Monroe Capital Corporation

Welcome to Monroe Capital Corporation's fourth quarter and four-year 2020 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, or cash flows, particularly in light of the COVID-19 pandemic. Although we believe statements are reasonable, Based on management estimates, assumptions, and projections as of today, March 3rd, 2021, 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. Action results may differ materially as a result of risk, uncertainties, or other factors, including but not limited to risk factors described from time to time in the company's findings with the SEC. Monroe Capital takes no obligation to update or advise these forward-looking statements. I will now turn the call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Good morning, and thank you to everyone who has joined us on our call today. Welcome to our fourth quarter and full year 2020 earnings conference call. I am joined by Aaron Peck, our CFO and Chief Investment Officer. Last evening, we issued our fourth quarter and full year 2020 earnings press release and filed our 10K with the SEC. First and foremost, we hope you and your families remain healthy and safe. We are pleased to report another strong quarter of solid net investment income and increased NAV performance again during the fourth quarter of 2020. We are also pleased to announce our quarterly dividend of 25 cents per share for the first quarter of 2021. During the fourth quarter, the financial markets remained strong and loan markets demonstrated continued resiliency. This can be seen in the performance of a couple of key markets. After being down as much as 30% for the year in late March, the S&P index shook off all effects of the COVID pandemic and ended up the year up over 15%. Price increases were also seen in traded credits investments as the S&P LSTA leverage loan index, which was down as much as 22% in March, has fully rebounded and was up almost 2% for the year. The continued reduction in credit spreads has benefited our portfolio marks, which have contributed to a significant improvement in our per share NAV over this period. including another increase in the fourth quarter. This normalization of the financial markets contributed to a resurgence of activity in the direct lending markets and from Monroe Capital specifically. In fact, Monroe experienced a record quarter of originations, closing 20 new loan transactions and several add-ons to existing loans, which aggregated approximately $1.1 billion of total commitments in the fourth quarter of 2020. Monroe benefited from the significant, MRCC benefited from this significant origination volume as evidenced by its strong portfolio growth in the fourth quarter, which was approximately 5% net of payoffs and ordinary course paydowns. Turning now to fourth quarter results, we are pleased to report adjusted net investment income of 25 cents per share, slightly lower than the adjusted net investment income of 27 cents per share in the prior quarter. Aaron will go into more detail regarding the components of our net investment income later in the call. We also reported a net increase in assets resulting from operations of $9.1 million or 42 cents per share during the quarter, which was driven primarily by the increase in fair value of our investment portfolio. As a result, our NAV on a per share basis grew from $10.83 per share at September 30th to $11 per share at the end of the year. a 1.6% increase. This represents the third consecutive quarter of growth in NAV per share, which has increased nearly 10% since the end of the first quarter. During the quarter, we increased MRCC's regulatory debt to equity leverage from 0.9 times debt to equity to 1.0 times debt This increase in leverage was primarily driven by strong asset growth at the end of the quarter, partially offset by normal repayment activity, as well as the increase in the fair value of our investments during the quarter. As much of the asset growth occurred near the end of the quarter, the resulting positive impact to NII has not yet fully materialized into our results for the fourth quarter. We continue to focus on managing our investment portfolio at the appropriate risk-adjusted leverage level going forward and are continuing to target regulatory leverage in a ratio of 1.1 to 1.2 times debt to equity in the near term. We have maintained an investment-grade corporate rating and recently announced a refinancing of our unsecured bonds with new bonds that carry a coupon, which is a full percentage point 100 basis below the bonds we recently redeemed, which should have a significant impact on our earnings going forward. Given the substantial pipeline of new deals at Monroe, we would expect to increase the leverage of MRCC carefully over the next few quarters in order to reach our near-term leverage target, which should benefit adjusted net investment income for future periods. Our focus for the next several quarters will be to make new investments in portfolio companies with compelling risk return dynamics, just as we have done at Monroe in the years following the last economic downturn in 2010 and 2011. We are very well positioned to do this. We will also remain dedicated to generating the best possible recovery on underperforming assets in our portfolio. We still have a couple COVID-related credits that we are in the process of working out. We have a strong track record in generating solid recoveries, and we expect that to continue going forward. Recent examples of our portfolio management successes include the recovery we have generated on Rockdale Blackhawk, and the significantly improved valuation of American community homes, just as examples. We remain heavily focused on generating similar recoveries for most of the other lower-rated credits and are optimistic that we can achieve this type of recovery for many of them. Besides strong portfolio management experience, our success in generating recoveries comes from the fact that we are typically a control lender and our agents on more than 80% of our loans and our investments. We have good loan documentation with tight baskets regarding indebtedness and restricted payments with no collateral leakage potential. We have at least two and often more financial covenants on most all of our deals, including maintenance and occurrence tests on leverage. This allows us to be proactively engaged with our borrowers and their financial sponsors, which can result in early intervention when performance begins to lag. Our recovery prospects are also enhanced by the fact that we maintain conservative starting leverage and loan to values when we underwrite our loans, often in the neighborhood of 50% loan to value. This morning, an affiliate of our external manager, Monroe Capital, issued a press release announcing that it has sold passive non-voting minority interest to Bon Accord Capital Partners. Bon Accord is the private capital markets group of Aberdeen Standard Investments, which is the largest asset management firm in the UK with approximately $600 billion in assets. While we certainly expect this transaction to be beneficial to the continued growth of the asset management platform at Monroe Capital, we also expect it to have benefits available to the MRCC shareholders and MRCC as it will open a window into the European market and shareholders to purchase MRCC and enjoy the consistent and stable dividend that we've been paying. MRCC enjoys a strong strategic advantage in being affiliated with a best-in-class middle-market private credit asset management firm with almost $10 billion in assets under management and over 130 employees as of January 1, 2021. We will continue to focus on generating adjusted net investment income, and positive NAV performance, just as we have shown in the last three consecutive quarters. I am now going to turn the call over to Aaron, who's going to walk you through our financial results in more detail. Thank you, Ted.

During the quarter, we funded a total of approximately $46.9 million in investments, which consisted of $32.3 million in fundings to 13 new portfolio companies, and $14.6 million of revolver and delayed draw fundings to existing portfolio companies. This solid portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $31.2 million during the quarter. At December 31st, we had total borrowings of $350.6 million, including $126.6 million outstanding under our revolving credit facility, $109 million of our 2023 notes, and SBA debentures payable of $115 million. Our outstandings under our revolver increased by approximately $27.2 million during the quarter as we increased our leverage during the period. We are well situated to continue to carefully grow our portfolio through participating in the substantial pipeline of opportunities generated at Monroe. The ING-led revolving credit facility had $128.4 million of availability as of December 31st, subject to borrowing base capacity. Additionally, in January 2021, we issued $130 million in senior unsecured notes at an interest rate of 4.75 percent. These proceeds were used to redeem all of the $109 million in outstanding 5.75 percent 2023 notes and repaid a portion of the outstandings on our revolving credit facility. Any future portfolio growth, revolver draws, or advances to existing borrowers will predominantly be funded by the availability remaining under our revolving credit facility. Turning to our results for the quarter ended December 31st, adjusted net investment income, a non-GAAP measure, was $5.4 million, or 25 cents per share, a decrease from the prior quarter's adjusted net investment income of $5.8 million, or 27 cents per share. The reduction in per share adjusted NII was predominantly as a result of a decrease in our average investment portfolio size during the quarter, as a majority of the new fundings occurred late in the fourth quarter. While total assets were higher at the end of the quarter, the weighted average level of total assets declined from the previous quarter. The external manager voluntarily waived approximately $430,000 in base management fees at $712,000 in incentive fees to generate net investment income in line with our dividend. When considering our targeted leverage, the refinance of our bonds, and the current credit performance at MRCC, we continue to believe that on a run rate basis, our adjusted net investment income can cover the 25 cents per share quarterly dividend without significant fee waivers in the future, all other things being equal. LIBOR rates remained basically flat during the period, and three-month LIBOR, as an example, was approximately 24 basis points as of December 31st. We maintain LIBOR floors in nearly all of our deals, with the majority of floors at a level of at least 1%. As of December 31st, our net asset value was $234.4 million, which was up approximately 1.6% from the $230.7 million in net asset value as of September 30th. Our NAV per share increased from $10.83 per share at September 30th to $11 per share as of December 31st. We estimate that of the 17 cents per share in net gains during the quarter, approximately 29 cents per share was attributable to increases in the portfolio valuation primarily as a result of the tightening of credit spreads during the period, unrelated to individual credit performance. During the quarter, according to a refinitive LPC, all in the yields for first lien and institutional middle market loans tightened by over 100 basis points to 6.57% in the fourth quarter, compared to 7.62% in the third quarter of 2020. Of that 29 cents per share of NAV increase, primarily attributable to spread tightening, approximately 21 cents per share, or around 70%, was attributable to assets held directly by us, while $0.08 per share, or 30%, was as a result of net markups on assets held in the MRCC Senior Loan Fund joint venture. During the quarter, we also experienced a decrease in book value of approximately $0.05 per share attributable to net reductions in the valuation of our portfolio companies that have a risk rating of grade 3, 4, or 5 on our internal risk rating system. a significant portion of which was as a result of the residual impact of the COVID-19 pandemic on these borrowers. Finally, approximately 7 cents per share of the decrease in book value is associated with other losses primarily associated with unrealized foreign currency fluctuations on our borrowings denominated in British pounds. These borrowings were used to finance investments denominated in pounds, and as such, we have corresponding gains in the fair value of these assets, which is part of the positive marks described earlier. Looking to our statement of operations, total investment income decreased during the quarter primarily due to a decrease in interest income due to the smaller average portfolio size during the quarter. This decrease was partially offset by an increase in dividend income from the SLF during the period. During the quarter, we placed no additional positions on non-accrual status. Total non-accruals now approximate 4.1% of the portfolio at fair value, which compares to 5.2% as of September 30th. The decrease in non-accruals at fair market value is primarily because of the increase in the size of the investment portfolio during the period, as well as the reduction in the fair value of the non-accrual assets as of December 31st. Moving over to the expense side, total expenses for the quarter decreased, primarily driven by the partial waiver of base management fees in the quarter and the lower average debt outstanding, which reduced interest in other debt financing expenses. At the end of the quarter, our regulatory leverage was approximately 1.0 debt to equity, a small increase from the regulatory leverage of nearly 0.9 at the end of the prior quarter. The increase in regulatory leverage is primarily due to the portfolio growth at the end of the quarter. The current level of regulatory leverage is below the targeted leverage range we have guided you to on prior calls. We are currently comfortably in compliance with the SEC asset coverage ratio limitations, and slightly below our previously discussed near-term target regulatory leverage level of 1.1 to 1.2 times debt to equity. As Ted discussed in his prior remarks, we would expect to grow our portfolio at a measured pace and slightly increase our regulatory leverage over the next few quarters. We also announced that on March 1st, we prepaid $28.1 million in SBIC to ventures with excess available cash at the SBIC subsidiary. This should have the effect of removing the cash drag we've experienced due to prepayments and income generated at our SBIC subsidiary. We have made no decision regarding any additional near-term debenture repayments at this time. The result of this repayment will not impact regulatory leverage, but will slightly reduce our total leverage calculation on a pro forma basis. The SLF had invested in 57 different borrowers, aggregating $205.7 million of fair value. with a weighted average interest rate of approximately 5.8%. The SLF had borrowings under its non-recourse credit facility of $131.5 million and $38.5 million of available capacity under this credit facility, subject to borrowing base availability. We do not expect to significantly grow the assets held in the SLF at this time, and the SLF continues to be in compliance with all covenants in its credit facility. As discussed earlier, the loans held in the SLF saw significant unrealized mark-to-market increases during the period as a result of continued market spread tightening. I will now turn the call back to Ted for some closing remarks before we open the line for questions.