Monroe Capital Corporation

Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin shortly. Until such time, your lines will again be placed on music hold. Thank you for your patience. Once again, ladies and gentlemen, this is the operator. Today's conference is scheduled to begin shortly. Until such time, your lines will again be placed on music hold. Thank you for your patience. Thank you. Thank you. Thank you. Welcome to Monroe Capital Corporation's third 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 particularly in light of the COVID-19 pandemic. Although we believe these statements are reasonable based on management estimates, assumptions, and projections as of today, November 3, 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 result 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.

Thank you. Good morning, and thank you to everyone who has joined us on our call today. Welcome to our third quarter 2021 earnings conference call. I'm joined by Aaron Peck, our CFO and Chief Investment Officer. Last evening, we issued our third quarter 2021 press release and filed our 10Q with the SEC. We are pleased to report another strong quarter of financial results with solid net investment income and increased NAV performance. During the third quarter, the financial markets, the M&A markets, and the loan markets remain strong in the face of inflationary pressures and supply shortages, and employment challenges. For the third quarter 2021, the S&P 500 index, which is near all-time highs, was up nominally after an increase of 8.2% in the second quarter and an increase of 5.7% in the first quarter. Middle market M&A activity during the third quarter was the busiest quarter on record, with 401 sponsored middle market deals completed, which easily surpassed the previous record from the second quarter of this year of 360 deals. And the loan markets followed suit with sponsored loan volume, including syndicated and direct deals, totaling $48 billion, up 14% from the second quarter. Turning now to the third quarter results, we are pleased to report adjusted net investment income of 30 cents per share, up from 25 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 $7.2 million, or 34 cents per share, during the quarter, which was driven by net investment income of $6.3 million, or 29 cents per share, and gains of over $900,000, or five cents per share. As a result, our NAV on a per share basis grew from $11.36 on June 30 to $11.45 per share at the end of the third quarter. This represents the sixth consecutive quarter of growth in NAV per share, which has increased by 14% since the end of the first quarter of 2020. During the quarter, MRCC's regulatory debt to equity leverage increased from 1.05 times debt to equity to 1.11 times debt to equity. This increase in leverage was primarily driven by an increase in the size of the portfolio during the quarter. New origination activity remains strong and we expect to continue to increase leverage within the target regulatory leverage of 1.1 to 1.2 times debt to equity in the near term. This increase in targeted regulatory leverage should benefit adjusted net investment income in future periods. 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. We continue to demonstrate our strong track record in getting solid recoveries on portfolio matters, and we expect that to continue going forward. Many of our portfolio companies have continued to see business improvements, which resulted in the positive NAV performance in the quarter. Our focus on strong loan documentation with reasonable financial covenants on most all of our deals 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 loan to value ratios when we underwrite loans, often in the neighborhood of 50% loan to value. MRCC enjoys the strategic advantage in being affiliated with a best in class middle market private credit asset management firm with over $11 billion in assets under management and over 150 employees as of October 1st, 2021. We will continue to focus on generating adjusted net investment income and positive NAV performance, just as we have shown in the last six consecutive quarters. I am now going to turn the call over to Aaron, who is going to walk you through our financial results.

Thank you, Ted. During the quarter, we funded a total of approximately $82.3 million in investments, which consisted of $54.8 million in fundings to 11 new portfolio companies and $27.5 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 $62.3 million during the quarter. At September 30th, we had total borrowings of $331.1 million, including $144.4 million outstanding under our revolving credit facility, $130 million of our 2026 notes, and $56.9 million of SBA debentures payable. Total borrowings outstanding decreased by $12.3 million during the quarter, primarily driven by the repayment of $30 million in SBA debentures during the quarter, partially offset by our borrowings on our ING-led revolving credit facility to support portfolio growth outside of our SBIC subsidiary. We are well situated to continue to carefully grow our portfolio through participating in the substantial pipeline of opportunities generated at Monroe. The revolving credit facility had $110.6 million of availability as of September 30th, subject to borrowing-based capacity. Turning to our results for the quarter ended September 30th, Adjusted net investment income, a non-GET measure, was $6.4 million, or 30 cents per share, up 5 cents per share from the prior quarter. Our adjusted net investment income was achieved without the need for the external manager to waive any fees during the quarter. When considering our targeted leverage 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, with three-month LIBOR at approximately 13 basis points as of September 30th. We do maintain LIBOR floors in nearly all of our deals, with the majority of those floors at a level of at least 1%. As of September 30th, our net asset value was $246.7 million, which increased from the $244.8 million in net asset value as of June 30th. Our NAV per share increased from $11.36 per share at June 30 to $11.45 per share as of September 30. This $0.09 per share NAV increase was the result of net realized and unrealized gains of $0.05 per share and net investment income in excess of the dividend paid during the quarter of $0.04 per share. Looking to our statement of operations, Total investment income was $15.2 million during the third quarter, up from $12.4 million in the second quarter. Total investment income for the third quarter included $1.7 million in additional interest and dividend income from certain investments that were returned to accrual status due to improvements in underlying credit performance. During the quarter, we placed no additional borrowers on non-accrual status. Total non-accruals approximately 3.1% of the portfolio at fair value at September 30th, which is down from the 5% of the portfolio at fair value as of June 30th. The effective yield on our debt and preferred equity portfolio increased to 7.9% at September 30th, up from 7.6% at June 30th. Moving over to the expense side, total expenses for the quarter increased from $7.2 million in the second quarter to $8.9 million in the third quarter, primarily due to an increase in net incentive fees resulting from improved net investment income. At the end of the quarter, our regulatory leverage was back up to approximately 1.11 times debt to equity, an increase from the regulatory leverage of 1.05 times at the end of the prior quarter, as a result of portfolio growth during the quarter. The current level of regulatory leverage is consistent with the target leverage range we've guided you to on prior calls, of 1.1 to 1.2 times debt to equity. As Ted discussed in his prior remarks, we would expect to continue to grow our portfolio at a measured pace and slightly increase our regulatory leverage within that range over the next couple of quarters. As of September 30th, we had restricted cash in our SBIC subsidiary of approximately $8 million, down from the restricted cash balance of $29.5 million at June 30th. On September 1st, the SBIC subsidiary used available cash to repay $30 million in SBA debentures. This will help reduce drag associated with the large cash balance previously held at this subsidiary and positively impact net investment income going forward. As of September 30th, the SLF had investments in 54 different borrowers, aggregating $192.5 million at fair value, with a weighted average interest rate of approximately 5.8%. The SLF had borrowings under its non-recourse credit facility of $104.6 million and $65.4 million of available capacity under this credit facility subject to borrowing base availability. I will now turn the call back to Ted for some closing remarks before we open the line for questions.