Q2 2023 Monroe Capital Corporation Earnings Call
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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.
Any statements regarding our goals strategies beliefs.
Future potential operating results and cash flows.
Although we believe these statements are reasonable based on management's estimates assumptions and projections as of today August 10, 2023. These statements are not guarantees of future performance.
Further time sensitive information, mainly no longer be accurate as of the time of any replay or lessening.
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 company's filings with the SEC.
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.
Good morning, and thank you to everyone, who has joined US on our earnings call today I'm here with the mixed <unk>, our CFO and Chief investment officer, and Alex permits or jeopardy portfolio manager.
Last evening, we issued our second quarter 2023 earnings press release and filed our 10-Q with the SEC.
And uncertain economic backdrop elevated interest rates and volatility in the bank and syndicated capital markets continue to make direct lenders such as Monroe capital consistent and reliable sources of capital.
Correct lenders continue to amass a larger share of the middle market lending landscape.
According to wood furniture direct lenders accounted for 85% of new LBO financing activity in the second quarter of 2023.
Further M&A activity shipped to its lowest level since the third quarter of 2020 due to the expensive cost of capital and valuations and jewelry in a period of correction.
During this period direct lenders such as Monroe, continuing to step up to support existing portfolio companies as they execute our growth strategies to enhance enterprise value.
Transaction transaction activity began to show signs of picking up in the latter part of the second quarter and into the third quarter, particularly in the lower middle market.
Monroe is the ability to offer a variety of underwritten solutions with a certainty of execution has proven to be a distinct advantage for our clients.
In the first half of 2023, when middle market transaction activity marked a three year low our platform funded nearly one $4 billion.
Slight increase over the first half of last year.
The market continues to offer direct lenders attractive pricing terms and structures.
Simultaneously our.
Transactions are being completed at lower leverage levels with higher equity contributions.
We continue to selectively deploy new capital into recession resilient sectors that offer these compelling risk return dynamics, we will focus on capitalizing on opportunities, where we can add attractive higher yielding assets as older legacy assets repay.
We believe that we are positioned to generate strong risk adjusted returns supported by one of the most compelling vintages in recent history.
While the economy has demonstrated more resiliency than many had anticipated companies continue to face higher borrowing costs and the lingering impact of inflationary pressures.
We've seen many instances where companies have been able to grow their top line, albeit at more compressed margins yes.
Yes, certain sectors with a consumer facing business models have faced bigger challenges.
Through the economic backdrop remains highly uncertain.
Its latest interest rate increase is made an economic slowdown more probable.
We continue to emphasize portfolio management is actively monitoring the cash flows of our portfolio companies and engaging with the management teams to keep a pulse of developing trends in these industries.
We believe that the purposefully defensive positioning of our portfolio.
Low MRC to navigate the potentially challenging economic conditions ahead.
Our portfolio's interest coverage remained sound with sufficient cushion to weather the current interest rate environment.
Additionally, the average loan to value and portfolio company leverage across the portfolio indicate meaningful equity value Christians below our debt.
As the direction of the economy and interest rates become more apparent our primary focus will be on maintaining the quality of the portfolio, while being value added partners to our borrowers.
We maintain a deep and highly experienced portfolio management team with a time tested playbook to navigate potential challenges and mix.
Outcomes.
Turning now to our second quarter results.
Adjusted net investment income was $6 1 billion.
Our 28 cents per share, which covered our dividend by 112 times and represented a 12% year over year increase to the second quarter of 2022.
Adjusted net investment income declined from $6 9 million or <unk> 32 per share for last quarter.
We also reported NAV.
$213 2 million.
Or $9 84 per share as of June 32023, compared to $223 million.
Or 10% or $10 29 per share as of March 31, 2023.
The decline in NAV.
Was primarily attributed to net losses and defensive realizations in two portfolio companies.
These companies were impacted by difficult market conditions affecting consumer household and markets and our portfolio is nominal remaining exposure to those specific sectors.
During the quarter MRC <unk> debt to equity leverage increased from $1 four nine times debt equity to 154 times debt to equity the increase in leverage was driven by the aforementioned decrease in NAV.
The portfolio is well positioned to ride the current interest rate environment and face potential challenges, resulting from an eventual slowdown in the economy.
Our loan underwriting focus continues to be on those companies with resilient business models defendable market positions proven and experienced management teams and exceptional 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 $17 $2 billion in assets under management.
And approximately 240 employees as of June 32023.
We continue to focus on generating adjusted net investment income that meets or exceeds our dividend and restoring positive long term performance.
I am now going to turn the call over to mix was going to walk you through our financial results in greater detail.
Thank you thank you Kevin.
As of June 32023.
Our investment portfolio totaled $515 4 million.
A decrease of $16 7 million.
From $532 1 million as of March 31, 2023.
At the end of the quarter, our investment portfolio consisted of debt and equity investments and 99 portfolio companies compared to 102 portfolio companies at the end of the prior quarter.
During the quarter, we made investments in three new portfolio companies with fundings totaling $6 3 million.
At a weighted average effective interest rate of 11, 9%.
We also made a nominal equity investment in one of those portfolio companies.
Further we had revolver or delayed draw fundings and add ons to existing portfolio companies totaling $11 million.
We received two full payoffs for $12 2 million and incurred normal course, paydowns totaling $14 $4 million.
At June 32023, we had total borrowings of $327 4 million, including $197 $4 million outstanding under our floating rate revolving credit facility.
And $130 million of our 475% fixed rate 2026 notes.
Total borrowings outstanding decreased nominally during the quarter the.
The revolving credit facility at $57 $6 million of availability subject to borrowing base capacity.
Now turning to our financial results.
Adjusted net investment income a non-GAAP measure was $6 1 million or 28 per share this quarter compared to $6 9 million or $2 32 per share in the prior quarter.
Our average portfolio yield increased from 11, 6% as of March 31 to 12, 2% as of June 30, which was offset by a decrease in fee income and prepayment gains a reversal of previously accrued interest related to the restructuring of <unk>.
And slightly lower average portfolio balances.
When considering current leverage levels, the interest rate environment, and the favorable percentage of our fund leverage at a fixed rate, we believe that on a run rate basis. Our adjusted net investment income will continue to cover our current 25 per share quarterly dividend.
Other things being equal.
As of June 32023, our net asset value was $213 2 million.
Which decreased from $223 million and net asset value as of March 31, 2023.
In the quarter, our NAV per share decreased from $10.29 per share to $9 84 per share.
Our net asset value this quarter was affected by market conditions, which negatively impacted realizations on our investments in forming nodes and California Pizza kitchen.
These were two legacy investments in the brick and mortar retail space, where we have only nominal remaining exposure.
The balance of the decrease to net asset value was the result, net mark to market unrealized losses due to the fundamental performance of a couple of specific portfolio companies still held in the portfolio and in SLS.
These decreases were partially offset by our net investment income outperformance our dividend for the quarter.
I will now turn it over to Alex who will provide more details on our second quarter operating performance.
Thank you Mac looking to our statement of operations total investment income was $16 3 million during the second quarter of 2023.
And from $16 8 million in the first quarter of 2023.
The increase in effective yield on our debt and preferred equity portfolio was offset by several factors, including slightly lower average portfolio balances a decrease in fee income and prepayment gains and the one time reversal of previously accrued interest income associated with the restructuring and realization on the majority of our investments performing notes.
While rising interest rate environment, we will continue to improve the yield on our investment portfolio and increased investment income fee income and prepayment gains and losses are tied to transactions, which can cause volatility in our investment income.
As of June 32023, we had four investments on non accrual status, representing one 3% of the portfolio at fair market value, which compares to three investments on non accrual status and 0.4% of the portfolio at fair market value as of March 31, 2023.
During the quarter, we placed two new investments on non accrual are store NATO, which resulted in an impact of approximately zero seven cents per share of NII and a remaining restructured position informing mills.
Additionally, during the quarter, we disposed of our previous nonaccrual asset Vinci brands.
Moving over to the expense side.
Total expenses slightly increased to $10 4 million in the second quarter of 2023 from $10 2 million in the first quarter.
Zero point $2 million increase in expenses during the quarter was primarily driven by an increase in interest and other debt financing expenses, resulting from the rising interest rate environment our.
Our net loss for the second quarter of 2023 was $10 3 million.
Compared to a net loss of $3 3 million for the first quarter of 2023.
Net realized and unrealized losses on investments were $10 2 million for the quarter.
Net losses for the quarter, which were comprised primarily of net gains on foreign currency forward contracts used to hedge currency exposure on investments denominated in foreign currency totaled <unk> 1 million.
Yeah.
As of June 30, the <unk> had investments in 56 different borrowers aggregating to $168 2 million at fair market value with a weighted average interest rate of 10, 7%.
<unk> underlying investments are loans to middle market borrowers and are generally larger and more sensitive to market spread movements and the rest of the <unk> portfolio, which is focused on lower middle market companies. The SLR portfolio decreased in value by approximately 200 basis points during the quarter from 93 five.
Net of amortized costs at March 31, 23 to <unk> 91, 5% of amortized cost as of June 32023.
During the second quarter MRC received income distributions from <unk> of $900000 consistent with the prior quarter.
As of June 32023, the <unk> borrowings under a nonrecourse credit facility of $107 9 million.
$2 $1 million of available capacity subject to borrowing base availability.
This point I will turn the call back to Ted for some closing remarks before we open up the line for any questions. Thank.
Thank you Mick and Alex in summary, we remain confident in the overall quality of the portfolio and its positioning to navigate a challenging economic and market environment.
This quarter's challenges in the retail space was isolated primarily with one company Forman mills and our remaining sector exposure is nominal.
Folio management is a primary focus and we remain actively engaged with our portfolio companies and their management teams, especially in this volatile environment.
We have a time tested and proven playbook and a highly experienced portfolio management team and while the middle market is enduring a period of historically low transaction activity.
The pipeline is strong heading into the second half of 2023.
We're excited about the opportunity for MRC to take advantage of this compelling lending environment, where we are benefiting from increasingly favorable pricing deal terms and structures as legacy assets pay off we will maintain a rigorous underwriting standards as we selectively redeploy capital to <unk>.
Sectors, we have demonstrated with session resiliency and attractive cash flow characteristics.
MRC continues to be well positioned to deliver stable and consistent dividends for our shareholders.
Monroe maintains a two decade track record of consistently delivering solid risk adjusted returns for our shareholders across various economic cycles. We believe that Monroe Capital Corporation, which is affiliated with an award winning best in class external private credit manager is approximately $17 2 billion.
Assets under management provides a very attractive investment opportunity at this entry points to our shareholders and to other investors. Thank you all for your time today and this concludes our prepared remarks and.
Going to ask the operator to open the call now for questions.
Okay.
At this time I would like to remind everyone that in order to ask a question.
Star followed by the number one on your telephone keypad.
We'll pause for a moment to compile a Q&A roster.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question is from the line of Christopher Nolan.
We landed in the Burns.
Your line is open.
Hey, guys.
Sorry, if I can cover this in the prepared remarks from tap overlapping calls.
What was the driver for the decline in the SLR.
Yeah.
So the decline in the value in.
And <unk> was largely due to market mark to market adjustments on a handful of names as you know Chris.
<unk> is a differentiated rated portfolio relative to MRC say, it's mostly upper middle market loans.
And broadly syndicated loans and so there were.
A handful of names.
On a mark to market basis, basically drove that downward during the course of the quarter I would imagine Chris it's mostly is attributable to spread widening.
Current current market versus legacy market.
What usually happens when the market goes up we see a slight decline than what the market retracts, we tend to pick it back up again.
Correct.
And then I guess on a more strategic question.
MRC seems external manager has acquired another BDC focus and technology.
Space.
With the emphasis on health care technology.
Actually start seeing.
At March Ccs investment book start seeing more healthcare related investments.
Good question MRC gets the benefit of everything that.
The external manager Monroe capital does.
And Mick and Alex sorry, the Pms for MRC and to the extent they believe that there is some.
Valuable risk adjusted returns.
We can pursue.
Through the origination and through the specific sector that horizon technology Finance has developed.
We will certainly incorporate that into some of our Ccs portfolio, but the venture debt business that horizon does is a different business than the middle market financing from a leverage from a cash flow standpoint, EBITDA. So when there is overlap.
Which there will be and companies that are generating good EBITDA.
Specced in MRC will take advantage and have the ability to take advantage of those on a selective basis.
Alright, that's it for me thank you.
Thanks, Chris.
Again, if you would like to ask a question press star followed by the number one on your telephone keypad.
There are no further questions at this time I will now turn the call back to the CEO .
Ted Kennedy. Please go ahead.
Please go ahead.
Thank you all very much.
For your time today, we appreciate it.
Your time to the extent you have any other questions.
Between now and our next call. Please feel free to follow up with MC and Alex and we look forward to seeing everyone again and enjoy the rest of the summer. Thank you very much.
Ladies and gentlemen, and thank you for participating. This concludes today's conference call you may now disconnect.
Okay.
Okay.