Q2 2020 Monroe Capital Corp Earnings Call
Before we begin I would like to take a moment to remind our listeners that my remarks made during this call today may contain certain forward looking statements, including statements regarding our goals strategies beliefs future potential operator results, our cash flows, particularly in light of the cobot 19 Pembina.
Although we believe these statements are reasonable based on managements estimates assumptions and projections as of today August six 2020. These statements are not guarantees of future performance further time sensitive information may no longer be accurate at any time of any replay are listening.
Actual results may differ materially as a result of race uncertainty or other factors, including but not limited to the risk factors described from time to time in the company's filings with FCC.
Okay. So takes no obligation to update or revise these forward looking statements.
I like to turn the call over to Pet pay me Chief Executive Officer of Monroe Capital Corporation. Please go ahead.
Good morning, and thank you, everyone, who has joined us on our call today.
Welcome to our second quarter 2020 earnings conference call.
I'm joined by Aaron Clark, our CFO and Chief investment Officer.
Last evening, we issued our second quarter 2020 earnings press release and filed our 10-Q with the FCC.
First and foremost we hope you when your family's remain healthy and say.
We're pleased that despite the continued economic in public health challenges associated with the I'm going Cupet 19 pandemic.
We were able to generate record net investment income and increased and they'd be performance during the second quarter 2020.
The continued uncertainty associated with the could've been 19 pandemic has created concerns related to the economy as well as specific on anticipated challenges for many companies due to business interruptions and a slowdown in business activity.
This uncertainty has caused volatility across the financial markets over the past several months.
The government stimulus has boy did the financial markets during the second quarter, what the S&P 500, erasing nearly all of the 20% decline experienced in the first quarter.
Price increases, we're also seeing traded credit investments as the S&P unless t., a leveraged loan index, which finished the first quarter down approximately 14% market failure.
Rebounded and was up approximately 8% during the second quarter.
Yes certainty that caused many of our portfolio companies across our platform to be focused on their own liquidity as evidenced by the wave of older draws requested that we saw during the March waned considerable after April we are back to weigh near normal on portfolio.
No company revolver draws.
The Monroe farms, including a mercy see have met all borrower revolver draw requests that we believed that we have the appropriate liquidity to meet any future requests across all of our farms.
As we discussed on last quarter's call we have been shifting our portfolio was over the past several quarters in all of the mineral phones away from higher risk cyclical industries as a result, and RCC has limited to no direct portfolio exposure in industry.
He is most affected by the pandemic such as the airlines automotive travel leisure oil and gas minerals in mining and energy.
However, the best thing about our portfolio is that we are typically a control lender. We are these agents at approximately 81% of our loan investments.
We have good loan documentation with tight baskets regarding indebtedness and restricted payments with no collateral leakage potential.
We have at least two and often several more financial covenants are most all of our deals, including maintenance and incurrence test on debt leverage.
This allows us to be proactively engaged with our borrowers and their financial sponsors in terms of liquidity.
It also allows us to opportunistically amend and replace our loans to constantly risk our portfolio.
In past calls we have discussed the importance of tighter loan documentation and the lower middle market that we player.
In the larger broad middle market, almost 80% of all loans are covenant lite.
And our market, we are dialoguing with our company's weekly and sometimes on a daily basis. This allows us to manage risk and too many things to enhance our risk and return positions. Our risk is also mitigated by the fact that weve maintained conservative starting leverage and loan to values what are we under.
You're right our loans often in the neighborhood of 50% loan to value.
Core arbitration proceeding in the Rockdale Blackhawk matter is now complete.
The award was issued and final form and received payment during the second quarter, which covered more than 100% of our car amounts accrued interest and fees on this loan.
We are expecting an additional payments over the remaining escrowed amounts once certain legal issues are resolved.
Assuming recovery the remaining escrowed amounts at the current estimated value. We will have received $223.6 million in proceeds of investment they had a cost basis of $19.5 million.
This recovery does not include the substantial interest payments and equity distributions that we received over the life of this investments including in June in conjunction with the settlement, which aggregated approximately $23.1 million for him RCC.
This is a prime example of how monroe's dedicated if an expert portfolio management efforts can yield outstanding results, even in a difficult and delicate situation.
Turning now to the second quarter results. We're pleased to report that in this challenging environment. We generated adjusted net investment income of 62 cents per share a significant increase from the adjusted net investment income of 33 cents per share in the first quarter.
The increase their net investment income was primarily the result of receipt of proceeds related to the Rockdale proceedings. Approximately 7.4 million were 36 cents per share of previously and accrued interest and fees were recognized as a result.
Of proceeds from the legal proceedings during this quarter without Rockdale, our adjusted net investment income would still have covered our recent quarterly dividend of 25 cents per share.
Aaron will go into more detail regarding the components of our net investment income later in the call.
We also reported a net increase some assets, resulting from operations of $14.2 billion or 69 cents per share during the quarter, which was driven primarily by the increase in the fair value of our investment portfolio during the quarter.
As a result or any the EUR per share basis grew from $10 of four cents per share at March 30, Onest $210 of 37 cents per share at the end of the second quarter.
Net increases in the fair value of investments contributed approximately 36 cents per share to our book value growth during the quarter or 3.6% on a per share basis. Additionally, the net impact of the settlement of Rockdale contributed approximately seven cents per.
Sure to the book value growth during the quarter.
In order to bolster our liquidity to reduce leverage we issued 825460 shares of stock under the ATM program during the quarter, which reduced our per share book value by 10 cents per share.
Without this issuance would have experienced a 44 cents per share increase in our book value per share.
We estimate that approximately 36 cents per share of the increased book value was attributable to changes in portfolio valuation.
Including 46 cents per share as a result of the tightening of credit spreads during the period unrelated individual credit performance.
During the quarter LCD first lien three year discounted lower spreads tightened by 365 basis points retracing around 60% of the first quarter spread widening.
Okay that 46 cents per share any the increase attributable to spread tightening approximately 26 cents per share or 57 percentage was attributable to assets held directly by us well 20 cents per share or 43% was as a result of markups.
On assets held in the Air Mercy see senior loan joint venture.
Loans and the joint venture tend to be middle market larger middle market companies and those loans experience higher price volatility in times of market correction.
This increase of 46 cents per share associated with spread tightening was partially offset by approximately 11 cents per share of unrealized mark to market valuation losses attributable to specific credits and certain portfolio companies.
Second portion of which is as a direct result of the impact of the could 19 pandemic on these borrowers.
A recovery of these unrealized losses dependent on both continued spread tightening as well as improved company performance for the specific opened 19 affected.
During the quarter, we've reduced EMARSS Ccs regulatory debt to equity leverage from 1.47 times debt to equity to 1.16 times returning to approximately the same level of regulatory leverage as of the beginning of the year.
Sure.
The decline in leverage was primarily driven by strong repayment activity during the quarter, including the realization on Rockdale.
We continue to focus on managing our investment portfolio at the appropriate risk adjusted leverage level going forward and continue to target regulatory leverage in the range of 1.2 to 1.3 times debt to equity.
Our senior management team is continuing to spend time and effort analyzing underperforming credits and collection strategies, we're very focused on realizing the highest possible recoveries on the assets that we have.
Town and we are engaged in several processes to execute on this strategy.
One such process was undertaken with respect to Rockdale Blackhawk in 2019, and we have seen the positive results of that process now contributing approximately seven cents of our per share book value increased during the period.
There are other similar processes on going.
To Monroe capital organization as approximately 125 employees with many devoted to underwriting risk management and workout strategies during periods like this it allows us to bring the very best resources to appear on the portfolio that are necessary.
As many of you know, we have but long track record of success in managing through difficult economic environments, notably the great financial crisis in 2008, 2009, including select workout situations with borrowers if need be we're not afraid to take over and owner business while that is not.
Our preferred option, we know how to do it and have done it successfully in the past if necessary, we will roll up our sleeves and do what we need to do in order to achieve the best possible recovery. The important thing is that we have the ability experience and internal resources to do that if necessary.
As we look ahead, there continues to be a high bar for investing new capital during uncertain times.
We are seeing many attractive investment opportunities to invest capital today, and we have over $100 million of liquidity on or high end GE led revolving credit facility in terms of availability subject to borrowing base capacity, Aaron we will discuss more about that later.
Our focus for the balance of the year will be to maintain current leverage levels and selectively making new investments and portfolio companies with compelling risk return dynamics, just as we have done at Monroe in the years following the last economic downturn in 2010.
2011.
We are now well positioned to do this investment spreads have widened considerably and terms and leverage have improved as well and we have the liquidity to selectively take advantage.
Im RCC enjoys a strong strategic advantage and being affiliated with a best in class middle market private credit asset management firm with over $9 billion and assets under management and over 125 employees as of July 1st 2020.
We will continue to focus on generating adjusted net investment income and Avi performance just as we have shown this past quarter.
I'm now going to turn the call over to Aaron was going to walk through with you our financial results.
Thank you Ted during the quarter, we funded a total of $10.3 million and investments, which solely consisted of new fundings to existing borrowers, including 9 million in revolver draws and 1.3 million and add ons and delayed draw fundings.
As we discussed earlier in the call many of our borrowers drew on the revolver is in order to increase liquidity on their balance sheets due to the uncertainty related to covert 19.
This portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $42.3 million during the quarter, including proceeds from the Rockdale settlement and partial sales and Paydowns at June Thirtyth, we had total borrowings of $370 million, including $146 million outstanding on our revolver.
Multi $109 million of our 2023 notes and SBH debentures payable of $115 million are outstandings under our revolver decreased by approximately $45 million during the quarter as we were focused on the reduction on our in our leverage during the period.
Any future portfolio growth revolver draws or advances to existing borrowers will predominantly be funded by the 109 million of availability remaining under our I LNG led revolving credit facility subject to borrowing base capacity and the Uninvested cash held in our FDIC subsidiary.
Turning to our results for the quarter ended June Thirtyth adjusted net investment income a non-GAAP measure was $12.8 million or 62 cents per share a substantial increase from the prior quarters. Adjusted net investment income of $6.8 million or 33 cents per share. The increase was primarily as a result of the recognition of previously under.
Accrued interest and fees received on Rockdale Blackhawk of 36 cents per share, which was previously recorded as part of our mark to market gain on our investment in Rockdale in June the company received $33.1 million and proceeds from the rockdale manner of which $19.5 million square is recorded as a reduction in the cost.
Basis of the company's investment in Rockdale $3.9 million was recorded as the collection of previously accrued interest.
$7.4 million or 36 cents per share was recorded as investment income for previously unaccrued interest and fees and $2.3 million or 11 cents per share was recorded as realized gains.
Additionally, as an offset the company recorded net change in unrealized losses of $8.2 million or 40 cents per year, primarily as a result of the reversal associated with the collection of proceeds from the Rockdale estate.
Total net income associated with our company's investment in Rockdale was $1.5 million or seven cents per share during the quarter ended June 32020.
As of June 32020, the company has a remaining investment in Rockdale associated with residual proceeds expected from these state of $1.8 million for about eight cents per share. This this increase in investment income from Rockdale was partially offset by declines in interest income as a result of overall declines in LIBOR, placing three smaller.
Additional assets on non accrual status and a reduction in dividend income earned on the SLF during the quarter.
Incentive fees were fully limited during the quarter as a result of the total return limitation in our shareholder friendly advisory agreement.
LIBOR rates were volatile during the period and three month LIBOR as an example fell from approximately 1.4 or 5% at March 30, Onest to 30 basis points as of June Thirtyth, well, while we maintain LIBOR floors in nearly all of our deals with the majority of floors at a level of at least 1% the reduction in LIBOR didnt.
Notably impact our net investment income during the period.
As of June Thirtyth, our net asset value was $220.6 million, which was up approximately 7.4% from the $205.4 million in net asset value as of March 30, Onest, our NPV per share increased from $10.04 per share at March 31 to $10.37 per share as of June 3rd.
Yes, as Ted already discussed in his earlier remarks, the increase in our per share any JV was primarily as a result of unrealized mark to market valuation adjustments in the portfolio related to general tightening of credit spreads during the quarter and the resolution of the Rockdale Blackhawk matter offset partially by some specific mark to market adjustments on search.
Names in the portfolio that were impacted by cobot 19, and the issuance of shares below and Navy during the quarter.
Looking to our statement of operations total investment income increased during the quarter, primarily as a result of an increase in interest income due to the recognition of previously unaccrued interest and fees on the Rockdale matter offset by a reduction in dividend income from the SLF during the period and a reduction in income on the remainder of the portfolio during the quarter.
Are we placed three additional positions on nonaccrual status, including our investments in California, Pizza kitchen, Partnerre flooring, and the preferred equity position in value to our products.
Notwithstanding those small additional non accruals, our overall fair value nonaccrual position improved markedly in the quarter total non accruals now approximate 4.7% of the portfolio at fair value, which compares to 7.4% as at March 30, Onest largely as the result of Rockdale, which had been listed as a non accrual asset.
In previous periods.
Moving over to the expense side total expenses for the quarter decreased primarily driven by the reduction in interest and other debt financing expenses in the quarter due to the lower debt balances base management fees also declined slightly primarily due to the lower level of assets at fair market value as a result of repayments in the portfolio during the quarter at the.
Ended the quarter, our regulatory leverage was approximately 1.16 debt to equity a substantial decrease from the regulatory leverage level of nearly 1.47 at the end of the prior quarter. The decrease in regulatory leverage is as a result, a positive fair market value adjustments in our portfolio as well as the pay down on our revolving credit facility during the period the curve.
Level of regulatory leverage is consistent with the targeted leverage range. We have guided you to on prior calls we are currently comfortably in compliance with the FCC asset coverage limit ratio limitation and actually below our previously discussed target regulatory leverage level of 1.2 to 1.3 times debt to equity.
As of June Thirtyth, the SLF had investments in 61 different borrowers aggregating $219 million at fair value with a weighted average interest rate of approximately 6%. The SLF had borrowings under its non recourse credit facility of $153.7 million and $16.3 million of available capacity and.
For this credit facility subject to borrowing base availability.
We do not expect to significantly grow the assets held in the SLF at this time and the SLF continues to be in compliance with all covenants and its credit facility.
As discussed earlier the loans held in the SLF saw significant unrealized mark to market increases during the period as a result of market spread tightening.
Regarding rockdale Blackhawk as we've discussed on prior calls there was a pending private arbitration of a breach of contract claim with a national insurance carrier with a material amount in dispute that claim served as collateral for the M. RCC loan to Rockdale Blackhawk. The underlying arbitration proceedings were completed in mid August and final trial briefs were due and submitted to the arbitrage.
In late September of last year, an interim award was issued in January 2020.
Just recently the arbitrator issued a final award, which updated the interim award to include certain attorney's fees interest and other amounts. The final word was very positive and resulted in a substantial recovery from MRC seat and the other lenders to rockdale far in excess of the cost basis of our outstanding loan balances, an unpaid interest and fees due to the lenders right to receive access pro.
Associates pursuant to the terms of a sharing agreement between the lenders and the estate a small portion of such proceeds are being held in escrow pending a decision by a judge on the merits of two parties claims to receive such proceeds.
Another portfolio company BJ services has been in the news as it recently filed for bankruptcy protection protection in Texas MRC see holds approximately $4.3 million of exposure to BJ services in the form of a first lien senior secured loan BJ services as an oil service company that has a leading provider of hydraulic fracking factoring and.
Cementing services to upstream oil and gas companies editors as a result of the decline in oil prices and as a result of the cobot 19 pandemic demand for their service as it has been negatively impacted our loan is secured by a very substantial amount of equipment and other fixed assets, which we expect to be sold through the bankruptcy proceedings, we believed.
That our loan has significant asset coverage and we expect to remain current on all payments and we anticipate being repaid in full through the bankruptcy process.
Equipment sales have already started.
I'll now turn the call back to Ted for some closing remarks before we open the line for questions.
Thank you Aaron in closing, we continue to find ourselves in an unprecedented economic environment, which is likely to clause rising default rates and the potential for a recession.
Despite these challenges we remain optimistic about our investment portfolio in our prospects similar to what we saw and growth of the firm after the great recession of 2008 in 2009.
The key is our conservative underwriting a purposeful defensive portfolio and our access to a large and experienced portfolio management team with experience managing through multiple economic cycles.
We have a defensively positioned portfolio with solid loan documentation and a lot of control over our own destiny in terms of risk management.
As such we continue to believe that Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders. Our dividend is fully covered by net investment income and we have sufficient liquidity to selectively play often some this market.
We are committed to navigating successfully through this economic period and are confident that we have the skills and experience necessary to maximize returns for all of our lending partners bond holders JV partners and shareholders. We believe that RCC is affiliated with a best in class external manager.
Sure, which has decades of experience approximately 125 highly skilled employees and approximately 9 billion and assets under management, which provides us the infrastructure and stability in times like these it also provides us an opportunity for emergency see to outperform.
Sure.
We would like to thank our shareholders for their loyalty and confidence I would also like to thank the entire team MRO at Monroe capital organization for their hard work and dedication. Thank you all for your time today and that concludes our prepared remarks im going to ask the operator to open the call know for quest.
Yes.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your test time telephone if your question and answer to you refer to move yourself from the Q. Please press the pound team.
Our first question is from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead Sir.
Hey, guys.
She is the escrow outstanding for Rockdale.
I will tell you I believe it's.
$1.8 million.
Loss from RCC, the escrows larger, but that relates to other farms, but the MRC portion is 1.8 million, that's and Thats at fair value, So thats our expectation of recovery.
Gotcha and by the way great job on Rockdale.
I guess strategy wise is the strategy still to further paydown revolver debt and lower the leverage ratios I know, it's below your targeted range, but.
The leverage strategy going forward.
Good question, Chris let we're at where I think we want to be today, we're on leveraging tool I know, we've talked aarons talked in the past about guiding to a 1.2 to 1.3, we're about a 1.1 leverage today. So we don't have any qualms about taking it up a little bit higher.
Thats going to be dependent.
Market opportunities and what we see we've got the capacity for growth. We just want to make sure we're being thoughtful and how we grow I'd also add credits you know what the portfolio naturally has some repayments that come in and even in this environment and because the market opportunities out there are attractive we will have significant opportunity to reinvest as well as things come in.
In the staying within the leverage limitation. So we're hopeful that we'll be able to move some of that up with the market as we see repayments great filed question any other material recoveries in your non accrual list.
Which compared to rockdale or anything similar.
Nothing that comes to mind today, but I told you.
On the call in prior calls we're very committed.
To recovering.
You know marked loans one of the ways that good asset management firms differentiate themselves is by.
Recovery on loans that marks with very often we don't have control over the mark process. We've got a pretty robust third party evaluation process that we go through as well as internally, but what we do we have some control over is the methods and the effort and.
No Halloween strategize in recovering proceeds so while I'm from time to time.
Concerned with marks.
Not overly focused because I know, what we're doing internally and I know the companies and I know that on the strategies that we have in place to collect our dollars are sound and generally fruitful.
Great. That's it for me guys. Thank you.
Thanks, Chris.
And again, if you like to ask your audio question. Please press star one of your telephone keypad CMS Star one.
Next question is from the line of Tim Hayes with B. Riley. Please go ahead.
Okay.
Hey, good afternoon, guys, who are doing well.
First question I just.
On the investment opportunity here your appetite to invest that you have brought down leverage a little bit I know you're being prudent investment now.
Yes.
Yeah.
The good activity in Nebraska in its core or go into given the opportunities you're seeing maybe you could talk about pipeline give us color on.
What you're looking at now is it more first lien focused mostly.
Okay and spreads structured comparing to what you were seeing eight months account.
Good question Tim.
You trade it in and out a little bit so I heard most of it but in what your question relates about mostly the investment opportunity set and I will tell you that we've got a strong pipeline. We did a number of add on transactions across the for the last quarter.
The private equity.
Platform transactions were down, but we're seeing more and more rescue type capital opportunities.
An add on deals four portfolio companies that are seeking to take advantage of the markets that seems to be where most of the deals coming from today.
What's interesting is that we're seeing.
Leveraged come down a half a turn to return over the last eight months or so as you said.
Seeing pricing from 100 to 150 basis points at least so I expect that the vintage of of assets that are going to come on in our portfolio will be very it will be accretive to bowls investment returns as well as overall leverage led.
Goals going forward as Aaron mentioned, we're going to be selective only because when times like this it's very hard to confirm in some industries.
Projected financial performance and add backs and things like Thats were being a little more conservative when it comes to.
Focusing on projected results and projected add backs.
We're being very diligent on historical results impact with cold bid and Theres, a number of industries that have actually gone.
Going quite well during cold good and those tend to be companies that are involved in supply and logistics technology software.
And that's where we're going to really focus more of our efforts. So I would expect that you'll see performance from Monroe, not only them RCC, but across all of our farms looks similar to the vintage of 2011 2012, when we came out of.
The crisis financial crisis, and there were some liquidity constraints in the market and we're able as a liquidity provider to take those opportunities and use them to our advantage and.
Good partner to clients companies private equity firms, but get paid fairly for doing that.
Thanks for that had some good color and I just want to confirm you know the.
The big.
Color you provided about kind of leverage levels and spreads that just on the lower middle market portfolio, you're talking right now.
Yes, thats, primarily lower middle market.
Upper middle market has moved as well, but we're still seeing high leverage rates upper middle market, we've seen pricing expand a little bit the challenges that the upper middle market is really competing for deals with the high yield market and the investment grade market today, and the investment grade Mark and high yield market have been very very.
Strong.
Still because of the investors' thirst for yield when you've got 10 year treasuries hovering around 50 basis points. It creates a lot of pressure.
Those investment grade.
Purchasers, so I like the overall risk return in the lower part of the middle market right now because I think we're getting feed a better before burden for taking the same kind of economic risks.
Right got it Okay, and then I don't know if you have.
Stats in front of you here, but you would you be able to disclose the average LTV or leverage multiples on lower middle market that portfolio.
Yes, we don't have updated staff that we provide for the portfolio, specifically, but where we can tell you is kind of where things look when we started on these loans sort of where monroe or originates middle market loans in the BDC and RCC would have a similar starting up starting stats and so typically you'll see our portfolio around four to four and a half times.
EBITDA leverage basis.
And when when we're starting a new transaction and it's typically just a hair below 50% loan to value on that basis on a weighted average basis across the mineral portfolios and I wouldn't expect MRC his portfolio to be markedly different.
For the lower middle market direct loans that we do in the in the portfolio.
Okay.
Got it and then you mentioned the I think Kevin about $109 million capacity on your revolver on can you just did.
Would you be able to disclose your borrowing base and how much of the capacity that you had access to at this point.
It's difficult to disclose that personal we don't disclose it second of all in moves right. So if you you may have a certain amount on your borrowing base today, that's available based on the current assets, but if you originate an asset it expands your borrowing base and so it's a bit of a moving target all the time, but we have capacity today, we have significant room on the borrowing base today were not near the full borrowing.
Based capacity today.
But.
We're really more focused on the overall leverage in the portfolio and the borrowing base is not posing an issue today.
Okay, and then just yet just on just on your comment on how that can move around a bit just curious if you've seen.
A.
Whether its.
A significant amount of assets or maybe just a modest amount fall out of the borrowing base is leverage multiples have either increase or credits have been added to non accrual or is that just not really been an issue for you guys.
Yes, I mean, not really seeing a major change in.
Eligibility as a result to cover 19 right now we're monitoring that very carefully but no we're managing through pretty well and and the borrowing base is that is continuing to be pretty solid and we haven't seen a lot of things fall out.
Got it okay, great. Thanks for taking my questions.
Thanks, Tim.
Im showing no further questions at this time I'd like to turn the call back to our presenters for closing remarks.
Thank you very much. We appreciate all of you on joining us today, and we look forward to speaking to you again.
The coming months in the interim to the extension of any questions as always please feel free to reach out to Aaron directly with any of your individual questions, but permit stay safe and we'll speak to you soon thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation have a wonderful day you may all disconnect.
[music].
[music].