Monroe Capital Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 5 speakers on the call.

Operator

Welcome to Monroe Capital Corporation's First 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, May 9, 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.

Operator

Monroe 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. Please go ahead.

Speaker 1

Good morning, and thank you to everyone who has joined us on our call today. Welcome to our Q1 2024 earnings call. I am here with Mick Salomini, our CFO and Chief Investment Officer and Alex Parmacek, our Deputy Portfolio Manager. Last evening, we issued our Q1 2024 earnings press release and filed our 10 Q with the SEC. On today's call, I'll begin by addressing our Q1 results and then some perspective on current market conditions.

Speaker 1

I am pleased to report that for the 16th 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 nearly 14% using our May 7, 2024 closing share price. We are proud of our track record of delivering stable and consistent dividends to our shareholders. In the Q1 of 2024, our adjusted net investment income was $5,500,000 or $0.25 per share, a slight decrease from $5,600,000 or $0.26 per share last quarter. We reported NAV of $2,001,500,000 or $9.30 per share as of March 31, 2024 compared to $203,700,000 or $9.40 per share as of December 31, 2023.

Speaker 1

The 1.1% decline in NAV was primarily due to net unrealized losses attributable to certain portfolio companies that have underlying credit performance concerns. MRCC's debt to equity leverage increased from 1.49x debt to equity at December 31, 2023 to 1.6x at March 31, 2024. While MRCC's average leverage during the quarter was lower than during the prior quarter, we made various debt and equity investments into new portfolio companies later in the quarter, which resulted in an increase in leverage as of March 31, 2024 compared to December 31, 2023. We continue to focus on managing our investment portfolio and selectively redeploying capital resulting from repayments into attractive new investment opportunities. Our portfolio continues to demonstrate solid revenue and EBITDA growth and is positioned to weather and increasingly likely higher for longer interest rate environment given the sound interest coverage.

Speaker 1

Portfolio management remains our primary focus in the face of a volatile and uncertain macroeconomic environment where borrowing costs are elevated for our portfolio companies. Our portfolio risk rating distribution has been relatively stable despite a higher interest cost borrowing environment. While we did see a slight increase in our non accrual 1.1%, We believe that the recent challenges faced by the companies on non accrual are primarily idiosyncratic. They're not indicative of broader or fundamental issues within the portfolio. Over the course of 2 decades, Monroe has established a time tested playbook, improving track record of navigating and turning around underperforming investments.

Speaker 1

We are confident that we can and will continue to maximize outcomes and deliver value for our shareholders. Turning now on our view on the macro market environment. Through the early part of 2024, M and A activity and loan volumes have been down compared to the Q4 of 2023, but represent a year over year increase of 41% per LSEG LPC's 1st quarter 2024 middle market analysis. While activity levels in the overall market have been relatively low, our positioning in the lower middle market has allowed us to see a steady flow of investment opportunities to selectively execute on. Our lower middle market focus and ability to provide flexible capital solutions with low execution risk to our borrowers has proven to be a true differentiator.

Speaker 1

We expect that transaction activity will accelerate throughout the year as inflation and interest rates suddenly normalized. Further, private equity investors are actively seeking to deploy dry powder and LP capital, which is another factor supporting higher levels of activity. These favorable market dynamics driving an increasingly active M and A environment will provide us with opportunities to rotate out of legacy assets and into attractive newer vintage assets. And currently, we have seen heightened competition in the credit markets. This has resulted in the tightening of spreads across the middle market spectrum.

Speaker 1

Although spreads have generally experienced compression, loan to value attachment points have held relatively stable. Given the high base rate environment, gross yields in our segment of the middle market continue to be attractive. This dynamic continues to offer direct lenders such as Monroe Capital compelling risk adjusted returns As MRCC's effective yield remains at an attractive rate of nearly 12% on a predominantly senior secured loan portfolio. Syndicated and bank deal activity has also accelerated, although direct lending still executes on a dominant share of the deal volume. Per Refinitiv, direct lenders still account for nearly 3 times the middle market deal volume of banks and the syndicated markets.

Speaker 1

In this increasingly competitive landscape, we will lean on our best in class originations team to source new investment opportunities while continuing to leverage our lower risk incumbency lending opportunities within the portfolio. Our ability to consistently generate deal flow through our existing portfolio has allowed us to retain higher quality assets while maintaining a highly selective approach with our originations, underwriting and deal execution. MRCC enjoys a strong advantage of being affiliated with a best in class middle market private credit manager with approximately $19,000,000,000 in assets under management, supported by a deep team consisting approximately 250 employees, including 110 dedicated investment professionals as of April 1, 2024. 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 now going to turn the call over to Mick, who is going to walk through with you our financial results in greater detail.

Speaker 2

Thank you, Ted. As of March 31, 2024, our investment portfolio totaled $500,900,000 a $12,500,000 increase from $488,400,000 as of December 31, 2023. Our investment portfolio consisted of debt and equity investments in 98 portfolio companies compared to 96 portfolio companies at the end of the prior quarter. During the quarter, we funded 10 point $2,000,000 to 3 new portfolio companies consisting of debt investments of $8,600,000 at an effective interest rate of approximately 11.1 percent and $1,600,000 of equity investments. Further, we had revolver and delayed draw fundings and add ons to existing portfolio companies of 14,000,000 In the quarter, we received one full payoff for $7,900,000 This payoff was related to a portfolio company that was previously rated a grade 3 in our investment performance risk rating scale and this deal was fully repaid at par.

Speaker 2

Finally, we incurred $4,200,000 of partial and normal course pay downs during the quarter. At March 31, 2024, we had total borrowings of $321,700,000 including $191,700,000 outstanding under our floating rate revolving credit facility and $130,000,000 of our 4.75 percent fixed rate 2026 notes. Total borrowings outstanding increased by $17,600,000 during the quarter as we utilized the revolving credit facility to fund new and existing portfolio company investments. At quarter end, the revolving credit facility had $66,300,000 of availability subject to borrowing based capacity. Now turning to our financial results.

Speaker 2

Adjusted net income, a non GAAP measure was $5,500,000 or $0.25 per share this quarter compared to $5,600,000 or $0.26 per share in the prior quarter. The slight decrease in adjusted net investment income during the quarter was primarily driven by a decrease in total investment income, primarily resulting from a reduction in the average investment and average invested assets over the period. Our effective yield decreased slightly during the quarter from 12.1% at December 31, 2023 to 11.9% at March 31, 2024. This reduction in effective yield was primarily driven by the movement of 2 of our investments to non accrual during the quarter. 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 our current $0.25 per share quarterly dividend, all other things being equal.

Speaker 2

As of March 31, 2024, our NAV was $201,500,000 which decreased from $203,700,000 of NAV as of December 31, 2023. Our corresponding NAV per share decreased by $0.10 from $9.40 per share to $9.30 per share. The decline in NAV this quarter was primarily a result of net unrealized losses attributable to a few portfolio companies that as of March 31, 2024 had grades of 3, 4 or 5 on our investment performance risk rating scale. These mark to market unrealized losses were partially offset by net gains on the remainder of the portfolio. I will now turn it over to Alex, who will provide more details on our Q1 operating performance.

Speaker 3

Thank you, Mick. Looking to our statement of operations, investment income totaled $15,200,000 during the Q1 of 2024, slightly down from $15,500,000 in the Q4 of 2023. Results of the Q4 of 2023 included the reversal of previously accrued fee income associated with the company's former loan investment in IT Global. Excluding the impact of the fee investment income decreased by $800,000 primarily due to the decrease in the size of the average investment portfolio during the quarter. In the Q1, we placed 2 new investments on non accrual with an aggregate fair market value of $4,000,000 As of March 31, 2024, we had 7 investments on non accrual status, representing 2.1% of the portfolio fair market value, a modest increase from the 1.5 percent of the portfolio fair market value as of December 31, 2023.

Speaker 3

Now shifting over to the expense side. Total expenses were $9,700,000 for the Q1 of 2024, compared to $10,200,000 of total expenses for the Q4 of 2023. A decline in income taxes, including excise taxes, and a decline in interest and other debt financing expenses due to the reduction in MRCC's average debt outstanding throughout the quarter resulted in the reduced expense base. The decrease in the income taxes, which include excise taxes, was primarily the result of a decline in income tax expense associated with locker entities that hold certain of MRCC's equity investments. Our net loss for the quarter was $2,300,000 compared to a net loss of $3,700,000 from the prior quarter.

Speaker 3

These net losses were primarily attributable to unrealized mark to market losses on the portfolio companies that as of March 31, 2024 had grades of 3, 4 or 5 in our investment performance risk rating scale. These mark to market unrealized losses were partially offset by net gains on the remainder of the portfolio. Turning now to SLF. As of March 31, 2024, SLF had investments in 41 different borrowers aggregating $116,400,000 at fair value. 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 the lower middle market companies.

Speaker 3

In the quarter, the average mark on that slot portfolio decreased slightly by approximately 2% from 90.9% of amortized cost as of December 31, 2023 to 88.9 percent of amortized cost as of March 31, 2024. Consistent with the prior quarter, MRCC received income distributions from SLF of $900,000 As of March 31, 2024, SLF had borrowings under its non recourse credit facility of $58,000,000 with $52,000,000 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.

Speaker 1

Thank you, Alex. To conclude, we remain confident in the overall quality of the portfolio and its ability to navigate the higher for longer credit environment. Our focus continues to be on portfolio management and we remain steadfast in executing on our plans to optimize recoveries for each of our more challenging investments. Further, our predominantly 1st lien portfolio carries an average effective yield of 11.9%, offering compelling risk return dynamics to our investors. MRCC continues to deliver stable and consistent dividends for our shareholders.

Speaker 1

This quarter marked the 16th consecutive quarter where our net investment income has met or exceeded our dividend and our dividend yield is an attractive rate of nearly 14% as of May 7, 2024. We believe that Monroe Capital Corporation, which is affiliated with an award winning best in class external private credit manager with around $19,000,000,000 in assets under management provides a very attractive investment opportunity to our shareholders and to other investors. 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.

Operator

Thank you. We will now begin our question and answer session. The first question comes from the line of Chris Nolan from Ladenburg Thalmann. Please go ahead.

Speaker 4

Hey, guys. I want to compliment you on sustaining the dividend. And it's don't think I know of another BDC, which has maintained the same base dividend for as long as you guys have. So kudos to you. On that, going forward, given, everything going on, if necessary, would you reinstitute the management fee waiver to support the dividend?

Speaker 1

So that's a good question, Bryce. Historically, we've been very aligned with our shareholders. If you look at historical practice over the last 10 years, 12 years since we've been public, from a management company standpoint, we've taken actions to ensure that our alignment with shareholders continues. And I don't see any reason that that will change in the near future.

Operator

Great.

Speaker 4

And then can we get an idea in terms of direction of leverage, the leverage ratio seem high?

Speaker 2

Hi, Chris. This is Max. Thanks for the question. So we're targeting to maintain leverage in kind of the 1.5 times to 1.6 times range. We've been at that range kind of for the past handful of quarters.

Speaker 2

We were at the higher end of the range this quarter, due to some just some of the ins and outs of the portfolio. Our current pipeline supports this guided kind of leverage range as we look at kind of the ins and outs of it. And we do remain comfortable with this range given the fact that portfolio is in decent shape and is primarily tilted in the direction of 1st lien.

Speaker 4

Got you. Just two more quick questions. The SLF, which invest in larger companies, more mature companies, but the asset quality over recent quarters seems to be a little bit lower than I would have expected. And the markdown in the fair value ratio from 90.9% to 88.8% is also interesting. I'm just trying to get an idea of what's going on with that.

Speaker 2

Yes, it's a really good question, Chris. And as a refresher, SLF is comprised of loans primarily made to upper middle market companies. We've been cautious around the upper end of the market during most of 2023, early 2023 before because of the economic headwinds and the loser structures and the higher leverage and loan to value attachment points in that portfolio. Our non accrual percentage is a tad higher in this portfolio. We're standing at around 9% non accrual rate on a fair market value basis, up from call it 3.5% at the most quarter end.

Speaker 2

So we're cautious about this portfolio. We're considering kind of the reentry point in terms of kind of reinvesting in these kinds of assets. We did have a bunch of pay downs in the last quarter, many of them unexpected in a good way. But we do have a little bit of a more cautious approach just given the nature of that market and the little higher attachment point, looser structures in that business.

Speaker 4

Okay. I'll get back in the queue. Thank you.

Speaker 1

Thanks, Chris.

Speaker 2

Thanks,

Operator

As there are no further questions at this time, this concludes our Q and A session. I would like to turn the call over back to Ted Koenig for brief closing remarks.

Speaker 1

I want to thank everyone today for the call. As always, please feel free to reach out to Mick or to Alex on an interim basis if you have any questions. And we look forward to speaking with you again soon next quarter. Thank you.

Speaker 2

Thank you, everybody.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Powered by Quartr

Key Takeaways

  • For the 16th consecutive quarter, adjusted net investment income of $0.25 per share covered the dividend, yielding nearly 14% on the May 7 trading price.
  • NAV per share declined by 1.1% from $9.40 to $9.30 due to net unrealized losses on a small number of portfolio companies, though overall portfolio risk remains stable.
  • Leverage increased from 1.49x to 1.6x debt-to-equity as of March 31, driven by late-quarter deployments, but remains within the targeted 1.5x–1.6x range.
  • Portfolio’s average effective yield stood at 11.9% on a predominantly senior secured, first-lien loan book, positioning it to withstand a higher-for-longer interest rate environment.
  • Lower middle market deal flow rose 41% year-over-year, and despite spread compression, attractive gross yields and best-in-class origination capability continue to drive selective new investments.
AI Generated. May Contain Errors.
Earnings Conference Call
Monroe Capital Q1 2024
00:00 / 00:00