Q4 2023 Monroe Capital Corp Earnings Call

[music].

Okay.

Welcome to Monroe Capital Corporation's fourth quarter, and full year 2023 earnings conference call.

Before we begin I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward looking statements, including statements regarding our goals strategies beliefs future potential operating results and cash flows.

Although we believe these statements are reasonable based on management's estimates assumptions and projections as of today March 12, 2024. These statements are not guarantees of future performance.

Further time sensitive information may no longer be accurate, that's just the time of any replay or listening.

<unk> results may differ materially as a result of risks uncertainties or other factors.

<unk> not.

Not limited to the risk factors described from time to time in the company's filings with the FCC when Roche capital. It takes no obligation to update or revise these forward looking statements.

I'll now turn the conference call over to Ted Kennedy, Chief Executive Officer from Roth Capital Corporation.

Good morning, and thank you to everyone, who has joined US today welcome to our fourth quarter and full year 2023 earnings call.

I am here with mixed cell Amini, our CFO and.

And Chief investment Officer, Alex permits suck or jeopardy portfolio manager.

Last evening, we issued our fourth quarter and full year 2023 earnings press release.

Our 10-K with the SEC and.

On today's call I'll begin by addressing our fourth quarter results.

Current market conditions.

I am pleased to report that for the 15th consecutive quarter.

Adjusted net investment income covered our 25 cents per share dividends.

RCC delivered a total annualized dividend yield.

Our trading price of over 13% using our March eight 2024 closing share price. We are proud of our track record of delivering stable and consistent dividend to our shareholders.

The fourth quarter of 2023, where adjusted net investment income was $5 6 million or 26 cents per share.

Increased from $5 5 million or 25 per share last quarter.

We reported <unk> of $203.7 million or $9 40 per share.

December 31, 2023 compared to <unk>.

$207.6 million or $9 58 per share as of September 30th 2023.

The 1.9% decline was primarily due to mark to market unrealized losses attributable to a few specific legacy portfolio companies that continue to be impacted by macro economic and idiosyncratic challenges.

<unk> debt to equity leverage decreased from 1.61 times debt equity to 1.5 old times, we continue to focus on managing our investment portfolio and selectively redeploying capital, resulting from repayments into attractive new investment opportunities.

Our underlying portfolio proved resilience as the vast majority of our portfolio companies generated solid revenue and EBITDA growth the.

The portfolio's overall interest coverage remains sound with sufficient cushion to withstand a higher for longer interest rate environment.

Further our portfolio risk rating distribution remained stable.

We continue to lean on our purposely defensive portfolio construct and focus on portfolio management as the direction of the economic environment remains uncertain.

Turning now to the broader lending market overall, M&A activity and loan volumes were down in 2023.

Injection activity began to rebound substantially in the fourth quarter with direct lending volumes, increasing by 31% from the third quarter. According to alessi, chief data and analytics.

The momentum in deal activity from late 2023 has carried into early 2024.

We anticipate this trend will continue as inflation and interest rates have shown signs of stabilization.

Private equity investors are actively seeking to deploy dry powder and L. P capital.

Direct lenders continue to dominate share of loan volumes in the middle market accounting for eight times that a syndicated loan and bank volumes in the fourth quarter.

While we have seen heightened competition in the overall market our ability to provide flexible capital solutions with low execution risks or borrowers has proven to be a true differentiator.

As such we believe that our long standing position in the lower middle market, it's relatively insulated.

Correct lenders, such as Monroe stand to benefit from a growing opportunity set in a more active M&A environment.

The current market dynamics continue to provide favorable tailwind for private credit.

While pricing has generally leveled off in recent months loan to value and leverage attachment points remain at attractive levels. These deal structures offer compelling risk adjusted returns for predominantly first lien senior secured lenders, we continue to leverage our lower risk incumbency lending your opera.

<unk> within the portfolio, which has allowed us to maintain a highly selective approach when underwriting new investment opportunities.

RCC enjoys a strong advantage in being affiliated with a best in class middle market private credit manager with $18 $4 billion in assets under management.

Sorted by a deep team consisting of approximately 245 employees, including 105 dedicated investment professionals.

One 2024.

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

I am going to turn the call over now to Mick was going to walk you through our financial results in greater detail.

Thank you Ted.

As of December 31, 2023, our investment portfolio totaled $488 4 million.

$9 9 million decrease from $518 3 million as of September 30th 2023 or.

Our investment portfolio consisted of debt and equity investments and 96 portfolio companies compared to 99 portfolio companies from the end of the prior quarter.

During the quarter, we funded $10 $7 million to new and existing portfolio companies and an effective interest rate of approximately 12, 4%.

Additionally, we made a nominal equity investment in one of these portfolio companies.

In the quarter. We also received three full pay offs aggregating $42 $6 million at an approximate weighted average interest rate of 11, 8%.

One of the payoffs was associated with the sale of a portfolio company in which we had an equity position that also produced a realized gain of $275000.

Further we incurred partial in normal course, paydowns totaling $6 4 million.

At the end of the fourth quarter, we had total borrowings of $304 $1 million, including $174 $1 million outstanding under our floating rate revolving credit facility and $130 million of our 475% fixed rate 2026 note.

Total borrowings outstanding decreased during the quarter as we utilized proceeds from payoffs and sales to pay down our revolving credit facility facility.

As of December 31, 2023, the revolving credit facility had $89 million of availability subject to borrowing base capacity.

Now turning to our financial results.

Adjusted net investment income a non-GAAP measure was five $6 million or 26 cents per share this quarter compared to $5 5 million or.

Or <unk> 25 per share in the prior quarter.

The increase in adjusted net investment income was a result of higher fee income and prepayment games, partially offset by a decrease in interest income.

The decrease in interest income was driven by a decrease in the average size of our portfolio and a reduction in our weighted average portfolio effective yield which decreased from 12, 5% as of September 30, the 12, 1% as of December 31.

We also wrote off the remaining $512000 of accrued fee income from our former loan investment in global.

Excluding this write off related to the I T Global interest receivable adjusted net investment income would have been 28 per share and our dividend coverage would have been over one one 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 other things being equal.

As of December 31, 2023, our NAV was $203 7 million, which decreased from $207 $6 million of NAV as of September 32023, and.

And our corresponding NAV per share.

Decreased by 18.

From $9 58 per share to $9 40 per share.

The decline in NAV. This quarter was primarily attributable to net unrealized losses on the portfolio attributed to attributable to a few specific portfolio companies that continue to be affected by macroeconomic and idiosyncratic factors.

The value of the remaining during the portfolio, including our investment in SLS was relatively stable for the quarter.

I will now turn it over to Alex who will provide more details on our fourth quarter operating performance.

Thank you Mac looking to our statement of operations investment income totaled $15 $5 million during the fourth quarter of 2023.

Slightly down from $15 6 million in the third quarter of 2023.

Both quarters included an impact for the reversal of previously accrued fee income associated with the company's former loan investment in IP global $512000 for the quarter ended 12, 31, 23 and $1 million for the quarter ended 932023. The company has no remaining fee income.

Accrued associated with it global.

Excluding the impact of EC income reversals investment income decreased by $675000 due to the decrease in the size of the average investment portfolio during the quarter and a reduction in effective rates on the portfolio.

In the fourth quarter, we placed one new investment on non accrual as of December 31, 2023, we had five investments on non accrual status, representing one 5% of the portfolio at fair market value.

Slight increase from one 2% of the portfolio at fair market value as of September 32023 now.

Now shifting over to the expense side.

Total expenses remained consistent at $10 2 million for the fourth quarter of 2023.

A decline in interest expense and other debt financing expenses driven by a reduction in our weighted average leverage level was offset by an increase in income taxes, primarily associated with blocker entities that hold certain of our equity investments.

Our net loss for the quarter was $3 7 million.

Compared to a net loss of $5 7 million for the prior quarter.

Net losses were primarily attributable to unrealized mark to market losses at a few specific portfolio companies.

Turning now to SLS.

As of December 31st 2023, <unk> had investments in 49 different borrowers aggregating $139 9 million at fair value with a weighted average interest rate of 10, 2%.

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

In the quarter the average mark on the SLS portfolio increased by approximately one 5% from 89, 4% of amortized cost as of September 30th 2023% to 99% of amortized costs as of December 31, 2023.

System with the prior quarter MRC received income distributions from <unk> of $900000.

As of December 31, 2023 to Aslef had borrowings under its nonrecourse credit facility of $82 million and $28 million of available capacity subject to borrowing base availability.

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

Thanks, Alex to conclude we remain confident in the overall quality of the portfolio and its ability to navigate higher for longer interest rates and volatile economic environment.

Our predominantly first lien portfolio carries an average effective yields of 12, 1% offering compelling risk return dynamics to our investors our focus remains balanced between portfolio management and selectively redeploying capital from pay offs into attractive new investments from the current vintage.

RCC continues to deliver stable and consistent dividend for our shareholders.

This marked the 15th consecutive quarter, where our net investment income has met or exceeded our dividend our dividend yield is at an attractive rate of over 13% as of March eight 2024.

We believe that Monroe Capital Corporation, which is affiliated with an award winning best in class external private credit manager with over $18 $4 billion in assets under management provides a very attractive investment opportunity to our shareholders and other investors.

Thank you all for your time today and this concludes our prepared remarks I'm going to ask the operator to open up the call now for questions.

Thank you and the floor is now open to your questions. So to ask a question. This time. Please press Star then the number one telephone on your telephone keypad.

For now we're going to pause for just a moment to compile the Q&A roster.

Our first question comes from the line of Christopher Nolan with <unk>.

Colin Please go ahead.

Hi.

On the SLS I noticed that there are four non accruals and I believe last quarter was.

John.

Is it going to be monroe's responsibility to work through those.

Non accruals at SLS were four at at this quarter and we added.

It added a new non accrual a company called <unk> health.

Last quarter, we also had four non accruals we.

We took one off.

A company called <unk>, which got realized.

So the net migration forward.

And the non accrual category was basically flat.

Quarter over quarter and yes.

These are.

Upper middle market credits, which had a little bit of a different.

It will jump profile than the traditional than than the direct middle market loans and in the rest of MRC.

We are actively.

Participating in the.

The resolution of these of these non accruals much like we do in our direct portfolio.

Okay, and I guess as a follow up question does the.

Level of non accrual sort of affect the amount of leverage SLS can take on.

Thus fee income that MRC, which deals from that.

To a certain extent or to a certain extent it does.

We've we've deliberately.

Kind of maintain the status quo at SLS in terms of.

Just being a kind of a more reluctant participant in kind of the 2023 vintage given that.

These are companies that are kind of in the upper end of the middle market, where structures are a little less favorable terms are a little less favorable yields are a little less yields are a little less favorable.

But.

The non accruals themselves haven't hasnt really affect either leverage or borrowing capacity. We have now decided to maintain a pretty cautious approach in terms of the leverage structure in this vehicle and that's why you've seen kind of over the course of.

2023 leverage levels at the fund at the SLS fund level generally coming down.

Okay. That's it for me thank you.

Thanks, Chris.

Okay.

Again, if you would like to ask a question Press Star then the number one on your telephone keypad.

Okay.

There are no further questions at this time I will now turn the call back over to action.

Thank you all for joining the call today.

We're excited about 2024, we think the market's going to pick up substantially and we look forward to talking to you again next quarter in the interim to the extent, there's any questions or thoughts please feel free to reach out to mix or Alex and we're always happy to talk.

Between quarters. Thank you have a good day.