Q3 2024 Monroe Capital Corp Earnings Call
Speaker Change: Welcome to Monroe Capital Corporation's 3rd Quarter 2024 Earnings Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may not be true.
Speaker Change: Today may contain certain forward-looking statements, including statements regarding our goals, strategies, beliefs.
Speaker Change: uncertainty or other factors including but not limited to the risk factors described from time to time and the company's filings with the SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements.
Speaker Change: Good morning, and thank you to everyone who has joined us today.
Welcome to our third quarter 2024 earnings call.
Speaker Change: I am here with Mick Solimene, our CFO and Chief Investment Officer, and Alex Parmacek, our Deputy Portfolio Manager. Last evening, we issued our third quarter 2024 earnings press release.
So he'll be rejoining shortly.
Okay, I'm back.
Sorry about that. I got dropped from the call.
Can you hear me Mick?
Speaker Change: We can. Okay, all right. So let's pick up again where I left off. Good morning and thank you to everyone. Welcome to our third quarter earnings 2024 call. I'm here with Mick Solimene, our CFO and Chief Investment Officer, and Alex Parmacek, our Deputy Portfolio Manager.
Speaker Change: Last evening, we issued our third quarter 2024 press release and filed our 10-Q with the SEC. On today's call, I'll begin by providing an overview of our third quarter results and then share some commentary on the recently announced strategic transaction with the Wendell Group.
Speaker Change: I am pleased to report that for the 18th consecutive quarter, our adjusted net investment income covered our $0.25 per share dividend.
Speaker Change: MRCC delivered a total annualized dividend yield on our trading price of over 12% using our November 11th 2024 closing share price. We are proud of our long-standing track record of delivering stable and consistent dividends to our shareholders.
Speaker Change: In the third quarter of 2024, our adjusted net investment income was $6.6 million or 31 cents per share, which was a nominal decrease from $6.7 million last quarter and stable on a per share basis of 31 cents per share.
Speaker Change: Our adjusted net investment income once again covered our $0.25 per share dividend by nearly 1.25 times.
We reported NAV of $198.9 million.
Speaker Change: for $9.18 per share as of September 30, 2024, compared to a fee of $199.3 million for $9.20 per share.
Speaker Change: 30th, 2024. The slight decline in NAV was primarily the result of net unrealized losses attributable to certain portfolio companies.
Speaker Change: MRCC's debt-to-equity leverage decreased from 1.54 times at June 30, 2024 to 1.50 times at September 30, 2024.
Speaker Change: We continue to focus on managing and supporting our existing investment.
Speaker Change: portfolio companies with add-on lending opportunities while maintaining a highly selective and disciplined approach when deploying capital from payoffs into attractive investment opportunities for new portfolio company relationships.
Speaker Change: During the quarter, over half of our new findings were in support of growth initiatives of our existing borrowers.
Speaker Change: announced plans to partner with the Wendel Group, a French investment company.
Speaker Change: Wendell is purchasing a majority ownership interest in Monroe and will commit $1 billion of new seed capital to support new and existing investment strategies for the Monroe platform.
Speaker Change: The Wendell Group is a 320-year-old investment firm based in Paris. They are a publicly held company now, but controlled by the Wendell family, who owns 52% of the firm and voting control.
Speaker Change: They are led by Laurent Mignol, who was previously the CEO of Netixas Investment Management, a vertically European multi-manager boutique. When the strategy is to acquire interest in asset managers in the following
Secretaries and Infrastructure
Speaker Change: Monroe will be their private credit management platform. Monroe, and by extension our external advisor, will continue to operate autonomously and independently and its investment process, strategy, and operations will remain the exact same. Wendell will not have a role in the Monroe investment process.
Speaker Change: MRCC expects to benefit from the additional capital, scale, and commitment of the partnership between Monroe and the Wendell Group. The transaction is expected to close in the first quarter of 2025.
Speaker Change: I am now going to turn the call over to Mick, who is going to walk you through our financial results in greater detail.
Thank you, Ted.
Mick Solimene: At quarter end, our investment portfolio totaled $474.3 million, an $11.5 million decrease from $485.8 million at the end of last quarter.
Mick Solimene: Our investment portfolio consisted of debt and equity investments in 94 portfolio companies, consistent with the end of the prior quarter.
Mick Solimene: In the third quarter, we saw middle market loan volumes rise, primarily driven by increased private equity sponsor activity.
Mick Solimene: According to LSEG LPC's third quarter 2024 middle market analysis, middle market direct lending M&A volumes were up 43% compared to the prior year, and middle market LBO lending volume was up 52% compared to the last quarter alone.
Mick Solimene: Additionally, sponsors continue to exhibit demand for capital solutions that can be used to support strategic initiatives for existing portfolio companies, and to ultimately position those companies for exits.
Mick Solimene: LSEG's report further indicated that Delayed Drawed Term Loan funded volumes in the third quarter of 2024 were up 62% compared to the third quarter of 2023.
Speaker Change: Our investment activity across our platform and at MRCC in the quarter is reflective of those industry dynamics. Incremental investments made toward existing portfolio companies accounted for nearly 60% of our investment activity in the quarter.
Speaker Change: During the quarter, we invested $11.1 million in three new portfolio companies, while we had revolver, delayed-draw fundings, and add-ons to existing portfolio companies totaling $14.7 million.
Speaker Change: We expect a more active deal environment in the middle market throughout the balance of 2024 and into 2025.
Speaker Change: Supporting this trend is the acceleration of sponsored transaction activity as private equity managers are benefiting from lower interest rates while at the same time are under pressure to return capital to their LPs.
Speaker Change: A more active deal environment will allow MRCC to rotate out of legacy assets and selectively redeploy capital into new assets in more attractive vintages.
Speaker Change: In the quarter, we received three full payoffs aggregating to $11.4 million and incurred partial and normal course paydowns totaling $26 million.
Speaker Change: We also received $1 million in proceeds relating to the full sale of one equity position and a partial sale of another equity position.
Speaker Change: At September 30, 2024, we had total borrowings of $299 million, including $169 million outstanding under our floating-rate revolving credit facility and $130 million of our 4.75% fixed-rate 2026 notes.
Speaker Change: At quarter end the revolving credit facility had 86 million dollars of availability subject to its capacity
Speaker Change: Now turning to our financial results. Adjusted net investment income, a non-GAAP measure, was $6.6 million, or $0.31 per share this quarter, compared to $6.7 million, or $0.31 per share in the prior quarter.
Speaker Change: excluding the impact of incentive fee limitations of seven hundred thousand dollars and one million dollars for the third and second quarters respectively.
Speaker Change: Adjusted net investment income would have been $5.9 million, or $0.27 per share, in the quarter ended September 30, 2024, up from $5.7 million, or $0.26 per share, in the quarter ended June 30, 2024.
Speaker Change: Even without the benefit from the incentive fee limitation, adjusted net investment income generated in the past two quarters still exceeded our $0.25 per share quarterly dividend.
Speaker Change: The weighted average effective yield on the portfolio's debt and preferred equity investments was 11%, which compares to 11.9% a quarter ago.
Speaker Change: The decline in effective yield was largely due to the 50 basis point decline in base rates during the quarter, as well as the addition of one investment to non-accrual status.
Speaker Change: As of September 30, 2024, our NAV was $198.9 million, which decreased slightly from $199.3 million as of June 30, 2024.
Speaker Change: Our corresponding NAV per share decreased by 2 cents from $9.20 per share to $9.18 per share.
Speaker Change: The decline in NAV this quarter was primarily the result of net unrealized losses attributable to certain portfolio companies that have mostly been impacted by idiosyncratic factors.
Speaker Change: Thank you, Vic. Looking to our statement of operations, investment income totaled $15.7 million during the third quarter of 2024, a slight increase from $15.6 million in the second quarter of 2024.
Speaker Change: The $100,000 increase in investment income was primarily due to an increase in fee income, which stemmed from various portfolio investment realizations during the quarter, which was included in other income.
Speaker Change: This increase was partially offset by a decline in interest income, resulting from placing an additional portfolio investment on non-accrual status and a decrease in the average invested assets during the quarter.
Speaker Change: With the addition of one new investment being placed on non-accrual during the quarter, our total investments on non-accrual status represented 3.1% of the portfolio at fair market value as of September 30, 2024.
Speaker Change: The balance of our predominantly first-lane, senior-secure portfolio continues to demonstrate resiliency.
Speaker Change: MRCC's portfolio companies continue to maintain sound interest coverage, supported by healthy revenue and EBITDA growth trends. We will continue to leverage our deep roster of investment professionals and our proven underwriting and portfolio management playbook.
Speaker Change: We maintain over a 20-year track record of navigating various market and economic environments and remain confident that we can continue to maximize outcomes and deliver value for our shareholders.
Speaker Change: Now shifting over to the expense side, total expenses for the third quarter of 2024 were $9.2 million, compared to $9.1 million of total expenses for the second quarter.
Speaker Change: excluding the impact of the incentive fee limitations during both periods.
Speaker Change: Total expenses decreased by $200,000 during the third quarter, primarily due to lower interest and other debt financing expenses driven by a decline in our average debt outstanding.
Speaker Change: Our net loss for the quarter was $1.5 million, compared to a net loss of $3.3 million for the prior quarter.
Speaker Change: These net losses for the quarter ended September 30, 2024, were primarily attributable to the unrealized mark-to-market losses on certain portfolio companies that have underlying credit performance concerns, partially offset by a modest net gain on the balance of our portfolio.
Speaker Change: The average mark on the portfolio decreased slightly by approximately 50 basis points from 94.4% of costs at June 30, 2024 to 93.9% of costs at September 30, 2024.
Speaker Change: Turning now to SLF. As of September 30, 2024, the SLF had investments in 36 different borrowers, aggregating to $98.7 million at fair value.
Speaker Change: 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.
Speaker Change: In the quarter, the average mark on the SLF portfolio decreased slightly by approximately 1.3%, from 88.3% of amortized costs as of June 30, 2024 to 87% of amortized costs as of September 30, 2024.
Speaker Change: Consistent with the prior quarter, MRCC received income distributions from SLF totaling $900,000.
Speaker Change: At this point, I will now turn the call back over to Ted for some closing remarks before we open up the line for some questions.
Ted: Thank you, Alex. Looking forward, our focus will be twofold. First, on selectively redeploying capital from payoffs into both accretion opportunities as well as into incumbent portfolio companies.
Ted: Second, on Portfolio Management, where we can leverage our deep and experienced team of investment professionals to execute our Portfolio Management Playbook.
Ted: MRCC enjoys a strong strategic advantage in being affiliated with an award-winning, best-in-class, middle-market private credit manager with approximately $20 billion in assets under management.
including 117 dedicated investment professionals as of October 1st, 2024.
Ted: Going forward, we will continue to focus on generating investment income that meets or exceeds our dividend and achieving positive long-term NAV performance.
Ted: We believe our new partnership with the Wendell Group will offer our shareholders and limited partners the benefit of significant new investment into the Monroe Capital overall platform.
Ted: We believe that our predominantly first-string portfolio, which carries an average effective
of 11 percent.
Ted: positions us well to continue delivering attractive, risk-adjusted returns to our investors as highlighted by our 12.3% dividend yield based on the November 11, 2024 closing price.
Ted: We believe the Monroe Capital Corporation continues to provide an attractive investment opportunity to our shareholders and to other investors.
Ted: Thank you all for your time today, and this concludes our prepared remarks.
Speaker Change: to ask the operator to open the call now for questions.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star, then the number 1 on your telephone keypad. Again, press star, then the number 1 on your telephone keypad to ask a question. We will pause for just a moment to compile the Q&A roster.
Speaker Change: Your first question comes from the line of Christopher Nolan with Lattenberg-Fallman. Please go ahead.
Christopher Nolan: Hi, thank you for taking my questions. Ted, I would respectfully suggest a third focus should be expense control. I applaud the fee waivers I experienced over the last two quarters, and I've noticed that the stock price for MRCC has climbed.
Christopher Nolan: I respectfully suggest that going forward, a major focus for MRCC should be containing operating expenses, because I think it would...
Christopher Nolan: impact the share price positively. No real questions, that's all I want to say.
Thank you.
Speaker Change: Your next question comes from the line of Robert Dodd with Raymond James. Again, if you would like to ask a question, press far, then the number 1. Mr. Robert Dodd, please go ahead.
[inaudible]
Robert Dodd: Thanks for taking my question. A question on the Windell Group Partnership. You talked about they're going to seed new strategies at Monroe, the parent, to expand the private credit footprint even further. Is it, I mean obviously it's early days, but would it be your expectation that any of the originations in those newer strategies?
would they...
I'll pretend to be appropriate.
Robert Dodd: for inclusion in the BDC and diversify, you know, the type of lending strategies that the BDC does, or is it more...
Speaker Change: And I'm talking obviously about the MRCC BDC because you also have a venture BDC that you own, in a sense. So, I mean, just any thoughts on that? Is it going to expand the footprint of the BDC, or are these strategies going to be more broad-based for the institutional side of the platform and maybe not impact the BDC?
Speaker Change: The answer, that's a good question Robert, MRCC will get the benefits.
Speaker Change: of any additional strategies or investments that the Monroe platform will undertake. We're going to look at strategies that are synergistic.
Oh.
easily
Speaker Change: digestible for the mineral platform. We've got several that we're looking at and I think MRCC will stand to benefit from each of those strategies because there'll be higher interest earning and create additional diversification.
Freeze if.
Speaker Change: being supportive. Would it be your expectation that, if necessary, right? I mean...
Speaker Change: have to come down, would the manager, do you expect the manager to be supportive in the same manner going forward?
Speaker Change: The answer, I believe, is yes. I mean, we've shown a history of being very investor-friendly and shareholder-friendly and supporting MRCC. We think it's very important for the Munro platform to continue to support MRCC.
Thank you.
Speaker Change: Again, if you would like to ask a question, press star then the number 1 on your telephone keypad. We will pause for just a moment to let the questions roll in.
Speaker Change: differentiated and high-quality assets into MRCC. So to the extent anyone has questions, please don't wait till the next quarter. Contact Mick or Alex or I look forward to speaking to everyone again on the next quarterly call. Thank you.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.