Q4 2022 Monroe Capital Corp Earnings Call

March 2, 2023

Speaker 2: Good day everyone, you're holding for today's Montreux Capital Corporations Fourth Quarter in full year 2022 earnings conference call. At this time we're still in many additional participants and should be starting shortly. We do appreciate your patience and please continue holding.

Speaker 1: And and and the that and.

Speaker 2: Welcome to my role capital corporation's fourth quarter and four year 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 four booking statements including statements regarding our goals, strategies, beliefs, feature potential, operating results, and cash flows.

Speaker 2: Although we believe these statements are reasonable based on management's estimates, assumptions, and projections as of today, March 2, 2023, these statements are not guarantees of future performance. Further, time-sensitive information may no longer be accurate as of the time of any replay listening. Actual results may differ materially as a result of risk uncertainty or other factors, including but not limited to the risk factors described from time to time in the company's participants but the SEC.

Speaker 2: Mono Capital takes no obligation to update or advise this for the key statements. I will now turn the call over to Ted Kamey, Chief Executive Officer of Mono Capital Corporation. Please go ahead, sir. Good morning and thank you to everyone who has joined us on our call today. Welcome to our fourth quarter and four year 2022 earnings conference call. I am joined by Nick Salimini, our CFO and Chief Investional Officer.

Speaker 3: and Alex Parmasek, our Deputy Portfolio Manager. Last evening, we issued our fourth quarter and four year 2022 earnings press release and filed our 10K with the SEC. I'd like to open up with some thoughts and observations on the market and the general economic environment.

Speaker 3: In the fourth quarter of 2022, and in the early 2023 period, compelling opportunities for MRCC have begun to emerge in response to the market volatility and the wary tone of the M&A and financing markets. As M&A and financing markets work through today's macroeconomic trends in what we consider to be a year of transition, middle market financing value totaled almost $280 billion in 2022 according to Refinitive.

Speaker 3: This mark was approximately 12% behind the record setting volume in 2021, but still well above historical averages. As a firm, Monroe made approximately $6 billion of new investments in 2022. In response to the current market volatility, we are executing on transactions that not only have enhanced economics.

Speaker 3: but that also come with reduced leverage as well as more favorable pricing terms and documentation. A trend that began in the third quarter of last year. With current market conditions, stiliness lower leverage levels coupled with higher equity cushions.

Speaker 3: We will selectively pursue assets in attractive markets as older vintage assets repay. Our view is that 2023 will present itself as one of the most attractive ventages for deploying private capital, private credit capital, and that MRCC is very well positioned, especially as market share continues to move.

Speaker 3: toward direct lenders away from traditional regulated lenders. While we are excited about the opportunities ahead, we are also mindful that the higher interest rate environment and anticipated broader macroeconomic headwinds could potentially present stress within private credit loan portfolios. We have intentionally built a portfolio in MRCC.

Speaker 3: and we are already seeing signs of resilience.

Speaker 3: Many of our borrowers have begun to experience relief as input costs and the supply chain have altered course towards normalization from what we've seen last year. As such, our portfolio has been able to demonstrate credit quality stability despite the substantial interest rate increases from last year. To supplement the defensive portfolio makeup.

Speaker 3: we maintain a deep and experienced portfolio management team. This team works in conjunction with our core investment teams to execute a key component of our portfolio management strategy, which is early intervention. This allows us to get ahead of potential challenges, and we will continue to take a proactive approach to navigating through this uncertain environment. Ultimately, we believe that we are positioned to actively...

Speaker 3: Maximize outcomes while remaining a trusted financial partner to our clients. I will now transition to a snapshot of our fourth quarter results. Adjusted net investment income was $5.6 million or $0.26 per share down from adjusted net income of $7.1 million or $33 cents per share for the third quarter, which included one time benefits.

Speaker 3: of the receipt of previously unrequited interest income on the successful repayment of our investment in Kurean holdings. Excluding the impact of this one-time benefit from the receipt of previously unaccrued interest income associated with Kurean during the third quarter, adjusted net investment income in the fourth quarter grew by 1.8%. We also reported NAV of $225 million or $10.39 per share as of December 31, 2022. A decrease of 4 cents per share from NAV of $226 million.

Speaker 3: for $10.43 per share as of September 30, 2022. NIST decline in any V was substantially the result of market market losses on the investment in MRCC Senior Loan Fund 1, which we refer to as our SLF. The decrease in value at the SLF was driven by these market to market unrealized losses on SLF investments, which are loans to traditional upper-middle market borrowers and have continued to experience higher volatility and valuations as a result of more recent interest rate increases.

Speaker 3: On a net basis, the valuations on the remainder of the portfolio remained relatively flat to September 30, 2022.

Speaker 3: During the quarter, MRCC's debt-to-equity leverage increased from 1.33 times debt-to-equity to 1.49 times debt-to-equity slightly above our long-term target range of 1.3 to 1.4 times. The increase in leverage was primarily driven by strong investment activity during the fourth quarter coupled with lighter than expected.

Speaker 3: portfolio pay off activity. We continue to focus on managing our investment portfolio and selectively redeploying capital resulting from repayments. The significant majority of our 105 portfolio companies are performing in line with expectations. Based on current and forecast of market interest rates, interest coverage is generally solid across our existing portfolio. In addition, we believe that the modest weighted average loan to value

Speaker 3: in the portfolio provides us with strong downside protection and cushion to these investments. And a portfolio will continue to benefit from the meaningful amount of equity invested in our companies. New deals continue to undergo a comprehensive under rating process that includes downside stress scenarios to assess performance volatility and cushion from rising interest rates, margin pressures and an overall economic slowdown. MRCC enjoys a strong strategic advantage in being affiliated with the best in class award winning middle market private credit asset management firm with approximately $16 billion in assets under management and approximately 200 employees as of December 31, $21,22. How dividend coverage continues to trend positively?

Speaker 3: We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive long term and AV performance despite anticipated macro market headwinds and Mark to market unrealized adjustments At this point I will turn the call over to Mick who is going to walk you through the financial results in greater detail Thank you, Tadad As of December 31st 2022 our investment portfolio totaled $541 million top $33 million from $500 and $8 million as of September 30th 2022

Speaker 4: Our portfolio consisted of debt and equity investments in 105 portfolio companies as of December 31, 2022, as compared to debt and equity investments in 98 portfolio companies as of September 30, 2022. During the quarter, we made investments in eight new portfolio companies with funding totaling $21.7 million at a weighted average interest rate of 11.2%. We also made nominal equity investments in two of these portfolio companies.

Speaker 4: Further, we had revolver or delay draw fundings and add-ons to various existing portfolio companies totaling $18.3 million. During the quarter, we received one full payoff, which was for a nominal immaterial amount. We also incurred partial and normal course paydowns of $9 million and had no sales this quarter. We also incurred partial and normal course paydowns of $18.3 million.

Speaker 4: We are well positioned to deploy capital from future repayments carefully and to attractive assets that will benefit from increases in interest rates and more favorable structures through participating in the substantial pipeline of opportunity generated at Monroe. As of December 31st.

Speaker 4: We had total borrowings of $334.6 million, including $204.6 million outstanding under our floating rate revolving credit facility and $130 million of our 4.75% fixed rate 2026 notes.

Speaker 4: Total borrowings outstanding increased by $33.4 million during the quarter. The revolving credit facility had $50.4 million of availability as of December 31st, subject to borrowing base capacity.

Speaker 4: Now, turning to our financial results for the quarter ended December 31, 2022. Adjusted net investment income, a non-gap measure, was $5.6 million or 26 cents per share compared to $7.1 million or 33 cents per share in the prior quarter.

Speaker 4: While the average portfolio yield increased during the quarter ended December 31, 2022, adjusted net investment income declined, primarily as a result of a one-time benefit of the receipt of previously unaccrued interest income associated with the repayment of carry-on holdings that had previously been on non-accural status.

Speaker 4: which occurred in the quarter ending September 30, 2022. Excluding the one-time benefit of Curian from the third quarter results, adjusted net investment income increased by 1.8% or $100,000 during the fourth quarter.

Speaker 4: When considering our targeted leverage, the rising interest rate environment, the favorable percentage of our fund leverage at a fixed rate and the current credit performance at MRCC, we believe that on a run rate basis, our adjusted net investment income will comfortably cover the current quarterly dividend, all things being equal. As of December 31, our total our net asset value was $225 million.

Speaker 4: which decreased from the $226 million in net asset value as of September 30th. Our NAV per share decreased from $10.43 at September 30th to $10.39 per share as of December 31st. The 4 cents per share NAV decreased.

was substantially the result of Mark to Market Losses on the investment in MRCC, Senior Loan Fund I. The decrease in value at the SLF was driven by these Mark to Market Losses on the SLF investment, which are loans to traditional upper-middle market borrowers and have continued to experience higher volatility in valuations. Valuations on the remainder of the portfolio remained relatively flat on a net basis compared to the prior quarter. Looking to our statement of operations,

Total investment income was $15.2 million during the fourth quarter, down from $15.9 million in the third quarter. Excluding the one-time third quarter benefit of $2 million in interest income on Surian, investment income actually increased by $1.3 million or 9.4%, primarily as a result of increase in portfolio yield and average portfolio size. In addition, during the quarter, we continued to see the impact of increases in interest rates on our investment income as all of the portfolio borrowers exceeded their benchmark interest rate floors during the quarter. And we were fully benefiting from phase rate increases across the portfolio during the fourth quarter.

At December 31, the effective yield on our debt and preferred equity portfolio was 11% up from 9.9% at September 30. Sovereys which have continued to increase in the latter half of the year rose during the quarter with one month so far at approximately 406 basis points as of December 31, versus approximately 304th-thing basis points as of September 30.

All things being equal, a rising interest rate environment will continue to improve the yield on our investment portfolio and increase net investment incomes. At December 31, we had four investments on non-accrual status representing 0.5% of the portfolio at fair market value compared to four investments on non-accrual status which represented 0.7% of the portfolio at fair market value at September 30. Our performance has steadily improved in this area as we have been working out the underperforming companies in our portfolio as we said we would on previous calls. This is the direct result of the turnaround and workout capabilities of our external manager when row capital.

and the resources they have provided to us. During the fourth quarter, we placed no additional borrowers on non-accual status. Further, the investment performance risk rating distribution has remained relatively stable. Moving over to the expense side, total expenses slightly decreased from $9.7 million in the third quarter to $9.6 million in the fourth quarter, primarily driven by lower income taxes, primarily associated with blocker entities that hold certain of the company's equity investment.

and lower incentives. These decreases were mostly offset by an increase in interest and other debt financing expenses due to the rising interest rate environment and higher average debt outstanding. Net loss for the quarter totaled $1 million compared to a net loss of $7 million in the third quarter. Net realized and unrealized losses on investments were $300,000 for the fourth quarter.

Other net losses totaling approximately $700,000 during the fourth quarter were related to foreign currency forward contracts used to hedge currency exposure on certain investments. As of December 31st, the SLF had investments in 60 different borrowers aggregating $183.2 million at fair value with a weighted average interest rate of 9.7%.

The SLF's underlying investments are loans to middle-market borrowers that are generally larger and more sensitive to market spread movements than the rest of MRCC's portfolio, which is focused on lower middle-market companies. The SLF portfolio decreased nominally in value by 10 basis points during the quarter from 93.6% of Amortized Costs as of September 30 to 93.5% of Amortized Costs as of December 31. Additionally, SLF realized on its previously recorded unrealized loss on port towns and holding company during the quarter. During the fourth quarter, MRCC

received income distributions from SLF of $900,000 consistent with the prior quarters. As of December 31, 2022, the SLF had borrowings under its non-recourse credit facility of $122.2 million and $52.8 million of available capacity under its credit facility subject to borrowing base availability. At this point, I will turn the call back to Ted for some closing remarks before we open the line for questions.

Thanks, Mick. In closing, we believe that we are well positioned to emerge from a transitional 2022 to capitalize on compelling opportunities for private credit and navigate the market uncertainty that may lie ahead. Our average portfolio asset yield is an accessible 11% on current deals, which portends well for the rest of 2023.

The depth and experience of our originations and underwriting teams will allow us to continue to selectively deploy capital and sectors that we have demonstrated resiliency to economic cycles. As we remain active in the market, we expect to realize the benefits of heightened demand for private capital from lower and overall middle-market companies, including been that limited to receiving more favorable economics and deal structures. This strategy is consistent with our historical focus on providing well protected, well-structured, senior secured, first-leam loans to companies with insulated market positions and reliable business models led by strong management teams and reliable sponsors. We will continue to lean on our team and core underwriting principles to generate attractive and differentiated risk-adjusted returns while navigating the uncertainties of 2000s and 2023 and beyond. MRCC is well-positioned to deliver stable and consistent dividends for our shareholders.

especially where our earnings and dividends stand to benefit from an increase in market interest rates. 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 and 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 am going to ask the operator to open up the call now for questions.

Thank you. At this time, if you do have question, please signal us by pressing star one. If you would like to withdraw your question, please press star one again. Again, that will be star one for questions. We'll pause for just a moment.

We'll hear first today from Kevin Fultz with JMP Securities. Hi, good morning and thank you for taking my questions. I'm Kevin Fultz.

I noticed that PIC income represented about 14.7% of interest income in the fourth quarter, which was up meaningfully from 7.8% in the prior quarter. I'm curious if the increase is driven by new deals that were maybe structured with a PIC component or if that was possible in that related to any insight would be helpful. Sure, good morning, Kevin. Thank you for the question.

So we did see an increase in a pick income during the course of the quarter. The primary reason for the increase in pick income was the election by one of our borrowers at its option to exercise that pick plug up During the quarter if I look at our kind of pick income trends quarter of a quarter year earlier We've kind of been in that in a 12 to 15% range

So we feel comfortable with kind of where a kick-in income is as a component of our total investment income But that was the main cause where the increase during the quarter Okay, thanks and I got just to continue kind of on that line of questioning I'm curious if you've seen a increase in amendment requests I guess in the December quarter and how that's trended recently Yeah, really good question, Kevin

across our portfolio. Okay, that's great to hear. And then one more if I can. You know, I noticed that other GNA expenses were up slightly in the fourth quarter. I guess can you just discuss what drove the increase? I'm just trying to get a sense if we should be scaling GNA expense in our model.

Yeah, so nothing meaningful in terms of that slight GNA bomb. I would guide you towards kind of a historical pattern on GNA front as you think about your model.

Okay, great. And I appreciate your time this morning. I'll leave it there. Thanks, Ellen. We'll hear next from Christopher Nolan with Layden Bergthalman. Special thank you Ryan. Cheers. See you guys.

The SLS. Any of the borrowings by the SLS secured by any MRCC investments in the main portfolio? They are not.

Okay, and then I guess in terms of asset liability management, what you're thinking right now, I mean, if the view was, if the Fed was start easing for whatever reason, would MRCT look ahead time to get more fixed rate loans or put on hedges? What's the thinking around that?

Yeah, so we're mindful of kind of capital structure. We've got a very, very favorable capital structure in terms of that note we did that that maturers in 2026, the 4.375 fixed right now. But we are, we have an internally dedicated capital markets team that we work with quite quite closely to think about kind of the liability side of our balance sheet.

and are keeping an eye on the markets to see if and when we might fine tune our approach to the right-hand side with balance sheet, but nothing in a minute. Yeah, Christopher, from my perspective, I think we're going to see some continuous slight increases here.

you know, keep an eye on the markets to see, you know, if and when, you know, we might fine tune our approach to the right-hand side of our balance sheet, but nothing in a minute. Yeah, Christopher, you know, this is from my perspective, I think we're gonna see some, continue to see some slight increases here, and overall Fed funds increases.

inflation still not where they want it and they've signaled that we're likely to see more, you know, upside and interest rates than downside right now in the near term. And then I guess file question of strategy related. Monroe Capitol announced...

recently, um, uh, acquiring the management of another BDC, um, what's the strategy overall there? And how will this BDC and MRCC work together if it all together? Uh, good question. You've gotten a firm amount of, um, head to a firm amount of discussions with media and this, uh, about...

Two weeks ago we announced that Monroe, the private asset management company, will acquire the investment advisor of another BDC, Horizon Technology Finance, NASDAQ, HRCM. That's a venture debt business. The management team there is comprised of about 38 people.

They've been in business for about 20 years best in class track record history They manage about a billion dollars today in a combination of their BDC and institutional capital

And I've been looking at the space for quite a while on behalf of Monroe. I think that the venture debt space in general is attractive in private credit, particularly in times when the IPO markets are closed, exits are difficult. Plum raising is difficult for venture firms.

Instead of doing large, down-round equity financings, many of these high-grilled companies will look to credit instead.

Instead of doing large, down-round equity financings, many of these high-grilled companies will look to credit instead. Pricing is good.

leverage is good. An enterprise value, low enterprise value risk. So it's say it was an acquisition, an opportunistic acquisition opportunity for us as a firm to continue to develop asset class categories that we can offer our institutional investors.

I don't think this will be an MRCC investment. I think it's a different type of asset class, but for our other funds and our institutional investors at our advisor level at Monroe, this represents a very attractive opportunity for us.

to take advantage of a tactical place in the market where we can earn excess alpha. Great, thanks, Ted. That's it for me.

a tactical place in the market where we can earn excess alpha. Great. Thanks, Ted. Thanks, Chris.

And again, for questions at this time, that is star one. We're here now from Robert Dodd with Raymond James. Hi guys, question on the SLF. The earnings, obviously, I mean, it's portfolio rate sensitive as well. The earnings within that SLF have increased about north to 20 percent from Q1 to Q4, but the dividend has obviously just been marked down within the SLF. But should we think of the dividend opportunity from the SLF to MRCC is kind of having out?

a high watermark or something like that where, you know, the book equity has to get back above 80 million before you get 50% of the earnings. Because I would say in the fourth quarter, you know, the payout ratio was the dividend to, to you is like 37% of the earnings. That would be going 50%. So can you give us any color on how we should think about that given that the earnings at the SLF are quite rate sensitive as they are at MRCC? They are quite rate sensitive. You are right. I would guide you towards our kind of $900,000 per quarter level.

As a run rate for the SLS, that's the guidance I would offer you on that front. So can you give us any color about why? Is it the mark sounds in here? Those need to be recovered or what's the decision I realize is not solely your decision?

as a run rate for the SLF, that's the guidance I would offer you on that front. So can you give us any color about why? Is it the mark sounds in here? Those need to be recovered or what's the decision I realize is not solely your decision or the MI.

decision but there is obviously there has been an increasing mismatch between the earnings power and the dividend paid out. Is there a scenario where that changes? Yeah I think we're mindful of obviously future performance potential of the court ball and we did have a realized loss in the court ball last quarter in the form of court camp council and when we consider our dividend distribution from the SLS.

to both partners, both us and nationalized. We consider portfolio performance in the context of that distribution yield. And it's something that we assess, you know, as we always do when we make that, when we make that dividend determination.

to both both partners, both us and nationalized. We consider portfolio performance in the context of that distribution yield. And it's something that we assess, you know, as we always do when we make that, when we make that dividend determination. Got it, got it, okay, I appreciate it.

And then just just back to the horizon Chris already asked the question, but I mean is is there a you have some

something that some are going over use software businesses within MRCC. You obviously have an entirely different fun purposes on that. So MRCC has sometimes taken...

opportunity to take advantage of other areas of expertise within Monday, I don't know what that is. So is there room within MRCC for a small sleeve adventure deck or is that just something you don't consider appropriate for this vehicle at all?

That's a great question, Robert. We manage 16 billion across our platform.

MRCC gets the benefit of

MRCC gets the benefit of the entire platform.

And what we try to do is, in our allocation policies, provide allocations of each deal, we do across the platform when it's appropriate.

you know, for the specific fund for the investment vehicle. I anticipate that from time to time, there's going to be highly attractive and a creative of deals.

that we originate across the platform, whether it's...

across the platform, whether it's from...

Polizon, whether it's in our software, lending, vertical, healthcare, sports, media, entertainment, and when the appropriate investment fits within the MRCC mandate.

It has managed by our portfolio managers, Mick and Alex. You may see these assets, but we've been pretty good historically at sticking to our knitting and MRCC.

and developing a high-quality senior secured portfolio that's got low leverage and good interest coverage.

You know, as you know, venture debt businesses don't necessarily have those two qualities.

You know, we may have good growth prospects, we may have good loan to value, good loan against enterprise value, but interest coverage and, you know, leverage are not usually the cornerstones of the venture debt portfolio. So we're going to tread slowly, I think, with MRCC.

in the ventured area.

Hi, good morning. I wanted to ask about balance sheet leverage and maybe future visibility into repayment activity to help fund new, newer investments. So obviously you have balance sheet leverage to take off above that.

and activities that made you comfortable, you know, kind of going above the high end of the target.

So, good morning, Bryson, great question. So, as we manage the portfolio, we're looking at, we're looking into the future in terms of repayments we expect from our borrowers in close contact with our over 100 borrowers.

We're also looking into our origination pipeline and we're trying to kind of cadence those two things if you will. We have really, really strong origination activity during the fourth quarter and our payoffs. Projected payoffs came lighter than expected as we looked at our payoff pipeline.

So we came in at the end of the year above our leverage targets. The way we think about this going forward is we still maintain our long-term leverage target of 1-3-1-4. And would guide you in the short term to the top end of that range.

which is where we are targeting to manage a portfolio.

Okay, okay, that's helpful. And then maybe one more for you, just around credit quality. Obviously you had a pretty steady, not a cruel number. I think one investment kind of makes up the bulk of what's left there in that not a cruel bucket. But beyond that, can you talk about maybe any kind of positive or negative migration you saw?

which is one of our four non-performers. So please with that. In terms of portfolio migration during the course of the quarter, if you look at our rating distribution, we were up about $7 or $8 million in our three-rated category during the course of the quarter. So we had a

a couple of a few credits that migrated into our three rating during the quarter. We call it rate deals on a one through five, one through five basis, but had a few names migrate into the three categories during the quarter, but overall, you know, feel really comfortable with, you know, the quality of the portfolio.

The coverage ratio, the interest spaces that are portfolio companies are reporting and believe that the portfolio is generally sound.

Okay, that's self-light. I mean, just to maybe follow up to that mix. Yeah, the ones that did migrate into a three. Yeah, is there. I assume that's idiosyncratic. What's going on there that? Yeah, so good question. So, you know, that's the...

So, you know, the polar companies are still experiencing, you know, some of the facts from, you know, rising input costs, rising freight costs, things like that. So the companies that, you know, have migrated in that kind of three category have seen some margin impact because of that.

And in those cases, you know, those companies are really, really focused on, you know, margin improvement by, you know, the kinds of actions that companies typically take. Passing price increases ultimately along to the customer strategically reducing costs, things like that. Well, you don't see in our kind of broad.

portfolio, risk rating distributions that we actually also during the quarter had migration out of the three into the two category as some of our companies that experienced some of the early effects of inflation and supply chain were able to effectively pass along price increases, execute strategic and initiatives and get margins kind of back and in line.

So, we continue to see kind of an evolving landscape as companies adapt and adjust to market economic conditions.

Got it. That makes a ton of sense. Appreciate the comments this morning. Thanks.

Thank you. And with no other questions at this time, I'd like to turn things back to the company for closing remarks. Thank you all for joining us today. We enjoy the conversation as well as the questions and we look forward to speaking again next quarter. So be safe and we'll speak to you soon and like always.

to extend anyone has any questions in the interim before our next quarterly call. Feel free to reach out to Mick directly and we're always willing and wanting to engage. So thank you all. Have a good day.

That will include today's conference again. Thank you all for joining us. You are now disconnect.

I have.

Welcome to my role capital corporations fourth quarter and four year 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 four booking statements including statements regarding our goals, strategies, beliefs, feature potential, operating results and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions, background significantly more? . . .

and projections as of today, March 2nd, 2023, 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 risk, uncertainty, or other factors.

including but not limited to the risk factors described from time to time in the company's silence with the SEC. Mono Capital takes no obligation to update all advised and sport booking statements. I will now turn the call over to Ted Kameh, Chief Executive Officer of Mono Capital Corporation. Please go ahead, sir. Good morning and thank you to everyone who has joined us on our call today.

Welcome to our fourth quarter and four year 2022 earnings conference call. I am joined by Nick Salimini, our CFO and Chief Investional Officer and Alex Parmasek, our Deputy Portfolio Manager.

Last evening, we issued our fourth quarter and full year 2022 earnings press release and filed our 10K with the SEC.

I'd like to open up with some thoughts and observations on the market and the general economic environment. In the fourth quarter of 2022 and in the early 2023 period, compelling opportunities for MRCC have begun to emerge in response to the market volatility.

and the wary tone of the M&A and financing markets. As M&A and financing markets work through today's macroeconomic trends in what we consider to be a year of transition,

Middle market financing value totaled almost $280 billion in 2022 according to Refinitive. This mark was approximately 12% behind the record setting value in 2021 but still well above historical averages has a firm.

Monroe made approximately $6 billion of new investments in 2022. In response to the current market volatility, we are executing on transactions that not only have enhanced economics.

but that also come with reduced leverage as well as more favorable pricing terms and documentation, a trend that began in the third quarter of last year.

With current market conditions, filling us lower leverage levels, coupled with higher equity cushions, we will selectively pursue assets in attractive markets as older vintage assets repay. Our view is that 2023 will present itself as one of the most attractive ventages

for deploying private capital, private credit capital, and that MRCC is very well positioned, especially as market share continues to move toward direct lenders away from traditional regulated lenders. While we are excited about the opportunities ahead,

We are also mindful that the higher interest rate environment and anticipated broader macroeconomic headwinds could potentially present stress within private credit loan portfolios. We've intentionally built a portfolio at MRCC that is focused on investments at the top of the capital structure.

with meaningful equity value cushions across resilient sectors, recession resilient sectors. We are confident that a defensive portfolio has been constructed to withstand those challenges and we are already seeing signs of resilience.

Many of our borrowers have begun to experience relief as input costs and the supply chain have altered course towards normalization from what we've seen last year.

As such, our portfolio has been able to demonstrate credit quality stability despite the substantial interest rate increases from last year. To supplement the defensive portfolio makeup, we maintain a deep and experienced portfolio management team. This team works in conjunction with our core investment teams to execute a key component of our portfolio management strategy.

which is early intervention. This allows us to get ahead of potential challenges and we will continue to take a proactive approach to navigating through this uncertain environment.

Ultimately, we believe that we are positioned to actively maximize outcomes while remaining a trusted financial partner to our clients.

I will now transition to a snapshot of our fourth quarter results. Adjusted net investment income was $5.6 million or $0.26 per share down from adjusted net income of $7.1 million or $0.33 per share to the third quarter.

which included one time benefits of the receipt of previously unrequited interest income and the successful repayment of our investment in curian holdings.

Excluding the impact of this one-time benefit from a receipt of previously unaccrued interest income associated with Curianne during the third quarter, adjusted net investment income in the fourth quarter grew by 1.8%.

We also reported NAV of $225 million or $10.39 per share as of December 31st.

A decrease of $0.04 per share from NAV of $226 million.

for $10.43 per share as of September 30, 2022. NIST decline at NEV was substantially the result of Mark-to-Market losses on the investment in MRCC Senior Loan Fund 1.

which we refer to as our SLF. The decrease in value at the SLF was driven by these mark-to-market unrealized losses on SLF investments, which are loans to traditional upper-middle-market borrowers.

and have continued to experience higher volatility and valuations as a result of more recent interest rate increases.

On a net basis, the valuations under remainder of the portfolio remained relatively flat to September 30, 2022.

During the quarter, MRCC's debt-to-equity leverage increased from 1.33 times debt-to-equity to 1.49 times debt-to-equity slightly above our long-term target range of 1.3 to 1.4 times.

The increase in leverage was primarily driven by strong investment activity during the fourth quarter, coupled with lighter than expected portfolio pay off activity.

We continue to focus on managing our investment portfolio and selectively redeploying capital resulting from repayments.

The significant majority of our 105 portfolio companies are performing in line with expectations.

Based on current and forecast of market interest rates, interest coverage is generally solid across our existing portfolio. In addition, we believe that the modest weighted average loan to value in the portfolio provides us with strong downside protection and cushion to these investments.

and a portfolio will continue to benefit from the meaningful amount of equity invested in our companies. New deals continue to undergo a comprehensive underwriting process that includes down-side stress scenarios to assess performance volatility and cushion from rising interest rates.

margin pressures, and an overall economic slowdown. MRCC enjoys a strong strategic advantage in being affiliated with a best-in-class, award-winning, middle-market, private credit asset management firm with approximately $16 billion in assets under management.

in approximately 200 employees as of December 31, 2022. Our dividend coverage continues to trend positively. We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend in positive long term and EV performance despite.

anticipated macro market headwinds and market to market unrealized adjustments. At this point I will turn the call over to Mick who is going to walk you through the financial results in greater detail.

market headwinds and market to market unrealized adjustments. At this point, I will turn the call over to Mick, who is going to walk you through the financial results in greater detail. Thank you, Tadden.

As of December 31st, 2022, our investment portfolio totaled $541 million, top $33 million from $508 million as of September 30th, 2022.

Our portfolio consisted of debt and equity investments in 105 portfolio companies as of December 31, 2022, as compared to debt and equity investments in 98 portfolio companies as of September 30, 2022. During the quarter.

We made investments in eight new portfolio companies with fundings totaling $21.7 million at a weighted average interest rate of 11.2%.

We also made nominal equity investments in two of these portfolio companies. Further, we had Revolver or Delay Draw Fundings.

and add-ons to various existing portfolio companies totaling $18.3 million.

During the quarter, we received one full payoff, which was for a nominal immaterial amount.

We also incurred partial and normal course paydowns of $9 million and had no sales this quarter.

We are well positioned to deploy capital from future repayments carefully and to attractive assets that will benefit from increases in interest rates and more favorable structures through participating in the substantial pipeline of opportunities generated at Monroe.

As of December 31st, we had total borrowing of $334.6 million, including $204.6 million outstanding under our floating rate revolving credit facility and $130 million of our 4.7 per 75%.

fixed rate, 2026 notes. Total borrowings outstanding increased by $33.4 million during the quarter. The revolving credit facility had $50.4 million for availability as of December 31st, subject to borrowing base capacity.

Now, turning to our financial results for the quarter ended December 31, 2022. Adjusted net investment income, a non-gap measure, was $5.6 million or 26 cents per share compared to $7.1 million or $33 cents per share in the prior quarter.

While the average portfolio yield increased during the quarter ended December 31, 2022, adjusted net investment income declined primarily as a result of a one-time benefit of the receipt of previously unaccrued interest income.

associated with the repayment of curianne holdings that had previously been on nonacrural status, which occurred in the quarter ending September 30, 2022. Excluding the one-time benefit of curianne from the third quarter results, adjusted net investment income increased by 1.8 percent.

or $100,000 during the fourth quarter. When considering our targeted leverage, the rising interest rate environment, the favorable percentage of our fund leverage at a fixed rate and the current credit performance at MRCC, we believe that on a run rate basis, our adjusted net

which decrease from the $226.9 in net asset value as of September 30.

Our NAV for share decreased from $10.43 per share at September 30th to $10.39 per share as of December 31st.

The 4-cent per share NAV decrease was substantially the result of Mark to Market losses on the investment in MRCC Senior Loan Fund 1.

The decrease in value at the SLF was driven by these market market losses on the SLF investment.

which are loans to traditional upper-middle market borrowers and have continued to experience higher volatility in valuations. Valuations on the remainder of the portfolio remain relatively flat on a net basis compared to the prior quarter.

Looking to our statement of operations, total investment income was $15.2 million during the fourth quarter, down from $15.9 million in the third quarter. Excluding the one-time third quarter benefit of $2 million in interest income on Curian, investment income actually increased by $1.3 million.

or 9.4 percent primarily as a result of increase in portfolio yield and average portfolio size. In addition, during the quarter we continued to see the impact of increases in interest rates on our investment income as all the portfolio borrowers exceeded their benchmark interest rate floors during the quarter.

and we were fully benefiting from base rate increases across the portfolio during the fourth quarter. At December 31st, the effective yield on our debt and preferred equity portfolio was 11 percent, up from 9.9 percent at September 30th. Sovereights, which have continued to increase in the latter half of the year, rose during the quarter.

with one month SOFR at approximately 406 basis points as of December 31st versus approximately 314 basis points as of September 30th. All things being equal, a rising interest rate environment will continue to improve the yield on our investment portfolio and increase net investment incomes.

At December 31st, we had four investments on non-accrual status, representing 0.5% of the portfolio at fair market value.

compared to four investments on non-acroll status, which represented 0.7% of the portfolio at their market value at September 30th.

Our performance has steadily improved in this area as we have been working out the underperforming companies in our portfolio as we said we would on previous calls. This is the direct result of the turnaround and workout capabilities of our external manager, Monroe Capital, and the resources they have provided to us.

During the fourth quarter, we placed no additional borrowers on non-accrual status. Further, the investment performance risk rating distribution has remained relatively stable. Moving over to the expense side.

we placed no additional borrowers on non-accrual status. Further, the investment performance risk rating distribution has remained relatively stable. Moving over to the expense side, total expenses.

slightly decreased from $9.7 million in the third quarter to $9.6 million in the fourth quarter, primarily driven by lower income taxes, primarily associated with blocker entities that hold certain of the company's equity investments.

Net realized and unrealized losses. I know investments were $300,000 for the fourth quarter.

Other net losses totaling approximately $700,000 during the fourth quarter were related to foreign currency forward contracts used to hedge currency exposure on certain investments.

As of December 31st, the SLF had investments in 60 different borrowers aggregating $183.2 million at fair value with a weighted average interest rate of 9.7%.

The SLF portfolio decreased nominally in value by 10 basis points during the quarter from 93.6% of Amortized Costs as of September 30 to 93.5% of Amortized Costs as of December 31. Additionally,

SLF realized on its previously recorded unrealized loss on tort, towns, and holding company during the quarter. During the fourth quarter, MRCC received income distributions from SLF of $900,000 consistent with the prior quarter.

SLF realized on its previously recorded unrealized loss on port towns and holding company during the quarter. During the fourth quarter, MRCC received income distributions from SLF of $900,000 consistent with the prior quarters. As of December 31, 2022.

The SLF had borrowings under its non-recourse credit facility of $122.2 million and $52.8 million of available capacity under its credit facility subject to borrowing base availability.

At this point, I will turn the call back to Ted for some closing remarks before we open the line for questions. Thanks, Vic. In closing, we believe that we are well positioned to emerge from a transitional 2022 to capitalize on compelling opportunities for private credit and navigate the market uncertainty. Okay.

that may lie ahead. Our average portfolio asset yield is an accessible 11% on current deals which portends well for the rest of 2023.

companies, including been not limited to receiving more favorable economics and deal structures. This strategy is consistent with our historical focus on providing well protected, well structured, senior secured, personally loans to companies with insulated market positions and reliable business models led by strong management teams and reliable sponsors.

We will continue to lean on our team and core underwriting principles to generate a track of and differentiate its risk-adjusted returns while navigating the uncertainties of 2023 and beyond.

MRCC is well positioned to deliver stable and consistent dividends for our shareholders, especially where our earnings and dividends stand to benefit from an increase in market interest rates. 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, 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 am going to ask the operator to open up the call now for questions. At this time, if you do have a question, please signal us by pressing star one. If you would like to withdraw your question, please press star one again. Again, that will be star one for questions. We'll pause for just a moment. Thank you.

meaningfully from 7.8% in the prior quarter. I'm curious if the increase is driven by new deals that were maybe structured with a pick component or if that was possible and then related. So any insight would be helpful. Sure, good morning, Kevin. And thank you for the question.

So we did see an increase in pick income during the course of the quarter. The primary reason for the increase in pick income was the election by one of our borrowers at its option to exercise that pick. I go during the quarter. If I look at our kind of pick income trends quarter of a quarter of a year or a year, we've kind of been in that in a 12 to 15% range. So we feel comfortable with kind of where our pick income is as a component of our.

increase in amendment activity in our portfolio. Most of the amendment activity was related to transaction activity related to add-on transactions and technical amendments related to sulfur and labor transition, but no meaningful amendment activity across our portfolio. OK.

That's great to hear. And then one more if I can. You know, I noticed that other GNA expenses were up slightly in the fourth quarter. I guess, can you just discuss where drove the increase? I'm just trying to get a sense if we should be scaling GNA expense in our model.

Yeah, so nothing meaningful in terms of that flight GNA prompt. I would guide you towards kind of a historical pattern on GNA front as you think about your model.

Okay, great. And I appreciate your time this morning. I'll leave it there. Thanks, Ellen. We'll hear next from Christopher Nolan with Layden Bergthalman. Hey guys.

The SLF, any of the borrowings by the SLF secured by any MRCC investments in the main portfolio? They are not. Okay, and then I guess in terms of asset liability management, you know, you have to be aware of the

What you're thinking right now, I mean, if the view was, if the Fed would start easing for whatever reason, would MRCC look ahead time to get more fixed rate loans or put on hedges? What's the thinking around that? Yeah, so we're...

We're mindful of capital structure. We've got a very favorable capital structure in terms of that note we did that mature in 2026, the 4.375 fixed right now. We have an internally dedicated capital market team that we work with quite closely to think about the liability side of our balance sheet.

and are keeping an eye on the markets to see if and when we might fine tune our approach to the right-hand side of our balance sheet, but nothing in a minute. Yeah, Christopher, from my perspective, I think we're going to see some continuous slight increases here, and overall Fed Funds increases.

recently requiring the management of another BDC. What's the strategy overall there and how will this BDC and MRCC work together if it all together? Good question. You've got an affirmative.

And to prepare a lot of discussions with media and this about weeks ago we announced that Monroe, the private

asset management company will acquire the investment advisor of another BDC Horizon Technology Finance NASDAQ HRCM. That's a venture debt business. The management team there is comprised of about 38 people. They've been in business for about 20 years, best in class, track record history.

Um, they manage about a billion dollars today in a combination of their BDC and institutional capital. And, um, I've been looking at the space for quite a while on behalf of Monroe.

I think that the venture debt space in general is attractive in private credit, particularly in times when the IPO markets are closed, exits are difficult, fundraising is difficult for venture firms, instead of doing large, down-round equity financing.

Many of these high growth companies will look to credit instead Facing is good Leverage is good and enterprise value low enterprise value risk So it's a it was an acquisition an opportunistic acquisition opportunity for us as a firm

to continue to develop asset class categories that we can offer our institutional investors.

to take advantage of a tactical place in the market where we can earn excess alpha. Great, thanks, Ted. And again, for Quashat this time, that is star one. We're here now from Robert Dodd with Raymond James. Hi, guys. Question on the SLS.

The earnings, obviously, I mean, it's portfolios rate-centered as well. So the earnings within that SLF have increased about, yeah, north of 20% from Q1 to Q4, but the dividend hasn't really, obviously, there's been markdowns within the SLF. But should we think of the dividend opportunity?

From the SLF to MRCC is kind of having a high water mark or something like that where you know the book equity has to get back above 80 million before you get 50% of the earnings because I was in the fourth quarter your the payout ratio was the dividend to um, to you is like 37% of the earnings every 50% of it.

So can you give us any color on how we should think about that given that the burnings at the SLF are quite consonant, are quite good. Hence we can turn it around and watch this.

They are quite sensitive. I would guide you towards our kind of $900,000 for quarter level.

They are quite right sensitive. I would guide you towards our kind of $900,000 per quarter level as.

As a run rate for the SLS, that's the guidance I would offer you on that front. Could you give us any color about why? Those need to be recovered or what's the decision I realize is not solely your decision or the MIT decision. But...

There is obviously there has been an increasing mismatch between the earnings power within that and the dividend paid out Is the scenario where that changes?

Yeah, I think, you know, we're mindful of, you know, obviously, you know, future performance potential of the court ball, we did have a realized loss in the court ball, a last quarter in the form of court count count and when we consider our, you know, our dividend distribution from the S.O.L.

you know as we always do when we make that when we make that dividend determination.

As we always do when we make that when we make that dividend determination. Got it got it. Okay, I appreciate it.

And then just back to the horizon, Chris already asked the question, but I mean, is there a, you have some. Some, you know, some look over here, so far, businesses within MRCC, you obviously have an entirely different fun purposes on that. So, you know, MRCC has sometimes taken.

opportunity to take advantage of other areas of expertise within Monday, I don't want to know that. So is there room within MRCC for a small sleeve adventure deck or is that just something you don't consider appropriate for this vehicle at all?

That's a great question, Robert. We manage 16 billion across our platform. MRCC gets the benefit of...

the entire platform and you know what we try to do is in our allocation policies provide

applications of each deal. We do across the platform when it's appropriate, you know, for the specific fund for the investment vehicle. I anticipate that from time to time, there's going to be highly attractive and accretive deals.

that we originate across the platform, whether it's from Verizon, whether it's in our software, lending, vertical, healthcare, sports, media, entertainment, and when the appropriate investment fits within the MRCC mandate.

It has managed by our portfolio managers, Mick and Alex. You may see these assets, but we've been pretty good historically at sticking to our knitting and MRCC.

and developing a high-quality senior secured portfolio that's got low leverage and good interest coverage. You know, as you know, venture debt businesses don't necessarily have those two qualities. You know, we may have good growth prospects, we may have good loan to value, good loan against enterprise value, but...

interest coverage and leverage are not usually the cornerstones of the venture debt portfolio. So we're going to tread slowly, I think, with MRCC in the venture debt area. Thank you for that talk. And from B. Riley, we'll hear next from Bryce Rowe. Hi, good morning. I wanted to ask about balance sheet leverage.

and maybe just future visibility into repayment activity to help fund new, newer investments. So obviously you have balance sheet leverage to tick off above the high end of your range. I'm pretty sure I understand that can happen from time to time, but just curious if we should expect balance sheet leverage to stay at

at current levels or if you have some visibility into repayment activities that made you comfortable, you know, kind of going above the high end of the target. So, good morning, Bryce, and great question. So, you know, as we manage the portfolio, we're looking at, you know, we're looking into the future in terms of

repayments we expect from our borrowers in close contact with our over 100 borrowers. We're also looking into our origination pipeline and we're trying to cut the kind of cadence those two things if you will. We had really, really strong origination activity during the fourth quarter and our payoffs. Projected payoffs came lighter than expected as we looked at our start payoff pipeline.

So we came in at the end of the year, you know, above our leverage targets. Um, the way I would think about this going forward is we still maintain our long-term, you know, leverage target of, you know, one, three to one, four, and would guide you in the short term to kind of the top end of that range, which is where we are targeting to manage a portfolio.

Okay, okay, that's helpful. And then maybe one more for you, just around credit quality. I mean, obviously you had a pretty steady monocrual number and I think one investment kind of makes up the bulk of what's left there in that monocrual bucket. But beyond that, can you talk about maybe any kind of positive or negative migration?

migrated into our three rating during the quarter. We recall that we rate deals on one through five basis, but had a few names migrate into the three categories during the quarter. But overall, you know, feel really comfortable with, you know, the quality, the portfolio, the coverage ratio of an interest basis that our portfolio companies are reporting and believe that the portfolio is generally sound.

Okay, that's that's helpful. I mean just to maybe a follow-up to that mix Yeah, what you know the the ones that did migrate into the three? Yeah, what is there? I assume that's idiosyncratic. What's what's going on there that you know that yeah, so It's okay

So, so good question. So, you know, the, you know, the whole of companies are still experiencing, you know, some of the fact from, you know, rising input costs, rising freight costs, things like that. So the companies that, you know, have migrated in that kind of three category have seen some margin impact because of that. And in those cases, you know, those companies are, are very, very focused on.

margin improvement by the kinds of actions that companies typically take. Passing price increases ultimately along to their customer strategically reducing costs, things like that. What you don't see in our broad portfolio risk rating distributions that we actually also during the quarter-head.

migration out of the three into the two category as some of our companies that experience some of the early effects of inflation and supply chain. We're able to effectively, you know, pass along price increases, execute strategic and nest initiatives and get margins kind of back in line. So, you know, we continue to, you know, see kind of an evolving, you know, landscape as companies, you know.

you know, but adapt and adjust to market and economic conditions. Got it. That makes that makes a ton of sense. Appreciate the comments this morning. Thanks. Thank you. And with no other questions at this time, I'd like to turn things back to the company for closing remarks. Thank you all for joining us today. We enjoyed the conversation as well as the questions and we look forward to.

And that will include today's conference again. Thank you all for joining us.

Q4 2022 Monroe Capital Corp Earnings Call

Request a DemoDemo

MRCC

Monroe Capital

Earnings