Q1 2021 Monroe Capital Corp Earnings Call
Welcome to Monro capital Corporation's first quarter, two tolleson in 'twenty, One earnings conference call before we begin I would like to take a moment to remind our listeners that during.
Mark's made during this call today may contain certain forward looking statements income.
Statements regarding our goals strategies beliefs future potential operating results or cash flows, particularly in light of the COVID-19 pandemic.
Although we believe these statements are reasonable based on management's estimates assumptions and projections as well.
Good day May 15, 2021. This statements are not guarantees of future price for months.
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 risk I'm, sorry, 10, T or other factors, including but not limited to the risk factors described from time to time in the company's filings with the SEC.
Monro capital takes no obligation to update or revise these forward looking statements.
I will now turn the conference over to Tad Keimig, Chief Executive Officer of Monroe Capital Corporation.
Good morning, and thank you everyone, who has joined US on our call today welcome to our first quarter 2021 earnings conference call I'm joined by Aaron Peck, Our CFO and Chief investment Officer.
Last evening, we issued our first quarter 2021 earnings press release and filed our 10-Q with the SEC.
We are pleased to reported another strong quarter solid net investment income and increased NAV performance for the first quarter of 2021.
During the first quarter, the financial markets remained strong and low markets continued to strengthen.
This can be seen in the performance of a couple of key market indicators for.
For first quarter of 2021 the S&P index was up nearly 6% after ending 2020 up over 15%.
Price increases were also seen in traded credit investments as the S&P O S. T. A leveraged loan index was up 1.6% during the first quarter.
The continued reduction in credit spreads has benefited all portfolio marks which has contributed to an improvement in our per share NAV since the first quarter of 'twenty 'twenty, including another increase from the first quarter of 2021.
Turning now to the first quarter results. We are pleased to reported adjusted net investment income up 25 cents per share flat.
Flat compared to the first quarter results.
Aaron will go into more detail regarding the components of a better investment income later in the call.
We also reported a net increase in assets, resulting from operations from $7.1 million or 33 cents per share during the quarter, which was driven primarily by the increase in fair value of our investment portfolio, partially offset by realized losses on the extinguishment of debt associated.
With the refinance of our baby bonds and the prepayments what portion of our SBA debentures.
All of which are accretive.
To our shareholders.
As a result, our NPV at a per share basis grew from $11 at December 31st $211.08 per share at the end of the first quarter.
This represents the fourth consecutive quarter of growth and then a V per share.
Post COVID-19, which has increased by over 10% since the end of the first quarter 'twenty 'twenty.
During the quarter MRC sees regulatory debt to equity leverage decreased from 1.0 times debt to equity 2.0 to 0.9 times.
This decrease in leverage was primarily driven by heavy prepayment activity during the first quarter much of which occurred near the end of the quarter.
New origination activity remains strong and we expect to continue to increase leverage over the next few quarters, partially offset by continuing strong prepayment velocity.
We continue to target regulatory leverage in the range of one one to one two times debt to equity in the near term.
Given the substantial pipeline of new deals of 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 leverage target, which should benefit adjusted net investment income in future periods.
We have maintained an investment grade corporate rating and during the first quarter. We were successful in refinancing our 5.75% unsecured baby bonds with new bonds that carry a coupon which is a full.
Percentage points 100 basis points below the barns, we recently redeemed, which should have a positive impact on our earnings going forward.
As we have discussed on prior calls our continued focus for the next several quarters as I'm, making new investments in portfolio companies with compelling risk return dynamics, just as we did at Monroe in the years following the last economic downturn in 2010 2011.
We are very well positioned to do this we also remain dedicated to generating the best possible recovery on underperforming assets in our portfolio.
We have a strong track record in generating solid recoveries and difficult deals and we expect that to continue going forward.
Most of our portfolio companies, which are rated three four or five on the mineral risk ratings scale have seen improvements, which has contributed to a positive NAV performance in the quarter.
We remain heavily focused on generating strong recoveries on these credits that are opportunistic optimistic that we can achieve solid recoveries for many of them.
Our focus on strong loan documentation with at least two and often several more financial covenants and most all of our deals including maintenance and incurrence tests on debt leverage allows us to be proactively engaged with our borrowers and their financial sponsors.
This allows us to have an early intervention point when performance begins to lag.
Recovery prospects are also enhanced by the fact that we maintained conservative starting leverage and loan to values. When we underwrite our loans often in the neighborhood of 50% loan to value.
M. A C C enjoys a strong strategic advantage in being affiliated with a best in class Middle market private credit asset management firm with approximately $10 billion in assets under management and over 130 employees as of April one 2021.
We will continue to focus on generating adjusted net investment income and positive performance just as we have shown in the last four consecutive quarters.
I'm now going to turn the call over to Aaron who is going to walk you through our financial results.
Thank you Ted during the quarter, we funded a total of approximately $43 $7 million in investments, which consisted of $21 $7 million in fundings to five new portfolio companies and $22 million of revolver and delayed draw fundings to existing portfolio companies.
This solid portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $75 $8 million during the quarter at March 31, we had total borrowings of $309 $8 million, including $92 $9 million outstanding under our revolving credit facility $130 million of our new.
2026 notes and $86 $9 million of SBA debentures payable.
Total borrowings outstanding decreased by $48 million during the quarter, our outstanding balance under our revolver decreased by approximately $33 $7 million and we repaid $28 1 million in SBA debentures. During the quarter. These decreases were partially offset by the $21 million increase in our unsecured bond balance.
We are well situated to continue to carefully grow our portfolio through participating in the substantial pipeline of opportunities generated at Monroe.
The <unk> revolving credit facility had $162 $1 million of availability as of March 31 subject to borrowing base capacity.
As previously discussed in January 2021, 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% 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 remaining under our revolving credit facility.
Turning to our results from the quarter ended March 31, adjusted net investment income a non-GAAP measure was $5 4 million or 25 per share virtually unchanged from the prior quarter's adjusted net investment income of $5 $4 million per 25 per share.
The external manager voluntarily waived approximately $637000 and incentive fees to generate net investment income in line with our dividend when considering our targeted leverage the refinance of our bonds in the current credit performance that MRC. We continue to believe that on a run rate basis, our adjusted NII 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 an approximately 19 basis points as at March 31.
We maintain LIBOR floors in nearly all of our deals with the majority of floors at a level of at least 1%.
As of March 31, our net asset value was $236 2 million, which was up slightly from the $234 4 million in net asset value as of December 31, or.
Our NAV per share increased from $11 per share at December 31 to $11 eight per share at March 31.
We estimate that of the <unk> <unk> per share in net gains during the quarter approximately <unk> 24 per share was attributable to increases in portfolio valuation primarily as a result of the tightening of credit spreads during the period unrelated to individual credit performance during the quarter. According to refunded about PC all in yields for first lien institutional middle.
Loans tightened by over 92 basis points to 565% in the end of the first quarter compared to $6 five 7% at the end of the fourth quarter of 2020.
Of that 24 per share of NAV increase primarily attributable to spread tightening approximately <unk> 16 per share or two thirds of it was attributable to assets held directly by us while <unk> per share of one third 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 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 <unk> 14 per share of the decrease in book value is associated with other losses, primarily associated with nonrecurring realized losses on the extinguishment of debt recognized in connection with the redemption of the 2023 notes and the repayment of a portion of our SBA debentures.
The early extinguishment of this debt resulted in a realized loss of $2 $8 million, which is comprised of previously unamortized deferred financing costs.
Looking to our statement of operations total investment income increased during the quarter, primarily due to an increase in interest income due in part to an increase in prepayment gains and fee income during the quarter.
During the quarter, we placed no additional borrowers on non accrual status, but did put the rest of our investment in CPO on non accrual as only a portion of the investment was on nonaccrual status and prior quarters.
Total non accruals now approximate five 2% of the portfolio at fair value, which compares to four 1% as of December 31, but was flat to the level at September 30 from 2020.
Moving over to the expense side total expenses for the quarter increased slightly primarily driven by the lack of unnecessary waiver in base management fees in the quarter and a reduction in the waiver of incentive fees earned during the quarter.
At the end of the quarter, our regulatory leverage was down to approximately 0.9 times debt to equity a small decrease from the regulatory leverage level of one <unk> times at the end of the prior quarter. The decrease in regulatory leverage is primarily due to significant payout payoff activity near the end of the first quarter. The current rent level of regulatory leverage is below the target.
Good leverage range, we have guided you to on prior calls we are currently comfortably in compliance with the SEC asset coverage ratio limitations and slightly below our previously discuss near term target 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 is from at a measured pace.
And slightly increase our regulatory leverage over the next few quarters to our target.
As a reminder, on March 1st we prepaid $28 $1 million in Spic's debentures with ex with excess available cash at the Spic's subsidiary.
This should have the effect of our moving the cash drag we have experienced due to prepayments and income generated in our Spic's subsidiary. We have made no decision regarding any additional near term debenture repayments at this time and this repayment did not impact regulatory leverage but of course did contribute to the reduction in our total average during the quarter.
As of March 31, the <unk> had investments in 55 different borrowers aggregating $198 6 million at fair value with a weighted average interest rate of approximately five 9%.
<unk> had borrowings under its nonrecourse credit facility of $121 6 million and $48 $4 million of available 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 Sof continues to be in compliance with all of the covenants in its credit facility as discussed earlier the loans held in the SNF 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 Erin and closing we continue to benefit from the resiliency of the financial markets from a strong proprietary origination network at Monroe to create differentiated risk adjusted returns for our shareholders.
Our overall Monroe capital platform continues to maintain a very strong pipeline of high quality investment opportunities for all funds of grow including them RCC.
As a result, we are excited about our investment portfolio activity and our prospects. The key is our underwriting a purposeful defensive portfolio and access to a large and experienced portfolio management team with experience managing through multiple economic cycles as.
As such we continue to believe Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders. Our dividend remains fully covered by net investment income and we have sufficient liquidity to continue to grow our portfolio to reach our targeted leverage.
We believe that MRC C is affiliated with an award winning best in class external manager, which has decades of experience over 130 highly skilled employees and approximately $10 billion in assets under management.
Thank you all for your time today and this concludes our prepared remarks I'm going to ask the operator to open up the call now for questions. Thank you.
As a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound key please standby, while we compile the question and answer roster.
Your first question comes from the line of Mr. Christopher Nolan from Ladenburg Thalmann, Sir Your line is open.
Hey, guys.
In your discussions with your portfolio companies are you hearing any discussion in terms of higher economic inflation.
A good question Chris.
There's a lot of discussion right now about debt.
I think we're going to see some wage inflation.
In the coming quarters, and we're also going to see some raw materials and supplies inflation you know everything that we're seeing where we're importing is involved.
The process raw materials are up.
Steels up I mean, steel's two three ex what it was.
A couple of years ago, So I think it's going to happen.
Particularly on the wages and on raw materials.
Okay, and then on that.
How would you guys position your capital structure.
And the anticipation of higher inflation lessor would there be less reliance on the facility or.
What were you thinking around that.
We've got to let Aaron speak to a true, but we've got a.
A number of different levers that we can pull.
We've got obviously, our <unk> credit facility.
We've got we just refinance from baby bonds down we've got the SBA.
Leverage so we're going to depending upon what actually happens.
Several years ago, we went long.
The baby bonds, and we're trying to protect.
Our our balance sheet.
And as it turned out it was the right thing to do philosophically, but economically we probably would've been better off increase.
Increasing the size of our <unk> credit facility.
And taking advantage of the low rates that we've had for longer.
So we're gonna be very thoughtful I think at this time.
And looking at using all three of our levers.
To create capital structure stability.
And I'll, just add Chris we're pretty well set up to benefit from from rising rates should we see that in the future because our book is almost entirely floating and while there are some LIBOR floors. So for some portion of the move we won't benefit on the on the portfolio side over the long haul we should benefit because we have some fixed rate debt as well as the floating rate debt with I N G.
So net net I think we're well set up for that.
Great. Thanks, Scott.
Thanks, Chris.
Your next question comes from the line of Sarkis, Sorry, Bad Chen from <unk> Securities. Your line is open.
Hey, Thanks. This is sarkies from B Riley.
Talked about gradual growth in the portfolio in your comments can you maybe speak to the cadence of your origination activity, especially in light of the level of significant prepayments and repayments were saying.
Yes, Aaron why don't you why don't you.
I'll handle that one.
Sure.
Good question, sorry, guys. So.
As you know Monroe manage this close to $10 billion in assets, we have a very large origination group over 20 people full time originators.
There are significant.
Opportunities for the BDC to benefit from good origination.
Our pipeline remains very very strong and so I think there's definitely some some heavy prepayment activity as well.
And I think it's a little bit hard to predict exactly what's going to prepay and when it's going to prepay and we're trying to manage the growth without knowing what's going out the back door. It's a constant discussion point that we always talk about which is it's very hard to know how much to put in when you don't know how much is going out and so we're trying very hard to be thoughtful about about how we add to assets in the portfolio.
But we really don't have any concerns about our ability to get to our targeted leverage point I think it's just a matter of how quickly we can get there and we're still sort of evaluating that but the biggest wildcard continues to be what goes out the back door and prepayments and we don't have a good method to really predict that it tends to be unpredictable.
So we're just trying to be as aggressive as we can in terms of making sure. We stay invested and good assets that we originate and try to get the leverage up to a better point, which would help on the NII side.
No thanks for that color there and maybe.
To dive a bit deeper on the prepay side I appreciate that it's unpredictable.
Opposed.
To date here in <unk>.
Anything different versus <unk> do you expect kind of a similar level or cadence or do you expect it to kind of start to normalize as we get into maybe the midpoint or the second half of this year any color there would be helpful.
Again, it's pretty difficult to gas in the way that it typically works is we definitely see a larger amount of repayment near the end of the quarter a lot of our competitors are trying to hit numbers on a quarterly basis, so that they get aggressive.
And they try to get things closed and rush things into the end of the quarter. So we sometimes get surprised at things that you are a show up right near the end.
But so it's difficult to predict the cadence of prepayment.
And what I can tell you is it was a very aggressive fourth quarter and first quarter in terms of activity and a lot of what was pre payable in other words a lot of other deals that we had in portfolio that we're looking to do something strategic or refinance of all a lot of that activity happen and so my guess would be that we will see a temporary little bit but.
Very difficult to predict.
Yeah, I mean, I can consistent with Aaron's comments circus I think that.
Fourth quarter and first quarter were active quarters in terms of repayments I don't.
From what I, where I see it right now.
I think that the cadence will slow down a little bit we'll get to more of a normalized.
Normalized period here over the next couple of quarters.
Great. Thanks for that and then just one more from me.
Maybe if you could talk talk to the to the size of the pipeline you are seeing on the platform overall and maybe if you can also speak to any significant changes in terms of deal terms or structures that you are seeing evolve as we kind of head to the midpoint of this year.
I'll talk about pipeline, a little bit on structure I'll, let Eric follow up.
We're seeing.
Today, I think we've got about $800 million across the firm pipeline.
Less less pipeline report I saw no you know not all of that is going to close things come up in diligence things come up in transactions, but we think we will close a substantial amount of that over the next 90 days give or take so.
Pipeline is about the same.
As it was in Q4.
For us it tends to it tends to build up early in the year and then towards once we get into kind of the end of the Q2, which tends to go down or build up again in Q3. So.
So I think that so you know we're in a normal cadence on that.
You know from a structure standpoint, the market is competitive.
Like it always has been.
Our benefit is proprietary relationships proprietary deal sourcing is driving a lot of what we're doing.
We're seeing more aggressive leverage.
In COVID-19 friendly deals I would tell you were probably less aggressive low leverage and COVID-19 unfriendly deals now that we've had a period of time to really look at COVID-19 and look at industries, we've seen software.
Technology cloud.
Services distribution.
E Commerce those industry has tended to do well.
During COVID-19, so what's happening is that private equity firms and lenders are being more aggressive.
In structure in those areas and areas that didn't do as well.
In person.
Type of.
Health care.
Retail I think we're seeing a little bit of a less aggressive terms and sales in those areas.
Yeah. The only thing I would add Ted is just to remind circuits and others that you know like we've been doing this a really long time at Monroe.
We have seen multiple cycles and so we maintained our discipline and our deal structures, because we know that structure is important to deal with travel.
Yeah.
There are some other folks in the market, who maybe were a little bit newer assets and haven't seen as a group protracted declines or major economic cycles. This has been a pretty big expansion cycle other than the blip for COVID-19 and so we're maintaining our discipline, we think thats key to long term success.
We think it's the right way to underwrite, particularly in the lower part of the middle market.
Great. Thank you that's all from me.
Your next question comes from the line of Mr. Robert Dodd from Raymond James Sir Your line is open.
Thank you hi, guys.
On credit quality.
Ken.
Sure.
Focuses as questions as non accruals, but non accruals first.
Broadly it looks like strength elsewhere in the portfolio, except for the non accruals has has gone down.
Sadly fairly meaningfully I mean, my my stress associated anecdotal, but it dropped precipitously this quarter versus last quarter.
So can you give us any guidance instead of anything.
Non non call.
Actually worried about that.
The non explicitly stressed assets are just performing meaningfully better.
Yeah, I'll start Robert what Erin dive in here.
I think your perception is a good one.
We feel good about our portfolio the non non accruals.
The portfolio continues to improve as we've kind of.
Take it out of COVID-19.
We've done a good job.
As a firm.
And managing the assets, but also in our underwriting portfolio management and I think that overall the portfolio was done well.
That's on the non non accruals on the non accruals and a lot of these companies are the same companies that we had non accruals earlier.
And we're diving in so.
Most of this has been COVID-19 related.
We have.
520 companies across the firm in Monroe, and a fraction of that an MRC C. But.
No. We had some industries that got hit you know whether it was total share whether it was retail whether it was you know we had a restaurant deal we've done a pretty good job I will tell you in the in managing those assets and we've got a number of strategies in place.
Create realizations in those strategies and unfortunately, those don't always.
It happened quickly some of these are longer term strategies multi quarters summer will go into 2022, but you know all in all we feel pretty good about what we've done to take these non accrual assets from point them in the right direction, you know hopefully over the next couple of quarters, you'll start to see.
Some of that as the the work we did last year comes to fruition. This year. So Aaron I don't know if you want to make any other comments no. I mean, I think that was really really well said Ted I mean, I think the answer Robert is look we worry all the time about everything because that's our job as lenders.
And so we worry about the whole portfolio every day, because if you don't worry about an asset that becomes your next difficult asset, but I Echo what Ted said all of our names almost all of our names are looking better even the difficult deals even the non accrual deals other than one or two that we're spending a lot of our energies on.
Everything seems to be performing better than it did in the past and so we're hopeful and confident that we're going to see continued benefits over the long term from the work we're doing on the portfolio side.
Got it got it adjusted.
Kind of follow up on the non accrual.
When I look at the fair value to cost of the non accrual assets marked at about 37%.
Cost.
If my math is right that is.
Obviously lower than your historic recoveries on on troubled assets, obviously, there's a lot because its value.
Just about the coverage, but what's your confidence level.
Debt.
Debt, you'll realize ations when they happen to.
To your point, sometimes that takes a lot are all going to be.
Higher than 37% it was 37% at the current.
Amongst the lightbox or they conservatively marked by.
I mean the posture.
Yeah. That's a good another good question Robert you know the good news is you're jumping from your hammering on the right things here.
Historically, we've done better.
It's no secret our recoveries have been very very strong as a firm.
That's one other ways we've created elfa.
Unfortunately in the business, we're in we don't get any extra points for free.
For valuing things higher.
At a point in our third party <unk>.
<unk> firms don't get any points for valuing things.
Higher from time to time, so what we've tried to be if you look at kind of the history here of Monroe and you know you've been following us for a long time.
We've tried to be as transparent as we possibly can with our marks we try to take marks and non.
Not.
Not create any false sense of security, we tried to be very very serious when we create marks and we consistently try to overachieve and and generate.
Higher recoveries and if you look at our history over the last eight years nine years, you know that's what you've seen so we're hopeful that.
Our third parties, you know you've done a good job and marking the portfolio you know we work with them very closely but at the end of the day, just because something's Mark to 37 cents I will tell you that our portfolio team and our credit team.
Doesn't view that as a as the high bar.
Those in their views those are the low bars and their incentives.
At Monroe to create recoveries far in.
Inaccessible debt. So all we can do is each one of those assets are separate assets individual stories that we have individual strategies for and I can tell you that I've been involved in many of these and many of the meetings and I like a lot of what we're doing in terms of the strategies, we've done some joint ventures.
With some parties we've we've.
Sometimes acquired some businesses, we've increased revenue as we've created more diverse portfolios.
But we've done joint ventures with.
T shirt consultants, we've done lots of different things in these non accrual assets to not only build businesses.
The diversified businesses create new areas of revenue bring in new management.
So very hands on business.
We've got a number of people in the firm that they are only responsibility is.
Portfolio management improvement.
And we've made an investment we've got eight or nine people in the firm that that's their sole responsibility is is basically taking those those non accrual or those those assets and creating value for us as we view that as a value creation opportunity no different than a new deal.
Yes.
I was just going to add one thing, which is and Ted hit on it right. We didn't we didn't hire a bunch of bank workout folks to work on our difficult deals and there is nothing wrong with bank workout folks, but it's a different mindset a lot of our team our equity investors and when we what Ted said is right 37, Santa par is not our goal and frankly for some of these deals.
Par isn't the goal the goal is maximum value and when you have people on your team, who know how to maximize value and equity transactions in some of these become equity transactions.
Possibility to make a return in many cases in excess of <unk> just like we did at Rockdale. So.
We're not we're not tapping our potential return because the way you make money in this business as you take your shots when you have a chance to make more than par to make up for the ones that you may lose some money and not get upon recovery.
Got it I appreciate the color guys. Thank you.
Thanks Robert.
There are no further questions at this time.
You may continue Sir.
Thank you all for joining us today.
We look forward to speaking to you again soon and as always if you have any individual questions or anything specific please feel free to reach out to either Aaron or me and we'd be happy to speak to you, but until our next meeting enjoy the rest of the.
Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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