Wednesday, April 27, 2011

Monroe Capital Corp - Another New Filing

(This post is also being published on Seeking Alpha - either as an Instant Blog or real article)

Monroe Capital Corp filed papers to register as a BDC on March 3rd, they just recently filed amended papers on April 19th (N-2/A) for their shelf statement (correcting a typo in the original filing and increasing the fees). This new BDC is a division of Monroe Capital, a smaller private lender that was established in 2004 and currently manages around $440mm. There is an "MCAP" (Mango Capital) traded on the OTC BB, so for this stock, they went with "MRCC" instead (all of the good M tickers are taken). There is a backlog of new BDCs to profile and that raises a concern. We all know from Porter's 5 Forces that Barriers to Entry is a key driver for a company maintaining superior returns. It appears the SEC registration process is no longer a barrier for a number of smaller CLO/PE managers and the potential returns are worth the effort. Will this increased competition hurt some of the other BDCs? Only time and the 10-Qs will tell.

The company will use Monroe Capital BDC Advisors, LLC (MCAD), an entity formed for the purpose of serving as investment advisor. MCAD will provide MRCC with investment professionals and portfolio selection. Interestingly, they will also use another LLC - Monroe Capital Management Advisors (MCMA), LLC to serve as the administrator. The two entities mean that expenses are split - MCAD will receive the management and performance fees and MCMA will bill MRCC the proportional share of expenses. This setup is slightly different from other external managers and it may result in additional expenses, but there is no way to know how this setup will affect returns.

People in Charge
The investment decisions will be led by Theodore L. Koenig and Daniel M. Duffy. Theodore Koenig is a former lawyer, coming from the defunct firm of Holleb & Coef. After Holleb, he was president and CEO of Hilco Capital. Daniel M. Duffy comes from a more traditional finance background by way of CapitalSource and GE Capital. From what I can find on Mr. Duffy via his old CapitalSource bio:

Duffy has over 21 years of experience in corporate finance providing both debt and equity capital to companies in a wide range of industries. Mr. Duffy has been with CapitalSource since April 2003. Prior to joining CapitalSource Mr. Duffy was managing director in charge of GE Capital's debt placement team. Mr. Duffy joined GE Capital via its acquisition of Heller Financial where he spent 12 years acting in a number of leadership roles including co-head of the media lending team senior credit officer in corporate finance senior credit officer in equipment finance and team leader in loan workouts. Prior to joining Heller Mr. Duffy received his B.S. in accounting from Northern Illinois University in 1984. 

The filing also mentions that 18 professionals from Monroe Capital will also be supporting the firm. There will be no direct employees.

This is something interesting to note. In the original filing (glad I did not post this last week), the management fees were stated as 1%, as of the 4/19 filing, management fees are stated as: "calculated at an annual rate equal to 2% of our total assets (which includes cash, cash equivalents and assets purchased with borrowed amounts)." The inclusion of cash and cash equivalents makes this one of the higher management fees. The first part of the incentive fee is 20% of Net Investment Income subject to an 8% annual hurdle rate.
The first, payable quarterly in arrears, equals 20% of our pre-incentive fee net investment income (including interest that is accrued but not yet received in cash), subject to a 2% quarterly (8% annualized) hurdle rate and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, MC Advisors receives no incentive fee until our net investment income equals the hurdle rate of 2% but then receives, as a “catch-up,” 100% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5%. The effect of this provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, MC Advisors will receive 20% of our pre-incentive fee net investment income as if a hurdle rate did not apply. The first component of the incentive fee will be computed and paid on income that may include interest that is accrued but not yet received in cash.
The second part is:
The second part is determined and payable in arrears as of the end of each fiscal year in an amount equal to 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of the year, computed net of all realized capital losses on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.

This is similar to other BDCs like BKCC where a huge liability may be payable at the end of the year and introduce some seasonal earnings into the 10-Q analysis. One other note - Monroe is also looking to pay up to 50% of the fee (pursuant to SEC approval) in MCBDC stock.

Portfolio Composition
The company expects to invest most of the proceeds of the IPOunitranche or junior-secured. The firm
expects to make investments in the $5mm to $25mm range, but maintains that range may drift as the firm's capitalization increases. As per the filing, the initial portfolio will have these statistics:
  •   Loans with a weighted average yield of 7% to 8%;
  •   Emphasis on middle market transactions;
  •   Minimum of 90% senior debt investments (including unitranche debt);
  •   Maximum concentration of 15% in any one industry;
  •   Average loan position of less than $5,000,000; and
  •   Loans with maximum loan-to-enterprise value ratio of between 50% to 70%

Standard risks are outlined here. The N-2/A has a lengthy list of risks as well that are worth reading.

I will keep everyone updated as this company moves along and IPOs.

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