Q3 2023 Monroe Capital Corp Earnings Call

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Welcome to Monroe capital corporations third quarter, 2023 earnings conference call.

For we begin I would like to take the moment to remind our listeners that remarks made during this call today may contain certain forward statements forward looking statements, including statements regarding our goals strategies beliefs.

Yet your potential.

Operating results and cash flows.

Although we believe these statements are reasonable based on management's estimates assumptions and projections as of today November nine 2023. This statements are not guarantees of future performance.

Further time sensitive information may no longer be accurate as of the time of any replay are listening.

Actual results may differ materially as a result of risks uncertainty or other factors, including but not limited to the risk factors described from time to time in the company's filings with the U S E T.

One real capital takes no obligation to update or revise these forward looking statements I.

I will now turn the conference call over to Ted Keeney, Chief Executive Officer of Monroe Capital Corporation. Please go ahead.

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

I am here with Nick <unk>, our CFO, and Chief investment Officer, and Alex Pardon me sick.

The portfolio manager.

Last evening, we issued our third quarter 2023 earnings press release and filed our 10-Q with the SEC.

I am pleased to report that for the 14th consecutive quarter.

Adjusted net investment income in the quarter covered our dividend.

Our adjusted net investment income was $5 5 million or 25 cents per share compared with $6 $1 million or 28 cents per share last quarter.

We also reported NAV.

207, $6 million or $9.58 per share as of September 32023 compared to two.

One three points $2 million or $9.84 per share.

June 30th 2023.

A decline in the Navy.

It was primarily attributable to net unrealized losses in the portfolio.

Attributable to a few specific portfolio companies that were affected by idiosyncratic factors as well as a decrease in value.

Yes.

Driven by unrealized mark to market losses.

The remaining portfolio increased modestly.

During the quarter MRC <unk> debt to equity leverage increased from 1.54 times debt to equity to one six times debt to equity the increase in leverage was primarily driven by the aforementioned decrease in an EV.

Before I turn the call over to Mick It Alex I would like to share some insights to the economic environment and current market and the.

Fixture of an uncertain economic outlook there continues to be an exciting time to deploy capital in direct lending where there are consistently attractive risk adjusted returns.

Direct lenders such as Monroe capital remain the preferred solution to middle market companies seeking financing with an emphasis on providing a higher certainty of execution and new transactions demonstrating ongoing support for portfolio companies.

A volatile macroeconomic environment is resulting in lower new deal activity that in prior years, our new investment pipeline remains robust heading into the fourth quarter.

This includes a steady flow of lower risk incumbency lending opportunities, which.

Relate to add them.

Financings, which has allowed us to maintain a highly selective approach.

And underwriting new investment opportunities.

In order for the fed to manage inflation, the interest rate environment will likely be higher for longer.

Given GDP expansion job growth statistics wage inflation, we see no signs of interest rate cuts on the horizon at the same time private equity and other middle market investors are facing heightened pressure to deploy dry powder and LP capital.

This has led to an uptick in M&A and loan activity. Despite the higher cost of financing is direct lending volumes with sponsored middle market increased 12% in the third quarter relative to the second quarter for furniture.

These dynamics provide compelling tailwind to the private credit direct lenders as transactions being completed at lower leverage levels more conservative attachment points and with historically higher equity contributions.

We believe this trend will continue in this fourth quarter and into 2024.

We remain focused on capitalizing on these attractive market fundamentals and the growing opportunity set within private credit.

Throughout 2023, the economy is showing more resiliency than many had anticipated in turn we have seen solid overall financial performance across our borrowers in our portfolio maintains a healthy average mark of nearly 97% at the end of the quarter.

Our portfolio companies have demonstrated strong top line growth with continued EBITDA growth, although at a slightly lower margin.

Our company has continued to adapt their business models to combat the lingering impacts of inflation.

<unk> begun to realize those benefits the portfolio's overall interest coverage remained sound with sufficient cushion to weather an extended period of elevated interest rates and potentially a more challenging economic environment.

Looking ahead, we anticipate that some combination of an economic slowdown are higher for long term interest rate environment heightened.

Heightened volatility in the capital markets and geopolitical uncertainty around the globe seems inevitable come.

Companies are facing higher borrowing costs against the potential challenging economic environment.

Dish until leaning in or defensive and diversified portfolio construction, we continue to emphasize our portfolio management and focus on capital preservation.

We believe that our defensive portfolio was well positioned to navigate a potentially prolonged economic downturn.

We have nominal exposure to highly cyclical industries and our portfolio is predominantly comprised of first lien senior secured loans, a conservative loan to value attachment points by portfolios modest average loan to value portfolio company leverage provides comfort given the meaningful equity deal you could.

It is below our debt.

Complementing the portfolio's risk averse position is our deep and highly experienced portfolio management team.

<unk> team continues to actively monitor real time performance and cash flows.

Portfolio companies, while regularly engaging with the management teams to stay informed on key operating and industry trends our portfolio management playbook, which has been time tested over the course of nearly two decades allow us to identify challenges early.

And to proactively developed strategies to maximize our outcomes we've.

We believe that the portfolio stands to benefit from <unk>, and the private credit and lower middle market.

Segment.

<unk> enjoys a strong strategic advantage in being affiliated with a best in class Middle market private credit asset management firm with nearly $18 billion in assets under management and approximately 240 employees with over 100 dedicated investment professionals as of September 30th 2023.

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

Now going to turn the call over to Mick.

We will walk through.

Our financial results in greater detail.

Thank you Ted.

As of September 32023.

Our investment portfolio totaled $518 $3 million, an increase of $2 $9 million from $515 4 million as of June 32023.

At the end of the quarter our investment.

Portfolio consisted of debt and equity investments in 99 portfolio companies unchanged from the end of the prior quarter.

During the quarter, we made an investment in one new portfolio company funded $2 million at an effective interest rate of 12, 6%.

<unk> made a nominal equity investment in this new portfolio of company.

Further we have revolver or delayed draw fundings and add ons to existing portfolio companies totaling $10 $7 million.

We received one full pay off quite nominal amount and incurred normal course, paydowns totaling $6 $7 million.

At the end of the third quarter, we had total borrowings of $331 1 million.

Including $201 $1 million outstanding under our floating rate revolving credit facility.

And 139 of our 475% fixed rate 2026 months.

Total borrowings outstanding increased nominally during the quarter.

The revolving credit facility had $53 $9 million of availability subject to borrowing base capacity.

Now turning to our financial results.

Adjusted net investment income a non-GAAP measure was $5 5 million.

Or <unk> 25 per share this quarter compared to $6 1 million or 28 per share in the prior quarter.

Our weighted average portfolio effective yield increased from 12, 2% as of June 30th to 12, 5% as of September 30th.

The positive effect from this increase in portfolio yield on adjusted net investment income was offset by a $1 million reversal of previously accrued fee income associated with our former loan investment in.

Global Holdings alone was fully pay off in 2022.

The incremental fee income was to be paid in conjunction with a future liquidity event that the company. However, unforeseen circumstances resulted in the company filing for chapter 11 prior to its sale, where we would have monetize that fee income.

We have $512000 a remaining accrued fee income from it global and we are actively monitoring the bankruptcy process to assess the likelihood of recovery for this exposure.

Excluding this onetime reversal of previously accrued fee income or investment income increased by $300000 from last quarter.

Other adjusted net investment income.

There have been 29 per share up from 28 cents per share last quarter due an increase due to an increase in portfolio yield driven by rising interest rates.

At this level our dividend coverage would have been nearly one two times.

When considering current leverage levels, the interest rate environment, and the favorable favorable percentage of our funded leverage at a fixed rate. We believe that on a run rate basis. Our adjusted net investment income will continue to cover the current 25 per share quarterly dividend, all things being equal all other things being equal.

As of September 32023, or.

Our net asset value was $207 $6 million, which decreased from $213 $2 million.

As of June 32023.

And our corresponding net asset value per share decreased by 26 guidance.

For $99 84 per share to $9 58 per share.

The decline in net asset value. This quarter was a result of net unrealized losses attributable to a few specific portfolio of companies that were affected by market conditions in various idiosyncratic factors.

The balance of the decrease to net asset value was the result of net mark to market unrealized losses that negatively impacted the value of SLS.

I will now turn the call over to Alex who will provide more details on our third quarter operating performance.

Thank you Mick looking to our statement of operations total investment income totaled $15 $6 million during the third quarter of 2023.

Down from $16 $3 million in the second quarter of 2023.

As Nick mentioned, excluding the reversal of the 1 million of previously accrued fee income related to the former <unk> global investment.

Investment income increased by $300000 compared to the last quarter due to a higher average portfolio yield driven by the rising interest rate environment.

While the 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.

Fee income and prepayment gains were not significant contributors to investment income over the last two quarters.

As of September 32023, we had four investments on non accrual status, representing one 2% of the portfolio at fair market value a slight decrease from one 3% of the portfolio at fair market value as of June 32023 in the third quarter, we did not place any new investments on non accrual.

Now shifting over to the expense side.

So those expenses slightly decreased from $10 $2 million in the third quarter of 2023 from $10 4 million in the second quarter.

The $200000 decrease in expenses during the quarter was primarily driven by a decrease in incentive fees from lower net investment income and a decrease in excise taxes.

These decreases were partially offset by an increase in interest and other debt financing expenses driven by rising interest rates are.

Our net loss for the third quarter of 2023 was $5 7 million.

Compared to a net loss of $10 3 million for the second quarter of 2023.

Net realized and unrealized losses on investments were $5 $7 million for the quarter.

Net loss on investments was primarily attributable to unrealized mark to market losses of a few specific portfolio companies and the slight decline in valuation of our <unk> investment.

As of September 30th the <unk> had investments in 53 different borrowers aggregating to $148 $2 million of fair value with a weighted average interest rate of 10, 9%.

The SLS underlying investments are loans to middle market borrowers that are generally larger and more sensitive the market spread movements than the rest of the MRC <unk> portfolio, which is focused on lower middle market companies in the quarter the SLS.

<unk> decreased in value by approximately two 1% from 91, 5% of amortized costs as of June 30 to 89, 4% of amortized costs as of September 30, consistent with the prior quarter MRC received income distributions from S. A lot of $900000.

As of September 32023.

<unk> had borrowings under its nonrecourse credit facility of $107 9 million and $2 1 million of available capacity subject to borrowing base availability.

At this point I will turn the call back to make for some closing remarks before we open up the lines for any questions.

Thank you Alex to conclude we remain confident in the overall quality of the portfolio and its ability to navigate prospective economic headwinds portfolio.

Portfolio management remains top of mind, and we continue to actively engage with our portfolio companies and their management teams, especially in this volatile environment.

While we are mindful of the potential challenges that may lie ahead fire similar periods of volatility have created some of the very best vintages and private credit credit.

Further our average effective yield of approximately 12, 5% on a predominantly first lien portfolio pretends well for the remainder of 2023 and into 2024.

<unk> continues to deliver stable and consistent dividends for our shareholders. We have a long standing dividend track record and as Ted highlighted earlier this quarter marked the 14th consecutive quarter, where our net investment income has met or exceeded our dividend our dividend yield is at an attractive 14, 3% as of November seven 2000.

23.

We believe that Monroe Capital Corporation, which is affiliated with an award winning best in class external private credit manager with nearly $18 billion in assets under management provides a very attractive investment opportunity to our shell shareholders and to other investors.

Thank you all for your time today and that concludes our prepared remarks.

I am now going to ask the operator to open up the call for questions.

<unk>. The floor is now open for your questions to ask a question at this time. Please press Star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Okay.

Yeah.

Yeah.

Yeah.

Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Your line is open.

Hey, guys.

<unk> given the decline in valuations I know, 2% or small but is if it continues to decline due to the provisions with the Sof require you and your partner to JV partner too.

Putting more capital.

The provisions under the JV agreement does not require us to put in.

But in new capital in it at this point, we don't anticipate.

Any.

Any capital will be required for the vehicle.

Got you and then on the question of leverage.

By the way congratulations on the asset quality I mean, holding the line on that and I think lot of the efforts that you guys put in the past in terms of addressing those as really paid off.

But going forward given the uncertain environment that you guys.

Outlined.

Should we view leverage as being one of those things that if as you get more cautious about the asset.

Quality environment that we could see leverage going down in the BDC.

Yes, it's a really good question Chris.

Our leverage at the end of the third quarter was.

We pointed out one six times.

Increased slightly quarter over quarter, we had slightly higher debt levels associated with a slight increase in portfolio size and in conjunction with.

The decline in NAV.

We're comfortable at todays leverage levels and would guide you towards that in the near term, we feel comfortable around our leverage levels given.

The first lien.

Eight of our portfolio and our average mark of nearly 97 and our portfolio.

The portfolio risk rating distribution, which didn't change over the course of course of the quarter.

Okay final question.

The fair value marks that you do in your portfolio.

How has the rise in short term interest rates.

Did those marks I'm, specifically thinking about discount rates on DCF.

Okay.

Okay.

Yes, so it's a really good question, Chris and as you know we Mark every one of our portfolio names with third party marks on a.

Quarterly basis discount rates have gone up that has affected the yield calculations when we do our fair market value calculations.

The impact this quarter was relatively flat.

If you looked at our portfolio companies, which have considerable enterprise value coverage question in that context.

Okay. Thanks, that's it for me thanks.

Thanks, Chris.

Sure.

Next question comes from the line of Robert Dodd with Raymond James Your line is open.

Hi, guys.

Global and thank you for the clarity on that all the <unk>.

You said 512 previously accrued fee income what the.

What do you think the timeframe is where youll be able to evaluate whether that should be the show or cat.

I mean is that likely to be a one quarter event or could it be prolonged given that there is a bankruptcy.

Yes. Thank you for that thank you for that Chris for that question.

Chris I think we'll have more clarity around this it global.

Receivable in the fourth in the fourth quarter it could slip into the first quarter.

But just as way of background this was alone.

That was.

$14 $4 million in MRC say.

The loan was made in 2018 was repaid in full.

In 2022.

The loan exclusive that fee event.

Had an IRR of around 12, 4% in the market around 135 times net incremental fee.

<unk> had to do with the future liquidity event related to the sale of the company.

The company that the future fee event was related to file for chapter 11.

Third quarter when a <unk>.

Significant tax liability kind of gotten away a sale process and hence the company filed for chapter 11. So.

We are monitoring that process to see what the results of the emergence from from the preceding might be and that will influence pursuant to a waterfall analysis.

The ultimate treatment of that roughly $500000 receivable.

Got it thank you for that then.

The credit quality, obviously, a formal accruals stable versus Q3, so congratulations on that I mean, you talked about.

The markdowns in the quarter being a couple a handful of.

Idiosyncratic issues with the company and can you give us a little more color.

Was that just operational issues was that something completely out of left field unrelated to operations.

Can you give us any color because obviously if its operations.

Beginning with performance a little bit more concerning the metrics just some.

Wildcard event of some sort so can you give us a lot yes.

Yes.

Yes, good question.

Good good good question, Robert So as I look at as we look at.

The unrealized loss change quarter over quarter.

And we look at kind of idiosyncratic factors that.

Affected yet.

In one case the.

Synchronic event was really right factors outside the control of the management team and the management team.

And as a management team is in the process of kind of reacting to that and opt in.

And our business model to it and in the case of the other matter that was the subject of an idiosyncratic event. It was really kind of the same setup. There was an external event that really kind of impacted the company. A company took is taking kind of quick charge of the situation.

To make sure that it can adapt.

<unk> planned to kind of kind of deal with that.

So that's that.

That kind of explains the idiosyncratic events that impacted a couple of names during the course of the quarter and Robert to your point I mean, not so much focused on the actual operations of the business as Nick noted very much kind of factories, either unforeseen or not but outside of the <unk>.

And both of the operation.

Got it. Thank you that's it from me Thanks a lot.

Robert.

Okay.

There are no further questions at this time, Mr. Solomon I'll turn the call back over to you.

Okay.

Alright, Thank you operator, and thanks for thank you for everyone for joining US this morning, and we look forward to speaking with you again next quarter.

This concludes today's conference call you may now disconnect.

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