Q1 2022 Monroe Capital Corp Earnings Call

May 4, 2022

Thank you for standing by the conference will begin momentarily until such time, you will hear music. Thank you and please continue to standby.

[music].

Welcome to Monroe Capital Corporation's first quarter 2022 earnings conference call.

Before we begin I'd 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 may four 2022.

These statements are not guarantees of future performance.

Furthermore, 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 uncertainty or other factors, including but not limited to the risk factors described from time to time in the Companys filings with the SEC Monro.

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, Sir you May now begin.

Good morning, and thank you to everyone, who has joined us on our call today.

Welcome to our first quarter 2022 earnings conference call.

I'm joined by Aaron Peck, our CFO and Chief investment Officer.

Also mix all Amini, our senior portfolio.

Portfolio manager for MRC.

Last evening, we issued our first quarter 2022 earnings press release and filed our 10-Q with the SEC.

After a very strong fourth quarter and 2021 activity during the first quarter of 2022 slowed in the M&A and financing markets. In addition, both risk premiums and volatility increased across asset classes as concerns about the impact of inflation and global growth.

More aggressive fed tone.

Ongoing supply chain issues and geopolitical unrest in Russia, and Ukraine moved investors to the sidelines.

Especially in the more liquid markets.

In 2021 sponsored middle market loan volume grew by over 82% year over year. According to <unk>.

And we expect the trend of direct lenders taking market share from traditional institution institutional lending sources will continue.

Especially during periods of market uncertainty like today, when issuers are seeking certainty of execution.

Monroe's ability to offer underwritten solutions is a real advantage for our clients during a variety of market environments, our pipeline of quality actionable financing opportunities at the platform level remains very strong.

<unk> today is more uncertain market backdrop.

Turning now to the first quarter results. We are pleased to report adjusted net investment income of $5 4 million or <unk> 25 per share.

We also reported.

$244 9 million or.

Or $11 30 per share as of March 31, 2022, a decrease of 21 per share for many of the two.

$49 5 million or $11 51 per share as of December 31, 2021.

A modest decline in NAV was primarily the result of a onetime book loss and extinguishment of debt associated with the redemption of the remaining SBA debentures during the quarter.

Net unrealized losses on the portfolio.

During the quarter MRC <unk> debt to equity leverage decreased slightly from 135 times debt to equity to one three.

Times debt to equity.

Modest decrease in leverage was primarily driven by a decrease in the size of the portfolio as a result of portfolio syndication and repayment activity near the end of the quarter.

New originated new origination activity at Monroe remains strong and we expect to modestly increase leverage to within our targeted leverage range of one three to one four times debt to equity.

As we have discussed on prior calls our continued focus is on making new investments with attractive risk return dynamics, while proactively managing in constructing our portfolio.

We believe that our existing portfolio companies will be able to navigate a higher interest rate environment.

They are generally well positioned to manage the inflationary supply chain and geopolitical headwinds they're facing.

Our loan underwriting focus continues to be on those companies with defendable market positions resilient business models exceptional management teams and strong sponsors or owners.

<unk> enjoys a strategic advantage in being affiliated with a best in class Middle market private credit asset management firm with approximately $13 $5 billion in assets under management and over 160 employees as of March 31 2022.

We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive long term NAV performance.

I am now going to turn the call over to Aaron who is going to walk you through our financial results.

Thank you Ted as of March 31, 2022, our investment portfolio totaled $546 million down $15 $7 million from $561 7 million as of December 31, 2021, our investment portfolio consisted of debt and equity investments.

In 97 portfolio companies at March 31, 2022, as compared to debt and equity investments in 96 portfolio companies at December 31.

During the quarter, we made investments in three new portfolio companies with loan fundings totaling $5 $6 million. In addition, we had revolver add on or delayed draw fundings to existing portfolio companies totaling $16 million.

During the quarter, we received three full payoffs totaling $22 $4 million and had loan sales and other ordinary course, low repayments aggregating $13 8 million.

At March 31, we had total borrowings of $318 $3 million, including $188 $3 million outstanding under our revolving credit facility and $130 million of our 2026 notes.

Total borrowings outstanding decreased by $19 $6 million, primarily as a result, our portfolio repayments and syndications near the end of the quarter.

We are well situated to continue to carefully grow our portfolio through participating in a substantial pipeline of opportunities generated dedman route.

The revolving credit facility had $66 $7 million of availability as of March 31.

Subject to borrowing base capacity.

Turning to our results for the quarter ended March 31, 2022, adjusted net investment income a non-GAAP measure was $5 $4 million or 25 per share compared to $5 $4 million 25 per share in the prior quarter.

When considering our target leverage and credit current credit performance at MRC, We believe that on a run rate basis, our adjusted NII can cover the 25 per share quarterly all other things being equally.

As of March 31, our net asset value was $244 9 million.

Which decreased from the $249 5 million and net asset value as of December 31.

Our NAV per share decreased from $11 51 per share at December 31, $211 30 per share as of March 31, the <unk> 21 per share NAV decreased substantially the result of a loss on the extinguishment of debt associated with the redemption of the remaining SBA debentures during the quarter and net unrealized loss.

On the portfolio.

I will now turn it over to Mick <unk>, who will provide some more details on our first quarter operating performance.

Thank you Erin looking to our statement of operations total investment income was $12 $5 million during the first quarter down from $13 million in the fourth quarter due to a lower fee income and reduced prepayment gains during the first quarter, we placed no additional borrowers on nonaccrual status.

Total non accruals approximate two 2% of the portfolio at fair value at March 31.

Down from two 6% of the portfolio at fair value at December 31, 2021, and four 1% of the portfolio at fair value at December 31, 2020.

At March 31, 2022, the effective yield on our debt and preferred equity portfolio was 8% unchanged from December 31 2021.

LIBOR rates, which had been at historically low levels rose during the quarter with three month LIBOR at approximately 95 basis points as of March 31 versus approximately 21 basis points as of December 31.

We maintain LIBOR floors in nearly all our deals with the majority of floors at a level of at least 1%.

All other things being equal a rising interest rate environment will improve the yield on our investment portfolio and increased net investment income as market LIBOR levels exceed floor LIBOR levels.

On most of amendments and on virtually all of our newly originated deals. We are focused on pricing our deals as a spread to the secured overnight financing rate our sulfur in advance of LIBOR going away, which is anticipated to occur in 2023.

Moving to the expense side total expenses for the quarter decreased from $7 6 million in the fourth quarter to $7 $1 million in the first quarter, primarily due to lower incentive fees net of associated fee waivers as a result of lower net investment income.

Net realized losses for the first quarter totaled $1 1 million.

Primarily related to the one time book loss on the repayment of the SBA debentures, which represented the unamortized deferred financing costs on the debentures at the time of debt repayment.

Net change in unrealized losses for the quarter totaled $3 4 million.

As discussed earlier on March one.

RCC SB ICEE subsidiary repaid all of its remaining SBA debentures and transferred its long positions to MRC.

This was achieved through borrowings on our revolving credit facility with IAG and the use of the restricted cash cash which was on hand in our SP ICEE subsidiary subsidiary.

While the repayment of the SBA debentures increased the level of regulatory leverage at MCC at slightly reduced total leverage all other things being equal.

In recent quarters, we have had substantial restricted cash in the SB ICEE subsidiary, resulting from lower loan repayments, which could only be used to repay SBA debentures on a semi annual basis.

The full repayment of our SBA debentures 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 March 31, the <unk> had investments in 60 different borrowers aggregating $195 3 million at fair value with a weighted average interest rate of 6%.

The <unk> had borrowings under its nonrecourse credit facility of $128 1 million and $54 9 million of available capacity under this credit facility subject to borrowing base availability.

I will now turn the call back to CAD for some closing closing remarks before we open up the line for questions.

Thanks, Nick <unk>.

In closing while there are a number of headwinds that are creating today's market uncertainty, we feel that MRC is well positioned to deliver differentiated risk adjusted returns for our shareholders.

Overall Monroe capital platform continues to mean, a very strong maintain a very strong pipeline of high quality investment opportunities for all funds at Monroe, including MRC.

As an example, we put to work over $6 $5 billion at the end.

Monroe capital platform in 2021.

We remain highly selective focusing on market, leading businesses with high free cash flow and we will continue our conservative underwriting model, where are we generally fund less than 5% of all the deals we review on an annual basis.

We have constructed a purposefully defensive portfolio under the watch of a tenured senior leadership team and we benefit from a large portfolio management organization.

And that is managed credits through multiple economic cycles going back to the year 2000.

2000.

Over 20 years ago.

As a result, we remain confident that our dividend, which is currently at a yield of approximately 10% can be supported by consistent adjusted net investment income.

We are excited about our investment portfolio and our prospects to continue to believe that Monroe Capital Corporation, which is affiliated with an award winning best in class external manager Monroe capital provides a very attractive investment opportunity to our shareholders and other investors.

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. Thank you.

Thank you speakers participants we will now begin the question and answer session to ask a question.

And over the phone you May press the star key followed by the number one.

To withdraw your request you May press the pound key.

Again, Thats star one to ask a question or the pound key to withdraw your request.

Speakers. Our first question is from the line of Christopher Nolan of Ladenburg Thalmann. Your line is now open.

Okay, given all the moving pieces in the economy supply chain inflation likely fed tightenings.

And also your stock is trading below book what are your thoughts in terms of the capital structure.

Are you going to look for more fixed rate notes.

As a share repurchase and consideration any details would be helpful.

Thanks Christopher.

Good question.

Everything is on the table Christopher.

We're looking at all options to increase shareholder value.

So I will tell you that.

As soon as we make a decision you'll know but right now.

Our platform is as humbling as I said in my prepared remarks, we put.

$65 billion to work in 'twenty one.

The first quarter.

Our 2022, we're almost a $2 billion across the platform.

And we see demand coming.

From traditional buyouts liquidity investments.

Secondary investments and right now we're navigating what's the best way for MRC Cedar participate in those transactions and increased value.

Great. Thanks, and my follow up question is on asset quality of your asset quality has really improved over the last quarters.

Will if you can get your non accruals down to let's say.

One 1% of investments of cost.

And you're in your income would actually go up would you start lowering the overall balance sheet leverage.

Another good question.

<unk> told you this.

Several quarters ago that our number one goal is to get our hands.

Around collecting some of the underperforming assets and I think we've proven that if you look at where we were two years ago.

Look at where we were a year ago.

We've done exactly what we said we were going to do so I anticipate we will continue to make progress.

On that front in 2022.

Once we do that I think youre going to see income go up I think youll see a lot of good things from a RCC and we can make those decisions.

Appropriate great.

Alright, I will just add Chris.

On the leverage side I don't think we are really looking at leverage is tied to what happens with our non accrual assets. So I don't think you would see any material change in our leverage strategy with regards to our reduction in non accruals I think we would continue to be targeting the the range that Nick talked about in our presentation of one three to one four times total leverage.

That's the current expectation.

Okay. Thanks, Dan.

Yeah.

Okay.

Next question is from the line of Kevin <unk> of JMP Securities. Your line is now open.

Yes.

Hi, Good morning, and thank you for taking my question.

First question originations were understandably light in the first quarter given the slowdown in M&A activity in a seasonally slower quarter. Overall can you give us a sense how origination activity is tracking so far this quarter.

Yes, I can.

But I can talk about the platform, we're seeing a fair amount of demand still usually what happens is Q1 and Q2.

Our heavy demand.

Quarters, and then things slow a little bit in Q3, and then they pick up in Q4.

We're seeing a little bit of a drop off in Q2 from Q1.

I think thats got to do more with.

Interest rates rising and some uncertainty over the future.

In the near term.

There is $2 two trillion dollars.

P/e dry powder sitting on the sidelines.

There is about.

750 billion.

<unk>.

Dry powder in private credit.

So that's a three to one ratio.

In PE dry powder, the private credit dry powder, where usually the cake, making.

Recipe is what kind of a one to one so there's going to be a big tailwind behind private credit. It's I think a function of just getting comfortable with the market.

There's a bunch of industries that are doing well kind of a COVID-19 bump.

There is other industries that have had a.

Covid challenge.

And we've transitioned our portfolio pretty much towards more of a market economy.

This services software.

Things that generate consistent earnings and defensible positions.

So I think we'll continue to see a steady stream of new business in originations I know pipeline internally.

<unk>.

Through the end of Q2 into Q3 are pretty full.

List of deals and its really going to be a geopolitical question I think if you see more.

<unk> coming out of Russia, and Ukraine, which is what the newspapers are quoting this morning.

I think thats going to potentially be.

Driver for <unk>.

More measured approach to deal flow in the U S.

And then Kevin I will just add.

Kevin I'll add MRC specifically.

Don't need to put a lot of new assets into MRC to hit our targeted leverage I think the challenge is always and we talk about this every quarter as we can absolutely control what comes in the front door, but its more difficult to control what goes out the back door. So we try to allocate deal with MRC that are both accretive on the yield side accretive from a diversity.

Standpoint accretive from all the things Ted talked about are positive from our industry choice based on the environment. We're in but we just don't know what's going to come out the back door and oftentimes. It comes out on the refinancing side at the very end of the quarter and so it shows up in our ending quarter leverage that's very common we see those repayments at end of month or end of quarter.

So we're still feeling really good even with reduced origination activity should that be the case that we should have plenty of opportunities that fit MRC to grow our portfolio and then just a matter of whether the refinancing activity slowed down.

RCC.

Okay that makes sense I appreciate your comments there and then just a follow up in regards to portfolio positioning are there any pockets or industries that you find particularly attractive in the current climate.

Yes, I'll take a quick run without another area and you can follow up if you want.

We really like recurring revenue right now.

Tend to be.

Data cloud.

Subscription based models business service based models, because we found that during COVID-19.

Industries tend to perform the best.

We're able to best predict the future in those industries.

Long term contracts sticky revenue sticking to supply.

Relationships.

Key business services key software elements for businesses.

That was a very good place to be during Covid and we had.

Really ramped up our.

As our platform our firm's exposure in those areas and we reduced our exposure to the highly cyclical industries relating to transport travel leisure.

Some of the health.

The health and we continue to feel we are in the right spot going forward.

Yeah, and I would just add Chad we still also like to invest in what we believe are non correlated businesses.

Which takes advantage of some of the flow that we see in specialty finance litigation finance and some of the less traditional assets, which we put into the into the all of our vehicles on a measured basis. So.

That's a nice yield pickup and adds non correlated risk. So we carefully and selectively we will add some of that origination and have been for many years.

Okay, Great I'll leave it there congratulations on the quarter.

Thanks, Kevin.

As a reminder, its star one to ask a question over the phone or the pound key to withdraw your request.

Speakers. Our next question is from the line of Robert Dodd of Raymond James Your line is now open.

Hi, guys.

Back to.

You've kind of touched on.

Improvement in ASP.

Asset quality.

Non accruals will come down you've made a lot of progress.

You indicated that you expect to make additional progress this year.

Can you give us any without.

Giving anything away I guess any any color.

What your comfort level there is.

With that kind of progress he's going to come from.

I mean, obviously you Vince you got marked down a little bit in the quarter.

That happens, but what are the dynamics that make you confident that you're going to see continued progress in there.

Couple of assets that are left.

I think it's a good question and it's a particularly relevant question from you Robert because two years ago, you would I had this discussion on one of these calls and I promise to them that we were going to deal with this aggressively and that was my number one priority.

And we dealt with it aggressively and exactly what I said at the time two years ago was occurred.

We had.

Got a few credits not a lot, but a few credits that we're very focused on.

As I mentioned to you before.

As opposed to.

Moving them out.

Mark or.

We're less we've decided as a firm the best thing to do is through <unk>.

<unk> generated the highest possible recovery that we can license now mind you, but these assets are not only in MRC, many and most of all of these assets or in other funds across the firm MRC Jose.

A small position in other investment funds have larger positions.

We have a portfolio management team of 10 people that are focused on.

Watch list.

Call It high risk.

The credits.

And it's as good a team as there is in the industry and if you look at what we've been able to do over the last two years.

Bringing down exposure in.

In instances, where private equity firms for one reason or another have decided not to invest.

We've taken over in <unk>.

Awesome changed management.

James direction change direction of businesses added businesses acquired businesses supplemented management brought in consulting brought in a new investment strategies.

Across the board.

Our work.

I think has been validated by the success we've had.

In the last three years, we've got a couple of positions left.

<unk>.

We're making good progress on a number of alternatives decisions, we're going to be making here over the next few quarters.

And I am hopeful that because of the hard work we've done over the last couple of years, we're going to see some some good results. Some nice results. So I can't tell you that's a linear focus but if you look at the last two years, we've made a heck of a progress.

Reducing this and my goal like you say is to get this down below 1% here in the near term.

I appreciate that and I do remember that conversation.

One one additional one if I can.

You mentioned, new recurring revenue lines.

The platform has if I remember about a recurring revenue.

Dedicated fund, obviously MLC can participate in those deals as well et cetera, how do you.

I think youll position relative and your approach to AI.

This is obviously.

At the large end.

Makeup platforms out there doing.

Multibillion dollar.

Yes.

The SaaS businesses that you'll not necessarily participating focusing you can but not leading those kind of deals currently house. How does your approach differ from that mega enter the market.

Yes, good question.

There is about a half dozen platforms Monroe being one of them that have developed a real expertise in SaaS lending.

Our lending and then our software.

Like everything.

We've chosen the market that we want to play in.

The market that we like to play in it as the more fragmented middle market lower middle market.

Place so as opposed to underwriting several billion dollar transactions of SaaS investments, we're underwriting two to $3 million to $400 million.

<unk>.

In the SaaS area. These are high quality.

Companies with high quality sponsors burn off from some of the larger sponsors.

Dual strategies, one at the higher end of the market one of the lower end of the market to build. These these companies is the way the way SaaS companies get built today.

It's very hard to go.

Wire a platform because most of these platforms are trading at 12% to 13 to 14 times revenue today. So the way most of the private equity firms are building SaaS platforms, starting with the smaller firms something that they can acquire for between two and $500 million.

And again remember, it's usually 30% or so debt, 70% equity and then doing a number of add on transactions tuck ins or bolt ons to create a very large platform and we are very very involved in that business. We did as a platform last year or about two five.

Billion.

And investments in this space.

We have a dedicated team based in San Francisco and Chicago.

Origination sourcing underwriting credit.

Self contained in that team and then the larger mineral platform brings its.

Underwriting and consistent credit.

No expertise to bear.

And it's a significant part of our portfolio I would say probably of our $14 billion 15 billion today, we're probably close to 25% 30%.

In this asset class. So it is an important part of the overall firm from RCC shares and all of those deals and they have been our best performing deals. If you look at the last four or five years in the firm.

I appreciate that color. Thank you Ted.

Thank you participants I'll now turn the conference back over to CEO , Ted Keening for final remarks.

Well, thank you all for joining us today.

There is a promise to you we're going to continue to block and tackle.

What we do best which is generate current return.

I appreciate the questions I appreciate the the line of questions, even if they're multiyear questions as Robert talked to from time to time.

Very much looking forward to speaking to all of you again next quarter in the meantime.

For earn mix to reach out.

Quarter, two to check further and provide you any more information that you'd like on a one on one basis. Thank you.

This concludes today's conference call. Thank you all for joining you may now disconnect.

Okay.

Sure.

[music].

Okay.

[music].

Yes.

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Okay.

[music].

Welcome to Monroe Capital Corporation's first quarter 2022 earnings conference call.

Although we believe these statements are reasonable based on management's estimates assumptions and projections as of today may four 2022. These statements are not guarantees of future performance. Furthermore, 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 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'll now turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation, Sir you May now begin.

Good morning, and thank you to everyone, who has joined us on our call today.

Welcome to our first quarter 2022 earnings conference call.

I'm joined by Aaron Peck, our CFO and Chief investment Officer, and also mix all Amini.

Our senior portfolio manager for MRC.

Last evening, we issued our first quarter 2022 earnings press release and filed our 10-Q with the SEC.

More aggressive fed tone.

Ongoing supply chain issues and geopolitical unrest in Russia, and Ukraine moved investors to the sidelines, especially in the more liquid markets.

In 2021.

<unk> middle market loan volume grew by over 82% year over year According to refinance it.

And we expect the trend of direct lenders taking market share from traditional institution institutional lending sources will continue especially.

Especially during periods of market uncertainty like today, when issuers are seeking certainty of execution.

Monroe is the ability to offer underwritten solutions is a real advantage for our clients during a variety of market environments, our pipeline of quality actionable financing opportunities at the platform level remains very strong.

So today is more uncertain market backdrop.

Turning now to our first quarter results. We are pleased to report adjusted net investment income of $5 4 million or 25 cents per share.

We also reported an EV.

$244 9 million or $11 30 per share as of March 31, 2022, a decrease of 21 per share for many of the $249 5 million or $11 51 per share.

<unk> as of December 31, 2021.

A modest decline in NAV was primarily the result of a onetime book loss and extinguishment of debt associated with the redemption of the remaining SBA debentures during the quarter and net unrealized losses on the portfolio.

During the quarter MRC <unk> debt to equity leverage decreased slightly from 135 times debt to equity to one three times.

Times debt to equity.

Modest decrease in leverage was primarily driven by a decrease in the size of the portfolio as a result of portfolio syndication and repayment activity near the end of the quarter.

New originated new origination activity at Monroe remains strong.

We expect to modestly increase leverage to within our targeted leverage range of one three to one four times debt to equity.

As we have discussed on prior calls our continued focus is on making new investments with attractive risk return dynamics, while proactively managing in constructing our portfolio. We believe that our existing portfolio companies will be able to navigate a higher interest rate environment and they are generally well positioned to manage the inflationary.

Supply chain and geopolitical headwinds they're facing.

Our loan underwriting focus continues to be on those companies with defendable market positions resilient business models exceptional management teams and strong sponsors or owners.

We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive long term NAV performance.

I am now going to turn the call over to Aaron who is going to walk you through our financial results.

In 97 portfolio companies at March 31, 2022, as compared to debt and equity investments in 96 portfolio companies at December 31.

During the quarter, we received three full payoffs totaling $22 $4 million and had loan sales and other ordinary course, low repayments aggregating $13 8 million.

At March 31, we had total borrowings of $318 3 million.

Including $188 $3 million outstanding under our revolving credit facility and $130 million of our 2026 notes.

Total borrowings outstanding decreased by $19 $6 million, primarily as a result, our portfolio repayments and syndications near the end of the quarter.

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 $66 $7 million of availability as of March 31.

Subject to borrowing base capacity.

Turning to our results for the quarter ended March 31, 2022, adjusted net investment income a non-GAAP measure was $5 $4 million or 25 per share compared to $5 4 million or 25 per share in the prior quarter.

When considering our target leverage and credit current credit performance at MRC, We believe that on a run rate basis. Our adjusted NII can cover that 25 per share quarterly all other things being equal.

As of March 31, our net asset value was $244 9 million.

Which decreased from the $249 5 million and net asset value as of December 31.

<unk> NAV per share decreased from $11 51 per share at December 31, $211 30 per share as of March 31, the <unk> 21 per share NAV decreased substantially the result of a loss on extinguishment of debt associated with the redemption of the remaining SBA debentures during the quarter and net unrealized loss.

On the portfolio.

I will now turn it over to Mick <unk>, who will provide some more details on our first quarter operating performance.

During the first quarter, we placed no additional borrowers on nonaccrual status.

Total non accruals approximate two 2% of the portfolio at fair value at March 31.

Down from two 6% of the portfolio at fair value at December 31, 2021, and four 1% of the portfolio at fair value at December 31, 2020.

At March 31, 2022, the effective yield on our debt and preferred equity portfolio was 8% unchanged from December 31 2021.

We maintain LIBOR floors in nearly all of our deals with the majority of floors at a level of at least 1%.

On most of amendments and on virtually all of our newly originated deals. We are focused on pricing our deals at a spread to the secured overnight financing rate or so far in advance of LIBOR going away, which is anticipated to occur in 2023.

Moving to the expense side total expenses for the quarter decreased from $7 6 million in the fourth quarter to $7 1 million in the first quarter, primarily due to lower incentive fees net of associated fee waivers as a result of lower net investment income.

Net realized losses for the first quarter totaled $1 $1 million, primarily related to the one time book loss on the repayment of the SBA debentures, which represents the unamortized deferred financing costs on the debentures at the time of debt repayment.

Net change in unrealized losses for the quarter totaled $3 4 million.

As discussed earlier on March one.

RCC Spic's subsidiary repaid all of its remaining SBA debentures and transferred its long positions to MRC.

This was achieved through borrowings on our revolving credit facility with IAG and the use of the restricted cash cash which was on hand in our SP ICEE subsidiary subsidiary.

While the repayment of the SBA debentures increased the level of regulatory leverage at M. RCC, it's slightly reduced total leverage all other things being equal.

In recent quarters, we have had substantial restricted cash in the Spic's subsidiary, resulting from lower loan repayments, which could only be used to repay SBA debentures on a semiannual basis.

The full repayment of our SBA debentures will help reduce the drag associated with the large cash balance previously held at the subsidiary and positively impact net investment income going forward.

As of March 31, the <unk> had investments in 60 different borrowers aggregating $195 3 million at fair value with a weighted average interest rate of 6%.

The <unk> had borrowings under its nonrecourse credit facility of $128 1 million and $54 9 million of available capacity under this credit facility subject to borrowing base availability.

I will now turn the call back to Tom.

Ed for some closing closing remarks before we open up the line for questions.

Thanks, Nick.

Closing, while there are a number of headwinds that are creating today's market uncertainty, we feel that MRC is well positioned to deliver differentiated risk adjusted returns for our shareholders.

Our overall Monroe capital platform continues to make a very strong maintain a very strong pipeline of high quality investment opportunities for all funds at Monroe, including MRC.

As an example, we put to work over $6 $5 billion at the at the Monroe capital platform in 2021.

We have constructed a purposefully defensive portfolio under the watch of a tenured senior leadership team and we benefit from a large portfolio management organization.

That is managed credits through multiple economic cycles going back to the year 2000.

2000.

Over 20 years ago.

As a result, we remain confident that our dividend, which is currently at a yield of approximately 10% can be supported by consistent adjusted net investment income.

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. Thank you.

Thank you speakers participants we will now begin the question and answer session to ask a question over the phone you May press the star key followed by the number one.

To withdraw your request you May press the pound key.

Again, Thats star one to ask a question or the pound key to withdraw your request.

Speakers. Our first question is from the line of Christopher Nolan of Ladenburg Thalmann. Your line is now open.

Okay, given all the moving pieces in the economy supply chain inflation likely fed tightenings.

And also your stock is trading below book what are your thoughts in terms of the capital structure.

Are you going to look for more fixed rate notes.

As a share repurchase and consideration any details would be helpful.

Thanks Christopher.

Good question.

Everything is on the table Christopher.

We're looking at all options to increase shareholder value.

So I will tell you that.

As soon as we make a decision you'll you'll know but right now.

Our platform is is humming as I've said in my prepared remarks, we put.

$6 billion to work in 'twenty one.

First quarter.

2022, we're almost a $2 billion across the platform.

And we see demand coming.

From traditional buyouts liquidity investments.

Secondary investments and right now.

We're navigating what's the best way for MRC Cedar participate in those transactions and increased failure.

Great. Thanks, and my follow up question is on asset quality your asset quality has really improved over the last quarters.

Will if you can get your non accruals down to let's say.

1% of investments of cost.

And you're in your income would actually go up would you start lowering the overall balance sheet leverage.

Another good question.

Told you this.

Several quarters ago that our number one goal is to get our hands.

Around collecting some of the underperforming assets. So I think we've proven that if you look at where we were two years ago.

Look at where we were a year ago.

We've done exactly what we said we were going to do so I anticipate we will continue to make progress on that front in 2022.

And.

Once we do that I think youre going to see income go up I think youll see a lot of good things from a RCC and we can make those decisions.

As appropriate.

Alright ill just add Chris.

On the leverage side I don't think we're really looking at leverage is tied to what happens with our non accrual assets. So I don't think you would see any material change in our leverage strategy with regards to our reduction in non accruals I think we would continue to be targeting the range that <unk> talked about in our presentation of one three to one four times total leverage.

That's the current expectation.

Okay. Thanks Darren.

Yeah.

Okay.

Next question is from the line of Kevin <unk> of JMP Securities. Your line is now open.

Yes.

Hi, Good morning, and thank you for taking my question.

First question originations were understandably light in the first quarter given the slowdown in M&A activity in a seasonally slower quarter. Overall can you give us a sense power adjacent activity is tracking so far this quarter.

Yes, I can.

We can do that I can talk about the platform, we're seeing a fair amount of demand still usually what happens is Q1 and Q2.

Our heavy demand.

Quarters, and then things slow a little bit in Q3, and then they pick up in Q4.

We're seeing a little bit of a drop off in Q2 from Q1.

Think thats got to do more with.

Interest rates rising and some uncertainty over the future.

In the near term.

There is $2 two trillion dollars.

Pte dry powder sitting on the sidelines.

And there is about.

$750 billion of.

Dry powder in private credit.

So that's a three to one ratio.

In PE dry powder, the private credit dry powder, where usually the cake, making.

Recipe isn't kind of a one to one so there's going to be a big tailwind behind private credit. It's I think a function of just getting comfortable with the market.

There's a bunch of industries that are doing well kind of a COVID-19 bump.

Theres other industries that have had a.

Covid challenge.

And we transitioned our portfolio pretty much towards more of a market economy business services software.

Things that generate consistent earnings and defensible positions.

So I think we'll continue to see a steady stream of.

<unk>, new business and originations I know our pipeline internally.

<unk>.

Through the end of Q2 and into Q3 are pretty full.

List of deals and its really going to be a geopolitical question I think if you see more.

<unk> coming out of Russia, and Ukraine, which is what the newspapers are quoting this morning.

I think thats going to potentially be.

Driver for <unk>.

A more measured approach to deal flow in the U S.

And then Kevin I will just add Mark Ken.

Kevin I'll add MRC, specifically we.

We don't need to put a lot of new assets into MRC to hit our targeted leverage I think the challenge is always and we talk about this every quarter as we can absolutely control what comes in the front door, but its more difficult to control what goes out the back door. So we try to allocate deal with MRC that are both accretive on the yield side accretive from a diverse.

<unk> standpoint accretive from all the things Ted talked about are positive from our industry choice based on the environment. We're in but we just don't know what's going to come out the back door and oftentimes. It comes out on the refinancing side at the very end of the quarter and so it shows up in our ending quarter leverage that's very common and we see those repayments at end of month or end of <unk>.

<unk>.

We're still feeling really good even with reduced.

Jason activity should that be the case that we should have plenty of opportunities that fit MRC to grow our portfolio and then just as a matter of whether the refinancing activity.

Correct.

Okay.

Yes.

Quick one.

And you can follow up if you want.

We really like recurring revenue right now and these tend to be.

Data cloud subscription based models business service based models.

Cause we found that during COVID-19 those industries tended to perform the best.

We're able to best predict the future in those industries.

Long term contracts sticky revenue sticky supply relationships.

Key business services key software elements for businesses.

That was a very good place to be during Covid and we have really.

Really ramped up our.

As our platform our firm's exposure in those areas and we reduced our exposure to the highly cyclical industries relating to transport travel leisure.

Some of the health.

The health and we continue to feel we are in the right spot going forward.

Yeah, and I would just add Chad we still also like to invest in what we believe are non correlated businesses.

That's a nice yield pickup in ads non correlated risk. So we carefully and selectively we will add some of that origination and have been for many years.

Okay, Great I'll leave it there congratulations on the quarter.

Thanks, Kevin.

As a reminder, its star one to ask a question over the phone or the pound key to withdraw your request.

Speakers. Our next question is from the line of Robert Dodd of Raymond James Your line is now open.

Hi, guys.

Going back to a topic, you've kind of touched on.

Improvement in ASP.

Asset quality.

Non accruals will come down you've made a lot of progress.

You indicated that you expect to make additional progress this year.

Can you give us any without.

Giving anything away I guess any any color.

What's your comfort level there is.

With that kind of progress is going to come through.

I mean, obviously you Vince you got marked down a little bit in the quarter.

That happens, but what are the dynamics that makes you confident that you're going to see continued progress in those few couple of assets that are left.

I think it's a good question and it's a particularly relevant question from you Robert because two years ago.

I had this discussion on one of these calls and I promise to them.

We were going to deal with this aggressively and that was my number one priority.

And we dealt with it aggressively and exactly what I said at the time two years ago was occurred.

We had a.

We've got a few credits not a lot, but a few credits that were very focused on.

And as I mentioned to you before as.

As opposed to.

Moving them out.

Yes, Mark.

Or less we've decided as affirmed the best thing to do is to <unk>.

<unk> generate the highest possible recovery that we cannot lose assets now mind you, but these assets are not only in MRC, many and most of all of these assets or in other funds across the firm MRC has a.

A small position in other investment funds have larger positions.

We have a portfolio management team of 10 people that are focused on our.

Our watch list and our.

Call It high risk.

The credits.

And it's as good a team as there is in the industry and if you look at what we've been able to do over the last two years in bringing down exposure.

Yes.

In instances, where private equity firms for one reason or another have decided not to invest.

Taken over and very often changed management.

Change direction change direction of businesses added businesses acquired businesses supplemented management brought in consulting.

Brought in new.

Investment strategies.

Across the board.

Our work.

I think has been validated by the success we've had.

In the last two years, we've got a couple of positions left.

<unk>.

We're making good progress on a number of alternatives decisions, we're going to be making here over the next few quarters.

And I am hopeful that because of the hard work we've done over the last couple of years that we're going to see some some good results. Some nice results. So I can't tell you that's a linear focus but if you look at the last two years, we've made a heck of a progress.

Reducing this and.

My goal like you say is to get this down below 1% here in the near term.

I appreciate that and I do remember that conversation.

One one additional one if I can.

You mentioned, new recurring revenue lines.

The platform has if I remember by a recurring revenue.

Dedicated fund, obviously MCC can participate in those deals as well et cetera.

Do you.

I think youll position relative your approach.

This is obviously.

At the large end.

Yes.

<unk> platforms out there doing.

Multibillion dollar.

Yes.

<unk> SaaS businesses that youll not necessarily participating focusing.

But not leading those kind of deals currently house, how does your approach differ from that Mega enter the market.

Yes, good good question.

There is about a half dozen platforms Monroe being one of them.

A real expertise in SaaS.

Ending.

In <unk> lending and then our software.

Like everything.

We've chosen the market that we want to play in.

The market that we like to play and it is the more fragmented middle market lower middle market place, so as opposed to underwriting.

At $1 billion.

Transactions.

SaaS investments, we're underwriting two to $3 million to $400 million.

Investments.

In the SaaS area. These are high quality.

Companies with high quality sponsors very often some of the larger sponsors with dual strategies one at the higher end of the market one of the lower end of the market to build. These these companies is the way the waste SaaS companies get built today.

It's very hard to go acquire a platform because most of these platforms are trading at 12% to 13 to 14 times revenue today. So the way most of the private equity firms are building SaaS platforms are the start with the smaller firms something that they can acquire for between two and 500 million.

And again remember, it's usually 30% or so debt and 70% equity and then doing a number of add on transactions tuck ins.

Holt arms to create a very large platform.

And we are very very involved in that business, we did as a platform last year or about $2 $5 billion and investments in this space.

We have a dedicated team based in San Francisco and Chicago.

Origination sourcing underwriting credit.

<unk> contained in that team and then the larger mineral platform.

Brings its.

Underwriting and consistent credit.

The expertise to bear.

And it's a significant part of our portfolio I would say probably of our $14 billion 15 billion today, we're probably close to 25% 30%.

In this asset class. So it is an important part of the overall firm <unk> shares and all of those deals and they have been our best performing deals. If you look at the last four or five years.

I appreciate that color. Thank you Ted.

Thank you participants I'll now turn the conference back over to CEO , Ted <unk> for final remarks.

Well, thank you all for joining us today.

There is a promise to you we're going to continue to block and tackle and.

And do what we do best which is generate current return I. Appreciate the questions I. Appreciate the line of questions. Even if they are multi your questions as Robert talked to from time to time.

Very much looking forward to speaking to all of you again next quarter in the meantime.

Look for earn mix to reach out intra quarter two to Jeff further and provide you any more information that you'd like on a one on one basis. Thank you.

This concludes today's conference call. Thank you all for joining you may now disconnect.

Q1 2022 Monroe Capital Corp Earnings Call

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