to deal with that as best we can, and that is identifying and closing on opportunities that are not being chased by everybody else or deals where we have some competitive advantage in as a platform. Just to give you some perspective on this, we did 75 transactions last year. And that's 75 transactions out of about a total of 2,000 looks or inbound logged transactions. That was 2018.

2017, we did about 72 transactions. That was 72 transactions out of over, again, 2,000 looks. So I'm not concerned about getting deals done. We've got plenty of looks with over 2,000 opportunities a year in the platform.

What I'm more focused on as an organization is the quality of the deals and making sure that we're staying focused, as Aaron said, on somewhere around 50% loan to value and deals that hit our return thresholds. It's easy to put money out in this business. It doesn't take a lot of originators, it doesn't take a big organization or a big infrastructure. We've got 116 people, I think, today in six offices throughout the country.

What makes -- what's hard in our business is to get the right combination of leverage and return, and that's really where we're focused on today.

Brian Hogan -- William Blair and Company -- Analyst

All right. And then last question for me -- actually, two, a couple of housekeeping. The fee income, I know it's very lumpy in nature, but can you kind of give the outlook? Do you expect it to bounce back or -- a run rate level of kind of, call it, normal level that you're thinking about? And then one follow-up.

Ted Koenig -- Chief Executive Officer

The fee income -- Aaron can chime in here. But fee income, Brian, is direct relationship to payoffs, the early payments. And the last several quarters, with interest rates being steady and PE firms buying companies for very large multiples, there hasn't been the incentive to refi early or pay off early. Several years ago, there was a much lower holding period with PE firms because they were tending to turn their deals quicker.

Now with the multiples that are being paid, it's much harder to turn your deal in the first year or two and generate prepayment fees for us. And generally, deals are staying longer in the portfolio. So I'm not anticipating a significant increase in fee income. Now that said, we had an abnormal quarter, where we had very little of it. So I think that from our standpoint, it's episodic.

We can't count on it. Aaron can give you maybe some overall feel for it. But I think that it's going to be more muted than it was in the last couple of years.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

I wish I could give you more guidance. It's really completely something we can't predict and really have no idea. It is true that it was much lower this period. On average, we had a higher level of prepayment activity and fee income associated with that. I will also say that early in the fund's life, we were able to get higher prepayment penalties associated with deals.

And in the more recent couple of three years, there's been a lower level of prepayment fees as well so that when we do get prepayments, they tend to be lower fees associated with them. But if you look, fee income this quarter was $60,000., I mean, we've never -- I can't remember the last time we had a number like that. Last quarter before that was about $560,000. So definitely sort of an aberration.

And -- but then again, could it be that again next quarter? Yes, it probably could be, but I don't expect it to be. But we really don't know. And payoffs tend to end up coming closer to end of quarters, as well as I don't have a lot of visibility for you, unfortunately.

Brian Hogan -- William Blair and Company -- Analyst

All right. And then last question from me is, with the increased leverage, you're talking 1.25 and maybe obviously, you can go up to two but I know you wouldn't take it there. But obviously, it drives more assets, and I know other BDCs have reduced some of their management fees for assets above the one to one ratio. I mean, have you given that kind of any thought of reducing the base management fee on any level of assets?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. So we're really focused on delivering returns to shareholders in the form of NII-covering dividend. And so, what we have chosen to do to date is to look at waiving fees voluntarily to make sure we're covering. And we're going to continue to monitor sort of our performance level, and we'll make decisions about that in the future if we think that it's warranted based on our ability to cover.

I think if you look at where we are in NII coverage today, all things being equal, if we could get the cash to work in the SBIC subsidiary, which we're working hard to do, and if we could try to get some of the money that's locked up in nonaccruals out and reinvested in accrual assets, our visibility for coverage looks really good. And to my thinking, at least today, if we're delivering a dividend yield where we have -- a lot of BDCs have cut dividends over the last several years. We never cut a dividend. We've only increased it once and have never cut.

If we can cover the dividend and continue to cover it with room over a long period of time, I feel like we're doing a pretty good job for shareholders. But we'll watch it. We'll monitor it. And the board will revisit it in the future, and we'll continue to think about it and look at it.

But to date, we haven't made a determination. You got to remember that we have a business model, as Ted just went through, that includes a lot of people. We've really invested in infrastructure of people here to generate the unique deal flow. And I think if you look at a lot of other BDCs our size, you'll find that their employee base is considerably smaller than ours.

Operator

Our next question comes from Robert Dodd from Raymond James. Your line is open.

Robert Dodd -- Raymond James -- Analyst

Actually, you answered a lot of it with the comments about the fee income, but just kind of a follow-up on that. Obviously, for asset-light stretch, particularly if rates fall and spreads widen, but you mentioned that prepayment fee structures have compressed. I mean, what's the norm that you're seeing out in the market right now? I mean, maybe three, four years ago, it was kind of a three to one. And obviously, assets that were put on then, if they repay within that, you get more.

But what's kind of the norm -- kind of a going rate today in the market that you see it?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. Look, every deal is different, and it depends on whether it's sponsored or non-sponsored, and it depends what industry it's in. But yes, I think you're right. It was much more common to see kind of a three to one structure going back several years.

What you're seeing these days is private equity firms are heavily negotiating. We're seeing it more often to be more like a two to one structure, sometimes it's even one to one and a half in the first year of prepayment. And also, a lot of the market has moved toward only earning a prepayment penalty on a refi. But on the sale of the company, a lot of times it gets waived.

And so, I wouldn't say that you can look at our portfolio and apply those numbers across the entire portfolio because it is a very different deal ideal. Some of the stuff we're doing in specialty finance has sometimes lockouts on prepayment and has make-wholes, but that's not at all the most common. And the most common is more like a two to one structure with a waiver if there's a sale of the company.

Ted Koenig -- Chief Executive Officer

Yeah. I mean, Robert, there's -- I want to have one follow-up to your question. You didn't focus on this particularly, but I'm going to tell you why, from a prepayment standpoint, there's been less flow of variability in our side. As I said earlier, we made a conscious decision to focus on safety.

And with some of the higher-risk deals with much higher leverage, we're taking more risk. There's much more variability you can negotiate in back-end prepayment success fees, things like that. When the market allowed us to play in a lower-leveraged market and we weren't funding the same level as we are today, we were trying to pack in different upside features in deals, and we were relatively successful doing that. Today, at this juncture, with the economy, credit cycle, tariffs, uncertainty coming out of the White House, fighting with most of our allies today, I'm very concerned and I want to make sure that we're doing everything in our power to protect our shareholders and our portfolio.

So I will tell you that over the last probably year or so since the government shutdown, we've been very much focused on not taking risks that could come back to hurt us here long term. And that's why I think you've seen maybe a falloff of some of the other fees that historically we've generated in the past. So that said, we're still going to be aggressive when we can. But I'm much more focused going forward here in the near-term cycle on protecting capital than I am trying on to swing for the fences here with certain returns. And that's an industry issue.

I will tell you that not all managers, from what I'm seeing, are doing that. And it's just all a function of the platform. We've built a pretty successful platform here at Monroe, and my focus is on maintaining the consistency of the dividend and the stability of the dividend.

Operator

We do have a follow-up from Christopher Nolan from Ladenburg Thalmann. Your line is open

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Is it fair to say that you guys are targeting larger deals? I ask because the parent organization is now $8 billion of AUM. And with a fund that size, I imagine that you're focusing on larger opportunities just to move the needle. So is that applying to MRCC as well?

Ted Koenig -- Chief Executive Officer

We're doing both, Christopher. We haven't left the markets that we've historically played in because that's where we're known. But the benefit of having a larger platform is that we're also getting the opportunity to participate in some of the larger deals just because we're a larger player. And other groups want parts of our deals so we tend to be sharing more on the larger-deal basis.

But with respect to the same markets that we've always played in, our firm is still a 5 million to 35 million EBITDA size company, and our average EBITDA has always been in that 15 to $20 million range. And that's still true today, even though our firm has grown substantially.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Follow-up question is, as of a year or two ago, following up on Tim Hayes' question. You guys are covering the dividend with like a 65% leveraged regulatory debt-to-equity ratio. That doesn't seem to hold anymore for various reasons. I mean, should we look at the new normal that you need a regulatory debt-to-equity ratio over one-time to cover the dividend?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. I mean, I think, look, I think a lot of it has to do with the nonaccruals. So the fact that we unfortunately had a growth in the nonaccruals has been part of the reason that we've -- that we're probably not able to generate the same level of NII at a lower leverage. But also, rates are different.

I mean, rates are coming down again, and so that's not ideal for us. We have done a lot of good things to try to help that, including getting our cost of borrowing down. But yes, look, I mean, I think it -- given what our asset -- and what I mean by that is while you haven't seen a major change in our average coupon in terms of total yield on a spread basis, it's narrower than it was. It went up.

As rates went up, spread was down a little. And so, I don't want to guide you that there's a specific regulatory leverage level we need to cover the dividend, but it's definitely higher than that kind of 55-ish percent regulatory leverage that we're at. We -- by the way, we never wanted to be at that level of leverage. We always thought that was too low.

We were successful back then in being in a position to build and raise capital, both on an equity basis accretive to NAV and also through the bond market. And so, we were in this recycling mode, where we are paying down the facility and then reborrowing, which artificially kept our leverage lower than we expected it to be. But we're really comfortable given the portfolio mix being at the regulatory leverage levels that we've guided toward. And as I said earlier, if we can get the cash to work in the SBIC and we can resolve some of these non-accruals and get them into earning assets, I think we should be in pretty good shape with regards to dividend coverage.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

OK. Thanks guys.

Operator

I'm showing no further questions at this time. I'm going to turn the call back over to Ted Koenig for some closing remarks.

Ted Koenig -- Chief Executive Officer

Thank you. Firstly, we appreciate all of you joining on the call today. I realize that people are busy. There's lots of things happening in the economy.

And I will tell you that for -- from a firm, at Monroe, we're very, very focused on not only the industry issues that we're facing, but also some of the macro issues. We've got fortunately the size of a platform today where we can spend some time doing more research and doing more industry analysis, and it's been a nice thing to do at a time and place where there's lots of uncertainties in the market. So the one thing that I want to leave you with today is that we're in an uncertain market and things are happening very often beyond our control as investors. And some of the things that happen from time to time that are beyond our control very really affect industries, in particular, companies in those industries, and it's very hard to predict. So what we've tried to do is take our business down and simplify a lot of the moving pieces to it in our analytics and in our portfolio management and monitoring.

So we're going to continue to do that, and we'll be back to you next quarter with a report. Hopefully, we'll see more stability in world affairs and other things that are happening that are the more uncontrollable factors. But for the time being, I want to assure you that we're doing our jobs, and we're digging in hard, and we're spending a lot of time on the portfolio side. We've hired several additional resources into the firm on the portfolio analytics side, as well as on the special assets and work outside. And that's a real distinct difference in the Monroe platform. So I want to thank you all for joining.

Enjoy the rest of the summer, and we'll be back at you in September quarter. And again, as always, to the extent you have any individual questions, please feel free to reach out to Aaron. We're always -- we always enjoy speaking to you on a periodic basis. So thank you again.

Operator

[Operator signoff]

Duration: 41 minutes

Call participants:

Ted Koenig -- Chief Executive Officer

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Tim Hayes -- B. Riley FBR -- Analyst

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Brian Hogan -- William Blair and Company -- Analyst

Robert Dodd -- Raymond James -- Analyst

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