Q1 2025 Monroe Capital Corp Earnings Call
Welcome to Monroe Capital Corporation's first quarter between 25 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.
Ctrip potential operating results and cash flows. Although we believe these statements are reasonable based on management's estimates assumptions and projections as of today may eight 2025 states.
Statements are not guarantees of future performance.
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 frisk I'm trying to eat or other factors, including but not limited to Joe based on factors described from time to time in the company's filings with U S E C.
But what kabi at all it takes no obligation to update or revise these forward looking statements.
Speaker Change: I will now turn the conference call over to Ted Koenig, Chief Executive Officer of Monroe capital.
Ted Koenig: Good morning, and thank you to everyone, who has joined us today.
Welcome to our first quarter 2025 earnings call I'm here with Nick <unk>, our CFO and Chief investment Officer, Alex <unk>, our Japanese portfolio.
Ted Koenig: Portfolio manager.
Ted Koenig: Last evening, we filed our 10-Q with the SEC and issued our first quarter 2025.
Ted Koenig: The earnings press release.
Ted Koenig: Today's call I'll begin by providing an overview of our financial results.
Ted Koenig: And I'm sure some relevant thoughts around our current position in this uncertain and volatile market environment.
Ted Koenig: I am pleased to report that we declared and paid a <unk> 25 per share dividend in the first quarter of 2025, representing an annualized dividend yield of 14, 3% based on our May six 2025 closing share price.
Ted Koenig: Our first quarter dividend of <unk> 25 per share was supported in part by our accumulated spillover income, which we've intentionally preserved our strong performance to provide stability during quarters of lower investment income.
Ted Koenig: As of March 31, 2025, we retained approximately 53 cents per share undistributed spillover income, which continues to offer a cushion for future distributions.
Ted Koenig: This disciplined approach allows us to manage through income variability.
Ted Koenig: Continuing to deliver consistent returns to our shareholders.
Ted Koenig: The face of a constantly evolving market environment. Our approach remains centered on prioritizing asset quality and positioning the portfolio for long term performance in.
Ted Koenig: In the first quarter of 2025, our adjusted net investment income was $4 2 million.
Ted Koenig: Or <unk> 19 per share.
Ted Koenig: At March 31, 2025, we reported.
Ted Koenig: <unk> of $186 9 million.
Ted Koenig: Or $8 63 per share and MRC six leverage was 145 times.
Ted Koenig: Debt to equity.
Ted Koenig: We ended the quarter with reduced balance sheet leverage and continue to focus on managing the investment portfolio, while remaining selective with new investment opportunities.
Ted Koenig: During the quarter, our portfolio companies reported solid revenue and EBITDA growth, which with a lower interest rate environment continued to support the portfolio's interest interest coverage ratio.
Ted Koenig: Our portfolio management team.
Ted Koenig: <unk> to focus on maintaining the asset quality of the portfolio, which has demonstrated stability over the last several quarters.
Ted Koenig: We rely on active portfolio management approach to work through underperforming investments. This ultimately allows us to proactively assess and mitigate potential risks where borrowers. So that we can successfully drive outcomes.
Ted Koenig: Over the last several quarters, we have successfully exited several investments that were previously on our credit watch list.
Ted Koenig: Going forward, we will look to utilize proceeds from portfolio exits to strategically redeployed into an increasingly attractive vintage where credit conditions are tightening and risk adjusted returns are compelling.
Ted Koenig: Amid the recent market volatility, we believe MRC six lower middle market direct lending approach with a focus on U S centric asset light businesses is well positioned.
Ted Koenig: Our senior secured positioning with lower leverage attachment points conservative structuring and covenant protections.
Ted Koenig: <unk> and hands on engagement with our borrowers are several features that drive downside protection and the ability to actively manage outcomes we.
Ted Koenig: We have spoken with every borrower and sponsor within the portfolio regarding their direct exposure to potential tariffs.
Ted Koenig: Through those discussions we have found that our portfolio, which was designed defensively.
Ted Koenig: Relatively insulated from potential tariff impacts and its composition, we're heavily weighted to services oriented companies and minimal exposure to consumer goods and manufacturing.
Ted Koenig: While trade policies and their economic effects remained highly dynamic dynamic we only have a small number of borrowers in the portfolio that we believe are directly exposed to potential tariffs.
Ted Koenig: In volatile markets.
Ted Koenig: With uncertain macroeconomic backdrops. It is important for us to be thoughtful and selective with our investment activity rather than to reach for risk. Thus, we will lead into incumbency lending opportunities with high performing existing portfolio companies that have demonstrated resiliency during challenging operating.
Ted Koenig: That's the companies that we have recently invested in new portfolio companies and existing portfolio companies operate in a recession resistant industries and are well insulated from the uncertain tariff environment.
Ted Koenig: We also believe that supporting existing portfolio companies will be an important strategy to employ in light of a slower than expected M&A environment in the near term.
Ted Koenig: Deploying capital into existing portfolio companies that we know well is proven to reduce underwriting risks to this historically generated some of whom are most attractive risk adjusted returns.
Ted Koenig: Consistent with the past several quarters incremental and follow on investments made to our existing portfolio companies that accounted for a majority of Mrc's capital deployment a trend we anticipate continuing throughout the first half of 2025.
Ted Koenig: Finally, Monroe capital the owner of Mrc's external advisor completed its partnership with <unk> Group, a French investment company and one of Europe's leading listed investment firms on March 31 2025.
Ted Koenig: Monroe and by extension our advisor continues to operate autonomously and independently in its investment process strategy and operations will remain the exact same we believe that this was an important step in driving value for our shareholders and are excited to move forward under this new part.
Ted Koenig: With that I am now going to turn the call over to Mick was going to walk you through Mrc's financial results in greater detail.
Mick: Thank you Pat at the end of the first quarter of 2025.
Mick: Our investment portfolio totaled $436 million and $26 $4 million decrease from $457 million at the end of the fourth quarter of 2024.
Mick: Our investment portfolio.
Mick: Is that a debt and equity investments in 85 portfolio companies compared to 91 portfolio.
Mick: The prior quarter.
Mick: Middle market LBO and M&A activity has slowed down from highly Apple fourth quarter of 2020 for January of 2025.
Mick: According to <unk> Ltc's first quarter of 2025 more of analysis middle market direct lending volume in the first quarter 2025 was down 22% from the fourth quarter of 2024 was up 16% year over year.
Mick: The <unk> report also indicated Adam recapitalization.
Mick: Recapitalization Cabot for a greater share of direct lending volume the LBO transactions in the first quarter.
Mick: As such delayed draw term loan filings often used to support existing investments accounted for a greater percentage of overall loan lock volumes continue to increase meaningfully so far in early 2025.
Mick: With M&A activity slower than originally anticipated many companies with an EBIT focus on executing strategic growth initiatives.
Mick: To drive enterprise value ultimately positioning themselves for an exit turn or more attractive.
Mick: Investment activity across our platform and MRC continues to be consistent with the industry dynamics over the last several quarters incremental investments in the form of Athens, and the delayed draw term loan.
Mick: <unk> made to our existing portfolio companies and accounted for a majority of our investment activity during.
Mick: During the first quarter of 2025, we invested $7 $6 million and one new portfolio company.
Mick: While we invested $8 $8 million delayed draw army and add ons to existing portfolio companies.
Mick: While M&A activity and slower than expected MRC sea salt rotated seven legacy asset.
Mick: $37 $6 million payoffs during the quarter several of our portfolio companies that were successfully exited or at one point in line.
Mick: On our credit watch list.
Mick: Additionally, the successful agonist exit allowed us to end the quarter with more conservative balance sheet leverage providing us with additional dry powder for redeployment of assets as well as the two existing portfolio companies.
Mick: Although we will continue to be selective with our investment approach. We believe that this 19 environment, where spreads have begun to widen and lender burns remain favorable and a particularly compelling opportunity or direct lending.
Mick: During this quarter our debt outstanding decreased by $22 7 million at March 31, 2025, and total borrowings of $271 2 million.
Mick: Including $141 $2 million outstanding on our under our floating rate revolving credit facility and $130 million.
Mick: 475.
Mick: <unk> fixed rate 2026 notes.
Mick: At quarter end, our leverage was 145 times debt to equity compared to 153 times debt to equity at the end of 2024 at March 31, 2025, the revolving credit facility at $113 8 million of availability subject to borrowing base capacity now.
Mick: Turning to our financial results.
Mick: Adjusted net investment income a non-GAAP measure was $4 2 million or.
Mick: Or <unk> 19 per share this quarter compared to $6 2 million or 29 cents per share in the prior quarter.
Mick: Excluding the impact of incentive fee limitations of $252000 and.
Mick: And $1 2 million for the quarters ended March 31, 2025, and December 31, 2020 for a second.
Mick: Adjusted net investment income would have totaled $3 $900 or <unk> 18 per share this quarter at 5 million or <unk> 23 per share.
Mick: The decrease of $1 $1 million or <unk> <unk> per share and adjusted net investment income operating or any impact.
Mick: It was driven by lower average effective yield reflected reflecting lower interest rates lower interest rate environment.
Mick: Asset specific performance and a decrease in the average size of the portfolio.
Mick: These impacts are consistent with the market dynamics that we've seen across private credit space and are not indicative of any structural change to portfolio quality.
Mick: In addition, as a result of the shareholder friendly total return requirement within MRC fees incentive fee calculation. We currently expect at least partial limitations on our incentive fees to persist throughout the quarter.
Mick: The weighted average effective yield on our portfolio's debt for equity investments was nine 2% at March 31, 2025, compared to 10, 2% at December 31 2024.
Mick: The decline in that that could deal with largely due to lower spreads on certain assets and declining interest rates.
Mick: As of March 31, 2025, our NAV.
Mick: $186 9 million.
Mick: Down from $191 8 million as of December 31, 2024, our corresponding NAV per share decreased by <unk> <unk>.
Mick: From $8 85 per share to $8 63 per share.
Mick: The decline in NAV. This quarter was primarily the result of net unrealized losses associated with certain portfolio companies and a first quarter dividend to be in excess of MRC fees net investment income for the quarter.
Mick: As of March 31, 2025, MRC have an estimated $11 5 million.
Mick: Or <unk> 53 per share undistributed spillover income.
Mick: I will now turn it over to Alex who will provide more details on our first quarter operating performance.
Mick: You may now looking to our statement of operations investment income totaled $11 $6 million during the first quarter of 2025 down from $14 million in the fourth quarter of 2024.
Mick: The $2 $4 million decline in this quarter is due to a lower effective yield on the portfolio and a decrease in average invested assets.
Mick: Throughout most of 2020 for the middle market saw loans Rexam products, while series at Blackrock amounted to nearly 120 basis point base rate decline.
Mick: Although spreads and slowly shown signs of widening <unk> five and <unk>.
Mick: Declining interest rate dynamic put pressure on yields for direct lenders. While these factors have contributed to a modest short term highway we view this as transitory.
Mick: Our portfolio continues to demonstrate solid underlying fundamentals, we are actively positioning for attractive deployment opportunities as credit spreads and my returns for.
Speaker Change: As Todd mentioned earlier credit quality is generally stable in the quarter. There were no new investments placed on nonaccrual status and our total investments on nonaccrual represented three 4% of the portfolio of fair market value.
Mick: Second with our non accrual rate at the end of last quarter.
Mick: Further we experienced favorable portfolio quality migration within our internal risk rating distribution during the quarter the strength of our platform, including the depth and experience of our portfolio management team is especially critical for successful aggregates in the current market environment.
Mick: <unk> upgraded our internal risk rating system, such as those that occurred during the first quarter of 2025 are indications that we are seeing improved performance in some of our underperforming portfolio companies.
Mick: It is important to note that the challenges we see in the portfolio. So far in may mostly due to idiosyncratic factors and specific borrowers are not indicated on a broader pattern or stress within the portfolio.
Mick: Now shifting over to the expense side.
Mick: Total expenses for the quarter ended March 31, 2025 were $7 6 million compared.
Mick: Compared to $8 million of total expenses for the fourth quarter of 2024.
Mick: Excluding the impact of incentive limitation of $252000 and $1 2 million and this order in the prior quarter, respectively total expenses decreased by $1 3 million.
Mick: Decrease in expenses was primarily due to a decline in our interest expense, resulting from a lower interest rate environment and a decrease in our average debt outstanding as well as a decline in our incentive fees, resulting from the lower net investment income during the quarter.
Mick: The net loss on the portfolio for the quarter was $3 6 million compared.
Mick: Compared to a net loss of $7 7 million for the prior quarter.
Mick: Do you have losses for the quarter ended March 31 2000.
Mick: Five we're generally primarily by unrealized mark to market losses from a few specific legacy portfolio companies that continue to be impacted by macroeconomic and idiosyncratic talent as well as the company's investment MCC Senior loan fund one at all.
The decrease in value of Soi was driven by unrealized mark to market net losses on asset off investments, which are loans to traditional upper middle market borrowers.
Mick: The average mark on the portfolio decreased by approximately one 1% from 92, 2% of cost at December 31, 2024 to 91, 1% of cost at March 31 2025.
Mick: Despite the slight increase in the overall average mark portfolio companies rated two on our internal risk rating scale accounted for over 81% of fair value consistent with the last several quarters and in line with our trailing eight quarter average.
Mick: Turning back to <unk> as of March 31, 2025.
Mick: And total assets of $86 million, including.
Mick: Including investments in 30 different borrowers aggregating 30 to $78 $4 million of fair value.
Mick: <unk> underlying investments are low to middle market borrowers that are generally larger and more sensitive to market spread movement and the rest of MRC portfolio, which is focused on lower middle market companies.
Mick: In the quarter, the average marketing ecolab portfolio decreased from 86, 8% of amortized cost as of December 31, 2024.
Mick: 82, 8% amortized as at March 31, 2025 and six.
Mick: With the prior quarter MRC received income distributions from <unk> of $900000 as of March 31, <unk> five <unk> had borrowings under our nonrecourse credit facility of 21 $8 million at this point I will turn the call back with that for some closing remarks before we open up the line for questions.
Mick: Thank you Alex as we look to the future we remain committed to develop delivering low term bill in your first stockholders leveraging our deep credit expertise rigorous underwriting standards and time tested portfolio management playbook.
Mick: Our predominantly first lien portfolio continues to produce strong risk adjusted returns, resulting in a 14, 3% annualized dividend yield.
Mick: <unk> enjoys a strong strategic advantage in being affiliated with an award winning best in class.
Mick: Middle market private credit manager.
Mick: With over $20 billion in assets under management supported by a team consisting of over 280 employees.
Mick: In order to underpin deploying dedicated investment professionals. So basically first sales in 'twenty five.
Mick: We remain confident in the resilience of our portfolio and our ability to navigate near term income volatility.
Mick: With a strong balance sheet and.
Mick: Spillover income.
Mick: Conservative credit posture, we believe that we are well positioned to continue delivering long term value to our shareholders.
Mick: Thank you all for your time today and this concludes our prepared remarks I'm going to ask the operator to open the call now for questions.
Mick: Thank you we will now begin the question and answer session. At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Speaker Change: And your first question comes from the line of Christopher Nolan.
Speaker Change: Ladenburg Thalmann. Please go ahead.
Christopher Nolan: Hey, guys. My question sort of centers on sustainability of the dividend and you know quite to your credit you stood by the 25 quarterly dividend for a long time, but the portfolio continues to contract size.
Christopher Nolan: Thus generating less income to support the dividend.
Christopher Nolan:
Christopher Nolan: Should we expect some sort of.
Christopher Nolan:
Christopher Nolan: Change in that contraction trajectory otherwise should we assume at some point the dividend will be cut.
Chris: Hey, Chris Thank you for that question.
Chris: We are continuing to evaluate our dividend.
Chris: Kind of stays earning level as you know we don't provide.
Chris: Tom.
Chris: On future evidenced based on kind.
Chris: The current rate environment, and our current portfolio composition.
Chris: At least in the short run we anticipate that.
Chris: The NII multi shop side of our debt levels.
Chris: Based on that we decided.
Chris: To support the dividend through previously cumulated spillover dividend spillover.
Chris: Spillover income, which today totals about 53 cents per share of our 11 happened late.
We used around <unk> six.
Chris: Spillover income this quarter to support our dividend.
Chris: I wouldn't anticipate.
Chris: No.
Chris: Having access to that.
Chris: All of our income.
Chris: In the near term for sure.
Okay, a follow up.
Chris: Even where the stock is trading right now.
Chris: And the dividend being dividend yield where it is.
Chris: Why aren't you buying back more stock.
Speaker Change: And so that's another fair that's another fair question Chris.
Chris: Yes.
Speaker Change: We historically have not.
Speaker Change: Been in the market for our stock our focus given especially work Leverages that's been.
Speaker Change: It has been to use our capital to support our portfolio portfolio portfolio companies and to maintain our leverage.
Speaker Change: It kind of current levels, but we given where the stock is trading are certainly cognizant of all of our strategic options, including where the stock is trading relative to NAV.
Speaker Change: Okay. Thank you.
Speaker Change: And your next question comes from the line of Robert Dodd with Raymond James. Please go ahead.
Robert Dodd: Hi, guys.
Speaker Change: Just.
Speaker Change: First one semi follow on to Christmas I mean in the past the manager.
Ben: It's Ben.
Ben: We're very supportive of the BDC in terms of waiving fees in order to.
Ben: To allow NII to meet the dividend even if.
Ben: While we were going through some transition periods before I'd take it from the commentary here that that we should know investors should no longer.
Ben: The manager to waive fees.
Ben: To make that and it's just going to be the spillover.
Ben: Issue and no fee waivers to be expected in in.
Ben: Voluntary fee waiver Thats, obviously, thats look backs in this catch ups and there's various other things but.
Ben: Is that a reasonable conclusion to your comments.
Robert Dodd: Good question Robert.
Speaker Change: Robert I don't think that's a good reasonable conclusion, we've done it in the past.
Speaker Change: We continue to do that if you look we've waived incentive fees. This.
Speaker Change: This quarter and we've done it in the prior quarters.
Speaker Change: The manager has consistently supported.
Speaker Change: MRC C. We will continue to support immerse you see in the future, but at this time, we made the decision this quarter to use some of the spillover income from prior periods and I think that was a quarter decision I think as we continue here.
Speaker Change: I am very committed from a manager standpoint to maintaining and supporting.
Speaker Change: Immersive suite.
Speaker Change: Got it. Thank you and then just.
Speaker Change: Just.
Speaker Change: A question I mean, when I look at the SLS.
Speaker Change: Yes.
Speaker Change: Kind of.
Speaker Change: The amount of assets in it the borrowing that they thought it had been trending down.
Speaker Change: Fairly significantly over the last call it 18 months.
Speaker Change: And add more but I'm just kind of this quarter.
Speaker Change: Is the answer.
Speaker Change: Excellent type structures are those expected to be a continued go forward part of the model or is it is that vehicle effectively in run down at this point.
Robert Dodd: Yes, Robert Thank you. Thanks. Thank you for that question as we've talked about.
Speaker Change: Previous quarters, we've not been constructed around this end of the market.
Robert Dodd: This is a portfolio of that yes.
Speaker Change: Yes, mostly consistent upper middle market names that have lower spreads lower recovery rates.
Speaker Change: And I'm not in a very constructive on it and as you point out we have allowance portfolio to decline over the course of the last several quarters to the point, where today, we have around 30 borrowers in our portfolio down pretty significantly significantly from peak.
Speaker Change: We are certainly evaluating today, whether we're going to continue to.
Speaker Change: Allow.
Speaker Change: Allow continuing runoff of the portfolio or possibly re lever.
Speaker Change: Portfolio, but at the present time.
Speaker Change: We are not constructive.
Speaker Change: Around your kind of end up.
Speaker Change: The asset class.
Speaker Change: Comfortable in.
Speaker Change: Sure.
Speaker Change: And allowing a portfolio.
Speaker Change: To effectively delever.
Speaker Change: Got it got it thank you and I mean, and then put it in all of those questions I mean, the deal with window. As you said closed on March 31st I mean.
Speaker Change: But it's still it's still.
Speaker Change: Independence.
Speaker Change: Operator operates autonomously.
Speaker Change: Right right.
Speaker Change: To put it but I mean have there given the new partnership and the expanded potential expanded reach of the whole platform as a whole has there been any.
Speaker Change: Is is the strategy beyond the things we've already talked about is the strategy here at the BDC.
Speaker Change: Likely the public BDC likely to evolve.
Speaker Change: Over the next couple of years, though as it is is is what.
Speaker Change: What we see what's likely to stay with the caveat that we talked about the SLS et cetera.
Speaker Change: Good question, Robert and I think Christopher programs go in this direction as well.
Speaker Change: We've got a very dynamic platform.
Speaker Change: Our first growing significantly.
Speaker Change: We are.
Speaker Change: Today.
Speaker Change: Probably over $5 5 billion close to $6 billion in kind of I'll call. It the wells high net worth.
Speaker Change: Channel, which I include the BDC MRC.
Speaker Change: We're going to continue to evolve strategically.
Speaker Change: And do everything we can to create value.
Speaker Change: For our shareholders and we're looking at we're constantly looking at.
Speaker Change: We used to do this.
Speaker Change: But you can assume I think that we're going to.
<unk> planned strategic ways to create value for our shareholders across the board, including MRC soon.
Speaker Change: Understood. Thank you.
Speaker Change: And there are no further questions at this time I will now turn the call back over to Ted Koenig for closing remarks.
Ted Koenig: Yes. Thank you for your time today, we appreciate.
Ted Koenig: Our analysts or shareholders.
Ted Koenig: We're working very very hard to maximize value for our stockholders and immersive UC.
No more to come we look forward to talking to you again next quarter, obviously, if theres anything that you would like or any questions. Please feel free to speak with MC or Alex.
Ted Koenig: Or a quarter we welcome those discussions so thank you.
Ted Koenig: This concludes today's conference call. Thank you all for joining you may now disconnect.
[music].
Ted Koenig: Yes.
Ted Koenig: [music].
Ted Koenig: [music].
Ted Koenig: [music].
Ted Koenig: [music].