According to Bloomberg, Monroe Capital Corporation (MRCC) is a business development company (BDC) specializing in senior, unitranche and junior secured debt and to a lesser extent, unsecured debt and equity investments, and buyouts in middle-market companies. The fund apparently prefers to invest in casinos and gaming, broadcasting, publishing, alcoholic beverage and tobacco distribution, oil and gas, insurance, pharmaceuticals and bio sciences, aerospace and defense, commercial printing, natural rubber, glass, container and packaging, metals and mining, and real estate.
According to BDC Reporter, one investment in MRCC’s portfolio, The Picture People, (TPP Acquisition) has filed for Chapter 11 bankruptcy. TPP Acquisition was initially acquired in 2012 by private equity group Blackstreet Capital, with Monroe Capital entities providing unitranche loan facility for $21mn, of which $13.3mn was subscribed to by its BDC with the ticker MRCC.
MRCC funded additional capital and took control of TPP Acquisition, as the company struggled. The debt has been written down 55% through June of 2016 but it is unclear what the implications of these losses will be. According to press reports, the BDC’s exposure is just a third of the Monroe group’s exposure of $41.2mn.
BDCs typically invest in debt of small and medium sized businesses. When those businesses are profitable, so is the BDC. However, BDCs often invest in businesses that were unable to secure bank loans and debt considered below investment grade.
BDCs are likely to be carrying non-secured debt in companies that have a higher risk of bankruptcy. Most BDCs seek to have their loans protected by receiving a property interest or equity in the companies they invest in. By doing this, the BDCs increase their chances of salvaging some of the investment’s value in the case of a bankruptcy.
In addition, BDCs typically are high commission products that carry significant upfront fees. The resemblance BDCs share with another high commission and illiquid product, Non-traded REITs, has drawn the attention of securities regulators. Brokers that sell BDCs are advised to firmly adhere to suitability requirements when recommending BDCs to clients.
For more information on BDCs, see BDCs – the good, the bad, and the UGLY.
Brokers have a fiduciary duty to perform due diligence on any investment and to insure that investment recommendations are consistent with their client’s age, net worth, risk tolerance, investment experience and objectives, risk tolerance. If a broker overlooks suitability requirements, investors may have an actionable claim to recover their losses in a product in a claim through FINRA dispute resolution.
If you have questions about your investment in a nontraded BDC and would like to speak to a securities attorney about your potential to recover losses through FINRA arbitration, please call The White Law Group at 1-888-637-5510 for a free consultation.
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