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Operator
today's conference will begin momentarily please continue to stand by thank you for your patience Thank you. Welcome to Monroe Capital Corporation's fourth quarter and full year 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, March 3, 2022, 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 risks, uncertainties, and 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 these forward-looking statements. I will now turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.
Ted Koenig
Good morning and thank you to everyone who has joined us on our call today. Welcome to our fourth quarter and full year 2021 earnings conference call. I'm joined by Aaron Peck, our CFO and Chief Investment Officer. Last evening, We issued our fourth quarter and full year 2021 earnings press release and filed our 10K with the SEC. We are pleased to report another strong quarter of financial results with solid net investment income and increased NAV performance. 2021 was a year punctuated by very strong M&A buyout and related financing activity, particularly in the fourth quarter as transaction volumes increased across the board. Total US middle market volume across direct and syndicated lending markets hit a record of $319 billion in 2021, up 85% from 173 billion in the year earlier and a prior high of 2018 by 12%. Activity was strong in anticipation of expected tax law changes and in the face of inflationary pressures, supply chain shortages, and employment challenges. Turning now to the fourth quarter results, we are pleased to report adjusted net investment income of $5.4 million or 25 cents per share. We also reported a net increase in assets resulting from operations of $6 million or 32 cents per share during the quarter, which was driven by net investment income of $5.4 million or 25 cents per share and net gains of almost $1.5 million or seven cents per share. As a result, our NAV and a per share basis grew from $11.45 per share on September 30th to $11.51 per share at the end of the year. This represents the seventh consecutive quarter of growth in NAV per share which has increased by almost 15% since the end of first quarter 2020. During the quarter, MRCC's regulatory debt to equity leverage increased slightly from 1.11 times debt to equity to 1.13 times debt to equity. Total leverage also increased slightly from 1.34 times debt to equity to 1.35 times debt to equity during the quarter. This modest increase in leverage was primarily driven by an increase in the size of the portfolio during the quarter. New origination activity at Monroe remains strong and we expect to continue to modestly increase leverage with a new target total leverage range of 1.3 to 1.4 times debt to equity in the near term after giving effect to the repayment of our SBIC debt and transfer of loan assets from our SBIC subsidiary to MRCC. Erin will discuss this development later in the call. This targeted level of gap leverage should support strong adjusted net investment income performance in future periods. As we have discussed in prior calls, Our continued focus is on making new investments with attractive risk return dynamics while proactively managing and constructing our portfolio. Most of our portfolio companies have continued to see performance improvements as the economy has rebounded, which has contributed to the positive NAV performance in the quarter. Our loan underwriting focus continues to be on those companies with defendable market positions, resilient business models, exceptional management teams, and strong sponsors or owners. MRCC enjoys a strong strategic advantage in being affiliated with a best-in-class middle market private credit asset management firm with approximately $13 billion in assets under management and over 150 employees as of December 31, 2021. We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive NAV performance, just as we have shown in the last seven 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 $45.1 million in investments, which consisted of $13.8 million in fundings to five new portfolio companies and $31.5 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 $40.9 million during the quarter. At December 31st, we had total borrowings of $337.9 million, including $151 million outstanding on our revolving credit facility, $130 million of our 2026 notes, and $56.9 million of SBA debentures payable. Total borrowings outstanding increased by $6.6 million during the quarter driven by 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 $104 million of availability as of December 31st, subject to borrowing-based capacity. 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, down from the $6.4 million, or 30 cents per share, in the prior 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 $0.25 per share quarterly dividend without significant fee waivers in the future, all other things being equal. LIBOR rates remained at historically low levels during the quarter, with three-month LIBOR at approximately 21 basis points as of December 31st. We maintain LIBOR floors in nearly all our deals, with a majority of floors at a level of at least 1%. On most amendments and on virtually all of our new originated deals, we are now focused on pricing our deals as a spread to the secured overnight financing rate, or SOFR, in advance of LIBOR going away, which is anticipated to occur in 2023. As of December 31st, our net asset value was $249.5 million, which increased from the $246.7 million in net asset value as of September 30th. Our NAV per share increased from $11.45 per share at September 30th to $11.51 per share as of December 31st. The $0.06 per share NAV increase was substantially the result of net realized and unrealized gains on the portfolio during the fourth quarter of $0.07 per share. Looking to our statement of operations, total investment income was $13 million during the fourth quarter down from $15.2 million in the third 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 fourth quarter, we placed no additional borrowers on non-accrual status. Total non-accruals approximate 2.6% of the portfolio at fair value at December 31st, down from 3.1% of the portfolio at fair value at September 30th. and 4.1% at December 31, 2020. The effective yield on our debt and preferred equity portfolio increased slightly to 8% at year-end, up from 7.9% at September 30. Moving over to the expense side, total expenses for the quarter decreased from $8.9 million in the third quarter to $7.7 million in the fourth quarter, primarily due to lower incentive fees, net of associated fee waivers, as a result of lower net investment income. At the end of the quarter, our regulatory leverage was back up a little to approximately 1.13 times debt to equity, which is a slight increase from the regulatory leverage level of 1.1 times at the end of the prior quarter as a result of portfolio growth during the quarter. Total leverage was 1.35 times debt to equity at year end, up modestly from the 1.34 times debt to equity level at the end of the third quarter. The level of regulatory leverage at December 31st is consistent with the targeted leverage range we have guided you to on prior calls of 1.1 to 1.2 times debt to equity. As of December 31st, we had restricted cash in our SBIC subsidiary of approximately $15.5 million, up from restricted cash of $8 million at September 30th. On March 1st, the MRCC SBIC subsidiary repaid all its remaining SBA debentures and transferred its loan positions to MRCC. This was achieved through borrowings on our revolving credit facility and the use of the restricted cash held in our SBIC subsidiary. While the repayment of the SBA debentures will increase the level of regulatory leverage at MRCC, it will slightly reduce total leverage, all other things being equal. In recent quarters, we have had substantial restricted cash in the SBIC subsidiary and resulting from loan repayments, which could only be used to repay SBA debentures on a semi-annual basis. The full repayment of our SBA debentures will help reduce the drag associated with the large cash balance previously held at the subsidiary and should positively impact net investment income going forward. As a result of the repayment of the SBA debentures and the transfer of loan positions to MRCC, we are no longer providing regulatory leverage guidance and instead are targeting total gap leverage in the 1.3 to 1.4 times debt to equity range, as with the repayment of our SBA to ventures, there is no longer a difference between our regulatory leverage and our gap leverage. As of December 31st, the SLF had investments in 57 different borrowers, aggregating $189.1 million at fair value, with a weighted average interest rate of approximately 5.9 percent. The SLF had borrowings under its non-recourse credit facility of $94.8 million and $80.2 million of available capacity under this credit facility subject to borrowing-based availability. I will now turn the call back to Ted for some closing remarks before we open the line for questions.
Ted Koenig
Thank you, Aaron. In closing, we continue to benefit from the strong M&A and financing markets, as well as the strong portfolio management skills 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 continue to be 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 over 9%. Number two, our dividend is fully supported by consistent adjusted net investment income coverage. Number three, we are currently trading at a discount to our per share NAV and a discount to the price-to-book ratio of most of our BDC peers. Number four, we have sufficient liquidity and the opportunity to grow our portfolio to achieve leverage at the upper end of our guided range. And number five, we are affiliated with an award-winning best-in-class external manager, which has decades of experience, over 150 highly skilled employees, and approximately $13 billion of 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 the call now for questions.
Operator
If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Our first question comes from Christopher Nolan with Ladenburg-Bellman.
Christopher Nolan
Yeah, the repayment of all the SBC, I mean, oops, sorry. Last quarter, you guys were hinting that you might pay some of it back. What was the catalyst for paying it all off?
Aaron Peck
Yeah, good question, Chris. As we went into year end, we saw the cash balance increase again in the SBIC subsidiary, and we didn't see the kind of quality deals that we like at Monroe that would fit well into the SBIC subsidiary. And so we made the decision, given that you could only pay back to ventures at the SBA twice a year, we made the decision that we didn't want to keep running with cash drag. And so we decided that it was no longer a significant benefit for us to keep the SBA subsidiary in place. The reality is, is with the new leverage rules, you know, from a few years ago, it doesn't have the same value add that it used to have. And on a rates basis, it's frankly not that different from what we pay on a revolving credit facility. So there really wasn't any pickup in cost by borrowing on the credit facility versus borrowing, you know, with the ventures. And there's a lot of operational cost and other costs to maintain it. And so it just wasn't a great use of our attention and time anymore. It wasn't generating the bang for the buck that it used to. So we finally made the decision to pay it off and to hand back that license for the BDC sub.
Christopher Nolan
Great. And as a follow-up, how does this affect your capital strategy? Because right now you have a lot of revolving credit facility debt, and obviously it's going to go up. but we're entering into a phase where the market's expecting multiple, you know, tightenings by the Fed. And so does this mean that you guys are going to try to, you know, go after some, you know, fixed-rate debt?
Aaron Peck
You know, we'll continue to monitor the markets and make decisions about the liability side of our balance sheet. We haven't made any determinations definitively today about, you know, about the need to go out and raise more fixed-rate debt or the desire to do that. You know, I remind you, and you know this well, Chris, that, you know, While there's definitely expectations of rate increases, those things tend to be priced into the market. So the market knows that that expectation is there. So what we're really concerned about would be more increases in rates than what the market currently expects, which would increase rates. But the market rates are impacted by what people think the Fed's going to do. So even with that, the short end of the curve remains relatively low rate-wise. I think you could see some steepening of the curve. It wouldn't be that impactful to us since we typically borrow on short-term LIBOR and in the future likely short-term SOFR. So for now, we're going to keep with the current strategy using our revolver and keep the fixed rate notes that we have in place. But, you know, we're always talking and always examining the market. And if we make any changes, we'll be sure to let the market know. Okay. Thanks, Aaron.
Operator
Our next question comes from Sarkis Sherbetian with B Reilly Securities.
Sarkis Sherbetian
Hey, good morning, and thank you for taking my question here. Just as a follow-up to the prior question on the repayment of the SBIC, you mentioned that there are some operational costs and other costs that are involved with that. Any, I guess, thought processes on your run rate operating expenses going forward after you kind of collapse that license and the operations there?
Aaron Peck
There really isn't anything I can point to or give you specifics at this moment. It is not something we've ever broken out in terms of what we pay. I'm not sure it's going to be a major savings, but there will be some savings. I would estimate probably $50,000 to $100,000 a year maybe in that range in terms of just the maintenance of that subsidiary. We can do a little more work on the specifics and come back, but it also provides us, you know, significant efficiencies to not have to deal with, you know, reporting to the SBA, you know, separate audit costs associated with the sub, you know, separate testing. So, you know, but probably my best guess would be about $100,000 a year in actual cost savings.
Sarkis Sherbetian
Okay, got it. So it sounds like were there any, I guess, accelerated kind of, prepayments or repayments happening in that bucket, if you will, where, you know, kind of if you then go out and look for opportunities, you're not really seeing that. So therefore, the cash balance was building and you just thought it's more prudent to kind of, you know, collapse it into your operations and, you know, deploy the incremental capital in your current strategy. Is that the right way to think about it?
Aaron Peck
I think sort of. I'd say We certainly see lots of opportunities to redeploy capital. You know, our pipeline at Monroe is huge. As a firm, we have the biggest fourth quarter in history, and Ted, I'm sure, will talk more about that. But what was getting more difficult was to find deals that specifically would fit for the SBIC subsidiary. And it's not just whether they'd fit or not, but it was, you know, When you ask borrowers to allow you to put their debt in your SBIC subsidiary, you also have to ask them to fill out a significant amount of paperwork and rep to certain things. And in a competitive market environment, that's a little bit more challenging to get done. And the reality is we don't have a lot of active SBIC subsidiaries today that are out lending. So there wasn't like there was, you know, a need across the firm for SBIC eligible investments. And so it wasn't easy to redeploy the cash in things that were specifically eligible from an SBIC standpoint. So we would prefer to be more unbridled in our investment strategy and be able to do whatever deals make the most sense on a risk-adjusted basis. And there's lots of those opportunities for us as a firm. And so we're happy to collapse the sub and move forward on a more regular way basis and allow the BDC to participate in pro-rat on deals with all the other funds at Monroe that aren't SBIC subsidiaries. I don't know, Ted, if you have anything else to add to that.
Ted Koenig
Yeah, I think it's really two questions, Sarkis. Number one is we had some cash that wasn't being utilized that we could utilize, so there was a drag associated with that cash. Number two, the SBIC rules are a little more complicated in that they require you to lend a or invest in companies that are defined as small businesses. Those tend to be companies with net income of $6 million or less. And frankly, given where the market is today, we thought it was more prudent from a credit standpoint to focus on companies with higher net income than those that were SBIC-eligible companies. So those were really the two driving strategic reasons for paying that off and moving forward. there's plenty of opportunities for us to deploy those dollars and generate good, solid arbitrage from a return dividend standpoint. And we thought we would kind of look at this and do what's in the best interest of the shareholders.
Sarkis Sherbetian
No, thank you for that. And I want to switch gears here for a moment to focus a little bit on the non-accrual side of your balance sheet. You know, any updates there? I think in the past we've talked about how you'd like to turn on some of those non-accruing assets back to accrual status. And then I think over time, right, that's a good thing because it helps kind of you redeploy capital back into earning assets. Any updates on the non-accrual side and kind of any incremental ideas there that you can share with us?
Aaron Peck
Sure. So, you know, I think generally we are seeing that happen. We're seeing generally non-accrual assets, you know, improve and in some cases turn back on. In some cases, it's a little more challenging or hard to see what's going on. So, for example, we had a non-accrual asset that became an accrual asset, and then it became a paying asset, and then it got sold and it left the portfolio. So, you know, and so we were able to do exactly that, redeploy that capital now into new, you know, traded assets. So, We are seeing improvements. You know, you're seeing both improvements on non-accruals on a fair value and cost basis. Both of those things are improving. We continue to work very hard to see improvements in all of our assets that are rated below a two. And generally speaking, you know, some are doing better than others, but generally speaking, we continue to see positive momentum in our more difficult portfolio quarter after quarter. And so we will continue to focus on this. We expect to continue to see assets on non-accrual status little by little become accrual assets or get realized and allow us to redeploy that cash into accruing assets. One of the two outcomes is likely.
Ted Koenig
Yeah, just to follow up on that, I mean, you know, we've done a good job here. I don't know if, you know, people have really understood that, but we were 4.1% a year ago, 2.6% now, fair value. We've almost by 50% we've cut our non-accruals, and our plan is to continue to do that. in this year. So, you know, I think that 21 was a great year for us to reduce non-acryl exposure, put those dollars to work, and we are all over this. I told you that, you know, last time, last couple calls, this is one of our highest priorities, and we're making really good progress on it.
Sarkis Sherbetian
Yep. No, certainly appreciate the color there. And then one more for me, and I'll hop back in the queue. You know, regarding kind of the incentive fee waivers that are outstanding for you to, you know, kind of maintain that 25 cent per share dividend level. Does that still kind of hold true from an operating philosophy standpoint into 22 as, you know, some of the balance sheet changes work through here with the collapse of the SBIC?
Ted Koenig
Yeah, I'll take that one, Eric. Go ahead, Ted. Yeah, we are going to do everything we can to maintain the consistency of our dividend and stability of our dividend. You know, we've shown that, I think, over the last 10 years that since we've been public, that from a manager standpoint, we've always put the interests of the shareholders ahead of any other interest in managing MRCC, and we intend to continue to do so.
Sarkis Sherbetian
Thank you. That's all from me.
Operator
Our next question comes from Matt Jotten with Raymond James.
Matt Jotten
Hey, guys. Morning, and thanks for taking my questions. You know, first one for me, maybe congrats on getting the non-accruals down. Notable progress on that front. I'd be interested in following up on Sarkis' question. You know, the exits you've seen over the past three quarters in non-accrual names, are you generally seeing exits at, you know, fair value realizations, slightly in excess of quarter-end marks, or are they fairly consistent with where they were marked the prior quarter?
Aaron Peck
It's a good question. It's kind of a mixed bag. Generally speaking, they're around the marks most of the time. We make a concerted effort to be updated and thoughtful about providing information to our valuation providers so that they can have all of the information necessary to mark the assets really carefully and intelligently. Occasionally, we get some positive surprises, and occasionally, we get some negative surprises, right? So, You know, for example, we had a deal in our portfolio called Luxury Optical that had been a challenging deal for a while. It ended up, you know, rebounding. We did a lot of work, spent a lot of time and effort on that. We've talked about this in past calls, and really improved the operations, hired a great team there to fix the business, and that one ended up realizing above our mark through a sale process considerably. But some of the others, you know, have been sort of, when we have realized them, have been sort of around the mark or maybe slightly below from time to time, and I think On a net-net basis, generally, it's around our mark. And so it's been a pretty good process, and we generally have them marked right. And that's a good testament to our process, that generally speaking, it works.
Matt Jotten
Got it. Fair enough. Just, you know, one for me may be taking a little bit different of a route. Can you give us a sense of the weighted average LIBOR floor in the SLF and how you think about, you know, the dividend up to MRCC in a rising rate environment? Sure.
Aaron Peck
I can answer the second part of the question a lot easier than I can answer the first part. I'd have to get back to you guys on the weighted average floors in the SLF. That's not something I have handy. But generally speaking, you know, as you would expect, a rising rate environment is a positive thing, all other things being equal, for our portfolio both in the SLF and in our portfolio overall. and in our base portfolio. And our base portfolio tends to have, on average, higher weighted average LIBOR floors than what we would expect to see in the SLF portfolio. That would be my guess based on what I know about the portfolio. So you'll probably see more impact at the SLF level on a direct basis for near-term movements than you would see in our base portfolio, where on average we tend to have about a 1% LIBOR floor. So my guess is, over time, you'll see the benefit come through more on the SLF in the near term than you would in our in our parent portfolio, but once we get above that kind of 1% rate, you start to see a commensurate benefit on both sides of the portfolio.
Matt Jotten
Got it. That's it for me. I appreciate the time this morning.
Aaron Peck
Yeah, thanks, Matt.
Operator
As a reminder, if you'd like to ask a question at this time, that is star, then 1. Our next question comes from Robert Dodd with Raymond James.
Robert Dodd
Hi, guys. Good morning. Sorry, I had technical difficulties doubling up with Matt. So just kind of a follow-up to the non-recall question. To your point, Ted, I mean, a year ago, December 20, you had 12 companies on a recall. Now it's six. So that's been cut in half. Now, Exits, I mean, we've talked in the past about sometimes you're willing to go through a much longer process with an asset to recover, you know, ideally, you know, even more than cost. Of the six, is that what's left in the portfolio? Now, the six remaining, are those going to be longer-term processes? But you just said maybe some are going to be resolved in 22. Or what mix now should we expect on the incremental process improvements on that to be more stretched out given your track record on getting good recoveries if you put a lot of time into it?
Ted Koenig
Good question, Robert. Here's the philosophy that we've had at Monroe for a long time. Our job is to manage our portfolio and generate the best risk-adjusted returns for shareholders. Part of that philosophy means getting every dollar we came back as opposed to, you know, cutting and running and, you know, trading an asset. So Aaron mentioned luxury optical. That was a really good example. That was a deal that we had pre COVID was a good performing deal. It was in the high end retail optical space, primarily in New York city, in and around New York city, a very good business. That business got hit hard. And, you know, we didn't think it was justified. So what we did is we doubled down in that company. We brought in new management. We acquired a vertical supplier. And we built a high-quality company with – when we took that over, there was probably a $50 million enterprise value in that business. Our debt was right about there. And we turned the company around. We used our portfolio management strengths, and we sold that business for about $130 million at the end of last year. And what happened was it was a big success. We've got other companies in our portfolio that are in various stages of those types of turnarounds. It's easy to take a loss and move on. That's not in the best interest of our shareholders all the time. and particularly over the long term. If you manage our business on a quarter-to-quarter basis, that may be the right thing to do. But recall that MRCC is about 8% of the total assets of Monroe Capital. So we are very, very focused as a firm in getting back every dollar for every one of our funds because we take a longer-term approach to this and try to generate you know, MOLIC returns, M-O-I-C, which is, you know, returns on invested capital, as opposed to, you know, fast IRR returns. So in my view, the shareholders or MRCC are better served by Monroe using the full panoply of our infrastructure. Our 150 people, when we have deals that don't perform as well as we'd like or in the circumstance for some of these deals, when we have private equity sponsors that don't do the right thing and continue to support their companies, sometimes we have no choice but to step in and be the catalyst for change in some of these deals. So the short answer to your question is we've made, I think, tremendous progress in 2021 and moving our non accruals from 12 to six. And I anticipate 22, we will make additional progress on moving these other names down. As Aaron mentioned, we don't, we haven't put any new assets on that accrual. We like our portfolio. We think we're in a good position today. You know, we're past COVID we're past a lot of the stress. So, you know, I'm optimistic about what we can do with the remaining part of the portfolio. I appreciate the call. Thank you.
Operator
As a reminder, to ask a question, that is star, then one. I'm showing no further questions at this time. I'd like to turn the call back to Ted Koenig for closing remarks.
Ted Koenig
Good. Thank you all for appearing on the call today. I know there's lots of things happening in the world right now. Our hearts go out. to the Ukrainian people. I tweeted out something the other day, a message in support. There's no place in this world for what's been happening. And we call it for an immediate end to this craziness and the atrocities. But from our standpoint, our job is to focus as best we can on our shareholders and our investor partners And, you know, you all are a very important part of that community that we interact with, and we certainly appreciate the support from this group of people on the call today, and we will do everything in our power to continue to generate solid risk-adjusted returns and increase our NAV for MRCC. So thank you all, and we will see you and speak to you again next quarter. Thank you.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.
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