Q4 2020 Monroe Capital Corp Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue the standby. Thank you for your patience.
[music].
Welcome to the Monroe capital Corporation's fourth quarter, and full year 'twenty 'twenty earnings Conference call.
Before we begin I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward looking statements, including statements regarding our goals strategies beliefs future potential operating results or cash flows, particularly in light of the COVID-19 pandemic.
Although we believe statements are reasonable based on management's estimates assumptions and projections as of today March 3rd 2021. These statements are not guarantees of future performance.
For the time sensitive information may no longer be accurate as of the time of any replay of our listening.
Actual results may differ materially as a result of risks uncertainties or other factors, including but not limited to risk factors described from time to time in the company's filings with the a C.
Monroe capital takes no obligation to update or revise these forward looking statements.
I will now turn the call of which 8-K, Nick Chief Executive Officer, I'm of BOE Capital Corporation.
Good morning, and thanks to everyone, who has joined US and are closely.
Welcome to our fourth quarter and full year 2020 earnings conference call.
I'm joined by Aaron Peck, our CFO and Chief investment Officer.
Last evening, we issued our fourth quarter and full year 2020 earnings press release and filed our 10-K with the FCC.
The first and foremost we hope you and your families remain healthy and safe.
We are pleased to report another strong quarter of <unk>.
Solid net investment income increased NAV performance again during the fourth quarter of 2020.
We're also pleased for firms the quarterly dividend.
Of 25 cents per share.
The first quarter 2021.
During the fourth quarter, the financial markets remained strong at the low.
The market's demonstrated the continued resiliency.
This can be seen in the performance of a couple of key markets.
After being down as much of 30% for the year of late March the S&P index shook off all the effects of the Covid pandemic and ended up the gear up for 15%.
The price increases were also seen treated credits.
Vestments as the S&P <unk> leveraged loan index, which was down as much as 22% in March as fully rebounded well.
It's up almost two percentage for the year.
The continued reduction in credit spreads has benefited our portfolio of merck's which of them.
Contributed to significant improvements in our per.
For sure the over this period.
Including another increase of the fourth quarter.
This normalization of the financial markets contributed to a resurgence of activity the direct lending nurkic from.
The World capital specifically.
Fast real experienced a record quarter originations.
The 20, new transactions and several add ons to existing loans.
Which aggregated approximately one point of $1 billion.
Of total commitments in the fourth quarter.
Of 2020.
Monroe benefitted from the significant MRC seed benefited from the significant origination volume.
Evidenced by its strong portfolio growth in the fourth quarter, which was approximately 5%.
The pay offs and ordinary course paydowns.
Turning now to fourth quarter results. We are pleased to report adjusted net investment income of <unk>.
<unk> five cents per share.
Slightly lower than the.
The adjusted net investment income of 27 cents per share in the prior quarter.
Aaron will go into <unk>.
Details regarding the components of all of our net investment income later in the call.
We also reported a net increase in assets, resulting from operations of <unk>.
Line.
For 42 cents per share during the quarter, which was driven primarily by the increase of the fair value of our investment portfolio.
As a result or any of the.
On a per share basis grew from $10.83 per share at September 30th $211 per share at the.
And of the year.
A one 6% increase.
This represents the third consecutive quarter of growth in any of the people.
Per share, which was increased nearly 10% since the end of the first quarter.
During the quarter, we increased the mercy seat regulatory debt to equity leverage from 0.9 times debt to equity of one time 1.0 times.
This increased leverage was primarily driven by strong asset growth at the end of the quarter.
Partially offset by normal repayment activity.
Well as the increase from the fair value of our investments during the quarter.
As much of the asset growth occurred near the end of the quarter, the resulting positive impact to NII.
Not yet fully materialized into our results for the fourth quarter.
We continue to focus on managing our investment portfolio at the.
Risk adjusted leverage level going forward.
Moving to target regulatory leverage ratio of 1.1 to one two times debt to equity in the near term.
We have maintained investment grade corporate rating.
The recently announced the refinancing of our unsecured bonds with new borrowers the carries a coupon.
There's a full percentage point 100 basis.
Well.
The box we recently the teams.
Which should have the significant impact on the earnings going forward.
Given the substantial pipeline of new deals at Monroe, We would expect to increase the leverage of the mercy seat carefully over the next few quarters in order to reach our near term average target, which should benefit adjusted net investment income for future periods.
Our focus for the next several quarters will be to make new investments in the portfolio of companies with compelling risk return dynamics, just as we have done at the Monroe in the years following the last economic downturn in 2010 of them in 2011.
We are very well positioned to do this.
We'll also remain dedicated to generating the best possible recovery.
Underperforming assets in our portfolio.
We still have a couple of Covid related credits that we are in the process of working out.
We have a strong track record of generating solid recoveries and we expect that to continue going forward.
Recent examples of our portfolio management of successes included the recovery we have generated.
Rockdale Blackhawk.
The significantly improved valuation of American community homes, just as examples.
We remain heavily focused on generating similar recoveries for most of the other lower rated credits and are optimistic that we can achieve this type of recovery for many of them.
Besides strong portfolio of management experience our success in generating the recoveries comes from the fact that we are typically of control lender and our agents of more than 80 per cent of our loans and our investments.
We have good loan documentation.
With the tight baskets regarding.
Regarding indebtedness.
Restricted payments.
Collateral leakage of potential.
We have at least true and often more financial covenants on most of all of our deals, including maintenance and incurrence tests of leverage.
This allows us to be proactively engaged with our borrowers and their financial sponsors, which could result in the early intervention.
The performance begins to wag.
Our recovery prospects are also enhanced by the fact that we maintain conservative starting the language.
Loan to values, when we underwrite our loans often in the neighborhood of 50% loan to value.
This morning, and affiliates of our external manager.
The Monroe capital issued a press release announcing the it is sold passer.
The I'm voting for minority interest to buy on a core of the capital partners.
The record is the private.
Capital markets group of Aberdeen standard investments.
Which is all of.
The largest asset management firm in the U K with approximately 600 billion and the assets.
Well, we certainly would expect this transaction to be beneficial to the.
The continued growth.
The asset management platform.
Capital.
We also expect it to have benefits available to the M. A C C shareholders of MRC C. As it will open the window into the European market.
And shareholders.
To purchase the MRC see enjoy the.
The consistent stable dividend that we've been paying.
RCC enjoys a strong strategic advantage.
Affiliated with the best in class Middle market private credit asset management firm with almost $10 billion in assets under management.
Kind of 130 employees as of January one 2021.
We will continue to focus on generating adjusted net investment income.
Positive NAV.
Performance.
Just as we have shown in the last three consecutive quarters.
I have nine points of turn the call over to Aaron which went to walk you through our financial results in more detail.
Thank you Ted.
During the quarter, we funded a total of approximately $46 $9 million in investments, which consisted of $32 $3 million in fundings to 13, new portfolio companies and $14 $6 million of revolver and delayed draw of fundings to existing portfolio companies.
This solid portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $31 $2 million during the quarter.
At December 31, we had total borrowings of $356 million, including $126 $6 million outstanding under our revolving credit facility of 100 of $9 million of our 2023 notes and the SBA debentures payable of $115 million.
Our outstandings under our revolver increased by approximately $27 $2 million during the quarter as we increased our leverage during the period.
We are well situated to continue to carefully grow our portfolio through participating in the substantial pipeline of opportunities generated that Monroe.
The I N G led revolving credit facility had $128 $4 million of availability as of December 31st subject to borrowing base capacity. Additionally in January of 'twenty 'twenty, one we issued $130 million in senior unsecured notes at an interest rate of 475%.
These proceeds were used to redeem all of the 109 million an outstanding 575% of 2023 notes and repaid a portion of the outstandings on our revolving credit facility.
Any future portfolio growth revolver draws or advances to existing borrowers will predominantly be funded by the availability of remaining under our revolving credit facility.
Turning to our results for the quarter ended December 31, adjusted net investment income a non-GAAP measure was $5 $4 million or 25 per share of decrease from the prior quarter's adjusted net investment income of $5 $8 million or 27 cents per share.
The reduction in per share adjusted NII was predominantly as a result of a decrease in our average investment portfolio of size during the quarter as the majority of the new fundings occurred late in the fourth quarter.
While total assets were higher at the end of the quarter. The weighted average level of total assets declined from the previous quarter.
The external manager manager voluntarily waived approximately $430000 in base management fees at $712 million excuse me $1000 and incentive fees to generate net investment income in line with our dividend.
When considering our targeted leverage the refinance of our bonds and the current credit performance of MRC C. We continue to believe that on a run rate basis. Our adjusted net investment income can cover the 25 per share quarterly dividend without significant fee waivers in the future all other things being equal.
LIBOR rates remained basically flat during the period and three month LIBOR. As an example was approximately 24 basis points as of December 31, we.
We maintain LIBOR floors in nearly all of our deals with the majority of Florida at a level of at least 1%.
As of December 31, our net asset value was $234 $4 million, which was up approximately one 6% from the $237 million in net asset value as of September 30th our NAV.
Per share increase from $10 83 per share at September 30th two of $11 per share as of December 31, we.
We estimate that of the 17 cents per share in net gains during the quarter approximately 29 per share was attributable to increases in the portfolio valuation primarily as a result of the tightening of credit spreads during the period unrelated to the individual credit performance during.
During the quarter. According to of Affinitive L. P. C. All in yields for first lien of institutional middle market loans tightened by over 100 basis points to 657% in the fourth quarter compared to 7.62% in the third quarter of 2020.
Of that 29 per share of NAV increase primarily attributable to spread tightening approximately 21 per share or around 70% was attributable to assets held directly by us while <unk> per share or 30% was as a result of net markups on assets held in the MRC Senior loan fund joint venture.
During the quarter. We also experienced a decrease in book value of approximately <unk> <unk> per share attributable to net reductions in the valuation of our portfolio of companies that have a risk rating of grade three four or five on our internal risk rating system, a significant portion of which was as a result of the residual impact of the COVID-19 pandemic on these borrowers.
Finally, approximately seven cents per share of the decrease in book value is associated with other losses, primarily associated with unrealized foreign currency fluctuations on our borrowings denominated in British pounds. These borrowings were used to finance investments denominated in pounds and as such we of corresponding gains in the fair value of these assets.
Which is part of the positive marks described earlier.
Looking to our statement of operations total investment income decreased during the quarter, primarily due to a decrease in interest income due to the smaller average portfolio size during the quarter the.
The decrease was partially offset by an increase in dividend income from the sell out during the period.
During the quarter, we placed no additional positions on non accrual status total non accruals now approximate $4 one per cent of the portfolio at fair value, which compares to five 2% as of September 30th the <unk>.
Decrease in non accruals at fair market value is primarily because of the increase in the size of the investment portfolio during the period as well as the reduction in the fair value of the non accrual assets as of December 31.
Moving over to the expense side total expenses for the quarter decreased primarily driven by the partial waiver of base management fees in the quarter and the lower average debt outstanding which reduced interest and other debt financing expenses.
At the end of the quarter, our regulatory leverage was approximately one point O debt to equity a small increase from the regulatory leverage of nearly 0.9 at the end of the prior quarter.
The increase in regulatory leverage is mainly due to the portfolio of growth at the end of the quarter the.
Current level of regulatory leverage is below the targeted leverage range. We have guided you to on prior calls.
We are currently comfortably in compliance with the SEC asset coverage ratio of limitations and slightly below our previously discussed near term target leverage regulatory leverage level of one one to one two 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 few quarters.
We also announced that on March 1st we prepaid $28 $1 million in Spi debentures with excess available cash at the Spic's subsidiary.
This should have the effect of removing the cash drag we have experienced due to prepayments and income generated by at our Spic's subsidiary.
We have made no decision regarding any additional near term debenture repayments at this time the results of this repayment will not impact of regulatory leverage but will slightly reduce our total leverage calculation on a pro forma basis.
The 31st the SLS had an invest 57 different borrowers aggregating $205 $7 million of fair value with a weighted average interest rate of approximately five 8%.
The S. L. I've had borrowings under its nonrecourse credit facility of $131 $5 billion and $38 $5 million of available capacity under this credit facility subject to borrowing base availability.
We do not expect to significantly grow the assets held in the <unk> 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 S. L. F saw significant unrealized mark to market increases during the period as a result of continued market spread tightening.
I will now turn the call back to Ted for some closing remarks before we open the line for questions.
Thank you Eric.
In closing, we continue to benefit from the resiliency of the financial markets and the strong proprietary origination network at Monroe to create differentiated risk adjusted returns for our shareholders.
Our overall Monroe capital platform closed a record amount of new loan origination in the fourth quarter and continues to maintain a very strong pipeline of high quality investment opportunities for all funds of Monroe.
<unk> of RCC.
As a result, we are excited about our investment portfolio and our prospects.
The key is our conservative underwriting approach.
This fully defensive portfolio and our access to a large and experienced portfolio management team with experience managing through multiple economic cycles.
Do you have of defensively positioned portfolio, the 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 remains fully covered by net investment income.
Of sufficient liquidity to continue to play offense and the smoking.
We believe that our mercies affiliated with an award winning the best in class external manager, which has decades of experience over 130 highly skilled employees.
Most 10 billion of assets under management.
We would like to think of shareholders for their loyalty and confidence.
I'd also like to thank the entire team at Monroe.
The capital organization for their hard work and dedication through.
2020.
Which was a tough COVID-19 year as well as a work remote here.
Thank you for all your time today.
That concludes our prepared remarks.
Moving to ask the operator to open the call now for questions.
Thank you for us.
Ask the question you would need the press Star then one of your telephone to withdraw your question. Please press the pound key.
Our first question comes from the line of Devin Ryan with JMP Securities. Your line is now open.
Good morning. This is Kevin full fund for Devon.
My first question. The current deal environment has been described as frothy on a number of earnings calls this quarter can you discuss the attractiveness of deals youre seeing in the lower middle market from a risk reward perspective.
Sure sure. Thanks for the for the question Kevin.
The market generally has brought the overall, there's a lot of the loan demand that we saw the we would've seen in Q2 and Q3 and 2020 was put off.
P firms put.
Put off acquisitions platform acquisitions, as well as the Adams until they really could get their hands around the.
The COVID-19 effects.
Adjustments once we got into Q4, primarily towards the back half of Q4, we started to see things open up again and from an activity level the market really took off.
Probably towards the early December and through the first quarter. It hasn't stopped so we're seeing a lot of pent up I think demand from 2020, that's fallen over.
For the 21.
We're starting to see a fair amount of new.
The sponsor platform acquisitions, but a tone of the add on tuck ins bolt on type of transactions so well.
We've been very disciplined in terms of of how we're looking at the market. We've got Covid no one of our rearview mirror.
So we've had the ability to analyze COVID-19 of folks.
But also more importantly.
We've got the ability.
From the.
Underwriting standpoint.
To remain disciplined in terms of our call.
The leverage covenants debt service coverage of interest EBITDA covenants.
Collateral packages.
The lower middle market, where we play.
Burdened by a lot of the.
High yield market or some of the bigger players that are doing deals with no covenants. So that's how we're differentiating.
Redo of Monroe, as well as our pork investment portfolio.
Okay. That's helpful. Ted and then just a follow on there are there any pockets that you find particularly attractive right now.
Yeah, we've really focused on.
Some of the business services opportunity is the software opportunities.
Data storage cloud computing things that don't tend to have in person.
Hum need of of inner.
Personal reaction, we're trying to stay away from.
Health clubs of proprietary leisure type things.
The orange theories of the pure borrowers of the world restaurants things, we're still not out of the woods yet.
The COVID-19.
We're still not sure how long it's been the cake for the vaccine to take effect. So we're very very focused on things that have shown resiliency for the pro.
Formed well during the last nine months.
Okay. That's helpful. I appreciate that and then pivoting the Pik income as a percentage of total total investment income rose sharply quarter over quarter to 29%.
Can you discuss what caused the increase I don't know if that was the amendment driven or possibly new investments that were structured with the component and then your overall level of concern with elevated Pik income.
Yeah, I'll, let Eric address that.
Yes for sure.
So yes, right in the quarter pick interest went up.
$7 million I think of the quarter, which compares to about 6 million of the previous period. It really comes from from three.
The portfolio of company now that the change of familiar dental.
And then a couple of the HFC capital entities.
And so some of this is the I.
I would say consider about $1 million of this to be what I would consider non reoccurring sort of one time pick interest that we got in connection with some restructuring activities. So we did like for example, we did a restructuring that was very favorable on familiar where we refinanced out of a significant portion of our debt and got the Pik interest as a result, and then took.
Considerable amount of upside equity as of.
As it applied to that deal and so that income.
Not likely to reoccur and then an HFC and each of the member R. B.
We did of restructuring there is a lot of it was also favorable the valuations are still very strong and we took in some.
Pick interest that was kind of one time associated with it there is some of that interest that will recur, but some will not and I'd say that makes up sort of the another call. It 500000 or so of of non reoccurring. So that's what was the the reason for the pickup. So we don't expect it to continue at this level all things being equal.
But it doesn't give us great concern because we're very confident of this exactly where those came from and why they they arose and we're confident with those workouts.
Okay, Thanks, Darren and Thats. It from me I appreciate you taking my questions today.
Thank you.
Thank you. Our next question comes from the line of Robert Dodd with Raymond James Your line is now open.
Hi, guys and congratulations of the heating way through 2020, a couple of semi housekeeping first I mean, I'd said you said, obviously the a lot of the asset growth occurred at the end of the quarter.
Can you give us any color on where the the prepayments of debt because obviously the portfolio of glu non accruals.
So the portfolio looks in better shape of the income dropped.
So can you give us an idea of like kind of.
How much lower the weighted average portfolio size was this quarter versus say Q3.
Anything on that.
Yeah, Hi, its Aaron.
I'll try to answer the stead, so yeah, you're right I mean, that's exactly what went on the we had a significant amount of pick up very very near the end of the quarter and the the repayment activity was a little bit more spread out over the quarter I don't have in front of me the exact weighted average portfolio balance for the quarter, but and so I understand that it's challenging for you to see that.
But given that the.
The effective yield on the portfolio was basically flat for a little bit up from last period and.
Do you see kind of where we were at the end of the year on portfolio bounce that should give you a pretty good idea of the capability of the portfolio to generate yield going forward I can't really unfortunately on this call reconcile specifically for you.
Exactly what the weighted average change was I think you know if I were guessing I would say the weighted average portfolio size in the quarter was probably.
30, or 30 or $40 million less than the prior quarters of average portfolio.
Portfolio size I think that's a pretty good number to use so it's probably and this would be guessing it probably got 530 million of weighted average portfolio balance for the quarter would be a reasonable number to use.
Got it.
I appreciate that.
Just to go back of the picking up the same.
Police.
Indicate some of the was was reclassification of all that.
It doesn't mentioned onetime, especially.
So it is.
Can you kind of a million of the half of that was one time or was that one time, but was reclassified well can you just clarify exactly.
Yes.
A 1 million high out of or how did the move around sorry go ahead, yeah. No. Good question and it's not one of half that I would characterize as recurring just to be just to be clear would be about $1 million that I would consider to be non reoccurring.
And you know.
So the answer is that.
Basically it's the stuff that we previously recorded as cash that we ultimately ended up capitalizing into the physician interest.
For those particular restructuring so that's why we said reclassify.
So it's things that we had already taken in as expected cash income we accrued as cash and then we ended up of capitalizing it into the position related to the restructuring.
Understood understood got it.
Ted if I can go back to you you had some type of I mean.
Talked about obviously the goal is as best possible of the company, obviously that the always of 100% sometimes it is but you've currently got unrealized depreciation of the depreciation of the portfolio sales a little over $2.
A lot of I mean, how much of that do you think you can get back I mean, not next quarter, obviously, but overtime how much of that do you think is.
Truly the comparable.
I mean basically it's at 100% would be the best possible of all of that or is it lower than any kind of idea of on the timeframe of that.
Yeah. So you know you know how this works Rob.
We do as we get.
We take current valuations.
Dependent for the third parties provide current valuations.
The.
Independent third parties don't look at the.
For the future.
Don't look at the some of our strategies that we've employed.
We've shown a very strong history of recovering.
Close to 100% and a lot of our assets. If you look at we took a big depreciation hit all of a company called Rockdale, We took a big depreciation hit of the company called the American community homes. So we feel confident that our underwriting thesis was good on these companies and we've got several ways out.
<unk>.
Unfortunately, the co.
Covid threw us for all of loop on a couple of other companies.
And we're working through right now.
The COVID-19 related strategies on a few of the companies I'm I'm bullish.
Overall generally on our recoveries.
We've got a couple of portfolio companies, but of her consumer facing a.
That we're we're very focused.
And we're focused on strategies.
Not only for the company today in terms of its doing business, but also thinking about how we can transform those companies.
Perhaps there's acquisitions, there's joint ventures, there's European partners.
Vantage that we have.
Is that we've got a lot of resources at the firm.
To dig down and to find ways to.
The next so much value that.
They must be of parents to affirm that's doing a quarterly valuation based upon historical EBITDA for the quarter historical revenues.
I can assure you that that's my number one priority in terms of resources that we're putting on the.
C C because the best way to increase value for the RCC.
Good value for our shareholders is to do exactly what you just asked.
Asked me about is to take net unrealized depreciation and turn that into recovery dollars.
If I, if I could just add debt.
Bob.
Is it the case of every single asset that has been marked down has the high probability of getting back to par.
No, but I think what I would say is if you look at our history in Rockdale is a great example of it there are assets of this in this group that are marked below par today that we believe with with the kind of work that we do have the opportunity to recover for us greater than par and so it's a difficult question to answer as to what is the potential recovery amount that we could get from those unrealized losses.
Because some of the maybe at a premium and so on an aggregate basis, we still feel really good about our ability to recover the considerable amount of the unrealized losses, but that doesn't mean, that's true for every single name. It just means of as a portfolio of three four and five rated credits. We're confident that we can recover a significant portion of the potentially all of that unrealized.
Loss by good portfolio management skills and by not are not looking at setting a goal line of just a recovery of our principal but looking at what is the most recovery we can generate and we did that on Rockdale and we'll do it on the other assets.
I've got a couple of assets Robert we've got a couple of assets that we think that.
Based upon what we've done to date, we've got a substantial recovery built in from RCC overpowered.
I appreciate that I understand that it's not an easy.
The question, but I like to fish and yes, it doesn't get factored in by the third party guidance today, obviously, the one more if I if I can congratulations on the relationship with Aberdeen.
It's a pretty big class globally.
Should we expect that I mean does the the.
In principle, I mean that because that could result in obviously, you're seeing more international. So you see some you have some of the UK already.
Are we going to see more international deals in the portfolio maybe in the JV since obviously theyre not qualified assets I mean could you give us any.
Yeah.
I would say that's not our goal for the partnership today.
And just to create more international exposure.
Think we got plenty.
As a firm we did over $2 billion of investments last year.
Our we've never had.
The issue with generating flow.
For the firm.
The North America. The U S. So I think we're gonna be okay. There the real benefit of this Aberdeen standard relationship from my view, which I think is going to be very very powerful is that we of the largest.
Asset management firm in all of the U K now I'm, sorry, the joint venture partner.
With distribution throughout the U K Europe and Asia.
And they need them.
The when road capital investment current income products. They don't have anything like the products. We have in terms of the quality of the consistency of from current income.
So we expect.
This relationship to open up.
A whole another group.
Of potential investors to various Monroe capital products, including of RCC for investors.
Throughout the world.
Got it thank you.
Thank you our net.
Question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is now open.
Hey, guys I'm on the follow up to of Roberts question of any particular, non accrual assets, which we should keep an eye on for a possible earlier resolution.
Good question, Chris I'd say.
We are we havent really disclosed anything specifically regards to individual assets and Neil near term recoveries I think it's a kind of of dangerous game to play because you know you're often in the very protracted negotiation of workout and you don't ever want to be out there specifically showing the world your cards.
When it comes to what you are trying to do but there are <unk>.
Assets, you know that I can talk about that should be in a position to generate income again ACTH for would be the one that I would point to is a pretty good size holding the MRC, which has been on non accrual but is.
The massive recovery I'm, sorry, if I take that back it was on accrual status I'm confusing that it's just a.
But other than that I mean, there's really not ones that I could point to the say specifically that.
Now that we expect to come back other than to say, there's plenty of things of the portfolio, we expect to see recovery on and repurpose those dollars into accruing assets and in the near term, but I'd be remiss to talk specifically about individual credits.
And as a follow up Eric on the comments that Theres no need for the waiver from coming quarters to cover the dividend will that be from higher leverage from the portfolio lower expenses could you give a little color on that.
Yeah sure. So I think what I said, specifically is that given where the portfolio is in what we expect to see and given the current status of our portfolio workouts in our accrual status that we believe when you put everything into the soup that we are generating we will be able to generate enough NII to cover the <unk> 25 per share dividend, obviously lots of things can change.
Positive or negative, but that's our current belief.
And that would come from taking the leverage continuing to take leverage up a little bit too where we targeted it is from just what we did at the end of the quarter materializing into our NII.
And it's from getting the benefit of the lower cost of money on our debt facility all of those things together are what gives me the.
The viewpoint that I think we can cover the dividend without waivers.
Today.
On a run rate basis, great. Thanks, guys.
Thank you Christopher.
Thank you.
As a reminder to ask the question you would need the press Star then one of your telephone.
Yes.
Our next question comes from the line.
Sarkis of bets in would.
But at the B Riley Securities. Your line is now open.
Thank you for taking my question debt and Eric.
You talked about gradual growth in the portfolio in the prepared remarks I just wanted to see if you can speak to the cadence of origination activity or repayments and prepayments as fiscal 'twenty one progresses.
Yeah, why don't you take there.
Okay.
The question sorry, so.
The portfolio of had grew a lot in the fourth quarter on a gross basis. We did have some some money come back to us, but we saw significant new origination and it was backend loaded as we mentioned the pipeline of Monroe remains incredibly strong and when I look out to the first quarter of for example, we are seeing a little bit of a similar dynamic in the first quarter, where a lot of our expected closings.
You seem to be pushing to the end of the quarter.
So that could occur again this quarter, but there is a significant amount earmarked.
To go into MRC C, which would you know.
Go a long way to continue to increase the leverage to the to the targeted level. So I think look I think we're looking to get that leverage up.
The two to the to the range that we discussed as reasonably quickly as it makes sense from the deal flow and right now the deal flow is very strong and we'd expect to chip away at that leverage increase you know relatively quickly, but we can never predict as you know is what goes out the back door right. You know theres always opportunities for us to be refinanced out of deals and we.
We certainly have seen some of that in the quarter I wouldn't say, it's the materially large number of from RCC, but we see it and so.
That's what we can't control and we don't always get a lot of advanced notice so I.
I think the takeaway is there's no lack of great deal flow from the Monroe capital origination engine to feed the MRC to get us to our leverage target relatively quickly and the one thing that toggles that down as you know whatever might go out in terms of refinance activity, which we really can't control.
What I'll add to surface and Matt is that 2020, which an aberrational year.
We had Q2 and Q3 and the early part of Q4 that the.
Market was really on the edge.
And we were very careful in terms of underwriting because we wanted to see.
Effects of Covid walk through of.
Our portfolio of companies.
Youre going to see 2021 with MRC, she come back to more of a normalized year.
Like the 18 or 19, where we've got significant pipeline demand.
We generate average year, we'll probably put $3 billion in the ground as a firm.
We will have plenty of capacity to allocate to kind of RCC.
The names of the more ratable basis, though.
As Aaron mentioned deals may close early in the quarter mid quarter linked quarter sort of quarter to quarter dynamics, but if you smooth it out over the year.
I anticipate the 2021 is going to be a very good year for us.
Great. Thank you for the extra color there really appreciate that and I guess as you kind of look towards the pipeline as of today, maybe if you can talk about some of the the underwritten yields or potential underwritten yields on the various security types I think.
No.
You kind of see spreads tightening are you sacrificing some of them on the yield side to get better quality assets in the book just trying to get your sense of what Youre seeing real time in the market environment.
I'll make a comment and then I'll, let Eric give you some specifics.
What we're trying to do is we're trying to take the best quality.
As such we can.
And put them into our various phones now the key to that is having a very wide funnel.
You know remember, we do both sponsored transactions non.
Sponsored transactions.
During the Covid.
There shouldn't be very little of it in the way of non sponsored transactions. So in 2020, we saw very little non sponsored transactions of deals that we did with primarily sponsored.
What we're seeing now in 'twenty one.
Seeing much more non sponsored transactions come into play.
The non sponsor transactions tend to be three to 400 basis points of.
Overall return.
Higher than the sponsor transactions. So one of the sponsor side, we're looking for quality.
We're looking for some type of excess spread.
Sometimes it's an industry's sometimes it's in the companies, sometimes just because of the proprietary relationship but we're also looking to sprinkle in a little more non sponsored into the the overall portfolio to drive some additional yield.
Yeah, and the only thing I would add sorry cases.
We do always think about risk is the first and foremost consideration before we would close the deal across the portfolio across the entire platform and you know we aren't we don't put a line in the sand on yield will.
What we tried to do is be a good portfolio manager and manage our portfolios two of blended yield in the blended risk and what you've seen us do over the last several years.
As you've seen our yield come down some of that has been market environment, but some of that has been a shift in the portfolio of since inception away from higher risk types of structures like last out transactions, which we still like and still do but you know the portfolio is much more turned towards straight first lien senior secured loans and if you look at what we're originating these days.
And has been true for the last couple of years.
For Monroe on average and our new origination were typically attaching it around 50.
<unk> 50 per cent loan to value and leverage levels that are relatively conservative when compared to the broad market of.
On average maybe four to four and a quarter of times EBITDA. So I think you'll see us continue to take advantage of the great origination network at Monroe, which has trended towards the kind of lower restructures and straight first lien loans and I don't necessarily think that's going to result in us seeing a reduction in our effective yield.
I think it's been relatively consistent in terms of what we put onto the book over the last couple of periods and we hope to keep it relatively consistent going forward.
Thanks, so much for the comments that's all for me.
Great. Thank you very much.
Thank you there are no further questions I will now turn the call back to Ted <unk> for any further remarks.
Yeah.
I just wanted to say thank you to everyone on the call today, we really appreciate your time of your questions. It's important to us to make sure we answer your questions.
You know as you can tell the market is back.
Deals are back.
Lots of activity.
We're very busy across the firm.
And I'm very excited about 2021.
I think the year's going to be a really good vintage.
The credit.
And.
Got it.
Difficult market share and we expect to go to.
Take a fair amount from.
From the market. This year. So we will talk to you next quarter and as always to the extent you of any individual questions. Please don't hesitate to reach out to us in the.
Thank you and we wish you all of us.
Safe and.
Happy and healthy 2021.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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