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spk01: 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.
spk02: 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.
spk06: 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.
spk02: Thank you, Aaron. In closing, we continue to benefit from the resiliency of the financial markets and the strong proprietary origination network at Monroe to create differentiated risk-adjusted returns for our shareholders. Our overall Monroe Capital platform continues to maintain a very strong pipeline of high-quality investment opportunities for all funds at Monroe, including MRCC. As a result, we are excited about our investment portfolio activity and our prospects. The key is our underwriting a purposeful defensive portfolio, and access to a large and experienced portfolio management team with experience managing through multiple economic cycles. As such, we continue to believe Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders. Our dividend remains fully covered by net investment income, and we have sufficient liquidity to continue to grow our portfolio to reach our targeted leverage. We believe that MRCC is affiliated with an award-winning best-in-class external manager, which has decades of experience, over 130 highly skilled employees, and approximately $10 billion in assets under management. Thank you all for your time today. And this concludes our prepared remarks. I'm going to ask the operator to open up the call now for questions. Thank you.
spk01: As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the question and answer roster. Your first question comes from the line of Mr. Christopher Noland from Ladenburg-Talman. Sir, your line is open.
spk03: Hey, guys. In your discussions with your portfolio companies, are you hearing any discussion in terms of higher economic inflation?
spk02: Good question, Chris. You know, there's a lot of discussion right now about that. I think we're going to see some wage inflation in the coming quarters, and we're also going to see some raw materials and supplies inflation. You know, everything that we're seeing where we're importing is involved. The process, raw materials are up, steel's up. I mean, steel's, you know, 2, 3x what it was a couple years ago, so I think it's going to happen, particularly on the wages and on raw materials.
spk03: Okay, and then on that, how would you guys position your capital structure in anticipation of higher inflation? Would there be less reliance on the facility, or what were you thinking around that?
spk02: I'm not going to let Aaron speak to it, too, but we've got a number of different levers that we can pull. You know, we've got, obviously, our ING credit facility. We've got, you know, we just refinanced some baby bonds down. We've got the SBA for leverage. So we're going to, you know, depending upon what actually happens, several years ago we went long in baby bonds, and, you know, we're trying to protect our balance sheet. And, you know, as it turned out, it was the right thing to do philosophically, but economically we probably would have been better off you know, increasing the size of our ING credit facility and taking advantage of the low rates that we've had for longer. So, you know, we're going to be very thoughtful, I think, this time in looking at, you know, using all three of our levers, you know, to create capital structure stability.
spk06: I'll just add, Chris, we're pretty well set up to benefit from rising rates. Should we see that in the future? Because our book is almost entirely floating And while there are some LIBOR floors, you know, so for some portion of the move, we won't benefit on the portfolio side. Over the long haul, we should benefit because we have some fixed rate debt as well as the floating rate debt with ING. So net-net, I think we're well set up for that.
spk03: Great. Thanks, guys.
spk06: Thanks, Chris.
spk01: Your next question comes from the line of Sarkis Surbachen from RLE Securities. Your line is open.
spk05: Hey, thanks. This is Sarkis from B. Riley. You talked about gradual growth in the portfolio in your comments. Can you maybe speak to the cadence of the origination activity, especially in light of the level of significant prepayments and repayments we're seeing?
spk06: Yeah, Aaron, why don't you handle that one? Sure. Good question, Sargas. So, you know, as you know, Monroe manages close to $10 billion in assets. We have a very large origination group, over 20 people, full-time originators. There's significant, you know, opportunities for the BDC to benefit from good origination. You know, our pipeline remains very, very strong. And so I think, you know, there's definitely some heavy prepayment activity as well. And I think it's a little bit hard to predict exactly what's going to prepay and when it's going to prepay, and we're trying to manage the growth without knowing what's going out the back door. It's a constant discussion point that we always talk about, which is it's very hard to know how much to put in when you don't know how much is going out. And so we're trying very hard to be thoughtful about how we add to assets in the portfolio, but we really don't have any concerns about our ability to get to our targeted leverage point. I think it's just a matter of how quickly we can get there. and we're still sort of evaluating that, but the biggest wild card continues to be what goes out the back door in prepayments, and we don't have a good method to really predict that. It tends to be unpredictable, and so we're just trying to be as aggressive as we can in terms of making sure we stay invested in good assets that we originate and try to get the leverage up to a better point, which would help on the NII side.
spk05: No, thanks for that color there. And maybe to dive a bit deeper on the prepay side, I appreciate that it's unpredictable. I suppose, you know, quarter to date here in 2Q, anything different versus 1Q? You know, do you expect kind of a similar level or cadence, or do you expect it to kind of start to normalize as we get into maybe the midpoint or the second half of this year? Any color there would be helpful.
spk06: Again, it's pretty difficult to guess, and the way that it typically works is we definitely see a larger amount of repayment near the end of the quarter. A lot of our competitors are trying to hit numbers on a quarterly basis so that they get aggressive, and they try to get things closed and rush things into the end of the quarter. So we sometimes get surprised at things that sort of show up right near the end. So it's difficult to predict the cadence of prepayment. And, you know, what I can tell you is it was a very aggressive fourth quarter and first quarter in terms of activity. And a lot of what was prepayable, and in other words, a lot of the deals that we had in portfolio that were looking to do something strategic or were refinanceable, a lot of that activity happened. And so my guess would be that we'll see it temper a little bit, but, you know, it's very difficult to predict.
spk02: Yeah, I mean, I'm consistent with Aaron's comments, Sarkis. I think that... Fourth quarter and first quarter were active quarters in terms of repayments. From where I see it right now, I think that the cadence will slow down a little bit. We'll get to more of a normalized period here over the next couple of quarters.
spk05: Great. Thanks for that. And just one more for me. Maybe if you could talk to the size of the pipeline you're seeing on the platform overall. And maybe if you can also speak to any significant changes in terms of deal terms or structures that you're seeing evolve as we kind of head to the midpoint of this year.
spk02: I'll talk about pipeline and a little bit on structure. I'll let Aaron follow up. We're seeing today I think we've got about $800 million across the firm pipeline, the last pipeline report I saw. Now, you know, not all that is going to close. Things come up in diligence. Things come up in transactions. But, you know, we think we'll close a substantial amount of it over the next 90 days, give or take. So, you know, pipeline is about the same as it was in Q4 for us. It tends to build up early in the year. And then towards once we get into kind of the end of the Q2, it tends to go down and build up again in Q3. So I think that's a, you know, we're in a normal cadence on that, you know, from a structure standpoint, the market's competitive. Um, like it always has been, you know, our benefit is, you know, proprietary relationships, proprietary deal sourcing is driving a lot of what we're doing. Um, we're seeing more aggressive leverage in, in COVID friendly deals. I would tell you when probably less aggressive leverage. in COVID unfriendly deals. Now that we've had a period of time to really look at COVID and look at industries, we've seen software, technology, cloud, services, distribution, e-commerce, those industries tended to do well during COVID. So what's happening is that private equity firms and lenders are being more aggressive in structure in those areas and areas that didn't do as well you know, in-person type of, you know, health care, retail, you know, I think we're seeing a little bit of less aggressive terms in those areas.
spk06: Yeah, the only thing I would add, Ted, is just to remind Sarkis and others that, you know, look, we've been doing this a really long time at Monroe. We have seen multiple cycles, and so we've maintained our discipline in our deal structures because we know that structure is important to deal with trouble And, you know, there are some other folks in the market who are maybe a little bit newer at this and haven't seen, you know, as a group protracted declines or major economic cycles. This has been a pretty big expansion cycle other than the blip for COVID. And so we're maintaining our discipline. We think that's key to long-term success, you know, and we think it's the right way to underwrite, particularly in the lower part of the middle market.
spk05: Great. Thank you. That's all for me.
spk01: Your next question comes from the line of Mr. Robert Dodd from Raymond dreams. Sir, your line is open.
spk04: Thank you. Uh, hi guys. I'm on credit quality. If I, if I can, not to focus as a question is not a calls, but not not a calls first broadly. It looks like stress elsewhere in the portfolio, except for the non-recalls has, has gone down. fairly, fairly meaningfully. I mean, my, my stress ratio, you don't have to agree with it, but you know, it dropped precipitously this quarter versus last quarter. Um, so can you give us any, is, is there anything that's not on non-call that you are actually worried about or is it just the, the, the, the non-explicitly stressed assets are just performing meaningfully better now?
spk02: Yeah, I'll, I'll start, uh, Robert and then let, let Aaron, um, dive in here. I think your perception is a good one. We feel good about our portfolio. The non-accruals, the portfolio continues to improve, you know, as we've kind of rotated out of COVID. You know, I think we've done a good job as a firm in managing the assets, but also in, you know, underwriting portfolio management. And I think that overall the portfolio has done well. Yeah. That's on the non-non-accruals. On the non-accruals, a lot of these companies are the same companies that we had non-accruals earlier and we're diving in. Most of this has been COVID-related. We have 520 companies across the firm in Monroe and a fraction of that in MRCC, but you know, we had some industries that got hit, you know, whether it was dental care, whether it was retail, whether it was, you know, we had a restaurant deal. But we've done a pretty good job, I will tell you, in managing those assets, and we've got a number of strategies in place to create realizations in those strategies. And, you know, unfortunately, those don't always, you know, happen quickly. You know, some of these are Longer-term strategies, multi-quarters, some will go into 2022, but all in all, we feel pretty good about what we've done to take these non-accrual assets and point them in the right direction. Hopefully, over the next couple of quarters, you'll start to see some of that as the work we did last year comes to fruition this year. Aaron, I don't know if you want to make any other comments.
spk06: I think that was really well said, Ted. I think the answer, Robert, is look, we worry all the time about everything because that's our job as lenders. We worry about the whole portfolio every day because if you don't worry about an asset, that becomes your next difficult asset. I echo what Ted said. Almost all of our names are looking better, even the difficult deals, even the non-accrual deals. Other than one or two that we're spending a lot of our energies on, everything seems to be performing better than it did in the past. And so we're hopeful and confident that we're going to see continued benefits over the long term from the work we're doing on the portfolio side. Got it, got it.
spk04: And just to kind of follow up on the non-accrual, I mean, when I look at the fair value to cost of the non-accrual assets, I mean, they're marked at about 37% of cost. If my math is right, that is – obviously lower than your historic recoveries on, on troubled assets. Obviously there's a lot that goes into valuing an asset and it's not just about the recovery, but what's your, your confidence level, um, that, that your realizations when they happen and to, to your point, Ted, sometimes that takes a while are going to be, you know, higher than 37% or is 37%, you know, the current marks the right marks or are they conservatively marked by? Yeah.
spk02: I mean, that's a, That's another good question, Robert. The good news is you're jumping and you're hammering on the right things here. Historically, we've done better. It's no secret. Our recoveries have been very, very strong as a firm, and that's one of the ways we've created Alpha. Unfortunately, in the business we're in, we don't get any extra points for valuing things higher. at a point in our third-party valuation firms, you know, don't get any points for valuing things higher from time to time. So what we've tried to be, if you look at kind of the history here of Monroe, and, you know, you've been following us for a long time, you know, we've tried to be as transparent as we possibly can with our marks. We try to take marks and not – not create any false sense of security. We try to be very, very serious when we create marks. We consistently try to overachieve and generate higher recoveries. If you look at our history over the last eight years, nine years, that's what you've seen. We're hopeful that our third parties have done a good job. and marking the portfolio, we work with them very closely. But at the end of the day, just because something is marked at 37 cents, I will tell you that our portfolio team and our credit team doesn't view that as the high bar. In their views, those are the low bars and they're incented at Monroe to create recoveries far in excess of that. All we can do is each one of those assets are separate assets, individual stories that we have individual strategies for. And I can tell you that I've been involved in many of these and many of the meetings, and I like a lot of what we're doing in terms of the strategies. We've done some joint ventures with some parties. We've sometimes acquired some businesses. We've increased revenues. We've created more diverse portfolios. We've done joint ventures with strategic consultants. We've done lots of different things in these non-accrual assets to not only build businesses but diversify businesses, create new areas of revenue, bring in new management. It's a very hands-on business. We've got a number of people in the firm that their only responsibility is portfolio management improvement. And, you know, we made an investment. You know, we've got eight or nine people in the firm that that's their sole responsibility is basically taking those non-accrual or those assets and creating value for us. Because we view that as a value creation opportunity, no different than a new deal.
spk06: I was just going to add one thing, which is, And Ted hit on it right. We didn't hire a bunch of bank workout folks to work on our difficult deals. And there's nothing wrong with bank workout folks, but it's a different mindset. A lot of our team are equity investors. And what Ted said is right. 37% of PAR is not our goal. And frankly, for some of these deals, PAR isn't the goal. The goal is maximum value. And when you have people on your team who know how to maximize value in equity transactions, and some of these become equity transactions, you know, there's a possibility to make a return in many cases in excess of PAR, just like we did at Rockdale. So, you know, we're not capping our potential return because the way you make money in this business is you take your shots when you have a chance to make more than PAR to make up for the ones that you may lose some money and not get a PAR recovery. Got it. I appreciate the color, guys. Thank you. Thanks, Robert.
spk01: There are no further questions at this time. You may continue, sir.
spk02: Thank you all for joining us today. We look forward to speaking to you again soon. And as always, if you have any individual questions or anything specific, please feel free to reach out to either Aaron or me, and we'd be happy to speak to you. But until our next meeting, enjoy the rest of the quarter. Thank you.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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