Monroe Capital Plans Public BDC, Private SBIC Vehicles

Monroe Capital LLC is bullish on credit, introducing an array of new lending options for buyout shops.

The Chicago specialty finance company, which announced Monday it raised $250 million for a new limited partner-backed fund, announced Friday it will raise $150 million from public investors by forming a business development company, Monroe Capital Corp.

The regulatory filing also said Monroe Capital received a license in February from the Small Business Administration to operate Monroe Capital Partners Fund LP as a small business investment company (SBIC), opening the door for additional lending capacity of up to $225 million.

“From the customer’s standpoint, it’s the same product,” said Theodore L. Koenig, Monroe Capital’s president and chief executive officer, referring to the lender’s lineup of senior secured, junior secured and mezzanine loans. “We want to provide consistent, flexible capital to our borrowers.”

Because the company is now in registration for a public offering of stock, Koenig said he was in a quiet period and could not discuss the company’s strategy.

But the filing itself provides some hints, as do Koenig’s previous statements.

Because it has public stockholders, a BDC provides permanent capital to a lender. And as long as it maintains a share price at least equal to the net asset value of the loans in its portfolio, it can return to the market whenever conditions are favorable to raise additional capital. But a BDC also has limitations: It can generally invest only in privately-held U.S. companies, and, unlike a fund-based lender, which can use leverage to the extent that the market will bear to increase its returns to LPs, a BDC is limited to a 1:1 leverage ratio.

An SBIC has a different set of restrictions. Backed by LP investors, it can lend only to U.S. companies, generally borrowers with less than 500 employees, and it typically focuses on mezzanine lending. It is usually limited to $75 million in capital investments, and it can use 2:1 leverage, adding on up to $150 million in debt to form a $225 million fund. An SBIC can bundle and sell a portfolio of loans through an SBA debenture program, replenishing the fund with proceeds priced at an interest rate tied to 10-year Treasury bonds.

Both Monroe Capital’s BDC and SBIC will operate beneath the company’s existing LLC umbrella, forming a lending complex that should enable Koenig and his staff to match the borrower to the vehicle. As Koenig said in Monday’s fund announcement, “Our strategy of providing a total one-stop financing solution to lower middle-market companies differentiates Monroe from other finance companies and positions us well in the market to be a value-added strategic partner to both banks and our prospective clients.”

The new BDC will establish its initial portfolio from 34 loans now owned by Monroe Capital LLC, which had $440 million under management and more than 130 loans in its portfolio as of Dec. 31, according to the filing. The fair value of the initial portfolio is $96.3 million. These BDC-bound loans— 83.6 percent senior secured debt, 8.2 percent unitranche secured debt and 8.2 percent junior secured debt— were chosen because “they are similar to the type of investments we plan to originate,” the filing said. But future loans will be less concentrated in senior tranches and include more of a mix of senior, unitranche and junior secured debt.

Monroe Capital announced earlier this year that it had hired six new staffers, including a managing director, to support its plans to lend more aggressively in 2011. The firm is looking now for managers to run the BDC offering, the filing said. Koenig said such IPOs typically take 60 to 90 days.

Steve Bills is a senior editor at Buyouts Magazine. Follow his tweets @Steve_Bills. Follow Buyouts tweets @Buyouts. For information on how to subscribe, contact Greg Winterton at greg.winterton@thomsonreuters.com.