Q2 2021 Monroe Capital Corp Earnings Call
Yeah.
Welcome to Monroe capital corporations second quarter 2021 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 of argo's strata.
Geez beliefs future potential operating results or cash flows, particularly in the light of the COVID-19 pandemic. Although we believe these statements are reasonable based on management's management's estimates assumptions and projections as of today August 4th of 'twenty 'twenty..1 these statements are not guarantees.
The use of future performance.
Time sensitive information may no longer be accurate as at the time of any replay or listening.
Actual results may differ materially as a result of risks uncertainty or other factors, including but not limited to the risk factors described from time to time in the Companys filings with the SEC.
Monroe capital takes no obligation to update or revise these forward looking statements I will now turn the conference over to Ted <unk>, Chief Executive Officer of Monroe Capital Corporation.
Okay.
Good morning, and thank you to everyone, who has joined us on our call today.
Welcome to our second quarter 2021 earnings conference call.
I am joined by Aaron Peck, our CFO and Chief Investment Officer last evening, we issued our second quarter 2021 earnings press release and filed our 10-Q with the SEC.
We are pleased to report another strong quarter of financial results with solid net investment income increased NAV performance during.
During the second quarter of the financial markets remained strong and the loan markets remains stable.
This can be seen in the performance of a couple of key market indicators for.
For the second quarter of 2021, the S&P index was up 8.2% after an increase of 5.7% in the first quarter 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 an additional 1 point of 1% during the second quarter after being up 1% during the first quarter.
Turning now to the second quarter results. We are pleased to report adjusted net investment income of 25 cents per share flow.
Flat when compared to the prior quarter results.
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 $11.3 million or <unk> 53 per share during the quarter, which was driven primarily by the increase in the fair value of our investment portfolio.
As a result, our NAC in a per share basis grew from $11 of each center at March 31 to $11.36 per share at the end of the second quarter. This represents the fifth consecutive quarter of growth in the NAV per share, which has increased by over 13%.
Since the end of the first quarter of 2020.
During the second during the quarter MRC sees regulatory debt to equity leverage increased from 0.9 times debt to equity to over 1.0 charms.
This increase in leverage was primarily driven by an increase of the size of the portfolio during the quarter.
Despite.
The portfolio of growth from the end of the prior quarter average portfolio size during the second quarter was down slightly from the prior quarter as we experienced strong prepayment activity during the quarter and a significant portion of the portfolio growth of occurred near the end of the second quarter.
New origination activity remains strong and we expect.
To continue to increase leverage over the next couple of quarters.
We continue to target regulatory leverage in the range of $1, 1 to 1.2 times debt to equity in the near term.
Given the substantial pipeline of new deals of Monroe, We would expect to increase the leverage at M. RCC carefully over the next couple of quarters in order to reach our near term leverage target, which should benefit adjusted net investment income in future periods.
As we have discussed on prior calls our continued focus for the next several quarters is on making new investments in the portfolio companies with compelling risk return dynamics, while remaining dedicated to generating the best possible recovery on the underperforming assets in our portfolio.
We have a strong track record in generating solid recoveries of difficult deals and we expect that to continue going forward.
Our focus is on strong loan documentation with reasonable financial covenants.
The most all of our deals this allows us to be proactively engaged with our borrowers and their financial sponsors of our.
Recovery prospects are also enhanced 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.
M. A C C enjoys a strong strategic advantage of being affiliated with the best in class Middle market private credit asset management firm.
With approximately $10.3 billion of assets under management and over 140 employees as of July 1.2021.
We will continue to focus on generating adjusted net investment income.
Positive any of the performance just as we have shown in the last 5 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.
During the quarter, we funded a total of approximately $55.8 million of investments, which consisted of $41.2 million in fundings to 11, new portfolio companies and $14.6 million of revolver and delayed draw of fundings to existing portfolio of companies.
This solid portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $55.4 million during the quarter.
At June 30, we had total borrowings of $343.6 million, including $126.7 million outstanding under our revolving credit facility.
$130 million of our 2026 notes and.
And $86.9 million of SBA debentures payable.
Total borrowings outstanding increased by $33.8 million during the quarter.
We are well situated to continue to carefully grow our portfolio through participating in the substantial pipeline of opportunities generated at Monroe the.
The IMG led revolving credit facility had $128.3 million of availability as of June 30th subject to borrowing base capacity.
Turning to our results for the quarter ended June 30th adjusted net investment income a non-GAAP measure was $5.3 million or 25 per share virtually unchanged from the prior quarter.
The external manager voluntarily waived approximately $420000 and incentive fees to generate per share adjusted net investment income in line with our dividend.
When considering our targeted leverage in the current credit performance at 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 with 3 month LIBOR at approximately 15 basis points at June 30th we maintain LIBOR floors in nearly all of our deals with the majority of the floor is at a level of at least 1%.
As of June 30, our net asset value was $244.8 million, which increased from the $236.2 million in net asset value as of March 31 of.
NAV per share increased from $11.8 per share at March 31 to $11.36 per share as of June 30th we.
We estimate that of the 28 per share increase in NAV during the quarter approximately <unk> 20 per share was attributable to net increases in the valuation of our portfolio companies that were previously underperforming as credit performance improved for most of these assets during the quarter.
During the quarter. We also experienced an increase in book value of approximately <unk> <unk> per share, which was attributable to increases in portfolio valuation, primarily as a result of broad market movements or improvements in fundamental performance on the remainder of the portfolio.
Of that 5 <unk> per share increase of NAV.
Approximately <unk> <unk> per share or 2 thirds of it was attributable to assets held directly by us while <unk> per share or 1 third was as a result of net markups on assets held in the MRC <unk> Senior loan fund joint venture.
Finally, approximately <unk> <unk> per share of the increase in book value is associated with other gains primarily associated with realized gains.
Looking to our statement of operations total investment income decreased slightly during the quarter, primarily due to a decrease in interest income due to in part of decrease in average portfolio size during the quarter.
During the quarter, we placed no additional borrowers on non accrual status and total non accruals of approximately 5 approximate 5% of the portfolio at fair value.
Moving over to the expense side total expenses for the quarter decreased primarily driven by lower interest and other debt financing expenses due to the lower weighted average portfolio balances during the quarter and the reduction in our borrowing costs due to the full quarter impact of the refinancing of our bonds.
At the end of the quarter, our regulatory leverage was back up to approximately 1 times debt to equity a small increase from the regulatory leverage level of 0.9 times at the end of the prior quarter as the result of portfolio of growth during the quarter.
The current rent level of regulatory leverage remains below the targeted leverage range. We have guided you to on prior calls of 1.1 to 1.2 times debt to equity as Ted discussed in his prior remarks, we would expect to continue to grow our portfolio at a measured pace and slightly increase our regulatory leverage over the next couple of quarters.
As of June 30, we had restricted cash in our Spic's subsidiary of approximately $29.5 million.
We would expect to use of portion of this restricted cash to pay down debentures at the next available Paydown date in September.
As of June 30th the Sof had investments in 54 different borrowers aggregating $196.5 million at fair value with a weighted average interest rate of approximately 5.9%.
The <unk> had borrowings under its nonrecourse credit facility of $117.8 million and $52.2 million of available capacity under this credit facility subject to borrowing base availability the.
<unk> continues to be in compliance with all covenants in its credit facility.
I will now turn the call back to Ted for some closing remarks before we open the line for questions.
Thanks, Eric and.
In closing, we continue to benefit from the resiliency of the financial markets and the strong portfolio management skills at Monroe the generates.
If he can improvements of the portfolio and to create differentiated risk adjusted returns for our shareholders.
Overall Monroe capital platform.
Continues to main of various.
We maintain a very strong pipeline of high quality investment opportunities for all funds of Monroe, including of RCC.
As a result, we are excited about our investment portfolio and our prospects the.
Key is our conservative underwriting of purposefully defense of portfolio and our access to large and experienced portfolio management team with experience managing through multiple economic cycles.
As such we continue to believe that Monroe Capital Corporation provides a very attractive investment opportunities of our shareholders of <unk>.
Dividend remains fully covered by adjusted net investment income per share we have steadily improved our NAV.
And we have sufficient liquidity to continue to grow our portfolio of 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 140 highly skilled employees and approximately $10.3 billion of assets under management.
Thank you all for your time today and this concludes our prepared remarks.
Moving to ask the operator to open the call now for questions.
As a reminder, if you would like to ask a question. Please press Star then the number 1 on your telephone keypad again that is star then the number 1.
And your first question is from Christopher Nolan with Ladenburg Thalmann.
Hey, guys, Aaron and your comments about the 20 cents.
Accretion.
I thought I heard you said that was for value of improvement for underperforming assets does that mean non accrual assets.
It could be some non accrual assets and will also be assets that are on accrual, but are just the assets that were lower on our risk rating scale.
Okay, and then on the non accruals.
[noise] idea, we can give us in terms of when.
We can might start seeing the.
Overall volume of non accruals start to the go down relative to the overall size of the portfolio.
It's a great question, it's 1 that's difficult to answer because not all of these are deals that we control, although a lot of them are.
And it really has to do with performance and as we see.
These deals many of the markup that's an indication that performance is improving so we would expect that for some of these deals that are in non accrual status in that group that they would start to to be in a position to start to generate accrued interest either because they turned back on from an accrual standpoint or because they get realized.
And that capital can be reinvested in new performing assets that are true, but it's difficult to give you of any real timing guidance on that at this time, but we are seeing as we said significant improvements in many of those names and so we would expect some of those to do 1 of 2 things that I described either start to accrue again or be monetized and be reinvested in the accrual.
Assets, great I'll get back in the queue. Thank you. Thanks.
Thanks, Chris.
Your next question is from Sarkis, <unk> with B Riley Securities.
Hi, Good morning, and thank you for taking my question here.
First question relates to just kind of the expectation for repayment activity here, obviously first quarter was extremely.
Elevated in here in the second quarter, I think maybe more elevated than historical standards I suppose when do you expect to kind of see prepayments normalize if we can call it that and then of <unk>.
In the parcels of that is from an origination standpoint, do you think you'll you'll be able to kind of continue to drive net originations in the second half of the year.
I'll take a stab at that sort of sitting on a lot of Aaron's comments as well.
The economy coming out of Covid has been Red Hot.
The M&A market has been Red Hot we've seen more M&A in the first 6 months of 2021.
And then we give in any 6 month period.
Almost 2 trillion dollars of M&A was done across the board.
So we anticipate the subsiding a little bit now we went through a heavy prepayment period in the quarters, 1 and quarters true I think that the back half of the year.
We'll see we'll see a return to normalcy.
On the prepayment side.
And.
You know I think you can expect to see more.
The history in line with our numbers that we've seen before and then the second question or originations.
We've got a very very strong pipeline right now of Monroe, it's over $1 billion of total pipeline.
All of the BDC MRC see benefits of the Porretto basis across the board. So I would expect to see.
Our originations continue to increase over the next couple of quarters.
The Erin I don't know, if you've got anything to add or net.
No I think you've covered it.
Oh, great thanks for that and as far as just kind of maybe the loan pricing in the areas that you compete in any kind of incremental.
The incremental comments or color that you can provide us with weather.
Whether things are tightening or whether whether you're able to still get good spreads on the underwriting that youre doing thank you.
Oh, that's the.
<unk> of market Circus, and it's been a competitive market.
The good news is debt.
The players in the market all of basically very similar cost of funds and are also all similar we're trying to drive.
Similar returns for their shareholders. So.
While there is not.
The agreements on pricing there tends to be a range where.
The bottom end of the range, where people don't tend to go from a competitive standpoint.
And again the difference we've grown quite a bit over the last 10 years.
And because of our size, we're able to digest.
The much larger pieces of.
Of transactional finance the many of our competitors in the lower middle market. So because of that we're able to drive better pricing on that because we can speak for them.
$200.250 million across the cap stack.
That's a real strategic advantage in the lower end of the middle market. So I anticipate the pricing that you see the 2.
Just to be to hold.
We should be consistent.
You know going forward.
Yeah.
Thank you I'll hop back in the queue.
Great.
Your next question is from Robert Dodd with Raymond James.
Hi, guys.
Kind of a follow up on the earlier question on the underperforming assets I mean, if I look at it.
In aggregate for the non accruals didn't go up much.
In terms of marketing.
Some did some 1 of the other way obviously.
So did you book.
On the non U.
The the underperforming assets that went on non accrual.
The flip side was that of any kind of.
Theme was that the 5.
By the of prepared remarks, it sounds like it was performance moving rather than just market spread but was there anything any commonalities of cros.
What's driving those.
Underperformers that book slightly underperform, it before but less though now maybe.
I can answer that Ted.
Just like there was no specific theme as to why these credit started to underperform. It was all idiosyncratic.
So it has been the recovery and a lot of it comes based on you know.
Our very strong portfolio of management team that works with underperforming credits and.
It makes the.
Does some very challenging work to make sure that we see of recovery and so we are very aggressive on underperforming credits in terms of managing the process, making sure of the right team is in place looking for ways to improve the businesses that we're involved with getting involved in some cases as you know taking over equity of the business of <unk>.
You'd be in and driving the recovery, we are all about driving performance and we're seeing the fruits of that and we're seeing great progress prior to Covid Covid set us back a little bit. Some of these companies you know were negatively impacted by Covid and you know coming out of that the COVID-19 are the co.
We're a little bit senior business recover.
Just took a very aggressive step to help these companies recover and we're seeing the benefits of that effort.
Got it got it okay, and then on the non accruals side.
To your point.
I think all of your non accruals, 60% of the fair value of non accruals of marked at roughly 90 or better.
Which sounds pretty good.
I mean all of that.
60% of the couple of articles that value.
Got it.
Can you give us any idea on on our timeline, obviously, it's hard to predict when that could be of monetization, but if something is marked.
105 is the non accrual it would tend to imply the.
It might be close at least 2 coming back onto accrual, even if it's not a monetization of that.
So can you give us any color on how much of the non accruals given those marks could could come back to actually generating income in the over the next day next 6 to 9 months.
Yeah again, it's difficult to give you a timeline I will note that there are no credits in our portfolio that would be marked at par or above par are that close to par that would be on non accrual status that would be highly unusual so.
If youre seeing markets largely because there's you know youre going to the marks that are lower than that for non accrual assets.
So I agree with the BLS.
Mark for very highly.
Yes got it.
That's 1 that is the trader NAV would be the only 1 net debt and that moved up quite a bit in the period were that'd be an example of the 1 where maybe there could be of more near term realization. That's not a name that we control where part of the syndicate on that name, but outside of that it's very difficult to put a T.
<unk> other than to say there are some assets on this list that we think could become accrual or become monetized to create accrual of assets for us sooner than others and we're certainly working to that goal. We are highly aware of that.
1 thing that the probably the number 1 lever that could improve our NII and our NII coverage is converting non accrual assets to accrual assets.
What we don't want to do is of crew assets without a clear path to full recovery because we want to make sure that we're not accruing an asset without having some visibility on when it can be come back to the coke performance level, where it's appropriate. So we tend to be very thoughtful and careful about turning something back to accrual.
And we're also thoughtful and careful about about predicting timelines.
I appreciate all of that thank you.
Thank you Robert.
And again, if he would like to ask a question. Please press Star then the number 1 on the telephone keypad.
And there are no further questions at this time.
Great.
I, thank everyone for joining us on the call today, we very much appreciate your involvement with us and to the extent of you hear of any other questions or thoughts. Please feel free to reach out to Erin or to me directly and we will see you again and speak to you next quarter. Thank you.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Okay.