Q4 2021 Monroe Capital Corp Earnings Call
Today's conference will begin momentarily. Please continue to standby. Thank you for your patience.
[music].
Welcome to Monroe capital corporations fourth quarter, and full year 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, 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 March 3rd 2022. These statements are not guarantees of future performance.
Further time sensitive information may no longer be accurate as of the time of any replay or listening.
Actual results may differ materially as a result of risks uncertainties and other factors, including but not limited to the risk factors described from time to time in the company's filings with the S. E C.
Monroe capital takes no obligation to update or revise these forward looking statements.
I will now turn the conference over to Ted Kennedy, Chief Executive Officer of Monroe Capital Corporation.
Good morning, and thank you to everyone, who has joined US on our call today welcome to our fourth quarter and full year 2021 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 2021 earnings press release.
Filed our 10-K with the SEC.
We are pleased to report another strong quarter of financial results were solid net investment income and increased performance 2021 was it your punctuated by very strong M&A buyout and related financing activity, particularly in the fourth quarter as transaction volumes increased across the board.
Total U S middle market volume across direct and syndicated lending markets hit a record.
$319 billion in 2021.
85% from 173 billion.
In the year earlier.
The prior high of 2018 by 12%.
Activity was strong in anticipation of expected tax law changes and in the face of inflationary pressures supply chain shortages unemployment challenges.
Turning now to the fourth quarter results. We are pleased to report adjusted net investment income of $5 $4 million or 25 cents per share.
We also reported a net increase in assets, resulting from operations of $6 $8 million or <unk> 32 per share during the quarter, which was driven by net investment income was $5 $4 million or 25%.
<unk> 25 per share and net gains of almost $1.5 million or seven cents per share.
As a result, our anybody on a per share basis grew from $11.45 per share on September 30 to $11 51 per share at the end of the year.
This represents the seventh consecutive quarter of growth in NAV per share, which has increased by almost 15% since the end of first quarter 2020.
During the quarter MRC sees regulatory debt to equity leverage increased slightly from 1.11 times debt to equity to 1.13 times debt to equity.
Total leverage also increased slightly from 1.34 times debt to equity to 1.35 times debt to equity during the quarter.
This modest increase in leverage was primarily driven by an increase in the size of the portfolio during the quarter.
New origination activity at Monroe remains strong and we expect to continue to modestly increase leverage with a new target total leverage range of 1.3 to 1.4 times debt to equity in the near term after giving effect to the repayment of our SP I see that.
And transfer of loan assets from our Spic's subsidiary to MRC C.
Aaron will discuss this development later in the call.
This targeted level of GAAP leverage should support strong adjusted net investment income performance in future periods.
As we have discussed in prior calls our continued focus is on making new investments with attractive risk return dynamics, while proactively managing in constructing our portfolio.
Most of our portfolio companies have continued to see performance improvements as the economy has rebounded which has contributed to the positive performance in the quarter.
Our loan underwriting focus continues to be on those companies were defendable market positions resilience business models exceptional management teams and strong sponsors are owners.
<unk> enjoys a strong strategic advantage in being affiliated with a best in class Middle market private credit asset management firm with approximately $13 billion in assets under management and over.
For 150 employees as of December 31, 2021.
We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive performance just as we have shown in the last seven consecutive quarters.
I am now going to turn the call over to Aaron.
Going to walk you through our financial results.
Thank you Ted during the quarter, we funded a total of approximately $45 $1 million in investments, which consisted of $13 $8 million in fundings to five new portfolio companies and $31 $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 $40 $9 million during the quarter.
At December 31, we had total borrowings of $337 $9 million, including $151 million outstanding on our revolving credit facility $130 million of our 2026 notes and $56 $9 million of SBA debentures payable.
Total borrowings outstanding increased by $6 $6 million during the quarter driven by borrowings on our <unk> revolving credit facility to support portfolio growth outside of our Spi subsidiary Spic's subsidiary.
We are well situated to continue to carefully grow our portfolio through participating in the substantial pipeline of opportunities generated at Monroe.
The revolving credit facility had $104 million of availability as of December 31, subject to borrowing base capacity.
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 down from the $6 4 million or <unk> 30 per share in the prior quarter.
When considering our targeted leverage in the current credit performance at MRC C. 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 at historically low levels during the quarter with three month LIBOR at approximately 21 basis points as of December 31, we.
We maintain LIBOR floors in nearly all all our deals with the majority of Florida at a level of at least 1% on most of amendments and on virtually all of our new originated deals. We are now focused on pricing our deals as a spread to the secured overnight financing rate or sofa and advance of LIBOR going away, which is anticipated to occur in 2023.
Hi.
As of December 31, our net asset value was $249 $5 million, which increased from the $246 7 million and net asset value as of September 30th.
Our NAV per share increased from $11 45 per share at September 32.
To $11 51 per share as of December 31, the.
<unk> per share NAV increase was substantially the result of net realized and unrealized gains on the portfolio during the fourth quarter of <unk> <unk> per share.
Looking to our statement of operations total investment income was $13 million during the fourth quarter down from $15 2 million in the third quarter total investment income for the third quarter included $1 $7 million in additional interest and dividend income from certain investments that were returned to accrual status due to improvements in underlying.
Buying credit performance during.
During the fourth quarter, we placed no additional borrowers on nonaccrual status total non accruals approximate approximate two 6% of the portfolio at fair value at December 31 down from three 1% of the portfolio at fair value at September 30, and four 1% at December 31 2020.
The effective yield on our debt and preferred equity portfolio increased slightly to 8% at year end up from seven 9% at September 30th.
Moving over to the expense side total expenses for the quarter decreased from $8 $9 million in the third quarter to $7 $7 million in the fourth quarter, primarily due to lower incentive fees net of associated fee waivers as a result of lower net investment income.
At the end of the quarter, our regulatory leverage was back up a little to approximately $1. One three times debt to equity, which is a slight increase from the regulatory leverage level of one one times at the end of the prior quarter as a result of portfolio growth during the quarter total leverage was 135 times debt to equity at yearend.
And up modestly from the 134 times debt to equity level at the end of the third quarter.
The level of regulatory leverage at December 31 is consistent with the targeted leverage range. We have guided you to on prior calls of one one to one two times debt to equity.
As of December 31, we had restricted cash in our Spic's subsidiary of approximately $15 5 million up from restricted cash of $8 million at September 30th on March 1st the MRC Spic's subsidiary repaid all of its remaining SBA debentures and transferred its loan positions.
Marci.
This was achieved through borrowings on our revolving credit facility and the use of the restricted cash held in our Spic's subsidiary.
While the repayment of the SBA debentures will increase the level of regulatory leverage at MRC. It will slightly reduce total leverage all other things being equal.
In recent quarters, we have had substantial restricted cash in the Spic's subsidiary, resulting from loan repayments, which could only be used to repay SBA debentures on a semiannual basis the.
The full repayment of our SBA debentures will help reduce the drag associated with a large cash balance previously held at the subsidiary and should positively impact net investment income going forward.
As a result of the repayment of the SBA debentures and the transfer of loan positions to MRC, we are no longer providing regulatory leverage guidance and instead are targeting total GAAP leverage in the one three to one four times debt to equity range as with the repayment of our SBA debentures. There is no longer a difference between our regulatory.
Leverage and our GAAP leverage.
As of December 31.
The <unk> had investments in 57 different borrowers aggregating $189 $1 million at fair value with a weighted average interest rate of approximately five 9%. The <unk> had borrowings under its nonrecourse credit facility of $94 8 million and $82 million of available capacity under this credit facility.
<unk> subject to borrowing base availability.
I will now turn the call back to Ted for some closing remarks before we open the line for questions.
Thank you Erin in closing, we continue to benefit from the strong M&A and financing markets as well as a strong portfolio management skills 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 at Monroe, including of RCC.
As a result, we continue to be excited about our investment portfolio and our prospects. The key is our conservative underwriting.
Purposefully defensive portfolio and our 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 over 90%.
Two our dividend is fully supported by consistent adjusted net investment income coverage number three we are currently trading at a discount to our per share NAV discounts to the price to book ratio of most of our BDC peers.
Number four we have a sufficiently look we have sufficient liquidity and the opportunity to grow our portfolio to achieve leverage at the upper end of our guided range and number five.
We are affiliated with an award winning best in class external manager, which has decades of experience over 150 highly skilled employees and approximately $13 billion of 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 the call now for questions.
If you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Our first question comes from Christopher Nolan with Ladenburg Thalmann.
Yes.
The repayment of all the SPC I mean.
Sorry.
Last quarter.
Guys were hinting that you might pay some of them back what we'll see.
Catalyst for paying it all off.
Yeah. Good question Chris.
As we went into year end, we saw the cash balance increase again in the SBA subsidiary and we didn't see the kind of quality deals that we like and Monroe that would fit well into the Spic's subsidiary and so we made the decision given that you could only payback debentures at the SBA twice a year, we made the decision that we did.
Wanted to keep running with cash drag.
And so we decided that it was no longer.
A significant benefit for us to keep the Spi SBA subsidiary in place. The reality is is with the new leverage rules you know from a few years ago. It doesn't have the same value add that used to have and on a rate spaces. It's frankly not that different from what we are what we pay on our revolving credit facility. So there really wasn't any pickup in core.
Cost.
Bye bye borrowing on the credit facility versus barring with debentures, and there's a lot of operational cost and other cost to maintain it and so it just wasn't a great use of our attention in time anymore. It wasn't it wasn't generating the bang for the Buck than it used to so we finally made the decision to pay it off into hand back that license.
For the BDC sub.
Great and as a follow up.
How does this affect your.
Capital.
Strategy because right now you have a lot of revolving credit facility debt and.
Obviously, it's going to go up but we're entering into a phase where the market is expecting multiple tightening by the fed and so does this mean that you guys are going to try to.
Go after something.
Fixed rate debt.
We will continue to monitor the market and make decisions about the liability side of our balance sheet. We haven't made any determinations definitively today about.
About the need to go out and raise more fixed rate debt or the desire to do that I'll remind you and you know this well Chris that.
While there is definitely expectations of rate increases.
There are those things tend to be priced into the market right. So you know the.
The market knows that that expectation is there. So what we're really concerned about would be more increases in rates than what the market currently expects, which would increase rates.
But the market rates are impacted by what people think the fed's going to do so.
Even with that the low end of the short end of the curve remains relatively low rate wise.
I think you could see some some steepening of the curve.
It wouldn't be that impactful to us since we typically borrow on short term LIBOR and in the future likely short term chauffeur. So for now we're going to keep with the current strategy.
Using our revolver and.
Keep the fixed rate notes that we have in place, but we're always talking and always examining the market and if we make any changes we'll be sure to.
But the market now.
Thanks, Sir.
Our next question comes from Sarkis, <unk> with B Riley Securities.
Hey, good morning, and thank you for taking my question here.
As a follow up to the prior question on the repayment of the Spic's you mentioned that there are some operational costs and other costs that.
You know are involved with that any I guess thought processes on your run rate operating expenses going forward. After you kind of collapse that that license in the operations there.
Yeah.
There really isn't anything I can point to or give you specific specifics.
At this moment it is.
Not a.
It's not something we've ever broken out in terms of what we pay.
But and so I'm not sure it's going to be a.
A major save.
Savings, but there will be some savings I would estimate.
Probably.
50 to 100 Grand a year, maybe in that range in terms of just the maintenance of that subsidiary, we can do a little more work on the specifics and come back but.
It just it also provides us significant efficiencies to not have to deal with.
Reporting to the SBA.
Separate audit costs associated with the sub separate testing, so, but probably my best guess it would be about $100000 a year in actual cost savings.
Okay got it so.
It sounds like.
Were there any I guess accelerated.
Kind of prepayments or repayments happening in that bucket, if you will where kind of.
Then go out and look for opportunities Youre, not really seeing that so therefore, the cash balance was building and you just thought it's more prudent to kind of you know.
Collapse it into your your operations and deploy the incremental capital in your current strategy is that the right way to think about it.
I think sort of I'd say, we certainly see lots of opportunities to redeploy capital in our pipeline at Monroe is huge we had.
As a firm we had the biggest fourth quarter in history, and Ted I'm sure, we'll talk more about that but what was getting more difficult was to find deals that specifically.
Would fit for the Spi subsidiary and it's not just whether they fit or not but it was trying to be competitive in the marketplace.
Borrowers to.
Allow you to put their their debt and your Spic's subsidiary you also have to ask them to fill out a significant amount of paperwork and rep to certain things and in a competitive market environment, that's a little bit more challenging to get done and the reality is we don't have a lot of active spic's subsidiaries today that are out lending. So there wasn't like there was a need.
Need across the firm for Spic's eligible investments and so it was just it wasn't easy to to redeploy the cash.
In things that we're specifically eligible from an spic's standpoint, so we would prefer to be more unbridled in our investment strategy and be able to do whatever deals make the most sense on a risk adjusted basis and theres lots of those opportunities for us as a firm.
So we're happy to.
Collapses hub and move forward on a more regular way basis and allow the BDC to participate pro rata on deals with all the other funds at Monroe that arent Spic's subsidiaries I don't know Ted if you have anything else to add to that.
Yes, I think it's really too two questions circus.
Number one is we had some cash that wasn't being utilized that we could utilize so there was a drag associated with that cash number two <unk> rules are a little more complicated than that.
They require you to lend or invest in companies that are defined as small businesses those tend to be companies with net income of $6 million or less.
And frankly, given where the market is today, we thought it was more prudent from a credit standpoint to focus on companies with higher net income than those that were spic's eligible companies. So those were really the two driving strategic reasons for.
For paying those off and moving forward there.
Plenty of opportunities for us to deploy those dollars and generate good solid.
Arbitrage.
Return dividends standpoint, we thought we would kind of look at this and do what's in the best interest of the shareholders.
No. Thank you for that and I want to switch gears here for a moment to focus a little bit on the nonaccrual side of your balance sheet.
Any updates there I think in the past we've talked about how you would like to turn on some some of those non accruing assets back to accrual status and then I think over time right.
That's a good thing because it helps kind of you redeploy capital back into earning assets any updates on on the nonaccrual side and kind of any any incremental.
Ideas, there that you can share with us.
Sure. So I think generally we are seeing that happen, we're seeing generally non accrual assets.
Improve and in some cases turned back on in some cases, there is it's a little more challenging or hard to see what's going on so for example, we had a nonaccrual asset that became an accrual asset and then it became a paying asset and then it got sold and it left the portfolio.
No.
And so we were able to do exactly that redeploy that capital in that window.
Traded asset so we are seeing improvements youre seeing both in.
Improvements on our non accruals on a on a fair value and cost basis. Both of those things are improving we continue to work very hard to see improvements in all of our assets that are rated below two <unk>.
Generally speaking you know some are doing better than others, but generally speaking we continue to see positive momentum in our.
<unk> and are more difficult portfolio quarter after quarter and so we will continue to focus on this we expect to continue to see assets on non accrual status little by little become accrual assets or get realized and allow us to redeploy that cash into accruing assets. One of the one of the two outcomes is likely.
Yes, just a follow up on that.
We've done a good job here I don't know if.
People really understood that but we were four 1% a year ago.
Two 6% now.
Fair value.
Almost by 50% we've cut our non accruals and our plan is to continue to do that.
And this year, so I think that 'twenty, one was a great year for us to reduce nonaccrual exposure put those dollars to work and we are all over this I told you that.
Last time.
Last couple of calls this is one of our highest priorities and we're making really good progress on.
Yes, certainly I appreciate the color there and then one more for me and I'll hop back in the queue.
Regarding kind of the incentive fee waivers that are outstanding for you to kind.
Kind of maintain that 25 per share dividend level does that still kind of hold true from an operating philosophy standpoint into 'twenty two as some of the balance sheet changes worked through here with the collapse of SAIC.
Yes.
Go ahead.
Yes.
We are going to do everything we can to.
Maintain the consistency.
Of our dividend stability of our dividend, we've shown that I think over the last 10 years since we've been public debt.
From a manager standpoint.
We've always put the interests of the shareholders ahead.
Of any other interest and managing of RCC and we intend to continue to do so.
Thank you that's all from me.
Our next question comes from Matt Johnson with Raymond James.
Hey, guys good morning, and thanks for taking my questions.
First one for me maybe congrats on getting the non accrual down notable progress on that front.
Be interested following up on <unk> question.
<unk> seen over the past three quarters and nonaccrual names are the exit are you generally seeing exits at fair value realization slightly excess of quarter end marks or are they fairly consistent with where they were marked the prior quarter.
It's a good question, it's kind of expect.
Generally speaking there around the marks most of the time, we make a concerted effort to be updated and thoughtful about providing information to our valuation providers. So that they can have all of the information necessary to mark the assets really carefully.
Carefully and intelligently occasionally we get some positive surprises.
And occasionally we get some negative surprises right so for.
For example, we had a deal in our portfolio called luxury optical that had been a challenging deal for awhile. It ended up.
Rebounding, we did a lot of work on a lot of time and effort on that we've talked about this in past calls and really improve the operations hired a great team there to fix the business and that one ended up realizing above our mark at through a sale process considerably.
But some of the others have been sort of when we have realized some have been sort of around the mark or maybe slightly below from time to time and I think on a net net basis generally it's around our mark and so it's been a pretty good process and we generally have a marked right.
And that's that's a good testament to our process, but generally speaking it works.
Got it fair enough just one for me, maybe taking a little bit of a different of our route can you give us a sense of the weighted average LIBOR floor in the SLS and how you think about the dividend up to <unk> and are raising rising rate environment.
I can answer the second part of the question a lot easier than I can answer the first part and I'd have to get back to that to you guys on.
The weighted average floors in the SNF, that's not something I have handy.
But generally speaking as you would expect.
A rising rate environment is a positive thing all other things being equal for our portfolio of both in the SLS and <unk> and in <unk>.
Our portfolio and in our base portfolio, our base portfolio tends to have on average higher weighted average LIBOR floors than what we would expect to see in the SNF portfolio that would be my my guess based on what I know about the portfolio. So youll, probably see more impact at the SLS level on a direct basis for near term movement, then you would see.
In our base portfolio, where on average that we tend to have about a 1% LIBOR floor. So my guess is over time, you'll see the benefit come through more on the sell off in the near term than you would in our in our and our parent portfolio, but once we get above that kind of 1% rate you start to see a commensurate benefit on both sides of the portfolio.
Got it that's it for me I appreciate the time this morning.
Yes, Thanks, Matt.
As a reminder, if you'd like to ask a question at this time that is star then one.
Our next question comes from Robert Dodd with Raymond James.
Hi, guys good morning, sorry.
Technical difficulty.
Doubling up quickly.
With Matt.
So.
Just kind of a follow up to that on a quick question to your point I mean, a year ago December 'twenty you had.
<unk> companies on the <unk> six.
Got it.
Now exit to fed by that I mean, we've talked in the past about.
Sometimes youre willing to go for a much longer process with an asset to cover <unk>.
Even more than cost.
<unk> six is that what's left in the pool, probably another six remaining are those going to be longer term processes, but just said might be maybe somewhat going to be resolved in 'twenty two.
Mick there should we expect on the incremental improvements on that to be more stretched out given given your track record on getting good recoveries if you Cook.
Yes, it's a time into it.
So good good question Robert.
So here's the philosophy that we've had at Monroe for a long time.
Our job is to manage our portfolio and generate the best risk adjusted returns for shareholders.
And part of that philosophy means getting every dollar.
We can back as opposed to cutting.
Cutting and running.
And.
Trading and asset.
So Aaron mentioned luxury optical that was a really good example that was a deal that we had pre COVID-19 .
Good performing deal.
It was in the high end retail optical.
Space, primarily in New York City in and around New York City, a very good business.
Got hit hard like.
Covid.
And.
We didn't think it was justified so what we did is we double down in.
And that company.
We brought in new management.
We acquired a vertical.
Supplier.
And we built a high quality company with.
When we took that over there was probably a $50 million of enterprise value.
In that business.
Our debt was right about there.
And we turned the company around we use our portfolio management strengths and we sold that business for about $130 million.
At the end of last year.
And what happened was it was a big success.
We've got other companies in our portfolio.
<unk> are in various stages of that.
Those types of turnarounds, it's easy to take a loss and move on that's not in the best interest of our shareholders all the time and particularly over the long term to manage our business on a quarter to quarter basis that may be the right thing to do but recall that MRC is about 8%.
The total assets.
Monroe capital.
So we are very very focused as a firm and getting back every dollar for every one of our funds because we take a longer term approach to this.
And try to generate.
Mullock returns <unk>.
Which isn't real returns on invested capital as opposed to fast IRR returns so.
In my view the shareholders of MRC are better served by Monroe using before.
Panoply of our infrastructure out of 150 people.
We have deals that don't perform as well as we'd like or.
Circumstance with some of these deals when we have private equity sponsors.
<unk>.
Don't do the right thing and continue to support their companies.
We sometimes we have no choice, but to step in and be the.
It will be the catalyst for change in some of these deals. So the short answer to your question is we've made I think tremendous progress in 2000.
21, moving to our non accruals from 12 to six and I anticipate 'twenty two we will make additional progress on moving these other names down as Aaron mentioned, we don't we haven't put any new assets on nonaccrual.
We like our portfolio, we think we're in a good position today.
We're past Covid, we're past a lot of the the stress.
So I'm optimistic about what we can do with the remaining part of the portfolio.
Got it I appreciate the color. Thank you.
As a reminder to ask a question that is star then one.
I'm showing no further questions at this time I'd like to turn the call back to Ted Kennedy for closing remarks.
Good thank.
Thank you all for.
Appearing on the call today I know, there's there's lots of things happening in the world.
Right now our Hearts go out to the <unk>.
Training and people.
Tweet.
Tweeted out something the other day.
Our message and supports.
There is no place in this world.
Sure.
What's what's been happening.
We call it for immediate end to this this craziness in the atrocities, but from our standpoint, our job is to focus as best we can or on our shareholders and our industrial partners and you. All are a very important part of that community that we interact with and we certainly appreciate.
Right the support.
From from this group of people on the call today, and we will do everything in our power to continue to generate solid risk adjusted returns and increase our NAV for MRC C. So thank you all and we will see you and speak to you again next quarter. Thank you.
This concludes today's conference call.
You for participating you may now disconnect.
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