Q2 2022 Monroe Capital Corp Earnings Call
Welcome to Monroe capital corporations second quarter, 2022 earnings conference call.
Before we begin I would like to take a moment to remind our listeners that remarks made during this call 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 August three 2022. These statements are not guarantees of future performance.
Further time sensitive information may no longer be accurate as at the time of any replay or listening.
Actual results may differ materially as a result of risks uncertainty or other factors, including but not limited to 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'll now turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.
Good morning, Thank you to everyone, who has joined us on our call today.
Welcome to our second quarter 2022 earnings conference call.
I'm joined by mixed <unk>, our CFO and Chief investment Officer.
Last evening, we issued our second quarter 2022 earnings press release and filed our 10-Q with the SEC.
The negative economic backdrop and the more <unk>.
Rest of fed action during the second quarter increased both risk premiums and volatility across asset classes, especially in the more liquid public markets.
Negative segment.
Sentiment was also felt in the private markets, but with lower levels of volatility.
Credit spreads widened in the various loan markets with the leveraged loan 100 index falling 534 basis points from 97.35% of par.
March 31st.
92 points or 1% of par at June 30, and the <unk>.
<unk> middle market loan index declining 348 basis points from 97.06% of par.
March 31 to 93, 5% of par at June 30.
The M&A and related financing markets set a more cautious tone in the first half of the year okay.
According to a refiner to U S middle market loan volume totaled approximately $133 billion for the first half of the year.
Proximately, 58% lower than.
2021 full year.
Activity levels, though were up during the second quarter in the face of widening credit spreads and an increase in 30 day LIBOR rates from 45 basis points at March 31 to 179 basis points at June 30.
<unk> pipeline of quality actionable financing opportunities at the platform level remained strong.
So today's economic headwinds.
The Monroe platforms ability to offer underwritten solution. This is a real advantage for our clients during periods of market uncertainty.
Turning now to the second quarter results. We are pleased to report adjusted net investment income of $5 $4 billion or 25 cents per share.
This is consistent with adjusted net income of $5 4 million or 25 cents per share for the first quarter.
We also reported <unk>.
$232 $1 million or $10 71 per share as of June 32022, a decrease of 15 nine cents per share from any of the up $244 9 million or $11 30 per <unk>.
Sure Yeah as of March 31, 2022.
The decline in the Navy was substantially as a result, net unrealized losses on the portfolio, primarily due to market volatility and spread widening throughout the quarter.
During the quarter MRC <unk> debt to equity leverage increased from one three times debt to equity to 1.38 times debt to equity.
New originated new origination activity at Monroe remains strong and we.
We expect to maintain leverage within our targeted leverage range of one three to one four times debt to equity.
The portfolio is well positioned to benefit from an increase in the short term interest rates.
Substantially all of our borrowers were above their interest rate floors going into the third quarter. Therefore, any additional increases in interest rates should proportionately benefit our investment 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 in their faces.
Our loan portfolio and underwriting focuses continues to be on those companies defendable market position resilient business models.
<unk> 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 $14 billion in assets under management and over 175 employees as of June 32022.
We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive long term performance.
I am now going to turn the call over to Mick Who's going to walk you through our financial results.
Thank you Ted.
As of June 32022.
Our investment portfolio totaled $536 million down $10 million from $546 million as of March 31, 2022.
Our investment portfolio consisted of debt and equity investments and 98 portfolio companies at June 32022, as compared to debt and equity investments in 97 portfolio companies at March 31 2022.
During the quarter, we made investments in four new portfolio companies with fundings totaling $11 $6 million.
We also made a $500000 capital contribution to <unk>.
In addition, we had revolver add on or delayed draw fundings to existing portfolio companies totaling $9 $2 million.
During the quarter, we received two full payoffs totaling $9 $6 million and had loan sales and other ordinary course loan repayments aggregating nine $9 million.
Subsequent to the end of the second quarter and the filing of the 10-Q, we had repayments of approximately $27 $9 million net.
Net investment activity.
We are well positioned to redeploy this capital carefully into attractive assets that will benefit from increases in interest rates through participating in a substantial pipeline of opportunities generated admin route.
At June 30.
We had total borrowings of $320 million, including $190 million outstanding under our revolving credit facility and $130 million of our 2026 notes.
Total borrowings increased slightly by $1 $7 million during the quarter.
The revolving credit facility had $65 million of availability as of June 30, yes subject to borrowing base capacity.
Turning to our results for the quarter ended June 32022 adjusted.
Adjusted net income.
Net investment income a non-GAAP measure was $5 4 million or <unk> 25 per share <unk>.
Compared to $5 $4 million or 25% per share in the prior quarter.
When considering our target did leverage in the current credit performance at MRC we.
We believe that on a run rate basis, our adjusted NII will cover the <unk> 25 per share quarterly dividend all other things being equal.
As of June 30.
Our net asset value was $232 1 million, which decreased from $244 9 million and net asset value as of March 31.
Our NAV per share decreased from $11 30 per share at March 31 to $10 71 per share as of June 30, 30th.
The <unk> 59 per share NAV decrease was substantially the result of market volatility and spread widening which increased net unrealized losses.
We experienced the same effects affect approximately two years ago at the outset of COVID-19.
Looking to our statement of operations total investment income was $13 million during the second quarter up from $12 $5 million in the first quarter due.
Due to higher fee income, partially offset partially offset primarily by lower interest income.
During the second quarter, we placed no additional borrowers on non accrual status.
Total non accruals approximate 2% of the portfolio at fair value at June 30 down from two 2% of the portfolio at fair value at March 31.
At June 30, the effective yield on our debt and preferred equity portfolio was eight 5%.
Up from 8% at March 31.
LIBOR rates, which had been at historically low levels rose during the quarter with one month LIBOR at approximately 179 basis points as of June 30th versus approximately 45 basis points as of March 31.
We maintain interest rate floors in nearly all our deals with the majority of floors at a level of at least 1%.
As interest rates did not exceed the majority of our floors until.
The rate reset.
Date at the end of June the second quarter did not include a significant benefit in interest income from this rising rate environment, and we expect to see a more sizable impact during the third quarter.
All other things things being equal a rising interest rate environment will improve the yield on our investment portfolio and increase net investment income.
<unk> reference rate levels exceed interest rate floor levels.
And 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 or sofa and advance of LIBOR going away, which is expected to occur in 2023.
Moving over to the expense side.
Total expenses for the quarter increased from $7 1 million in the first quarter to $8 million in the second quarter, primarily driven by higher incentive fees net of associated fee waivers and income taxes, including excise taxes, partially offset by lower interest and debt financing.
As a result of the repayment of our SBA debenture debentures during the first quarter.
Net loss for the second quarter totaled $12 $4 million compared to a net loss of $4 $6 million in the first quarter.
Net unrealized losses on investments were $13 4 million for the second quarter, primarily driven by the market volatility and spread widening partially offset by unrealized gains approximating $1 million on foreign currency forward contracts.
As of June 30th DSL as AD investments in 62 different borrowers aggregating $195 2 million at fair value with a weighted average interest rate of seven 1%.
The S. L apps underlying investments are loans to middle market borrowers that are generally larger and more sensitive to market spread movements than the rest of mrc's portfolio, which is focused on lower middle market companies.
The <unk> portfolio decreased in value by three 1% during the quarter from 97, 9% of amortized cost as of March 31 to 94, 8% of amortized cost as of June 30th.
During the second quarter MRC received income distributions from <unk> of $900000 consistent with the first quarter.
As of June 32022, the <unk> had borrowings under its nonrecourse credit facility of $129 6 million and had $45 4 million of available capacity under its credit facility subject to borrowing base availability.
I will now turn the call back to Ted for some closing closing remarks before we open up the line for questions.
Thanks, Nick we feel that Im RCC is well positioned to deliver differentiated risk adjusted returns for our shareholders, especially where our earnings and dividend will benefit from increases in market interest rates are.
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 firm we funded over $2 $5 billion of new investments in the first half of 2022.
We see significant opportunities to deploy capital in sectors with resiliency of growth including technology.
Services health care and opportunistic we remain highly focused on the primary risks in the economy today and remain selective in our underwriting where we generally fund less than 5% of all the deals we review on an annual basis we.
We have constructed a purposefully defensive portfolio under the watch of tenured senior leadership team.
And we benefit from a large portfolio management organization that is managed credit through multiple economic cycles.
We have made substantial progress on portfolio matters in the last two years, we are excited about our investment portfolio and our prospects and continue to believe that Monroe Capital Corporation, which is affiliated with an award winning best in class external manager provides a very attractive investment opportunity to our shareholder.
There are some other investors in the current market.
Thank you all for your time today and that concludes our prepared remarks.
Going to ask the operator to open the call now for questions. Thank you.
Thank you if you'd like to ask a question over the telephone. Please press star followed by the number one on your telephone keypad.
To withdraw your question. Please press star one again, we'll pause for just a moment to compile the Q&A roster.
Our first question comes from Kevin <unk> from JMP Securities. Please go ahead. Your line is open.
Hi, good morning, and thank you for taking my questions.
Given the evolution of market conditions over the past two quarters I'm curious if you've seen that translate to improved pricing on new deals that you're viewing and I guess more broadly if you can discuss the attractiveness of deals you're currently seeing from a risk reward perspective.
Okay.
Mick you want to start and then I'll comment on that one.
Sure.
So.
From a deal flow perspective, we still are seeing tremendous actual opportunities as Ted said earlier, we've got.
Pretty significant pipeline, we closed over two 5 billion.
Deals in the first half of the year pipeline remains strong.
In terms of what we're seeing in terms of opportunities.
We have seen.
Better opportunities in terms of.
Greater spread.
Thats coincident as you can imagine with.
Some of the spread widening of the spread widening that we've seen kind of in all markets.
<unk> spreads better.
In terms of conditions, better and by terms and conditions I mean tighter documentation.
As well as our covenants and we have covenants in all of our direct deals that are generally tighter relative to.
Television relative to forecast our budget so.
This is a an advantageous market for us it's advantageous in the sense that.
We can be selective around the kinds of opportunities that we're looking at.
And.
In that regard.
They are just really good opportunities for us to put capital to work.
Yes, I'll Echo, what Mitch said, Kevin I think higher spread lower leverage better documents are the three things that we're seeing I will tell you, though it took a little bit of time.
The market was still competitive.
At the beginning of the quarter, we're just starting to see trends narrow for increased spread.
First quarter was pretty much business as usual.
From 2021, we had a lot of falloff.
Into Q1, and there's a lot of liquidity in the market deals are getting done hi.
High quality companies are still commanding.
Premium terms.
But what we've seen is we've seen the market start to adjust here towards the back half of Q2.
We've been purposefully.
I'll call it cautious.
Think that spreads are going to continue to get better in Q3 and Q4 as the year goes on.
And what we're doing as a firm is we're positioning ourselves to get the benefit of that.
Risk adjusted return.
And as well as be thoughtful in how we approach the market.
With our with our existing clients. So that's.
That's a quick answer higher spread lower leverage better documents.
Okay. That's all really helpful. And then just looking at non accruals nonaccrual at fair value came down quarter over quarter to 2%.
Was there any change to non accruals at cost or is that stable quarter over quarter.
From a cost perspective.
Over quarter, it was basically basically flat.
Okay got it and that's it for me. Thank you for taking my questions.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead. Your line is open.
Hi, Thanks for taking my questions and congratulations Mike on your stuff.
What was the EBITDA coverage for.
To your portfolio companies and the main portfolio to your debt positions in the second quarter and then how do you expect that to change with the rising rates.
Through the second half of the year.
So in terms of interest coverage on a if I look at our at our portfolio businesses.
General interest coverages are going to be between two five and three and three quarters times.
That's the way we've that's.
That's the way the portfolio is constructed.
We think there's adequate cushion in.
And our coverage ratios to support.
No.
Good good portfolio in the context of foreseeable rate increases for sure.
Great and then I guess on asset quality.
The SLS had an additional non accrual port Townsend holdings.
Correct.
Any.
Any color you can provide on the SLR credit quality since it's our middle market portfolio and it's supposed to be.
A little bit more conservative than the normal sketch.
Scheduled investments for.
MRC.
Yes, so so the SLS.
As we've talked about in the opening remarks, as well as a little bigger borrower then.
The <unk> portfolio. There is one non accrual in that portfolio of Port Townsend paper company, which is a corrugated box business.
There was it was placed on them.
Non accrual this year.
Otherwise the portfolio if I look.
Look at that portfolio the.
The average mark in that portfolio is down around 310 basis points quarter over quarter, we feel good about the quality of that portfolio. We obviously have one non accrual position that we are.
That we're working with but feel good about the credit quality of that portfolio, which again is generally larger larger loans.
CIBC CBC restaurants in that portfolio as Mark does non accrual in the <unk>.
That is correct you're correct.
Okay. Okay. Thank you.
It's a small position, but yes, that's also on nonaccrual. Thank.
Thank you.
Our next question comes from Robert Dodd from Raymond James. Please go ahead. Your line is open.
Hi, guys.
Just a more general question Ted based based on one of your comments you said you expect spreads to continue to get.
Better than Q3 Q4.
I guess, one how confident are you in that.
Backing Covid obviously.
March we all expected spreads to widen fairly material.
Throughout the year in that.
Obviously, it ended up not happening and there's a lot of stimulus, but a lot of other things going on at the same time. So what gives you some confidence that they are going to widen.
No.
This time it will be different.
If you've got any any thoughts there.
Yes.
I don't expect things to change Robert drastically I think the economy is basically.
In decent shape, we've got a lot of talk about recession, we've got trucks about supply chain issues.
The good companies that we're seeing in our portfolio are performing well, there's a lot of competition for higher quality companies that are able to project out.
With certainty what their cash flows are.
And what's happening is I talked to lots of the Ceos of other.
Middle market private credit firms and there's been a fair amount of price discovery going on over the last 45 days.
Used to be that.
The market was.
Relatively efficient.
I've seen much more price discovery.
Happened in the last 45 days and a lot of discussions were.
Deals are getting done 50 75 basis points wide.
Where they would have gotten done in late 2021 or even Q1.
2022, so I anticipate.
The remainder of the year.
To follow the trend lines of what we've been seeing in the second half of Q2.
And what that means is probably 50 to 75 basis points of spread widening and we're experiencing that across our portfolio.
All I can tell you when we look at these things as we looked at our own.
Portfolio when you look at our own kitchen to find out what the market's doing and thats been our experience and.
I want to always we try and take a global view of the business here.
Try and time markets and Thats why from from a Q2 standpoint as a firm we're being.
We're trying to be thoughtful in deploying capital.
Being good partners being reliable partners, but also being thoughtful on how we deploy capital.
I really appreciate that color. Thanks, a lot guys appreciate it.
We have no further questions in queue I'd like to turn the call back over to Ted Koenig for closing remarks.
Rob.
Thank you very much for your questions today I appreciate it we look forward to obviously answering any other questions.
Basis, if you have them.
I think that.
Just like after the Covid period.
The rest of this year is going to be good for private credit.
And we're excited.
Just to speak to you all next quarter. So thank you for your time today Bye bye.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Yes.
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