Monroe Capital (MRCC) Q4 2019 Earnings Call Transcript

Monroe Capital (MRCC 0.91%)
Q4 2019 Earnings Call
Mar 04, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Monroe Capital Corp.'s fourth-quarter and full-year 2019 earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward-looking statements, including statements regarding our goals, strategies, beliefs, future potential, operating results or cash flows although we believe these statements are reasonable based on management's estimates, assumptions and projections as of today, March 4, 2020. 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 Corp.

Ted Koenig -- Chief Executive Officer

Good morning, and thank you to everyone who has joined us on our call today. I'm joined by Aaron Peck, our CFO and chief investment officer. Last evening, we issued our fourth-quarter and full-year 2019 earnings press release and filed our 10-K with the SEC. For the fourth quarter, we generated adjusted net investment income of $0.37 per share, higher than our quarterly dividend of $0.35 per share and higher than our adjusted net investment income of $0.35 per share in the third quarter.

This represents the 23rd consecutive quarter we have covered our dividend with adjusted net investment income. Turning to the market. We continue to believe that overall business conditions remain solid in the lower middle market, which we define as companies generating $35 million of EBITDA and below. We believe MRCC is well-positioned in this market.

Both small and medium-sized middle market companies are increasingly turning to private credit asset managers who are nonregulated lenders for financial solutions. We see evidence of this by the fact that Monroe reviews approximately 2,000 investment opportunities each year. The major reason for this is our proprietary origination platform. These deals tend to be lower leveraged and have better credit and covenant structures than deals in upper end of the middle market today.

One of our most important sources of deal flow is from our own existing borrowers. This allows us to expand and grow our best customers. Our incumbent portfolio accounted for 37% of our investment fundings in 2019 and 63% in the fourth quarter. We believe that these opportunities provide attractive proprietary investments as we typically have had the experience and time to observe company and management performance before increasing our exposure to these borrowers.

That is the positive side of the coin. The negative side is that there continues to be strong flows of new capital into our sector. Newer entrants tend to put pressure on both pricing and loan structures. This trend is magnified in the broader middle market, which we define as borrowers with EBITDA higher than $35 million per year.

In the lower part of the middle market where Monroe has built a significant sustainable brand, we do not see much of this type of behavior, and while our part of the market has seen increased competition and reduced yields primarily due to lower LIBOR spreads, we have been able to maintain reasonable spreads and strong covenant packages and deal structures. Given our underwriting standards and credit focus, we find that we are passing on more and more deals in the market currently. Despite seeing very limited signs of market weakness, we tend to be more industry and sector specific. We remain acutely aware that we are likely in the later innings of a long cycle of expansion in the U.S.

economy. In addition, we have added uncertainty of what will likely be a divisive 2020 presidential election campaign and still unknown long-term economic impacts of the coronavirus. As a result of this uncertainty, combined with a commonative monetary policy witnessed by yet another rate cut this week, we feel interest rates will be lower for longer. We believe this combination of factors will contribute to more of a wait-and-see approach from borrowers and private equity sponsors.

As a defensive measure, over the past several quarters, we have continued to focus on our origination efforts on industries and companies that we believe are less cyclical, and we have been careful not to follow the larger market in pushing average leverage up in structuring deals with either no covenants or extremely loose covenants. Most all of our deals are structured to include LIBOR floors, which helps to maintain our yield given the recent pullback in rates. Additionally, we have reduced our regulatory leverage during the most recent quarter. We have remained disciplined in our origination and underwriting and continue to structure deals with strong covenant packages, which we believe is important.

Our ability to maintain this discipline and remain selective in the deals we close is the direct result of our large proprietary deal origination team, which consists of 22 origination professionals located in multiple offices throughout the U.S. and our broad industry vertical coverage teams in the following areas. Business services, healthcare, technology, media, software, specialty finance, real estate, and of course, the middle market private equity community. Across the Monroe platform, we evaluated approximately 2,040 investment opportunities in 2019 that were originated by our team.

We closed and funded 90 of these investments, 50 of which were to new borrowers. This large and diverse pipeline of opportunities allows us to remain extremely selective in the deals we close in our funds. And as a result, we invest only in what we believe are the strongest borrowers. And we structure our deals to provide us with covenants and monitoring tools necessary to protect our investments.

On average, the Monroe platform closes approximately 2.5% of the new investment opportunities we evaluate in a given year, which affords us the luxury of being highly selective in our investment decisions. Specific to our portfolio, as we disclosed in our earnings release and 10-K in January of 2020, an arbitrator issued an award in favor of one of our borrowers, the estates of Rockdale Blackhawk, in a pending legal proceeding between the state and the national insurance carrier. The lenders to Rockdale, including MRCC, will share in the proceeds of this arbitration award with the state. The exact amount of the award has yet to be finalized because attorney's fees, interest and certain other amounts included as part of this award still need to be determined and finalized.

We expect this to resolve over the next few quarters. But based on this award, we expect proceeds to exceed the cost basis of our outstanding loan balances to Rockdale. We believe this to be a very positive development and something that we have discussed with you on previously quarterly calls. Accordingly, at the end of the fourth quarter, a fair value mark of our holdings in Rockdale has increased.

During the fourth quarter, our portfolio decreased by $41.3 million on a net basis. This decline was attributable to $83.5 million of paydowns and payoffs on existing deals, partially offset by portfolio growth of $42.2 million during the quarter. Approximately $36.3 million of these new loan fundings was attributable to existing portfolio company expansion. As we said in the prior-quarter conference call, we expected to see a decrease in our portfolio during the fourth quarter as we anticipated several payoffs in the ordinary course just after the end of the third quarter, which have occurred.

At the end of the fourth quarter, our per share NAV was $12.20 per share, a 1% decline from the end of the prior quarter. Monroe Capital has a greater than 15-year operating history in direct lending. And over that period of time, investors have enjoyed very low defaults and strong recoveries in Monroe Capital direct loans. While we believe that many of our recent unrealized mark-to-market declines are related to specific idiosyncratic credit issues with a select few borrowers, our senior management team is continuing to spend a significant amount of time analyzing these credits and focusing on our workout and collection strategies.

We are very focused on realizing the highest possible recoveries on the assets that have been marked. The recent Rockdale Blackhawk arbitrator's award is a good example of that effort. MRCC enjoys a very strong strategic advantage and being affiliated with a best-in-class middle market private credit asset management firm with over $9 billion in assets under management and over 125 employees as of January 1, 2020. Monroe Capital will continue to devote whatever resources are necessary to generate acceptable levels of adjusted net investment income and improve NAV performance of MRCC going forward.

I am now going to turn the call over to Aaron, who is going to walk through with you our financial results.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Thank you, Ted. During the quarter, we funded a total of $42.2 million in investments, consisting of $5.5 million in loans to new borrowers, $23.7 million in new fundings to existing borrowers and $13 million in fundings under existing revolving lines of credit and existing delayed drug term loans. This growth was offset by partial sales and repayments on portfolio assets, which aggregated $83.5 million during the quarter. At December 31, we had total borrowings of $404.3 million, including $180.3 million outstanding under our revolving credit facility, $109 million of our 2023 notes and SBA debentures payable of $115 million.

Any 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. Since quarter end, we have made significant progress in investing a portion of the uninvested cash in the SBI subsidiary, which totaled $27.4 million at the end of the quarter. Turning to our results. For the quarter ended December 31, adjusted net investment income, a non-GAAP measure, was $7.7 million or $0.37 per share, an increase from the prior quarter's adjusted net investment income of $7.2 million or $0.35 per share.

At this level, per share adjusted NII covered our quarterly dividend of $0.35 per share. As of December 31, our net asset value was $249.4 million, which was down slightly from the $252.4 million in net asset value as of September 30. Our NAV per share decreased 1% from $12.34 per share at September 30 to $12.20 per share as of December 31. This decrease was primarily a result of unrealized mark-to-market valuation adjustments.

Looking to our statement of operations. Total investment income increased during the quarter primarily as a result of an increase in fee income, principally due to a success fee realized upon the payoff of our investment in Tap Room Gaming. Interest income declined during the quarter, driven by our lower average portfolio balance, decreases in LIBOR and a reduction in LIBOR spread in the portfolio due to repayments of higher-yielding assets during the quarter. During the fourth quarter, we did not put any additional positions on nonaccrual status.

Moving over to the expense side. Total expenses for the quarter increased slightly, primarily driven by an increase in net incentive fees. In many prior quarters, we voluntarily waived incentive fees to ensure dividend coverage. This was not necessary during the fourth quarter as adjusted NII exceeded the dividend on its own.

Interest and other debt financing expenses also declined during the quarter as a result of a reduction in our borrowings due to the smaller average portfolio balance in the quarter. Regarding liquidity. As of December 31, we had approximately $75 million of capacity under our revolving credit facility. At the end of the quarter, our regulatory leverage was approximately 1.16 debt to equity, a decrease from the regulatory leverage of nearly 1.3 at the end of the prior quarter.

The current level of regulatory leverage is within the targeted leverage range we have guided you to on prior calls. We do expect some net portfolio growth in the first quarter, which could result in a higher level of regulatory leverage going forward as we reinvest a portion of the fourth-quarter repayments in the first quarter of 2020. As of December 31, the SLF had investments in 64 different borrowers, aggregating $239.8 million at fair value with a weighted average interest rate of approximately 7%. The SLF had borrowings under its nonrecourse credit facility of 142 -- excuse me, $147.2 million and $22.8 million of available capacity under this credit facility.

At this level of funding, the equity in the SLF is currently generating a dividend yield of over 11% to MRCC and our JV partner. Regarding Rockdale Blackhawk, as Ted discussed, there was a pending confidential and private arbitration of an accounts receivable claim with a national insurance carrier with a material amount in dispute. That claim serves as collateral for the MRCC loan to Rockdale Blackhawk. The underlying arbitration proceedings were completed in mid-August and final trial briefs were due and submitted to the arbitrator in late September.

An award was issued in January 2020. As Ted stated earlier in the call, there is still some amount of uncertainty over the exact amount that will be payable to the state and available to the lenders, but the initial award was very positive and should result in a substantial recovery for MRCC and the other lenders to Rockdale in excess of the cost basis of our outstanding loan balances due to the lenders' right to receive excess proceeds pursuant to the terms of a sharing agreement between the lenders and the estate. If there are any updates that could have a material effect on the value of this position, either positive or negative, we will update the shareholders at the appropriate time. During the quarter, we experienced a mark-to-market decline on our investment in the Worth collection.

Headquartered in New York City, Worth is a direct-to-consumer luxury and contemporary women's apparel business. In the fourth quarter, the company experienced further declines in sales and increased attrition of its sales reps. Despite previous indications that the private equity sponsor that owns Worth would continue to support the company's liquidity, which it had done in prior quarters, the PE sponsor declined to provide further support. As a result, there is substantial doubt about the company's ability to continue to survive as a going concern, and the current mark reflects that doubt.

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

Thank you, Aaron. In closing, we continue to execute on the same plan at Monroe as we have for the last 16 years: investing in origination resources to cast the widest net possible of proprietary deal flow, being highly selective in our underwriting and maintaining a strong and active portfolio management discipline. We are entering 2020 with continued caution and discipline, recognizing that our overall firm and platform is one of the largest and most stable in the U.S. lower-middle market private credit space.

That gives us the ability to be selectively competitive when the right situation presents itself. It also gives us the ability to pass when we believe the situation is not right, which will be more and more important in the coming year as we are confronted with market challenges and uncertainty. We continue to believe that Monroe Capital Corp. provides a very attractive investment opportunity to our shareholders and other investors for the following reasons.

Our stock pays a high current dividend rate, our dividend is fully supported by consistent adjusted net investment income coverage for the last 23 straight quarters, and we have a very shareholder firmly, external advisor management agreement in place that limits incentive fees payable in periods where there was any material decline in our net asset value, and base management fees have been reduced at higher leverage points. And lastly, we were affiliated with a best-in-class external manager with offices throughout the U.S. over 125 employees and approximately $9.2 billion in assets under management as of January 1, 2020. Thank you all very much for your time today.

And with that, I'm going to ask the operator to open the call for questions.

Questions & Answers:

Operator

Thank you. [Operator instructions] And our first question is from Bob Napoli with William Blair. Please go ahead.

Bob Napoli -- William Blair and Company -- Analyst

Thank you, and good morning. Just with the virus, the coronavirus out there, I guess, what investments do you have? Or do you have investments that are affected by the travel industry? And obviously, this could become potentially a broader macro effect, although it doesn't seem to have in the U.S. quite yet. But I was just curious, as you look at your borrower base, who is most at risk for areas that are most susceptible to the virus currently?

Ted Koenig -- Chief Executive Officer

Good question. Thank you, Bob. I anticipated that question, and we have done a pretty intensive review of our portfolio over the last several weeks as I hope most private credit managers have. We do not have very much, if any, exposure in the travel, leisure, aircraft, transportation space.

So I think from a portfolio standpoint, I think we're in pretty good shape on that. I'm more concerned about the tangential effects of it. And I don't think we're in a position to know yet what's happening. I mean I was in Europe last week, and I will tell you that I was at the largest private equity conference in the world in Berlin, and there were no Asian participants there.

And there were no Italian participants there. In Chicago, the Housewares Trade Association was canceled, which was roughly about 50,000 people. So I think that there's a lot of general concern in the market today. And as long as we don't panic in that we focus on the facts, hopefully, this will be a Q1 and Q2 issue, and everybody can get back to business in Q2.

But we need more information there. All I can tell you is that from a portfolio standpoint, the MRCC portfolio, as well as Monroe Capital is in relatively good shape and not a risk.

Bob Napoli -- William Blair and Company -- Analyst

Great. Thank you. I second the motion on the first- and second-quarter effects. Hopefully.

Just on Rockdale Blackhawk, when do you get paid? And I mean, do you have the write-up in the quarter? Is that a conservative? Is there more potential write-up from that? Or is there some risk to that amount?

Ted Koenig -- Chief Executive Officer

Yeah. So here's what I can tell you. Now the challenge is that we're being as transparent as we can because we're under some confidentiality arrangements right now with the arbitration procedure. I anticipate that that may change in the future.

And if it does change, then we'll be able to say more on it. But what I can tell you is that the example of the recovery, in this case, is a marked asset, and we spoke on previous calls to you and other members of the analyst community that we don't cut and run as a firm on our credits. Now we may take marks. And we try to be as transparent as we can with you and our public shareholders on the marks.

Just because we take marks that doesn't mean that we believe that the assets are not collectible at full value or at a higher level than the marks. And that's a very important distinction because over the last several quarters, like others, we've taken some marks in certain industries. We've spent over a year with a significant amount of effort of senior management and our portfolio management team and legal counsel and experts and others in pursuing this claim because we knew and we thought we were a winner on this just as we may believe we are in other claims within our portfolio. But until it actually converts, there's a limit to what we can do and say to the community.

So I'm asking the community to just understand that that's our business. That's what we do. That's what we're good at, and that's what we're going to continue to do with all of the marks that we have in our portfolio, and it wouldn't surprise me to come to you on future calls and be able to talk about other credits and resolutions of other credits. But on this particular one, what I can tell you today is that we received a very favorable ruling in the arbitration.

We expect recoveries to be substantially in excess of our cost basis. And that it's going to play out over the next couple of quarters is my guess because there are -- as part of the arbitration, we were awarded reimbursement of certain costs and expenses. And those need to be determined and finally agreed to. And that's all part of the order.

So I'm asking you to be patient with us on this. And Aaron and I will be back to you as soon as we possibly can.

Bob Napoli -- William Blair and Company -- Analyst

Thank you. Last question from me. Your confidence level in being able to continue to cover the dividend, maintain the dividend. You have a 13% dividend yield and a 0% interest rate market, if you would.

And you've done a good job maintaining that dividend to this point is that the book value, you need to be able to maintain, obviously, the book value to be able to continue to support that dividend. So just some thoughts around that big picture question, if you would.

Ted Koenig -- Chief Executive Officer

Listen, obviously, I can't predict the future, but I'm telling you on this particular point, we feel good about where we are with the company. We're going to collect a bunch of money on Rockdale. We've got a bunch of money that has been deployed from our SBIC sub. We've got a lot of headroom in our credit facilities.

So I think this is a really good development, and I think we're going to be humming a longer.

Bob Napoli -- William Blair and Company -- Analyst

All right. Thank you. Appreciate it.

Operator

Thank you. Our next question comes from Tim Hayes with B. Riley FBR.

Tim Hayes -- B. Riley FBR -- Analyst

Hi, good morning, guys. Thanks for taking the questions. My first one is just a follow-up on Bob's last question there. And upon redeploying the proceeds from Rockdale and 4Q loan repayments, how close do you think that will put you to consistently covering the dividend with adjusted NII signs foregoing incentive fees?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Thanks, Tim. This is Aaron. So good question. All I can say to you is we're very focused on it.

We feel good about our ability to continue to deploy assets at a level that supports our current NII. If that changes, we'll certainly let you know, but getting cash back on this nonaccrual asset that's substantial is pretty meaningful in our ability to do that. If you look at it versus our NAV, there's a fair amount of capital tied up in this. So when we can get that cash back to work on an accrual basis, that's very favorable.

Tim Hayes -- B. Riley FBR -- Analyst

And obviously, the near-term outlook probably a little bit more uncertain, just given the fears around coronavirus and the volatility in the markets, but how long do you think it will take you to redeploy that capital, given the pipeline you have in front of you? And just as a follow-up to that. And on the coronavirus, do you see near-term volume falling off given the uncertainty? And are you seeing any changes in demand from your portfolio companies or prospective portfolio companies currently?

Ted Koenig -- Chief Executive Officer

Good question, Tim. I'll take that. This is Ted. We have over $1 billion in pipeline right now in the firm.

Now we've got -- as a firm, we manage $9.2 billion of assets. The BDC is obviously much smaller. I don't see any issue in being able to redeploy assets as they come due or as prepayments happened with the BDC. So from MRCC standpoint, I think we're going to be in really good shape here over the next three to six months.

Now obviously, the market, in general, coronavirus is going to have an effect as I told you in my earlier remarks, but I don't see that impacting our ability to deploy capital in the near term.

Tim Hayes -- B. Riley FBR -- Analyst

OK. Got it. That's helpful. And then your stock currently trading at about 87% of NAV and a 13.2% dividend yield, you just delevered a good amount this quarter.

So I'm just curious as to how you think about potentially allocating capital toward stock buybacks at these levels?

Ted Koenig -- Chief Executive Officer

And that's a good question, too. We really haven't had a chance to dig into that. At the board level, obviously, we talked about everything. I think that you'll see over the next near-term here, our No.

1 goal is going to be deploy capital in good deals. And we think that we've got a positive arbitrage in deploying capital in good deals, and that's what we're very, very focused on doing.

Tim Hayes -- B. Riley FBR -- Analyst

Got it. OK. And then just one more for me. Would you be able to disclose if you have it in front of you that is the average leverage multiple, LTV and/or interest coverage on debt portfolio companies?

Ted Koenig -- Chief Executive Officer

I will tell you I don't have that information in front of me. But from a market standpoint, as I mentioned in my earlier remarks, there is a -- generally, I'm speaking for the general market now, there's a different level of leverage in the upper middle market and the lower middle market. Upper middle market today is close to around 6 turns of leverage. And in the lower middle market, it's closer to 4.5 turns in the neighborhood.

And from a coverage standpoint, we're similarly situated where we've got a better margin of coverage in the lower middle market. And that's why we like to play in that market.

Tim Hayes -- B. Riley FBR -- Analyst

I guess then -- I don't know, again, I know you don't have the exact data in front of you, but would you be able to, from a high level, touch on just how those metrics have trended over the past year, whether they've been stable? Or are you seeing them kind of creep up a bit?

Ted Koenig -- Chief Executive Officer

Yeah, sure. Again, in general speaking, what I can tell you is that it's moved a little bit over the last year or so, 18 months. If you look at the larger market, that market has probably moved half a turn to almost a full turn. We're seeing today 6 to 7 times leverage is pretty common in the larger middle market space.

And we used to see around 4 turns in the lower-middle market space and that market today is probably closer to 4.5 turns and up to 5 turns. So that's, I think, a good flavor. Now if you ask me how does that compare to the last cycle we were in that I thought was the most frothy cycle in my career. In 2007, we were probably at 3.5 to 4 turns of leverage in the lower middle market.

So we're probably up about a full turn in the lower end of the middle market. And we're probably up closer to almost 2 turns in the higher end of the middle market.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

I would guess, though, Ted, that coverages were probably not as different back then because the general level of rates going precycle were quite a bit higher than where we are today.

Ted Koenig -- Chief Executive Officer

Yeah. From a coverage standpoint. You're right.

Tim Hayes -- B. Riley FBR -- Analyst

Makes sense. OK. I appreciate the color there.

Ted Koenig -- Chief Executive Officer

And I guess my last comment to your question on the stock is I think our stock price is too low. So that's a separate comment.

Tim Hayes -- B. Riley FBR -- Analyst

Understood. Thanks, guys.

Operator

Thank you. Our next question comes from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Hi, guys. Ted, congratulations on growing Monroe to $9.2 billion. That's impressive. Rockdale -- hold on a second, my headset.

Hello?

Ted Koenig -- Chief Executive Officer

We're here, Chris.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

OK. Great. On Rockdale, the fair value on that increased $19 million from about $9 million last quarter. Given that this was December 30 and the court adjudicator was announced in January 2020, what was the cause of this increase in fair value?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah, great question, Chris. And it's something that we have to be really thoughtful about when we have information that comes post quarter end because, as you pointed out, and you're correct, the valuations are as of 12/31. Clearly, we've been saying for some period of time that as this extended on, we felt that bolstered our position. And based on all the reads we got from all of the legal advice we were getting, we felt like as time went on, that that increased the probability that we would have a positive resolution.

And so the mark at 12/31 reflects a higher probability of a positive resolution. It does not necessarily incorporate what we believe the total recovery to be because that was not knowable at 12/31.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Got it. Second question sort of related to Ted's earlier comment on tangential exposure to the coronavirus. What happens if your portfolio companies start having a working capital shortage because of supply chain issues and so forth? Who will step up? Will it be the PE sponsor? Will it be the lenders such as yourself? How does that work out?

Ted Koenig -- Chief Executive Officer

Good question. I will tell you, that's probably one of the best questions because what happens when you have something like a coronavirus an issue, it doesn't really translate into a P&L issue right away for most borrowers. It translates into a liquidity issue for the borrowers. And the reason why it translates into a liquidity issue is that sales go down for a very short period of time, revenues come down, receivables come down.

Inventory tends to come down, particularly companies that are heavy in the manufacturing business. And payables tend to extend. So what happens is you get a working capital squeeze in these companies, and they need cash. So our portfolio is primarily driven by business services, software, medical reimbursements, things that are not the subject of a working capital or liquidity squeeze.

Companies that are much more susceptible to that are companies that are manufacturing or heavily importing. We purposely, over the last several years, rotated our borrower base into less of a manufacturing and importing and dependence on heavy metals or oil and gas, things that are more cyclical. So we feel we're in a pretty good position with the MRCC portfolio. Your question was more of a general nature.

And I will tell you that when that happens, when there's a liquidity squeeze, what generally happens is that if the company is within their leverage covenants, then very often the lender may extend additional credit within the leverage guideline covenants. However, if the company is at its leverage guideline covenants or at where they intended to be, then the private equity firm may have to step up in a short period of time and provide some type of interim bridge that is fully reimbursable when the normal working capital comes back. So that's hard to answer your question.

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Great. Thanks for taking my questions, and I'll follow up off-line.

Operator

Thank you. Our next question comes from Robert Dodd with Raymond James.

Robert Dodd -- Raymond James -- Analyst

Hi, guys, and congratulations on the quarter. A couple of house, sort of, housekeeping ones first and then a bigger picture question. On Rockdale, and I know it's under confidentiality, etc., but would an arbitration settlement kind of, would that constitute fee income to you? Or would that go to a realized gain, depending on what it is ultimately?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah, it's a good question. We're still examining all of that and how it will flow through. It most likely would not be considered fee income. It most likely be considered a realized gain, and there'll probably be some potential for other income over time, depending on what elements of the settlement, how that plays out through, what we are owed.

So there is some accrual of interest, for example, that will be calculated that is not currently accrued in our P&L movement. So that could be an interest income metric, but we'll try our best once this is settled, and we have more to say to try to break out for people exactly the components so that it's very clear as to what's flowing through where.

Ted Koenig -- Chief Executive Officer

Yeah, just to be clear on that, too, Robert. That's a great question. On something like this, remember, we're in the business of charging interest, current interest, accrued interest, default interest on fee income. So there's a number of different line items here that Aaron will make more clear as time goes on.

But one of the things we're waiting for right now is the arbitrator to rule on a number of our additional fees and expenses. So until that happens, we really can't give you much more guidance other than it's a very positive development, and it's going to be really good for MRCC.

Robert Dodd -- Raymond James -- Analyst

Yeah, understood. And exactly that point. I mean, it's obviously been dragged, it's going on a while now, and I would imagine there's some catch-up income that's going to flow through as well. Then secondly, on the fee income in the quarter, which was very high, and it doesn't look like it was prepayment income.

So far as I can tell from the filings. So can you give us any color on what the source of that was in this quarter?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah, sure. So you're right, it wasn't necessarily prepayment fee. It was related to a prepayment, though. So we had an investment in a company called Tap Room Gaming.

And as a part of our investment, we had structured something called a success fee that would be based on the value of the company upon a sale and repayment of our loan -- for the value of the company on the repayment of our loan. And so that occurred in the quarter. And most of the fee income in the quarter was associated with that. Now you say it was very high in the quarter.

It's certainly higher than it's been in recent quarters. But it is not inconsistent with levels we've had in previous years. So definitely higher than the last couple of quarters, but not what I would consider extremely high versus what we've seen historically.

Ted Koenig -- Chief Executive Officer

Two things on that, too, Robert, is that historically, in periods of heavy refinance activity, we tend to see more prepayment income. And as Aaron mentioned, in the last couple of quarters, we just haven't seen a lot of prepayment income. If you go back a couple of years, you used to see a fair amount of prepayment income in our portfolio. So that's one area.

But the other thing that I think is not really understood and not really easily manageable by folks in your business is that we play in the lower middle market. And Tap Room Gaming is a good example of deals that we have in our portfolio that we have success fees and ways to create additional return that we can't book because it hasn't occurred yet. But a number of deals in our portfolio because we play in this nonsponsored small end of the market, we've created additional opportunities to make income from the portfolio when and if the companies pay refinance or sell. And this Tap Room Gaming was an excellent example of a deal where we structured a success fee as opposed to a warrant or as opposed to equity in the company.

And then when the deal was refinanced or sold, we got the benefit. Now a lot of that was episodic. But when you've got a portfolio, the size of our portfolio, we expect that over time, those things are going to happen. So I just want to make sure that you understand that and the community understands that this is something that we'll be coming back to you with, hopefully, in the future with other instances.

Robert Dodd -- Raymond James -- Analyst

Understood, Ted. I mean, yeah, in your lower-middle market coupon, I know OID are not the only sources of income that you can generate from a portfolio company. The last one for me is back to the virus, but a secondary effect, so to speak, LIBOR, obviously, I mean, the fed cut 50 basis points. You mentioned LIBOR force in your prepared comments.

Can you give us any more color of where the average floor is, how many of them are in play today, so to speak, since, obviously, LIBOR has moved now? And how much protection you've got within that portfolio for additional LIBOR moves if the fed moves again in summer?

Ted Koenig -- Chief Executive Officer

Good question, actually. So in our deals, you have to understand how financial institutions work, maybe I'll give you a short lesson on this quickly. Banks and insurance companies are very much tied to cost of funds. And as the cost of funds go down, this 50-basis-point cut this week was a very negative effect on most banks and insurance companies.

In our business, private credit business, particularly Monroe and MRCC in the lower middle market, we have LIBOR floors in virtually every deal we have. We set those LIBOR floors at usually where LIBOR is. So if LIBOR is a point and a quarter or a point, whatever it may be, we tend to set our floors at that level. So if you look at our portfolio, when we do deals, we tend to set somewhere between a point and a point and a quarter with our LIBOR floors.

And to the extent that LIBOR tends to move much more, we don't see a lot of exposure in our asset spreads with LIBOR floors.

Robert Dodd -- Raymond James -- Analyst

Appreciate that. Thank you.

Operator

Thank you. Our next question comes from Chris Kotowski with Oppenheimer.

Chris Kotowski -- Oppenheimer -- Analyst

Most of mine have been asked, but just a little bit more clarification on maybe the capacity in the SBIC subsidiary. You said there's $27 million of cash and $56 million of -- or $57 million of leverageable capital. Does that mean you would like, first, use the cash and then there are further debentures that you can draw? Or how would that work and flow through your financials?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah, I'm sorry if we somehow confused on that. So no, there's $27 million of cash at December 31 that's investable. There's no more debentures that's available. So that's the max amount of cash that's available to invest in the SBIC subsidiary.

We wouldn't necessarily expect to invest all of that because we have some delayed draw term loan exposure in the SBIC subsidiary that we need to reserve some cash for in case we get a draw. But we do have the ability to substantially increase our investments in the SBIC by use of at least a portion of that $27 million of cash, but there is no additional capital available in the SBIC sub.

Chris Kotowski -- Oppenheimer -- Analyst

OK. And then just, obviously, this quarter, I guess I wanted to get -- tend to clarify again a little bit. I mean this quarter, we saw a bit of a decline in the investments. The language in your opening comments, I would say, was cautionary.

But then I also heard you say that with $9 billion of AUM and $1 billion in pipeline that there should not be any problem in maintaining the BDCs, the investment portfolio. So does that mean one should expect to see kind of this quarter's decline in the total investments made up in coming quarters?

Ted Koenig -- Chief Executive Officer

So again, a good question. We had a high level of prepayment activity in the fourth quarter that we anticipated. We had a number of companies that were being sold. So we kind of gave you some heads up, I think, in our last quarterly call in the third quarter that we're expecting to see that.

We don't see the same prepayment activity coming this quarter. We've got a nice pipeline. We're putting money to work. I think that you anticipate more of a normalized deployment from us now.

The nice thing about having a very large platform is we've got a very large pipeline, always. But again, I tried to give you some cautionary words only that we're trying to be careful, too. Fourth quarter, the market was running pretty hot. And we made a decision as a firm to be thoughtful and not chase the market.

And when you've got a large firm, you've got the ability to make those decisions if you see that the market is running a little too hot. I think with coronavirus and some of the other things that we're facing currently in the market, we don't see the same level of hotness right now. And I think we're going to get back to business.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

And I would just add one thing, which is one thing we've been consistent on when we talked about leverage in the portfolio is that the leverage targets that we think about are directly related to what we're doing on the portfolio side that you can't live in a vacuum and just say, we're going to be at a certain leverage point because it depends on the perceived risk of the assets you're putting on and the more conservative that portfolio that we look -- that we see, the more likely we'll be willing to be slightly higher on leverage. And we, over the last couple of years, have really pushed the portfolio more and more to straight first-lien senior secured loans, which is in part why our yield has come down. Of course, there's other competitive pressures in LIBOR that have also contributed to the yield declines, but it's also a shift into a more defensive portfolio, which can take a little bit more leverage, which we did purposefully to take advantage of what we thought was a better positioning in a late cycle to be a little bit more leverage and a little less risky portfolio. And so that's always part of the thinking as well.

So look, what we said was we thought we were going to get a bunch of prepayments that we knew about. We allowed the portfolio leverage to go a little higher than we would have wanted otherwise at the end of last quarter. And that's moderated here in the first quarter. And it's gotten probably a little bit on the lower end of where we thought leverage would be based on the portfolio mix, and we have the ability to consider taking it up a little from here and the final level of where we go, we'll have to do, of course, with what we see in terms of opportunities, but also as we assess the portfolio mix in terms of risk.

Chris Kotowski -- Oppenheimer -- Analyst

OK. And then last for me is, there was a mark on company called Forman Mills. It's still on accrual, but I think it's about 70%, 72% of cost now. Is there any color you can give us on that?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah, sure. So Forman Mills is a name we're obviously monitoring very heavily as we do with all of our names, but particularly names that are marked below par. So what's really happened with Forman Mills and Forman Mills is in the general low-priced retail segment. It's a sponsor-owned business.

The company had some challenges with regards to some of its internal systems and some inventory purchases that were ill-conceived. They've, I think, really put the company back in a position to start growing again. They feel good about their prospects, given their customer base. But as a result of some of their issues, they needed some additional capital.

And so what you're seeing in the market is really more about some working capital that was provided to the company by both us and the sponsor as a loan. So what you didn't see was a major shift in terms of the enterprise value of this company, which you just saw was a higher loan balance, which is what contributed to the decline in the mark. But based on everything we're seeing with the right levels of inventory because they were not in a good position with regards to inventory and some additional support to their factors, we would expect to see revenue and EBITDA improvements over the prior year. So we continue to think that the trajectory here looks positive, which is why, at this point, the company is still on accrual status.

It really just still expect to get a recovery here with regards to both our par amount, as well as all of our interest.

Chris Kotowski -- Oppenheimer -- Analyst

OK. That's it for me. Thank you.

Operator

Thank you. And our next question is from Chris York with JMP Securities.

Chris York -- JMP Securities -- Analyst

Hi, Ted. Hi, Aaron. Thanks for taking my questions. The first is on Rockdale.

And I recognize you're limited on what you can provide us, but you do have a loan here that is not accruing interest and it's material to earnings. So do you expect this investment to return to an accrual post the close of the legal proceeding?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

No. Chris, what will happen with this is once everything is concluded, we expect to receive a cash payment for the loan and any other settlements that we get, and we'd expect to redeploy that in earning assets. There's no situation where this loan starts then paying us interest again because there is no real ongoing operations at Rockdale. So it's more about a recovery of our loan, and hopefully, additional recoveries as you can see from the mark and then redeploying that cash, that's the expectation.

Chris York -- JMP Securities -- Analyst

Got it. I was a little confused. That makes a lot of sense. Elaborating a little bit on balance sheet leverage.

And I know it depends on the portfolio and risk, but are you still targeting a operating regulatory leverage ratio of 1.25 to 1.3 times longer term?

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Yeah. We still think that that's consistent with what we would expect here. Anywhere between 1.2 and 1.3 is sort of a reasonable range for regulatory leverage based on what we see in the portfolio mix. That's correct.

Chris York -- JMP Securities -- Analyst

Perfect. And then, Ted, last question here is a little bit on strategy. As you said in your prepared remarks, Monroe is focused on the lower middle market. And I think the market certainly thinks that Monroe is a leader in the lower middle market.

That said, the platform has achieved strong growth in assets under management, and we've seen Monroe compete in some more traditional and larger middle market deals. So why should investors not think that your growth is leading to a drift in style?

Ted Koenig -- Chief Executive Officer

Good question, Chris. Listen, I can't tell you that that's not the case. We've grown our portfolio significantly. We're about a $10 billion player today in the market Monroe Capital is.

And what we've been able to do is we've done it in a unique way as opposed to go up market like others have and compete against some of the much larger asset management platforms. What we've done is we've expanded our platform, and we've gotten wider and deeper with new products. As we mentioned in the prepared remarks, we've developed more of a niche focus on specialty finance, software, in technology and in healthcare, areas where we think we can make a difference on a proprietary basis. And we've hired professionals into those areas that are knowledgeable with deep contacts and relationships so that we can pull transactions from the market in these various niches.

So if you look across our platform, a couple of years ago, we were probably -- at the Monroe level, we were probably somewhere around an average EBITDA of $16 million, $17 million EBITDA. Today, we're probably close to $19 million average EBITDA, and that's across the entire platform of over 500 companies. So we've been sticking to our knitting. We're obviously getting involved in a few larger deals because some of our competitors are inviting us into some of the larger deals because we may bring a certain expertise or add a certain amount of value.

But our core originations, if you look at the 50 deals that we mentioned, that Aaron mentioned in our remarks earlier, those 50 deals, which are directly originated transactions, are in the core, lower end of the middle market. Now we have an active CLO business as well at the firm. We manage over $3.5 billion of CLOs, and that CLO business does play in the upper end of the middle market. But that's more of -- that's a different business.

It's more unique. That business has been growing and will continue to grow aggressively. We've got one of the top weighted -- top decile performing CLO businesses in the entire market. So that market, I anticipate, and that business will continue to grow.

I like the lower middle market. I think we've created a brand. And I think we're probably the largest player in that space, and we're going to continue to take advantage of the goodwill, the trade and the brand that we built in that space, and that's where you'll see MRCC play.

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

And I'll just add one thing, Chris. I mean, when you think about our focus on the lower middle market, it's more important to think about what we like about the lower middle market. And what we like about that space is deals that still have covenants and good structure. We like the leverage attachment points that Ted referred to earlier.

And so those are things that are most important to us. And those are the things you're seeing go out of a lot of the larger middle market deals. But if we see a deal in the larger part of the middle market with slightly higher EBITDA, but it has the features we like in the lower middle market, conservative leverage, good sponsorship, low loan to value and covenants, we'll consider doing those deals, even if they might be slightly higher than what we typically do in terms of EBITDA.

Chris York -- JMP Securities -- Analyst

Perfect. That's it from me. Thank you for the insight and the context.

Ted Koenig -- Chief Executive Officer

Thanks, Chris.

Operator

And we have a follow-up from Robert Dodd with Raymond James.

Robert Dodd -- Raymond James -- Analyst

Hi, guys. Just one question on the dividend. Obviously, this year, you covered the dividend, in fact, slightly overearned the dividend. And on a quarter-by-quarter basis, you either waived, or this quarter didn't waive, in order to cover more covenant.

And when we look forward, should we kind of expect the same pattern that you will do what obviously is necessary. I think you said in your prepared remarks that to cover the dividend on a quarterly basis or a value weight what you may or may not need to do based on what you expect to do for the full year because obviously, with locked out proceeds coming back, maybe some catch-up income from there, the dynamics might be a little different about full year versus quarter to quarter?

Ted Koenig -- Chief Executive Officer

Good question, Robert. I can tell you that we've shown you through many years of performance that management at Monroe Capital Corp. is very, very focused on maximizing value and creating value for our shareholders. That historical focus is not going to change in the future.

We're going to do everything we possibly can to create value and maximize value for our shareholders.

Robert Dodd -- Raymond James -- Analyst

Understood. Thank you.

Operator

Thank you. And this ends our Q&A session for today. I would like to turn the call back to Ted Koenig for his final thoughts.

Ted Koenig -- Chief Executive Officer

OK. Thank you very much, everyone. Lots of questions today, which I thought were good. And hopefully, you've got a better feel now from a strategic focus and where we are, what we are trying to do with Monroe and where we're going.

For us, a lot of this is just business as usual. There's a lot of noise in the market, whether it's Rockdale Blackhawk, whether it's the presidential elections, whether it's Forman Mills or whether it's coronavirus. I can tell you that we're very, very focused on doing what we do best, which is invest on capital and earn interest and fees and get our capital back. And particularly, the last piece of this is getting our capital back.

The Rockdale Blackhawk example, I think, is a very good factual experience for all of us that we are very focused on irrespective of what our marks are and what the carrying value of our loans are. We're focused on getting our capital back and all of it back. So with that, I want to thank you for joining us. I want to thank Aaron and our finance team.

I want to thank our legal team. I want to thank our financial reporting teams here at Monroe and Investor Relations for maintaining relationships and for doing everything that we do here to exemplify a first-class private credit organization, and we anticipate adding and improving to that in the year 2020, and we look forward to talking to you all on our next call. So thank you, and have a good day.

Operator

[Operator signoff]

Duration: 61 minutes

Call participants:

Ted Koenig -- Chief Executive Officer

Aaron Peck -- Chief Financial Officer and Chief Investment Officer

Bob Napoli -- William Blair and Company -- Analyst

Tim Hayes -- B. Riley FBR -- Analyst

Christopher Nolan -- Ladenburg Thalmann -- Analyst

Robert Dodd -- Raymond James -- Analyst

Chris Kotowski -- Oppenheimer -- Analyst

Chris York -- JMP Securities -- Analyst

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