Q3 2020 Monroe Capital Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Monroe capital corporations third quarter 2020 earnings Conference call.
Well once again I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward looking statements.
Leading statements regarding our goals strategies beliefs future potential operating results or cash flows but.
Particularly in light of the COVID-19 painting.
Although we believe these statements are reasonable based on managements estimates assumptions and predictions as of today November <unk> 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 uncertainties or other factors, including but not limited to the risk factors described from time to time in the Companys filings with the FCC.
Monroe capital takes no obligation to update or revise these forward looking statements.
I will now turn the conference over to Kim Chaney, Chief Executive Officer of Monroe Capital Corporation. Please go ahead Sir.
Good afternoon, and thank you to everyone, who is joined us on our call today.
Welcome to <unk> third quarter 2020 earnings conference call I am joined by Aaron Peck, Our CFO and Chief investment Officer.
Last evening, we issued our third quarter.
Many 20 earnings press release and filed our 10-Q with the FCC.
First and foremost we hope you and your families remain healthy and safe.
Pleased that despite the continued economic and public health challenges associated with the ongoing COVID-19 pandemic.
Able to generate a very good quarter of solid net investment income and increased our Navy performance again during the third quarter of 2020.
The continued uncertainty associated with COVID-19 pandemic has created concerns related to the economy.
As well as specific on anticipated challenges for many companies to do business interruptions and a slowdown in business activity.
This market volatility caused by just some certain she was most pronounced in March.
The early part of the summer, but has moderated and mostly reversed itself into the fall.
This can be seen in the performance over a couple of key market metrics.
After being down as much as 30% for the year in late March the S&P 500 index has seen a significant recovery.
And as of the end of the third quarter was up approximately 4% for the year.
Price increases were also seen in traded credit investments as the S&P.
I watch T. <unk> leverage loan index.
Which finished the first quarter down approximately 14 or can value after being down as much as 22% in March has rebounded considerably and as of the end of the third quarter was down less than 2%.
On the year.
The reduction.
Recent reduction in credit spreads has benefited our portfolio marks which has contributed to significant improvement.
<unk> per share a navy over this period, including a 4.4% increase in the third quarter.
As we discussed on last quarter's call.
We have been shifting or portfolios over the recent past and all of them enroll funds away from higher risks cyclical industries.
As a result, MRC she has limited to no direct material portfolio exposure and the industry's most affected by the pandemic such as airlines automobile travel leisure oil and gas.
Minerals and mining and energy.
However, the best thing about our portfolio.
We are typically a control lender.
We're the agent on approximately 82% 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 on most all of our deals including maintenance and incurrence test on leverage.
This allows us to be.
Actively engaged with our borrowers and their financial sponsors in terms of liquidity, but.
It also allows us to opportunistically, amend and reprice or loans to constantly risk or portfolio.
In past calls we have discussed the importance of tighter loan documentation in the lower middle market that we play in.
In the larger broad middle market, almost 80% of all loans are covenant light it.
In our market, we're dialoguing with her companies weekly and sometimes on a daily basis.
This allows us to manage risk and do many things to enhance our risk and return positions.
Our risk was also mitigated by the fact that we maintain conservative starting leverage and loan to values. When we underwrite our loans often in the neighborhood of 50% loan to value.
Turning now to third quarter results.
We are pleased to report that in this challenging environment, we generated adjusted net investment income of 27 cents per share.
Well this was a decrease from adjusted net investment income of 62 cents per share in the second quarter.
Prior quarter performance was primarily the result of a one time receipt of proceeds related to the Rockdale Blackhawk proceedings.
<unk> Rockdale, our adjusted net investment income would have been approximately 26 cents per share in the second quarter lower than the 27 cents per share we generated in the third.
Third quarter.
Aaron will go into more detail regarding the components of our net investment income later in the call.
We also reported a net increase in assets, resulting from operations of.
$15.2 million or 71 cents 71 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, our energy on a per share basis grew from $10.37 per share at June thirtyth to $10.83 per share at the end of the third quarter, continuing our trend of increasing NPV per share in the last two consecutive quarter in peer.
Yes.
Net increases in the fair value of of investments contributed approximately 49 cents per share to our book value growth during the quarter were 4.7% on a per share basis.
We estimate that of the 49 cents per share increase in book value attributable to changes in portfolio valuations.
Approximately 30 cents per share was primarily as a result of the tightening of credit spreads during the period unrelated to individual credit performance.
During the quarter LCD first lien three year discounted loan spreads tightened by approximately 130 basis points after tightening approximately 365 basis points in the prior quarter.
Of the 30 cents per share of any the increase is primarily attributable to spread tightening approach.
Approximately 21 cents per share or 70% was attributable to assets held directly by us well nine cents per share were 30% was as a result of that mark ups on assets held in the M. RCC Senior loan fund joint venture.
The loans and the joint venture tend to be larger middle market companies and those loans experienced higher price volatility in times of market correction.
During the quarter. We also experienced an increase in book value of approximately 19 cents per share attributable to recovery in the valuation of specific portfolio companies, which had previously been marked down due to specific credit performance.
Significant portion of which was as a result of the impact of the COVID-19 pandemic on these borrowers.
During the quarter.
We reduced our mercy sees regulatory debt to equity leverage from 1.16 times debt to equity two points.
Zero point, only <unk> nine 0.9 times.
Much below the level of regulatory leverage we reported at the end of the first quarter of 1.47 times.
This significant decline in leverage was primarily driven by strong repayment activity as well as the increase in the fair value of our portfolio during the quarter.
We continue to focus on managing our investment portfolio with the appropriate risk adjusted leverage level going forward and are targeting regulatory leverage in the range of 1.1 to 1.2 times debt to equity.
Given the substantial pipeline of new deals at Monroe.
We would expect to increase leverage at Mercy see carefully over the next few quarters in order to reach our leverage target.
Which should benefit adjusted net income in future periods.
The Monroe capital organization has over 125 employees with many devoted to underwriting risk management and workout strategies.
During periods like this we have brought the very best resources to bear.
On the portfolio.
As many of you know we have a long track record of success in managing through difficult economic environments, notably the great financial crisis in 2008 and 2009 includes.
Including select workout transactions with borrowers.
If need be we're not afraid to take over and when a business well that is not our preferred option, we know how to do it and I've 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 we have the ability experience and internal resources to do that if needed.
Results of this process are ongoing and are evidenced in the improvement in book value, we experienced during the third quarter.
As we look ahead, there continues to be a high bar for investing capital during these uncertain times.
We are seeing many attractive opportunities to invest capital today, and we have adequate liquidity to take advantage of these opportunities, including a $156 million of availability.
On her eye in G. led revolving credit facility.
Subject to borrowing base capacity.
Aaron will discuss more about that later.
Our focus for the balance of the year and into early next year will be to slightly increase leverage levels and to make new investments in portfolio companies with compelling risk return dynamics, just as we have done I'm an ROE in the years following the last economic downturn in 2010 2011.
We're now very well positioned to do this investment spreads are wider today than they were prior to the start of the pandemic and.
In terms of leverage have improved as well.
And we have the liquidity to take advantage of these improved market conditions.
M. RCC enjoys a strong strategic advantage.
Phil either with a best in class Middle market private credit asset management firm with over $9 billion and assets under management.
For 125 employees as of October 2020.
We will continue to focus on generating adjusted net investment income and positive NPV performance just as we have shown in the last two consecutive quarters.
I'm now going to turn the call over to Aaron.
I'm going to walk you through our financial results.
Thank you Ted.
During the quarter, we funded a total of $15 million in investments, which consisted of new fundings to existing borrowers. This.
This modest portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $68.4 million during the quarter.
At September Thirtyth, we had total borrowings of $323 million, including $99 million outstanding on our revolving credit facility $109 million of our 2023 notes and SB eight debentures payable of $115 million.
Our outstanding under our revolver decreased by approximately $47 million during the quarter as we continue to reduce our leverage during the period. It is important to note that our significant reduction in leverage over the last two quarters was primarily as a result of Paydowns and payoffs of performing credits. In addition to the significant positive settlement related.
To the Rockdale Blackhawk matter in the second quarter.
We achieved a significant de leveraging of our portfolio without a significant sale of assets or having to recognize losses on dispositions, thereby avoiding.
Awaiting any realized losses, which art whats our plan that we articulated earlier this year.
We are well situated to carefully grow our portfolio through participating in a substantial pipeline of opportunities generated at Monroe.
Any future portfolio growth revolver draws where advances to existing borrowers will predominantly be funded by the 156 million of availability under our I.N.G. led revolving credit facility subject to borrowing base capacity and the Uninvested cash held in our SP IC subsidiary.
Turning to our results for the quarter ended September Thirtyth adjusted net investment income a non-GAAP measure was $5.8 million or 27 cents per share a decrease from the prior quarter's adjusted net investment income of $12.8 million or 62 cents per share last.
Last quarter's results were positively impacted by a onetime recognition of previously unaccrued 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 without last quarter's income associated with Rockdale adjusted net investment income would have been approximately two.
26 cents per share, which is one cents per share lower than the adjusted per share and I realized this quarter.
Incentive fees were again fairly limited during the quarter as a result of the total return limitation in our shareholder friendly advisory agreement.
LIBOR rates fell slightly during the period and three month LIBOR as an example fell from approximately 30 basis points as of June Thirtyth to 23 basis points as of September Thirtyth.
We maintain LIBOR floors in nearly all of our deals, but the majority of our floors at a level of at least 1%.
As of September Thirtyth, our net asset value was $230.7 million, which was up approximately 4.6% from the $220.6 million in net asset value as of June thirtyth.
Our NPV per share increased from $10.37 per share at June thirtyth $210.83 per share as of September Thirtyth set already discussed in his earlier remarks, the increase in our pressure and maybe 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 some specific positive mark to market adjustments on certain names in the portfolio that had been impacted directly by COVID-19, and mark down in previous quarters.
Looking to our statement of operations total investment total investment income decreased during the quarter, primarily as a result of a decrease in interest income due to the previous quarter recognition of onetime interest and fees on the Rockdale matter.
This decrease was partially offset by an increase in dividend income from the SLF during that period.
Without the prior quarter beneficial impact of Rockdale normal course investment income increased slightly during the period during the quarter. We placed two additional positions on non accrual status total nonaccruals now approximately approximate 5.2% of the portfolio at fair value, which compares to 4.7% as of June Thirtyth.
The increase in non accruals at fair market value is primarily as a result of the decline in the size of the investment portfolio during the period due to repayments.
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 lower average debt outstanding.
At the end of the quarter, our regulatory leverage was approximately 0.9 debt to equity a further decrease from the regulatory leverage of nearly 1.16 at the end of the prior quarter and down from 1.47 times at the end of the first quarter.
The decrease in regulatory leverage is as a result of positive fair market value adjustments in our portfolio as well as $47 million in net pay downs on a revolving credit facility during the period.
The current level of regulatory leverage is below the targeted leverage range. We guided you to on prior calls we are currently comfortably in compliance with the FCC asset coverage limit ratio limitation and significantly below our previously discussed target regulatory leverage level of 1.2 to 1.3 times debt to equity.
As Ted discussed in his prior remarks, we would expect to grow our portfolio at a measured pace and slightly increase our regulatory leverage over the next several quarters.
As of September Thirtyth, the SLF had investments in 59 different borrowers aggregating $207 million at fair value with a weighted average interest rate of approximately 5.8%, yes, I've had borrowings under its non course credit Ron course, non recourse credit facility of $142.1 million and 20.
$7.9 million of available capacity under this credit facility subject to borrowing base availability we.
We do not expect to significantly grow the assets held in the SLF at this time and the SLS continues to be in compliance with all covenants in 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 the market spread tightening.
I will now turn the call back to 10% closing remarks before we open the line for questions.
Thank you Aaron in closing, we find ourselves in an unprecedented economic environment.
At the same time, we see unique opportunities in the market to utilize our proprietary sourcing channels to create differentiated risk adjusted returns for our shareholders.
Our overall Monroe capital platform.
Monroe capital platform his experience.
Experiencing its largest pipeline of high quality investment opportunities and almost a year.
As a result, we are excited about our investment portfolio and our prospects are similar to what we saw in the substantial growth of our firm after the great recession of away no nine.
The key is our conservative underwriting a purposeful defensive portfolio and our access to a large experienced portfolio management team with experienced managing through multiple economic cycles.
We have a defensively positioned portfolio with solid loan documentation and a lot of countries of control for 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 or.
Our dividend is fully covered by net investment income we have sufficient liquidity to now play off and so this market.
We are committed to navigating successfully through this economic period, and we are confident that we have the skills and experience necessary to maximize returns for all of our lending partners bondholders JV partners and shareholders.
We believe that our RCC is affiliated with a best in class external manager, which has decades of experience over a 125 highly skilled employees and more than 9 billion in assets under management, which provides us the infrastructure and stability in times like these which is important.
It also provides us an opportunity for immerse you see to outperform.
We would like to thank our shareholders for their loyalty and confidence.
We would also like to thank the entire team at the Monroe capital organization for their hard work and dedication.
Thank you for all of your time today and this concludes our prepared remarks, I am going to ask the operator to open the call now for questions. Thank you.
If you would like to ask a question. Please press star one on your telephone keypad again, I just don't want to ask a question.
Again, ladies and gentlemen that is star one to ask a question I'll make a comment.
And there are no questions in queue at this time.
Okay.
Oh, Thank you everyone for joining the call today. We appreciate your continued support and we look forward to speaking to you again in our next call.
Like we see each quarter to extent anybody has any questions or any thoughts there would like to ask please do not hesitate to call Aaron directly or me. Thank you.
Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation you may now disconnect.
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