Monroe Capital Q3 2024 Earnings Call Transcript

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November 13, 2024

Key Takeaways

  • Positive Sentiment: MRCC's adjusted net investment income was $6.6 million ($0.31 per share), covering its $0.25 dividend for the 18th consecutive quarter and yielding over 12% annually.
  • Negative Sentiment: Net asset value (NAV) edged down to $9.18 per share as of September 30, driven by net unrealized losses on certain portfolio companies.
  • Positive Sentiment: Debt-to-equity leverage improved to 1.50x from 1.54x, thanks to portfolio payoffs and selective reinvestments, underscoring disciplined balance sheet management.
  • Neutral Sentiment: Monroe’s external advisor will partner with France’s Wendell Group, which is committing $1 billion of new seed capital; the deal is set to close in Q1 2025 with Monroe operating autonomously.
  • Negative Sentiment: One additional loan was placed on non-accrual, raising total non-accrual exposure to 3.1% of fair value, though management cites idiosyncratic borrower issues.
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Earnings Conference Call
Monroe Capital Q3 2024
00:00 / 00:00

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Operator

Welcome to Monroe Capital Corporation's third 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 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, November 13, 2024, these statements are not guarantees of future performance. Further, time-sensitive information may no longer be accurate as of the time of any replay or 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 SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements.

Operator

I will now turn the conference call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

Good morning, and thank you, everyone who has joined us today. Welcome to our third quarter 2024 earnings call. 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.

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

For folks on the line, it looks like Ted has been disconnected temporarily, so we'll give him a moment. So he'll be rejoining shortly.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

Okay. I'm back. Sorry about that. I got dropped from the call, unfortunately. Can you hear me, Mick?

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

We can.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

Okay. All right. 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. 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 Wendel Group. I am pleased to report that for the 18th consecutive quarter, our adjusted net investment income covered our $0.25 per share dividend. MRCC delivered a total annualized dividend yield on our trading price of over 12% using our November 11th, 2024, closing share price.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

We are proud of our long-standing track record of delivering stable and consistent dividends to our shareholders. In the third quarter of 2024, our adjusted net investment income was $6.6 million or $0.31 per share, which was a nominal decrease from $6.7 million last quarter and stable on a per-share basis of $0.31 per share. Our adjusted net investment income once again covered our $0.25 per share dividend by nearly 1.25 times. We reported a NAV of $198.9 million or $9.18 per share as of September 30th, 2024, compared to a NAV of $199.3 million or $9.20 per share as of June 30th, 2024. The slight decline in NAV was primarily the result of net unrealized losses attributable to certain portfolio companies offset by net investment income in excess of the dividend paid during the quarter.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

MRCC's debt-to-equity leverage decreased from 1.54 times at June 30th, 2024, to 1.50 times at September 30th, 2024, driven by several payoffs that occurred throughout the quarter, as well as proceeds from various investment sales and paydowns. We continue to focus on managing and supporting our existing investment portfolio companies with add-on lending opportunities while maintaining a highly selective and disciplined approach when deploying capital from payoffs into attractive investment opportunities with new portfolio company relationships. Our ability to grow with our existing portfolio companies that we know well allows us to remain highly selective with new investment opportunities. Our incumbency lending ability has proven to reduce underwriting risk and has historically generated some of our most attractive risk-adjusted returns. During the third quarter, we received three full payoffs of older vintage assets.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

While we invested in three new portfolio companies, we also made numerous incremental investments in various existing portfolio companies. During the quarter, over half of our new fundings were in support of growth initiatives of our existing borrowers. Before I turn the call over to Mick and Alex, I want to provide commentary on the strategic partnership that Monroe announced several weeks ago. As you know, Monroe, the owner of MRCC's external advisor, announced plans to partner with the Wendel Group, a French investment company. Wendel is purchasing 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. The Wendel Group is a 320-year old investment firm based in Paris. They are a publicly held company now, but controlled by the Wendel family, who owns 52% of the firm and voting control.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

They are transitioning from an old-line industrial holding company to an asset management company, and Monroe is a significant step for them in making this transition. They are led by Laurent Mignon, who was previously the CEO of Natixis Investment Management, a diversified European multi-manager boutique. Wendel's strategy is to acquire interests and asset managers in the following: secondaries and infrastructure. 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. Wendel will not have a role in the Monroe investment process. MRCC expects to benefit from the additional capital, scale, and commitment of the partnership between Monroe and the Wendel Group. The transaction is expected to close in the first quarter of 2025.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

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

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

Thank you, Ted. 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. Our investment portfolio consisted of debt and equity investments in 94 portfolio companies, consistent with the end of the prior quarter. In the third quarter, we saw middle market loan volumes rise, primarily driven by increased private equity sponsor activity. 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. 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
Mick Solimene
CFO and CIO at Monroe Capital Corporation

LSEG's report further indicated that delayed draw term loan funded volumes in the third quarter of 2024 were up 62% compared to the third quarter of 2023. 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. 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. We expect a more active deal environment in the middle market throughout the balance of 2024 and into 2025. 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.

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

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. In the quarter, we received three full payoffs aggregating to $11.4 million and incurred partial and normal course paydowns totaling $26 million. We also received $1 million in proceeds relating to the full sale of one equity position and a partial sale of another equity position. At September 30th, 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. At quarter end, the revolving credit facility had $86 million of availability subject to capacity.

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

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. Excluding the impact of incentive fee limitations of $700,000 and $1 million for the third and second quarters, respectively, adjusted net investment income would have been $5.9 million or $0.27 per share in the quarter ended September 30th, 2024, up from $5.7 million or $0.26 per share in the quarter ended June 30th, 2024. Even without the benefit from the incentive fee limitation, adjusted net investment income generated in the past two quarters exceeded our $0.25 per share quarterly dividend.

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

As a result of the shareholder-friendly total return requirement within MRCC's incentive fee calculation, we currently expect limitations on our incentive fees to persist at various levels over the next two quarters. The weighted average effective yield on the portfolio's debt and preferred equity investments was 11%, which compares to 11.9% a quarter ago. 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.

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

As of September 30th, 2024, our NAV was $198.9 million, which decreased slightly from $199.3 million as of June 30th, 2024. Our corresponding NAV per share decreased by 2 cents from $9.20 per share to $9.18 per share. 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.

Mick Solimene
Mick Solimene
CFO and CIO at Monroe Capital Corporation

These mark-to-market unrealized losses were partially offset by net investment income in excess of the dividend paid during the quarter. I will now turn it over to Alex, who will provide more details on our third quarter average performance.

Alex Parmacek
Alex Parmacek
Deputy Portfolio Manager at Monroe Capital Corporation

Thank you, Mick. 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. 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. 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. 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 30th, 2024.

Alex Parmacek
Alex Parmacek
Deputy Portfolio Manager at Monroe Capital Corporation

The challenges we have seen in the portfolio have been, for the most part, due to idiosyncratic factors of specific borrowers and are not indicative of broader pattern or stress within the portfolio. The balance of our predominantly first-lien, senior-secured portfolio continues to demonstrate resiliency. 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. 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. 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.

Alex Parmacek
Alex Parmacek
Deputy Portfolio Manager at Monroe Capital Corporation

Excluding the impact of the incentive fee limitations during both periods, 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. Our net loss for the quarter was $1.5 million, compared to a net loss of $3.3 million for the prior quarter. These net losses for the quarter ended September 30th, 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. The average mark on the portfolio decreased slightly by approximately 50 basis points from 94.4% of cost at June 30th, 2024, to 93.9% of cost at September 30th, 2024. Turning now to SLF.

Alex Parmacek
Alex Parmacek
Deputy Portfolio Manager at Monroe Capital Corporation

As of September 30th, 2024, the SLF had investments in 36 different borrowers aggregating to $98.7 million of fair value. 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. In the quarter, the average mark on the SLF portfolio decreased slightly by approximately 1.3% from 88.3% of amortized cost as of June 30th, 2024, to 87% of amortized cost as of September 30th, 2024. Consistent with the prior quarter, MRCC received income distributions from SLF totaling $900,000. As of September 30th, 2024, SLF had borrowings under its non-recourse credit facility of $41.5 million and $68.5 million of available capacity, subject to borrowing-based availability.

Alex Parmacek
Alex Parmacek
Deputy Portfolio Manager at Monroe Capital Corporation

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 Koenig
Ted Koenig
CEO at Monroe Capital Corporation

Thank you, Alex. Looking forward, our focus will be twofold. First, on selectively redeploying capital from payoffs into both accretive investment opportunities as well as into incumbency portfolio companies. Second, on portfolio management, where we can leverage our deep and experienced team of investment professionals to execute our portfolio management playbook. MRCC continues to offer stable and consistent dividends to our shareholders, as this quarter marked the 18th consecutive quarter where our adjusted net investment income has met or exceeded our $0.25 per share dividend. 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, supported by a team consisting of over 275 employees, including 117 dedicated investment professionals as of October 1st, 2024.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

Going forward, we will continue to focus on generating investment income that meets or exceeds our dividend and achieving positive long-term NAV performance. We believe our new partnership with the Wendel Group will offer our shareholders and limited partners the benefit of significant new investment into the Monroe Capital overall platform. We believe that our predominantly first-lien portfolio, which carries an average effective yield of 11%, 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 11th, 2024, closing price. We believe the Monroe Capital Corporation continues to provide an attractive investment opportunity to our shareholders and to other investors. Thank you all for your time today, and this concludes our prepared remarks. I'd like to ask the operator to open the call now for questions.

Operator

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. Again, press star, then the number one on your telephone keypad to ask a question. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan
Christopher Nolan
Managing Director of Equity Research at Ladenburg Thalmann

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, and I respectfully suggest that going forward, a major focus for MRCC should be containing operating expenses because I think it would impact the share price positively. No real questions. That's all I want to say.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

Thank you.

Operator

Your next question comes from the line of Robert Dodd with Raymond James. Again, if you would like to ask a question, press star, then the number one. Mr. Robert Dodd, please go ahead.

Robert Dodd
Robert Dodd
Director of Specialty Finance at Raymond James

Hi. Thanks for taking my question. Question, Ted, on the WendelGroup partnership. I mean, you talked about they're going to seed new strategies at Monroe, the parent, to expand the private credit footprint even further. I mean, obviously, it's early days, but would it be your expectation that any of the originations in those newer strategies, would they potentially be appropriate for inclusion in the BDC and diversify the type of lending strategies that the BDC does, or is it more, 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?

Robert Dodd
Robert Dodd
Director of Specialty Finance at Raymond James

The answer, that's a good question, Robert. MRCC will get the benefit of any additional strategies or investments that the Monroe platform will undertake. We're going to look at strategies that are synergistic and easily digestible for the Monroe platform. We've got several that we're looking at, and I think MRCC will stand to benefit from each of those strategies because they'll be higher interest earning and create additional diversification.

Robert Dodd
Robert Dodd
Director of Specialty Finance at Raymond James

Got it. Thank you for that. Just the other one kind of on the theme to Chris's question. I mean, the manager has been very supportive of MRCC over the years in terms of waiving fees. Obviously, that is not a necessity right now with rates where they are, and maybe they're going to stay more elevated for a longer period of time, but you emphasized 18 consecutive quarters of earning that dividend. Some of those were a consequence of the manager being supportive. Would it be your expectation that if necessary, right? I mean, rates would have to come down. Would the manager do you expect the manager to be supportive in the same manner going forward?

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

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 Monroe platform to continue to support MRCC.

Robert Dodd
Robert Dodd
Director of Specialty Finance at Raymond James

Got it. Thank you.

Operator

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to let the questions roll in. Seeing as there are no further questions at this time, I will now turn the call back over to Ted Koenig for closing remarks. Please go ahead.

Ted Koenig
Ted Koenig
CEO at Monroe Capital Corporation

I want to thank everyone for joining us on the call today. Monroe Capital is a best-in-class platform, and we are going to continue to do everything possible to support MRCC and continue to drive 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, and I look forward to speaking to everyone again on the next quarterly call. Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Executives
    • Mick Solimene
      Mick Solimene
      CFO and CIO
    • Ted Koenig
      Ted Koenig
      CEO
    • Alex Parmacek
      Alex Parmacek
      Deputy Portfolio Manager
Analysts
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