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Operator
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.
Ted Koenig
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.
Aaron Peck
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.
Ted Koenig
Thanks, Aaron. In closing, We continue to benefit from the resiliency of the financial markets and the strong portfolio management skills at Monroe to generate significant improvements to the portfolio and 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 and our prospects. The key is our conservative underwriting, a purposefully defensive portfolio and our access to a large and experienced portfolio management team with experience managing through multiple economic cycles. As such, we continue to believe that Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders and other investors for the following reasons. Number one, our stock pays a current dividend rate of nearly 10%. Number two, Our dividend is fully supported by consistent, adjusted net investment income coverage. Number three, we are currently trading at a meaningful discount to our per share NAV, and we think at an unwarranted discount to the price-to-book ratio of most of our BDC peers. Number four, we have sufficient liquidity and opportunity to grow our portfolio to achieve leverage at the upper end of our guided range. And finally, number five, We are affiliated with an award-winning, best-in-class external manager, which has over two decades of experience, over 150 highly skilled employees, and over $11 billion in assets under management. Thank you all for your time today. And that concludes our prepared remarks. I'm going to ask the operator to open the call for questions now.
Operator
Thank you, Mr. Koenig. We will now begin our question and answer session. To ask a question, you will need to press star one on your telephone. To withdraw your questions, press the pound key. Please stand by while we compile the Q&A roster. And speakers, our first question from Christopher Nolan of Leidenberg Thalmann. You may now ask your question.
Koenig
Hey, guys. Congratulations on a good quarter and the improvement in the asset quality. Going forward, and given the Ford curve is sort of implying the Fed is going to be raising interest rates and given the prospect of a Fed taper trend, Does that affect your funding strategy? Are you going to continue to rely on Revolver, or are you going to switch over to something more fixed rate?
Ted Koenig
I'll take that to start. Aaron, why don't you follow up? First, Christopher, thanks for the question. That's a good one. I gave a speech last week in Korea, and they were asking a lot about U.S. interest rates and what was going to happen. I don't think we're going to see a market increase in rates. I think that, you know, we're going to see some inflation. I think that the economy is going to, it's not going to be as robust in 22. And I think the government's going to be careful not to upset the apple cart here. So I think in the near term, you know, I think we're in pretty good shape with our financing package. But Aaron, why don't you make a comment on that as well?
Aaron Peck
Yeah, I agree with everything you said, Ted. And just to point out, Chris, as you know, the portfolio is almost entirely floating rate with some LIBOR floors built in, and the funding is a combination of the revolving funding, which is floating, as well as the fixed rate bonds. So we're pretty happy with the mix. As you know, we benefit, all other things being equal, our portfolio benefits from rises in rates because of that, the way that we funded ourselves, because we have more assets than we have leverage, and we have a portion of our leverage that's fixed. So I think we're pretty well set up for whatever happens on the rate side, and we're pretty comfortable with how we're funded today.
Koenig
Great. And as a follow-up, Aaron, what percentage of your deal flow is SBA compliant?
Aaron Peck
Yeah, it's a good question. I think we have de-emphasized the SBIC subsidiary, which is obvious from our portfolio and how we've paid down to ventures. So I think that our strategy is to, you know, if there's a deal that comes in that makes sense, For the SBIC subsidiary, we'll consider putting it in there and consider our leverage there using the cash that's available there. But we're really not as focused on that today. I think that in a competitive market, it's harder and harder to find deals that you can make fit into an SBA compliance for our subsidiary. So I think you should expect, as time goes on, that it's likely, as cash builds up in that subsidiary, that we will continue to selectively pay down to ventures You know, as well, as you know, as the regulatory regime changed and the regulatory leverage requirements changed and allowed BDCs to go to two-to-one leverage, you know, the benefit of the excess leverage associated with an SBIC subsidiary is lessened. So that's part of the reason for our change in strategy there. Great. I'll get back into the queue. Thank you.
Operator
And speakers, our next question from Sarkis Shretbitian. of B. Riley Securities. You may ask your question.
Monroe
Hi, good morning, and thank you for taking my question here. I just want to also compliment you on returning some of the investments back to accrual status and getting the improved underlying credit performance there. And my question relates to that, right? So it seems like you're recognizing some additional interest in dividend income there. And as I look at the investment income lines, You know, PIC moved up meaningfully quarter on quarter. Is that where the majority of the improvements happening? Help us understand that.
Aaron Peck
Yeah, great question, Sargas. So, yes, some of the increase in PIC is associated with returning some of our investments to accrual status. When you look at it specifically, a name like luxury optical, which before was on non-accrual status, but you'll see has marked up materially in terms of NAV and also has been returned to accrual status. But for now, that continues to be a PIC name for us. So that's a big portion of the increase in PIC is associated with that name. And there's a few other names and a few other pickups on accrual status that have resulted in some increases in PIC. And so, yes, your observation is correct. A significant amount of the increase in PIC is associated with the return to accrual status. And we aren't necessarily out in the market doing a lot more PIC-oriented deals But, you know, as you probably know, when we just make the decision to return something to accrual status, it's because we have an expectation that we will receive a payment on that PIC interest. So it just becomes a matter of timing as to when that happens.
Monroe
Yeah, certainly helpful there. And I suppose if I kind of step back and go over the remarks made by Ted regarding the M&A environment, the loan markets, and just, you know, an overall robust backdrop, I think the comments we're hearing for a lot of players, you know, into Q4 is that the environment still remains very robust and, you know, maybe there are some decisions to be made, particularly on the M&A side, you know, regarding potential tax shift regimes. And, you know, just want to kind of ask about originations, right? Do you think, you know, you're going to have a fairly aggressive or robust origination quarter here, you know, from a visibility standpoint, or do you think, you know, there's going to be, you know, kind of an offset with the repays?
Aaron Peck
Ted, do you want to talk a little bit about pipeline?
Ted Koenig
Yeah, I'll tell you that. Just to give you some perspective, overall, this is at the Monroe level because the way we do things is that we have an allocation policy and every deal gets allocated across the firm. Through the first six months of the year, we did 49 deals as a firm. And we did around 55, 57 all of last year. So that gives you a little bit of perspective on the amount of transaction velocity that we're seeing in 2021. I imagine the fourth quarter, which is always our most significant quarter in terms of new business, to be consistent with that as well, just because of you know, normal year-end situations, but also we've got tax policy changes, which always accelerates deal activity. So I would expect, you know, our fourth quarter to be fairly robust across the firm.
Monroe
Thanks. And, Aaron, any comments on kind of, you repayment schedules or anything that's visible from that angle that we should be thinking about?
Aaron Peck
Yeah, look, I mean, I think we don't get usually a lot of advance warning on repayments. What we have seen in our decades of experience is when there's risk of significant tax policy change, that usually increases repayment activity because people will do, as you described in the nature of your question, they will start to make decisions about M&A that they might not have made otherwise for fear of increases in capital gains rates or other rates. And so our expectation is that we would – it's possible that we'll see a pickup in prepayment activity going into the end of the year. Sometimes we get visibility because, you know, sometimes we'll be asked to provide financing or an indication of financing for a portfolio company for a new buyer. But oftentimes we don't get much indication. But our expectation, just based on what we see in the pipeline today, is that our new origination activity is likely to far outstrip any prepayment activity that we would expect to see at the end of the year. And sometimes it just comes down to a little bit of a matter of time where we might see some big prepayments near the end of the year that we didn't anticipate, but our pipeline is strong enough that maybe early in the first quarter we'll have enough deal flow to sort of make up for that. You know, I always tell people, focus a little bit more on our average footings rather than, you know, the balances at the end of a quarter, because things do happen at quarter end a lot.
Monroe
Absolutely. Thank you for taking my question. Thanks, Marcus.
Operator
And as a reminder, everyone, in order to ask a question, you will need to press star 1 on your telephone keypad. That's, again, star 1 on your telephone keypad. And speakers, our next question from Robert Dodd of Raymond James. You may ask your question.
Robert Dodd
Hi, guys. Thanks for taking the question. And I also want to say congratulations on getting some of those assets back off non-accrual. And my question is kind of related to that. I really appreciate, Aaron, in your prepared remarks, you mentioned the $1.7 million gap. that was in total investment income that I think you said that was related to returns to accrual status. How much of that, if you can give us a ballpark, was all of that or close to all of that non-recurring kind of catch-up income? Or was some of that catch-up and some of that the recurring number?
Aaron Peck
Yeah, great question, Robert. I had a feeling that I would get this question. So when you look at it, you know, There's two assets that sort of make up the bulk of that 1.7, and they both remain in portfolio. So a big portion of the 1.7 is certainly non-recurring in nature, but there is a recurring aspect to it. So the way to sort of think about that is if you look at luxury optical and sort of run a basic calculation based on our contractual income, you're going to get to a reasonable number, you know, in the couple hundred thousand dollar plus range of interest income on a run rate basis quarterly, and then maybe close to another 20 grand associated with the preferred stock, preferred value door. So if you put it all together, I think it's reasonable to think, you know, a little bit more than a couple hundred thousand should recur, all things considered, and maybe a little less than 1.5 million of it, of that 1.7 is non-reoccurring. But it's pretty easy to do the numbers. I think it's like about 225,000 or so associated with luxury optical, maybe another $20,000 would be a reasonable run rate calculation for the preferred for Valuador. So just back of the envelope. And you'll see all of that basically based on the effective yield, right? So the effective yield for the whole portfolio went up during the quarter. And, you know, certainly some of the new deals we're putting on are accretive, but also a lot of that has to do with the return to accrual status of these assets. Absolutely, yeah.
Robert Dodd
I I did do the math. I just want to double check anyway. I appreciate that. And then, I mean, just generally, I mean, I think your non-accruals, et cetera, are probably still above where you'd like them to be, I think, and above historically where you tended to run them until relatively recent periods. Without – I'm not asking you to tell us quarter by quarter, but what would you expect, you know, timeline-wise? I mean, you know, non-recalls at fair value are down to 3%, which is a tiny bit elevated versus the industry, but not – you know, what do you think the timeframe is where you could get your non-recalls probably at fair value rather than across down to – industry kind of average levels. I think that's a fairish question.
Aaron Peck
Yeah, I understand the question, and I think there's a bit of a philosophy difference, I think, between us and some of our peers, right? And so the answer is I could get our non-accruals on a fair value basis down tomorrow if that was my only goal, right? And the way you would do that is by selling difficult assets at huge discounts, and locking in long-term NAV issues and getting them off of your non-accrual status. That's not how we operate, right? We view our job as investors is to earn, you know, solid income for our shareholders, but also to make sure that our NAV performs well and can increase on assets that are troubled. And so we work the system. We work our assets. We have a very strong portfolio management discipline. We've developed it over a couple of decades. We have a great track record of getting back every nickel on most deals, and we fight and we claw. And so what I'm trying to say is, while it's certainly a goal is to get our non-accruals down, our goal is to get those non-accruals down by getting good recoveries on difficult assets and redeploying those recoveries into accruing assets. And if that takes us a couple of quarters longer than maybe someone else, but we think it's better long-term for shareholders. So it's hard to give you visibility on exactly when that will happen. We also are not super aggressive in putting things back on accrual status. We try to be very thoughtful about when we put something back, and we have to have a high confidence that we've turned the corner and that we're going to receive all that previously unaccrued interest. And so I guess it's a long way of saying I don't have a great answer for you, But we want to make sure as lenders we get back as much recovery as we can and redeploy that into accruing assets. And we don't just cut and run and lock in losses to get our non-accruals down.
Ted Koenig
Robert, as Jeff said, we're all over this. I mean, if you look at the trend lines on this, you're going to see over the last 12 months a really positive trend line on it. And we've got a number of things we're working on currently. And my expectation is that this is going to be a non-issue here soon.
Robert Dodd
I appreciate all that color, and that kind of motivated the question. It's going to happen a little faster than I thought it would. So congratulations on that.
Ted Koenig
You know me, Robert. We're not sitting around and waiting for anything here. We've got a lot of good things happening in the portfolio. There's a lot of things that we're very positive about that are happening with a number of the portfolio names. And Aaron and the team have been working very hard to clean up things. The challenge always on our side as a manager is what's best. What's best sometimes for short-term numbers is not best for long-term shareholders. And if it takes us, like Aaron said, another quarter or two to do the right thing, we're going to do it.
Robert Dodd
I appreciate that. Thank you.
Operator
And speakers, we have our follow-up question from Christopher Nolan of Ladenburg-Tolman. You may ask your question.
Koenig
Hey, guys. As a follow-up to Robert's question, Vinci Brands, formerly Insipio, a few of those credits are marked down to zero fair value. Is this a potential situation like Rockdale? where you can suddenly get a major recovery on these assets, given your comments to Robert just a minute ago?
Ted Koenig
You know, Christopher, we're always looking at ways to re-engineer companies. This company, Incipio, is a consumer products company. It's an electronics industry. We took it over at a very difficult time. in the cycle, in the business cycle. Last year, we had COVID. A number of stores were closed. They sell through the retail channel. iPhones just did a new launch recently. We're seeing really good results from that. We think the company's got good long-term prospects. We control a big portion of this company, and we'd like to think we have some upside there. whether it turns into a rock tail or it turns into an LOH or it turns into something else. I think we've proven that with time and patience, we've done a good job in taking these companies and re-engineering the companies, hiring new management teams, opening new markets, adding new distribution channels, and we're spending a fair amount of time with this particular name, Incipio, to try and achieve those similar results.
Koenig
Okay, thanks, Ted.
Operator
And speakers, there are no further questions as of this time. You may continue.
Ted Koenig
Great. Well, everyone, thank you very much for joining us today. We appreciate the thoughtful questions. We look forward to continuing our run of good news, and we will see you next quarter.
Operator
This concludes today's conference call. Thank you all for joining. You may now disconnect.
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