Monroe Capital Q4 2023 Earnings Call Transcript

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March 12, 2024

There are 5 speakers on the call.

Operator

Welcome to Monroe Capital Corporation's 4th 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 estimates, assumptions and projections as of today, March 12, 2024. These statements are not guarantees of future performances. Further time sensitive information may no longer be accurate as of the time of any replay or listening.

Operator

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 Monroes Capital takes no obligation to update or revise these forward looking statements. I will now turn the conference call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Speaker 1

Good morning and thank you to everyone who has joined us today. Welcome to our Q4 and full year 2023 earnings call. I am here with Mick Salomini, our CFO and Chief Investment Officer and Alex Permasek, our Deputy Portfolio Manager. Last evening, we issued our Q4 and full year 2023 earnings press release and filed our 10 ks with the SEC. On today's call, I'll begin by addressing our 4th quarter results and current market conditions.

Speaker 1

I am pleased to report that for the 15th consecutive quarter, our adjusted net investment income covered our $0.25 per share dividend. MRCC delivered a total annualized dividend yield and our trading price of over 13% using our March 8, 2024 closing share price. We are proud of our track record of delivering stable and consistent dividends to our shareholders. In the Q4 of 2023, our adjusted net investment income was $5,600,000 or $0.26 per share, a slight increase from $5,500,000 or $0.25 per share last quarter. We reported NAV of $203,700,000 or $9.40 per share as of December 31, 2023, compared to 207 $600,000 or $9.58 per share as of September 30, 2023.

Speaker 1

The 1.9% decline in NAV was primarily due to mark to market unrealized losses attributable to a few specific legacy portfolio companies that continue to be impacted by macroeconomic and idiosyncratic challenges. MRCC's debt to equity leverage decreased from 1.60 times to debt equity to 1.50 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 resilient as the vast majority of our portfolio companies generated solid revenue and EBITDA growth. The portfolio's overall interest coverage remains sound with sufficient cushion to withstand the higher for longer interest rate environment.

Speaker 1

Further, our portfolio risk rating distribution remains 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 and A activity and loan volumes were down in 2023. Transaction activity began to rebound substantially in the 4th quarter with direct lending volumes increasing by 31% from the 3rd quarter according to LSEG Data and Analytics. The momentum in deal activity from late 20 23 has carried into early 2024.

Speaker 1

We anticipate this trend will continue as inflation and interest rates have shown signs of stabilization and private equity investors are actively seeking to deploy dry powder and LP Capital. Direct lenders continue to dominate share of loan volume in the middle market accounting for 8 times that of syndicated loan and bank volumes in the Q4. While we have seen heightened competition in the overall market, our ability to provide flexible capital solutions with low execution risks to our borrowers has proven to be a true differentiator. As such, we believe that our long standing position in the lower middle market is relatively insulated. Direct lenders such as Monroe stand to benefit from a growing opportunity set and a more active M and A environment.

Speaker 1

The current market dynamics continue to provide favorable tailwinds 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 1st lien senior secured lenders. We continue to leverage our lower risk incumbency lending opportunities within the portfolio, which has allowed us to maintain a highly selective approach when underwriting new investment opportunities. MRCC enjoys a strong advantage in being affiliated with market private credit manager with $18,400,000,000 in assets under management, supported by a deep consisting of approximately 2.45 employees, including 105 dedicated investment professionals as of January 1, 2024.

Speaker 1

We continue to focus on generating adjusted net investment income that meets or exceeds our dividend and achieving positive long term NAV performance. I am going to turn the call over now to Mick, who is going to walk you through our financial results in greater detail.

Speaker 2

Thank you, Ted. As of December 31, 2023, our investment portfolio totaled $488,400,000 a $29,900,000 decrease from $518,300,000 as of September 30, 2023. Our investment portfolio consisted of debt and equity investments in 96 portfolio companies compared to 99 portfolio companies from the end of the prior quarter. During the quarter, we funded $10,700,000 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.

Speaker 2

In the quarter, we also received 3 full payoffs aggregating $32,600,000 an approximate weighted average interest rate of 11.8%. 1 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 $275,000 Further, we incurred partial and normal course paydowns totaling $6,400,000 At the end of the 4th quarter, we had total borrowings of $304,100,000 including $174,100,000 outstanding under our floating rate revolving credit facility and $130,000,000 of our 4.75 fixed rate 2026 notes. Total borrowings outstanding decreased during the quarter as we utilized proceeds from payoffs and sales to pay down revolving credit facility. As of December 31, 2023, the revolving credit facility had $80,900,000 of availability subject to borrowing based capacity. Now turning to our financial results.

Speaker 2

Adjusted net investment income, a non GAAP measure was $5,600,000 or $0.26 per share this quarter compared to $5,500,000 or $0.25 per share in the prior quarter. The increase in adjusted net investment income was a result of higher fee income and prepayment gains, 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 to 12.1% as of December 31. We also wrote off the remaining 512 $1,000 of accrued fee income from our former loan investment in IT Global. Excluding this write off related to the IT Global interest receivable, adjusted net investment income would have been $0.28 per share and our dividend coverage would have been over 1.1 times.

Speaker 2

When considering current leverage levels, the interest rate environment and the favorable percentage of our fund leverage at a fixed rate, we believe that on a run rate basis, our adjusted net investment income will continue to cover the current $0.25 per share quarterly dividend, all other things being equal. As of December 31, 2023, our NAV was $203,700,000 which decreased from $207,600,000 of NAV as of September 30, 2023. And our corresponding NAV per share decreased by $0.18 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 attributable to a few specific portfolio companies that continue to be affected by macroeconomic and idiosyncratic factors. The value of the remainder of the portfolio including our investment in SLF was relatively stable for the quarter.

Speaker 2

I will now turn it over to Alex, who will provide more details on our 4th quarter operating performance.

Speaker 3

Thank you, Mick. Looking to our statement of operations, investment income totaled $15,500,000 during the Q4 of 2023, slightly down from $15,600,000 in the Q3 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, dollars 512,000 for the quarter ended Twelvethirty Onetwenty 3 $1,000,000 for the quarter ended ninethirtytwenty 23. The company has no remaining fee income accrued associated with IC Global. Excluding the impact of these fee income reversals, investment income decreased by $675,000 due to the decrease in the size of the average investment portfolio during the quarter and a reduction in effective rates on the portfolio.

Speaker 3

In the Q4, we placed one new investment on non accrual. As of December 31, 2023, we had 5 investments on non accrual status, representing 1.5% of the portfolio at fair market value, a slight increase from 1.2% of the portfolio at fair market value as of September 30, 2023. Now shifting over to the expense side. Total expenses remain consistent at $10,200,000 for the Q4 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 $3,700,000 compared to a net loss of $5,700,000 for the prior quarter.

Speaker 3

These net losses were primarily attributable to unrealized mark to market losses of a few specific portfolio companies. Turning now to SLF. As of December 31, 2023, the SLF had investments in 49 different borrowers, aggregating $139,900,000 at fair value with a weighted average interest rate of 10.2%. The SLS 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 increased by approximately 1.5% from 89.4% of amortized cost as of September 30, 2023 to 90.9 percent of amortized cost as of December 31, 2023.

Speaker 3

Consistent with the prior quarter, MRCC received income distributions from SLS of $900,000 As of December 31, 2023, the SLF had borrowings under its non recourse credit facility of $82,000,000 $28,000,000 of available capacity subject to borrowing base availability. At this point, will turn the call back to Ted for some closing remarks before we open up the line for questions.

Speaker 1

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 1st lien portfolio carries an average effective yield of 12.1%, offering compelling risk return dynamics to our investors. Our focus remains balanced between portfolio management and selectively redeploying capital from payoffs into attractive new investments from the current vintage. MRCC continues to deliver a stable and consistent dividend for our shareholders.

Speaker 1

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 8, 2024. We believe that Mineral Capital Corporation, which is affiliated with an award winning best class external private credit manager with over $18,400,000,000 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.

Speaker 1

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

Operator

Thank you. And the floor is now open to your questions. Our first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Speaker 4

Hi. On the SLF, I noticed that there are 4 non accruals and I believe last quarter was one. Is it going to be Monroe's responsibility to work through those?

Speaker 2

Hi, Chris. Good question. So just to clarify, non accruals at SLF were 4 at this quarter end. We added it added a new non accrual, a company called Kano Health. Last quarter, we also had 4 non accruals.

Speaker 2

We took one off a company called Bromford, which got realized. So the net migration in the non accrual category was basically flat quarter over quarter. And yes, while these are upper middle market credits, which have a little bit of a different profile than the traditional than the direct middle market loans in the rest of MRCC. We are actively participating in the resolution of these non accruals much like we do in our direct portfolio.

Speaker 4

Okay. And I guess as a follow-up question, does the level of non accrual sort of affect the amount of leverage that SLF can take on and thus the income that MRCC would yield from that?

Speaker 2

To a certain extent, it does. We've deliberately kind of maintained the status quo at SLF 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 favorable. But the non accruals themselves hasn't really affect either our leverage or borrowing capacity. We have though 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 SLF fund level generally coming down.

Speaker 4

Okay. That's it for me. Thank you.

Speaker 2

Thanks, Chris.

Operator

There are no further questions at this time. I will now turn the call back over to our team. Thank you.

Speaker 1

Thank you all for joining the call today. We're excited about 2024. We think the market 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 Mick or Alex. And we're always happy to talk between quarters.

Speaker 1

Thank you. Have a good day.

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Key Takeaways

  • For the 15th consecutive quarter, adjusted net investment income of $5.6 million (or $0.26 per share) covered the $0.25 per share dividend, yielding over 13% annually based on the March 8, 2024 share price.
  • NAV declined 1.9% to $9.40 per share as of December 31, 2023, largely due to unrealized mark-to-market losses on a few legacy portfolio companies despite solid revenue and EBITDA growth across most investments.
  • Leverage was reduced from 1.60× to 1.50× debt-to-equity during Q4, with $32.6 million in full payoffs and $6.4 million in paydowns funding selective new investments at an average 12.4% interest rate.
  • A rebound in Q4 direct lending activity (+31% quarter-over-quarter) and stable loan‐to‐value and leverage attachment points have created favorable tailwinds for private credit, reinforcing MRCC’s defensive lower‐middle‐market positioning.
  • The Secured Loan Fund (SLF) portfolio, totaling $139.9 million at a 10.2% average yield, saw its marked portfolio value increase to 90.9% of cost, with four non‐accruals actively being managed without impacting borrowing capacity.
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Earnings Conference Call
Monroe Capital Q4 2023
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