Monroe Capital Corporation

Corporations First Quarter 2021 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 these statements are reasonable based on management's estimates, assumptions, and projections as of today, May 5, 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. Actual results may differ materially as a result of risk 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 this forward-looking statement. I will now turn the conference 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 first quarter 2021 earnings conference call. I am joined by Aaron Peck, our CFO and Chief Investment Officer. Last evening, we issued our first quarter 2021 earnings press release and filed our 10Q with the SEC. We are pleased to report another strong quarter of solid net investment income and increased NAV performance for the first quarter of 2021. During the first quarter, the financial markets remained strong and loan markets continued to strengthen. This can be seen in the performance of a couple key market indicators. For the first quarter of 2021, the S&P index was up nearly 6% after ending 2020 up over 15%. Price increases were also seen in traded credit investments as the S&P LSTA leveraged loan index was up 1.6% during the first quarter. The continued reduction in credit spreads has benefited our portfolio marks, which has contributed to an improvement in our per share NAV since the first quarter of 2020, including another increase in the first quarter of 2021. Turning now to the first quarter results, we are pleased to report adjusted net investment income of 25 cents per share, flat compared to the first quarter results. 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 $7.1 million, or 33 cents per share, during the quarter, which was driven primarily by the increase in fair value of our investment portfolio, partially offset by realized losses on the extinguishment of debt associated with the refinance of our baby bonds, and the prepayment of a portion of our SBA debentures, all of which are accretive to our shareholders. As a result, our NAV and a per share basis grew from $11 at December 31st to $11.08 per share at the end of the first quarter. This represents the fourth consecutive quarter of growth in NAV per share. post-COVID, which has increased by over 10% since the end of the first quarter of 2020. During the quarter, MRCC's regulatory debt to equity leverage decreased from 1.0 times debt to equity to 0.9 times. This decrease in leverage was primarily driven by heavy prepayment activity during the first quarter, much of which occurred near the end of the quarter. New origination activity remains strong, and we expect to continue to increase leverage over the next few quarters, partially offset by continuing strong prepayment velocity. We continue to target regulatory leverage in the range of 1.1 to 1.2 times debt to equity in the near term. Given the substantial pipeline of new deals in Monroe, we would expect to increase the leverage in MRCC carefully over the next few quarters in order to reach our near-term leverage target. which should benefit adjusted net investment income in future periods. We have maintained an investment grade corporate rating and during the first quarter we were successful in refinancing our 5.75% unsecured baby bonds with new bonds that carry a coupon which is a full percentage point, 100 basis points below the bonds we recently redeemed which should have a positive impact on our earnings going forward. As we have discussed on prior calls, our continued focus for the next several quarters is on making new investments in portfolio companies with compelling risk-return dynamics, just as we did at Monroe in the years following the last economic downturn in 2010-2011. We are very well positioned to do this. We also remain dedicated to generating the best possible recovery on underperforming assets in our portfolio. We have a strong track record in generating solid recoveries on difficult deals, and we expect that to continue going forward. Most of our portfolio companies, which are rated 3, 4, or 5 on the Monroe Risk Rating Scale, have seen improvements, which has contributed to our positive NAV performance in the quarter. We remain heavily focused on generating strong recoveries on these credits and are optimistic that we can achieve solid recoveries for many of them. Our focus on strong loan documentation with at least two and often several more financial covenants and most all of our deals including maintenance and occurrence tests on debt leverage allows us to be proactively engaged with our borrowers and their financial sponsors. This allows us to have an early intervention point 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. MRCC enjoys a strong strategic advantage in being affiliated with a best-in-class middle-market private credit asset management firm with approximately $10 billion in assets under management and over 130 employees as of April 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 four consecutive quarters. I am now going to turn the call over to Aaron, who's going to walk you through our financial results.

Thank you, Ted. During the quarter, we funded a total of approximately $43.7 million in investments, which consisted of $21.7 million in fundings to five new portfolio companies and $22 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 $75.8 million during the quarter. At March 31st, we had total borrowings of $309.8 million, including $92.9 million outstanding under our revolving credit facility, $130 million of our new 2026 notes, and $86.9 million of SBA debentures payable. Total borrowings outstanding decreased by $40.8 million during the quarter. Our outstanding balance under our revolver decreased by approximately $33.7 million, and we repaid $28.1 million in SBA debentures during the quarter. These decreases were partially offset by the $21 million increase in our unsecured bond balance. 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 $162.1 million of availability as of March 31st, subject to borrowing base capacity. As previously discussed, in January 2021, we issued $130 million in senior unsecured notes at an interest rate of 4.75%. These proceeds were used to redeem all of the $109 million in outstanding 5.75% 2023 notes and repaid a portion of the outstanding 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 March 31st, adjusted net investment income, a non-GAP measure, was $5.4 million or 25 cents per share, virtually unchanged from the prior quarter's adjusted net investment income of $5.4 million or 25 cents per share. The external manager voluntarily waived approximately $637,000 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 NII 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 at approximately 19 basis points as of March 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 March 31st, our net asset value was $236.2 million, which was up slightly from the $234.4 million in net asset value as of December 31st. Our NAV per share increased from $11 per share at December 31st to $11.08 per share at March 31st. We estimate that of the $0.08 per share in net gains during the quarter, approximately $0.24 per share was attributable to increases in 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 Refinitiv LPC, all in yields for first lien institutional middle market loans tightened by over 92 basis points to 5.65 percent in the end of the first quarter compared to 6.57% at the end of the fourth quarter of 2020. Of that $0.24 per share of NAV increase, primarily attributable to spread tightening, approximately $0.16 per share, or two-thirds of it, was attributable to assets held directly by us, while $0.08 per share, or one-third, 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 two cents per share attributable to net reductions in the valuation of our portfolio companies that have a risk rating of grade three, four, or five 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 14 cents per share of the decrease in book value is associated with other losses, primarily associated with non-recurring, realized losses on the extinguishment of debt recognized in connection with the redemption of the 2023 notes and the repayment of a portion of our SBA debentures. The early extinguishment of this debt resulted in a realized loss of $2.8 million, which is comprised of previously unamortized deferred financing costs. Looking to our statement of operations, total investment income increased during the quarter primarily due to an increase in interest income due in part to an increase in prepayment gains and fee income during the quarter. During the quarter, we placed no additional borrowers on non-accrual status but did put the rest of our investment in incipio on non-accrual as only a portion of the investment was on non-accrual status in prior quarters. Total non-accruals now approximate 5.2 percent of the portfolio at fair value. which compares to 4.1% as of December 31st, but was flat to the level at September 30th of 2020. Moving over to the expense side, total expenses for the quarter increased slightly, primarily driven by the lack of a necessary waiver in base management fees in the quarter and a reduction in the waiver of incentive fees earned during the quarter. At the end of the quarter, our regulatory leverage was down to approximately 0.9 times debt to equity, a small decrease from the regulatory leverage level of 1.0 times at the end of the prior quarter. The decrease in regulatory leverage is primarily due to significant payoff activity near the end of the first 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 to our target. As a reminder, on March 1st, we prepaid $28.1 million in SBIC debentures 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. And this repayment did not impact regulatory leverage, but of course did contribute to the reduction in our total leverage during the quarter. As of March 31st, the SLF had investments in 55 different borrowers, aggregating $198.6 million at fair value, with a weighted average interest rate of approximately 5.9%. The SLF had borrowings under its non-recourse credit facility of $121.6 million, and $48.4 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 the 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.