Q3 2021 Monroe Capital Corp Earnings Call
Ladies and gentlemen, this is the operator conference is scheduled to begin shortly until such time your lines will again be placed on music hold thank you for your patience.
Once again, ladies and gentlemen, this is the operator todays conference is scheduled to begin shortly.
No such time your lines will again be placed on music hold thank you for your patience.
[music].
Welcome to Monroe Capital Corporation third 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 our goals strategies beliefs future potential operating results or cash flows britvic, particularly in light of the COVID-19 pandemic.
Although we believe these statements are reasonable based on management's estimates assumptions and projections as of today November 3rd Gladden deep when do you want.
These statements are not guarantees of future performance.
Future further time sensitive information may no longer be accurate as of the time of any replay are lessening.
Actual results may differ materially as a result of risks and certain D are either factors, including but not limited to the risk factors described from time to time in the company's filings with the S E T.
One broke up adult 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.
Thank you good morning, and thank you to everyone, who has joined us on our call today.
Welcome to our third quarter 2021 earnings conference call.
Joining by Aaron Peck, our CFO and Chief investment Officer.
Last evening, we issued our third quarter 2021 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 and increased performance during the third quarter of the financial markets. The M&A markets and the loan markets remained strong in the face of inflationary pressures supply shortages and employment challenges.
For the third quarter 2021, the S&P 500 index, which is near all time highs was up nominally after an increase of eight 2% in the second quarter, an increase of five 7% in the first quarter.
Middle market M&A activity during the third quarter was the busiest quarter on record with 400 warm sponsored middle market deals completed which easily surpassed the previous record for the second quarter of this year of 360 deals.
And the low markets, followed suit with sponsored loan volume, including syndicated and direct deals totaling $48 billion up 14% from the second quarter.
Turning now to the third quarter results. We are pleased to report adjusted net investment income of 30 cents per share up from 25 cents per share in the prior quarter.
Erin 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 $7 $2 million or <unk> 34 per share during the quarter, which was driven by net investment income of $6 $3 million or 29 cents per share and gains of over $900000 or.
Five cents per share.
As a result, our NAV per share basis grew from $11.36 on June 30.
To $11 45 per share at the end of the third quarter. This represents the sixth consecutive quarter.
Of growth and NAV per share, which has increased by 14% since the end of the first quarter of 2020.
During the quarter MRC sees regulatory debt to equity leverage increased from 1.5 times debt to equity to 1.11 times debt to equity. This increase in leverage was primarily driven by an increase in the size of the portfolio during the quarter.
New origination activity remains strong.
Expect to continue to increase leverage within the target regulatory leverage of one one to one two times debt to equity in the near term.
This increase in targeted regulatory leverage should benefit adjusted net investment income in future periods.
As we have discussed on prior calls our continued focus for the next several quarters and making new investments in portfolio companies with compelling risk return dynamics.
We continue to demonstrate our strong track record in getting solid recoveries on portfolio matters, and we expect that to continue going forward.
Many of our portfolio companies have continued to see business improvements, which resulted in the positive performance in the quarter.
Our focus on strong loan documentation with reasonable financial covenants on most all of our deals 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.
Our recovery prospects are also enhanced by the fact that we maintain a conservative starting leverage loan to value ratios. When we underwrite loans often in the neighborhood of 50% loan to value.
RCC enjoys the strategic advantage in being affiliated with a best in class Middle market private credit asset management firm with over $11 billion in assets under management and over 150 employees as of October one 2021.
We will continue to focus on generating adjusted net investment income and positive performance just as we have shown in the last six consecutive quarters.
Now going to turn the call over to Aaron who is willing to walk you through our financial results.
Thank you Ted during the quarter, we funded a total of approximately $82 $3 million in investments, which consisted of $54 $8 million in fundings to 11, new portfolio companies and $27 $5 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 $62 $3 million during the quarter at September 30, we had total borrowings of $331 $1 million, including $144 $4 million outstanding under our revolving credit facility 130.
Of our 2026 notes and $56 $9 million of SBA debentures payable.
Total borrowings outstanding.
Decreased by $12 $3 million during the quarter, primarily driven by the repayment of $30 million in SBA debentures during the quarter, partially offset by our borrowings on our revolving credit facility to support portfolio growth outside of our Spic's subsidiary.
We are well situated to continue to carefully grow our portfolio through participating in a substantial pipeline of opportunities generated at Monroe.
The revolving credit facility had $110 $6 million of availability as of September 30th subject to borrowing base capacity.
Turning to our results for the quarter ended September 30th adjusted net investment income a non-GAAP measure was $6 $4 million or <unk> 30 per share up <unk> <unk> per share from the prior quarter.
Our adjusted net investment income was achieved without the need for the external manager to waive any fees during the quarter.
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 three month LIBOR at approximately 13 basis points as of September 30th we do maintain LIBOR floors in nearly all of our deals with the majority of those floors at a level of at least 1%.
As of September 30th our net asset value was $246 $7 million, which increased from the $244 8 million and net asset value as of June 30th.
NAV per share increased from $11 36 per share at June 30 to $11 45 per share as of September 30th.
This <unk> <unk> per share NAV increase was the result of net realized and unrealized gains of <unk> <unk> per share and net investment income in excess of the dividend paid during the quarter of <unk> <unk> per share.
Looking to our statement of operations total investment income was $15 $2 million during the third quarter up from $12 4 million in the second quarter total investment income for the third quarter included $1 $7 million in additional interest and dividend income from certain investments that were accrued were returned to accrual status due to <unk>.
Proven and underlying credit performance.
During the quarter, we placed no additional borrowers on nonaccrual status total non accruals approximately three 1% of the portfolio at fair value at September 30, which is down from the 5% of the portfolio at fair value as of June 30th.
The effective yield on our debt and preferred equity portfolio increased to seven 9% at September 30 up from seven 6% at June 30th.
Moving over to the expense side total expenses for the quarter increased from $7 2 million in the second quarter to $8 9 million in the third quarter, primarily due to an increase in net incentive fees, resulting from improved net investment income.
At the end of the quarter, our regulatory leverage was back up to approximately $1. One one times debt to equity an increase from the regulatory leverage of one five times at the end of the prior quarter as a result of portfolio growth during the quarter.
The current level of regulatory leverage is consistent with the target leverage range. We've guided you to on prior calls.
Of one one to one two times debt to equity as Ted discussed in his prior remarks, we would expect to continue to grow our portfolio at a measured pace.
Slightly increase our regulatory leverage within that range over the next couple of quarters.
As of September 30, we had restricted cash in our Spic's subsidiary of approximately $8 million down from the restricted cash balance of $29 5 million at June 30th.
On September one the Spic's subsidiary used available cash to repay $30 million and SBA debentures. This will help reduce drag associated with the large cash balance previously held at the subsidiary and positively impact net investment income going forward.
As of September 30th the SLS had investments in 54 different borrowers aggregating $192 5 million at fair value with a weighted average interest rate of approximately five 8%.
The <unk> had borrowings under its nonrecourse credit facility of $104 $6 million and $65 $4 million of available capacity under this credit facility subject to borrowing base availability.
I'll now turn the call back to Ted for some closing remarks before we open the line for questions.
Thanks, Sharon and closing we continue to benefit from the resiliency of the financial markets and the strong portfolio management skills in Monroe to generate significant improvements to the portfolio.
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 at Monroe, including them RCC.
As a result, we are excited about our investment portfolio and our prospects.
Key is our conservative underwriting are purposefully defensive portfolio.
Access to a 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 opportunity to our shareholders and other investors for the following reasons number one our stock pays a current dividend rate of nearly 10%.
Number two our dividend is fully supported by consistent adjusted net investment income coverage number three we are currently trading at a meaningful discount to our per share NAV and we think at an unwarranted discounts to the price to book ratio of most of our BDC peers.
Number four we have sufficient liquidity and opportunity to grow our portfolio to achieve leverage at the upper end of our guided range.
And finally number five we are affiliated with an award winning best in class external manager, which has over two decades of experience over 150 highly skilled employees and.
And over $11 billion in assets under management.
Thank you all for your time today and that concludes our prepared remarks I'm going to ask the operator to open the call for questions now.
Thank you Mr Keeney.
We'll now begin our question and answer session to ask a question.
Star one on your telephone.
I would draw your question press the pound key.
Please standby, while we compile the Q&A roster.
And speakers our first question from Christopher Nolan of Ladenburg.
You May now ask your question.
Hey, guys congratulations on a good quarter and the improvement in the asset quality.
Going forward given the.
Forward curve is sort of implying that the fed is going to be raising interest rates and given the prospect of a fed taper.
Does that affect your funding strategy are you going to continue to rely on our revolver.
Or are you close switchover something more fixed rate.
I'll take that to start.
Aaron why don't you follow up.
We don't see Christopher Christopher Thanks for the question. That's a good one I gave a speech.
Speech the last weekend.
Korea, and you were asking a lot about U S interest rates and you know what.
What was going to happen.
I don't think we're going to see.
A market increase in rates.
Think that we're going to see some inflation I think that the economy's going to.
It's not going to be as robust in 'twenty two.
And I think the government's gonna be careful not to.
Upset the Applecart here.
So I think in the near term I think we're in pretty good shape.
With our financing.
But here on why don't you make a comment on Venezuela.
Yeah, I agree with everything you said, Ted and just to point out Chris as you know the portfolio is almost entirely floating rate with some LIBOR floors built in and the funding is combination of the revolver and funding, which is floating as well as the fixed rate bonds. So we're pretty happy with the mix as you know we benefit all other things being equal our portfolio benefits from rises in rates.
Because of that the way that we funded ourselves because we have we have more assets than we have leverage and we have a portion of our leverage that's fixed so I think we're pretty well set up for whatever happens on the rate side and we're pretty comfortable with how were funded today.
Great and as a follow up Eric on what percentage of your deal flow is SBA compliant.
Yeah. It's a good question I think we have de emphasized the spic's subsidiary, which is obvious from our our portfolio and how do we pay down debentures. So I think that our strategy is to.
If theres a deal that comes in that makes sense for the Spic's subsidiary will consider putting it in there and consider our leverage there are using the cash that's available there, but we're really not as focused on that today I think that in a competitive market, it's harder and harder to find deals that you can make fit into an SBA compliance.
For our subsidiary so I think you should expect as time goes on that it's likely as cash builds up in that subsidiary that we will continue to selectively pay down debentures as.
As well as you know is the regulatory regime change in the regulatory leverage requirements changed and allowed Bdcs to go to two to one leverage the benefit of the excess leverage associated with an spic's subsidiary has lessened.
So that's part of the reason for our change in strategy there.
Great I'll get back into queue. Thank you.
And speakers our next question from Sarkis <unk> sure sure.
<unk> of.
B Riley Securities you May ask your question.
Hi, Good morning, and thank you for taking my question here.
Just wanted to also compliment you on returning some of the investments.
Back to accrual status and then getting the improved underlying credit performance there.
My question relates to that right. So it seems like you're.
Recognizing some additional interest and dividend income there and as I look at the.
The investment income lines.
Pick moved up meaningfully quarter on quarter is that where the majority of the improvements happening help us understand that.
Yeah, Great question. So yes, some of the increase in pig is associated with returning some of our investments to accrual status.
When you look at it specifically.
Name like luxury optical which before was on non accrual status, but youll see has marked up materially in terms of NAV and also has been returned to accrual status, but for now that continues to be a pik name for us. So that's that's a big portion of the increase in taxes associated with with that name and Theres a few other names and a few other.
You know pickups on accrual status that have resulted in some increases in tech and so yes. Your observation is correct a significant amount of the increase is associated with the return to accrual status and you know.
We don't we aren't necessarily out in the market doing a lot more.
Pick oriented deals.
But you know.
As you probably know when we just make the decision to return something to accrual status. It's because we have an expectation that we will receive a payment on that pick interest and so it just becomes a matter of timing as to when that happens.
Yes, certainly helpful. There and I suppose if I kind of step back and go over the remarks made by <unk> regarding the M&A environment the loan market than just you know.
Overall, a robust backdrop I think the comments we're hearing for.
A lot of players.
Q4 is that the environment still remains very robust and you know maybe there are some decisions to be made particularly on the M&A side regarding potential tax ship regimes and just wanted to kind of ask about originations right do you think.
Youre going to have a fairly aggressive or a robust origination quarter here from a visibility standpoint, or do you think there's going to be kind of an offset with the repays.
Do you want to talk a little bit about pipeline.
Hey.
Yeah, I mean, I'll tell you that just to give you. Some perspective overall this was at the Monroe level, because you know the way we do things is that we have an allocation policy and every deal gets allocated across the firm.
Through the first six months of the year.
We did 49 deals.
As a firm.
And we did around 50 557 all of last year.
So that gives you a little bit of.
Perspective.
The amount of transaction velocity that we're seeing in 2021.
I imagine the fourth quarter, which is always our most significant quarter.
In terms of new business to be.
<unk> looked at as well just because of.
Normal.
Year end situations, but also we've got.
Checks tax policy changes, which I'll always accelerates deal activity.
So I would expect our fourth quarter to be fairly robust across the firm.
Thanks, Aaron any comments on kind of maybe.
Repayment schedules or anything that's visible from from that angle that we should be thinking about.
Yeah look I mean, I think we don't get usually a lot of advance warning on repayments.
What we have seen in our decades of experience is when there is risk of significant tax policy change that usually increases repayment activity because people will do as you described and the nature of your question. They will they will start to make decisions about M&A that they might not have made otherwise for fear of increases in capital gains rates or are there other.
The rates and so our expectation is that we would it's possible that we'll see a pickup in prepayment activity going into the end of the year.
Sometimes we get visibility because sometimes it will be asked to provide financing or an indication of financing for our portfolio company for a new buyer, but oftentimes we don't get much indication.
But our expectation just based on on what we see in the pipeline today is that our new origination activity is likely to far outstrip any prepayment activity that we would expect to see at the end of the year and sometimes it just comes down to a little bit of a matter of time matter.
Where we might see.
We see some big prepayments near the end of the year that we didn't anticipate but our pipeline is strong enough that maybe early in the first quarter, we will have enough deal flow to sort of make up for that so.
I always tell people focus a little bit more on our average footings rather than you know the balances at the end of a quarter because things do happen at quarter end alone.
Absolutely. Thank you for taking my question.
Thanks Erica.
And as a reminder, every one in order to ask a question you will need to press star one on your telephone keypad.
That's again star one on your telephone keypad.
And speakers our next question from Robert Dodd Raymond.
Raymond James You May ask your question.
Hi, guys.
Thanks for taking the question and I also want to say congratulations.
Getting some of those assets back off non accrual and my question is kind of relates to that I really appreciate Alan in your prepared remarks, you mentioned the $1 7 million.
That was in total investment income.
You said that was related to returns two to accrual status how much of that if you could give us a book was all of that or close to all of that nonrecurring kind of catch up income.
With some of that catch up on some of that occurring.
Yes, Great question, Robert and I had a feeling that I would get this question.
So.
When you look at it.
You know, there's two assets that sort of make up the bulk of that one seven.
And they are both remain in portfolio. So a big a big portion of the one seven is certainly nonrecurring in nature, but there is a recurring aspect to it so the way to sort of think about that is if you look at luxury optical and sort of run a basic calculation based on our contractual income youre going to get to.
A reasonable number.
And a couple of hundred thousand dollars plus range of interest income on a run rate basis quarterly and then maybe close to another 20 grand associated with the preferred stock valued or so if you put it all together I think it's reasonable to think a little bit more than a couple of hundred thousand should recur.
<unk> considered and maybe a little less than $1 5 million of it of that $1 seven as non reoccurring, but it's pretty easy to do the numbers I think it's like about 225000, or so associated with luxury optical and maybe another 20000.
It would be a reasonable run rate calculation for the preferred for valued or so just back of the envelope and you'll see all that basic.
Basically based on the effective yield right. So the effective yield for the whole portfolio went up during the quarter and certainly some of the new deals. We are putting on are accretive but also a lot of that has to do with the return to accrual status of these assets.
Absolutely yeah.
Did did the math I just wanted to double check anyway I appreciate that color and then I mean, just just.
Generally I mean, I think you had non accruals et cetera, probably still above where you'd like them to be.
I think and above historically, you've tended to run them until.
Yeah, the relatively recent past.
Without.
Oscar.
Tell us quarter by quarter, but what would you expect to.
Timeline wise.
Those are fair value down to 3%, which.
Tiny bit elevated versus the industry, but don't get what do you think the timeframe is where you could get your non accruals.
He loves it down too.
The industry industry kind of absolute levels.
I think thats.
Our first question.
Yes, I understand the question and I think there's a bit of a philosophy difference I think between us and some of our peers right and so the answer is I could get our non accruals on a fair value basis down tomorrow. If that was my only goal right and the way you would do that is by selling.
Difficult assets at huge discounts and locking in long term issues.
Issues and getting them off of your your nonaccrual status.
That's not how we operate right we view our job as investors is to earn.
Solid income for our shareholders, but also to make sure that our NAV.
Performs well and can increase on assets that are troubled and so we work the system. We work our assets we have a very strong portfolio management discipline. We've developed it over several a couple of decades, we have a great track record of getting back every nickel on most deals and we fight and we clawed so what I'm trying to say is.
While it is certainly our goal is to get our non accruals down.
Our goal is to get those non accruals down by getting good recoveries on difficult assets and redeploying those recoveries into accruing assets and if that takes us a couple of quarters longer than maybe someone else, but it's we think it's better long term for shareholders. So it's hard to give you visibility on exactly when that will happen.
We also are not super aggressive in putting things back on accrual status. We tried to be very thoughtful about when we put something back and we have to have a high confidence that we've turned the corner and that we're going to receive all of that that previously on accrued interest and so I guess, it's a long way of saying I don't have a great answer for you.
But we are we want to make sure as lenders, we get back as much recovery as we can and redeploy that into accruing assets and we're not just cut and run and locked in losses to get our non accruals down.
Robert just said, we're all over this I mean, if you look at the trend lines I Miss Youre going to see over the last 12 months, a really positive trend line on it and we've got a number of things we're working on.
Currently and my expectation is that this is gonna be a.
It will be a non issue here soon.
I appreciate all that color on that kind of motivated the question.
Yeah, it's been happened faster than I thought so.
So congratulations on that and.
You know me you know me Robert we're not we're not sitting around waiting for anything here. This was a we got a lot of good things happening in the portfolio, there's a lot of things.
Things that were very positive about that are happening with a number of the portfolio names.
And the team have been working very hard to clean up things you know that the challenge always in our status as a manager.
Whats, what's best Whats best sometimes for short term numbers is not best for long term shareholders and if.
If it takes us like Aaron said, another quarter or two to do the right thing we're going to do it.
I appreciate that thank you.
Yeah.
And speakers, we have our follow up question from Christopher Nolan of <unk>.
Madden Girl Goldman you May ask your question.
Hey, guys just a follow up to Robert's question Vinci brands firmly in Scipio.
A few of those credits are a mark down to zero or fair value is this a potential situations like rockdale.
Were you can suddenly get a major recovery on these assets.
Given your comments to Robert just a minute ago.
Christopher We've got we're always looking at.
Ways to reengineer companies this company and Scipio as a consumer products company.
The electronics industry.
We took it over in a very difficult time.
And the cycle in the business cycle last year, we had COVID-19 a number of stores that were closed they sold through the retail channel.
My phone is just a new launch recently, we're seeing really good.
Hum.
Results from that we think the company has got good long term prospects.
We control a big portion of this company and we'd like to think we have some upside there whether.
It turns into a rockdale or it turns into an ela wage or it turns into something else. You know I think we've proven that with time and patience.
Done a good job in taking these companies and reengineering the companies.
Tiring management teams opening new markets.
Adding new distribution channels, and we're spending a fair amount of time with with this particular name Scipio to try and achieve those similar results.
Okay. Thanks, Doug.
And speakers there are no further question as of this time you may continue.
Great well everyone. Thank you very much for joining us today, we appreciate.
The thoughtful questions.
We look forward to continuing our run of good news and we will see you next quarter.
This concludes today's conference call. Thank you all for joining you may now disconnect.
Yeah.
[music].
Yes.
[music].
Yes.
Yes.
Okay.
<unk>.
[music].
Yes.
Yes.
Okay.
Morning.
Yes.
Okay.
Okay.
Uh huh.
Hum.
Okay.
Yeah.
Okay.
Yes.
Hum.
Okay.
Okay.
And the dividend.
Okay.
Sure.
Yes.
Yes.
Yes.
Yes.
Okay.
Okay.
Okay.
Okay.
[music].
[music].
[music].