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Operator
Welcome to Monroe Capital Corporation's first quarter 2022 earnings conference call. Before we begin, I'd 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 4, 2022, these statements are not guarantees of future performance. Furthermore, 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, uncertainty, or other factors including but not limited to the risk factors described from time to time and 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. Sir, you may now begin.
Ted Koenig
Good morning and thank you to everyone who has joined us on our call today. Welcome to our first quarter 2022 earnings conference call. I am joined by Aaron Peck, our CFO and chief investment officer, and also Mick Salamini, our senior portfolio manager for MRCC. Last evening, we issued our first quarter 2022 earnings press release and filed our 10-Q with the SEC. After a very strong fourth quarter in 2021, Activity during the first quarter of 2022 slowed in the M&A and financing markets. In addition, both risk premiums and volatility increased across asset classes as concerns about the impact of inflation and global growth, a more aggressive Fed tone, ongoing supply chain issues, and geopolitical unrest in Russia and Ukraine moved investors to the sidelines, especially in the more liquid markets. In 2021, sponsored middle market loan volume grew by over 82% year over year, according to Refinitiv. And we expect the trend of direct lenders taking market share from traditional institutional lending sources will continue, especially during periods of market uncertainty, like today, when issuers are seeking certainty of execution. Monroe's ability to offer underwritten solutions is a real advantage for our clients during a variety of market environments. Our pipeline of quality, actionable financing opportunities at the platform level remains very strong in the face of today's more uncertain market backdrop. Turning now to the first quarter results, we are pleased to report adjusted net investment income of $5.4 million today. of 25 cents per share. We also reported NAV of $244.9 million or $11.30 per share as of March 31st, 2022, a decrease of 21 cents per share from NAV of 249.5 million or $11.51 per share as of December 31, 2021. The modest decline in NAV was primarily the result of a one-time book loss on the extinguishment of debt associated with the redemption of the remaining SBA debentures during the quarter and net unrealized losses on the portfolio. During the quarter, MRCC's debt to equity leverage decreased slightly from 1.35 times debt to equity to 1.30 times debt to equity. This modest decrease in leverage was primarily driven by a decrease in the size of the portfolio as a result of portfolio syndication and repayment activity near the end of the quarter. New origination activity at Monroe remains strong and we expect to modestly increase leverage to within our targeted leverage range of 1.3 to 1.4 times debt to equity. As we have discussed on prior calls, Our continued focus is on making new investments with attractive risk-return dynamics while proactively managing and constructing our portfolio. We believe that our existing portfolio companies will be able to navigate a higher interest rate environment, and they are generally well-positioned to manage the inflationary supply chain and geopolitical headwinds they are facing. 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 strategic advantage in being affiliated with a best-in-class middle market private credit asset management firm with approximately $13.5 billion in assets under management and over 160 employees as of March 31, 2022. We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive long-term NAV performance. 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. As of March 31, 2022, our investment portfolio totaled $546 million, down $15.7 million from $561.7 million as of December 31, 2021. Our investment portfolio consisted of debt and equity investments in 97 portfolio companies at March 31, 2022, as compared to debt and equity investments in 96 portfolio companies at December 31st. During the quarter, we made investments in three new portfolio companies with loan fundings totaling $5.6 million. In addition, we had revolver add-on or delayed draw fundings to existing portfolio companies totaling $16 million. During the quarter, we received three full payoffs totaling $22.4 million and had loan sales and other ordinary course loan repayments aggregating $13.8 million. At March 31st, we had total borrowings of $318.3 million, including $188.3 million outstanding under our revolving credit facility and $130 million of our 2026 notes. Total borrowings outstanding decreased by $19.6 million, primarily as a result of portfolio repayments and syndications near the end of the quarter. 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 $66.7 million of availability as of March 31st, subject to borrowing base capacity. Turning to our results. For the quarter ended March 31st, 2022, adjusted net investment income, a non-GAAP measure, was $5.4 million or 25 cents per share compared to $5.4 million or 25 cents per share in the prior quarter. When considering our target leverage and current credit performance at MRCC, we believe that on a run rate basis, our adjusted NII can cover the 25 cents per share quarterly, all other things being equally. As of March 31st, our net asset value was $244.9 million, which decreased from the $249.5 million in net asset value as of December 31st. Our NAV per share decreased from $11.51 per share at December 31st to $11.30 per share as of March 31st. The $0.21 per share NAV decrease was substantially the result of a loss on the extinguishment of debt associated with the redemption of the remaining SBA debentures during the quarter, and net unrealized losses on the portfolio. I will now turn it over to Mick Salamini, who will provide some more details on our first quarter operating performance.
Ted
Thank you, Aaron. Looking to our statement of operations, total investment income was $12.5 million during the first quarter, down from $13 million in the fourth quarter due to lower fee income and reduced prepayment gains. During the first quarter, we placed no additional borrowers on non-accrual status. Total non-accruals approximate 2.2% of the portfolio at fair value at March 31st, down from 2.6% of the portfolio at fair value at December 31, 2021, and 4.1% of the portfolio at fair value at December 31, 2020. At March 31, 2022, the effective yield on our debt and preferred equity portfolio was 8%, unchanged from December 31, 2021. LIBOR rates, which had been at historically low levels, rose during the quarter with three-month LIBOR at approximately 95 basis points as of March 31st versus approximately 21 basis points as of December 31st. We maintain LIBOR floors in nearly all our deals with the majority of floors at a level of at least 1%. All other things being equal, a rising interest rate environment will improve the yield on our investment portfolio and increase net investment income as market LIBOR levels exceed floor LIBOR levels. On most amendments and on virtually all of our newly originated deals, we are focused on pricing our deals as they spread to the secured overnight financing rate, or SOFR, in advance of LIBOR going away, which is anticipated to occur in 2023. Moving to the expense side, total expenses for the quarter decreased from $7.6 million in the fourth quarter to $7.1 million in the first quarter, primarily due to lower incentive fees, net of associated fee waivers as a result of lower net investment income. Net realized losses for the first quarter totaled $1.1 million, primarily related to the one-time book loss on the repayment of the SBA debentures, which represented the unamortized deferred financing costs on the debentures at the time of their repayment. Net change in unrealized losses for the quarter totaled $3.4 million. As discussed earlier, 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 with ING and the use of the restricted cash which was on hand in our SBIC subsidiary. While the repayment of the SBA debentures increased the level of regulatory leverage at MRCC, it slightly reduced total leverage, all other things being equal. In recent quarters, we have had substantial restricted cash in the SBIC subsidiary, 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 drag associated with the large cash balance previously held at this subsidiary and positively impact net investment income going forward. As of March 31st, the SLF had investments in 60 different borrowers aggregating $195.3 million at fair value with a weighted average interest rate of 6%. The SLF had borrowings under its non-recourse credit facility of $120.1 million and $54.9 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
Thanks, Mick. In closing, while there are a number of headwinds that are creating today's market uncertainty, we feel that MRCC is well positioned to deliver 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 an example, We put to work over $6.5 billion at the Monroe Capital Platform in 2021. We remain highly selective, focusing on market-leading businesses with high free cash flow and will continue our conservative underwriting model where we generally fund less than 5% of all the deals we review on an annual basis. We have constructed a purposefully defensive portfolio under the watch of a tenured senior leadership team, and we benefit from a large portfolio management organization that has managed credit through multiple economic cycles going back to the year 2000, over 20 years ago. As a result, we remain confident that our dividend, which is currently at a yield of approximately 10%, can be supported by consistent adjusted net investment income. We are excited about our investment portfolio and our prospects to continue to believe that Monroe Capital Corporation, which is affiliated with an award-winning, best-in-class external manager, Monroe Capital, provides a very attractive investment opportunity to our shareholders and other investors. 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. Thank you.
Operator
Thank you, speakers. Participants, we will now begin the question and answer session. To ask a question over the phone, you may press the star key followed by the number 1. To withdraw your request, you may press the pound key. Again, that's star 1 to ask a question or the pound key to withdraw your request. Speakers, our first question is from the line of Christopher Nolan of Leidenberg-Fallman. Your line is now open.
Christopher Nolan
Okay, given all the moving pieces in the economy, supply chain, inflation, likely Fed tightenings, and also your stock is trading below book, what are your thoughts in terms of the capital structure? Are you going to look for more fixed rate notes? Is a share repurchase in consideration? Any details would be helpful.
Ted Koenig
Thanks, Christopher. Good question. Everything is on the table, Christopher. We're looking at all options to increase shareholder value. So I will tell you that as soon as we make a decision, you'll know. But right now, our platform is humming. As I said in my prepared remarks, we put $6.5 billion to work in 21, first quarter of 2022. We're almost at $2 billion across the platform. And we see demand coming from traditional buyouts, liquidity investments, secondary investments. And right now we're navigating what's the best way for MRCC to participate in those transactions and increase value.
Christopher Nolan
Great. Thanks, Ted. And my follow-up question is on asset quality. Your asset quality has really improved over the last quarters. Will... If you can get your non-accruals down to, let's say, less than 1% of investments of cost, and your income would actually go up, would you start lowering the overall balance sheet leverage?
Ted Koenig
Another good question. I told you this several quarters ago, that our number one goal was to get our hands around collecting funds. you know, some of the underperforming assets, and I think we've proven that. If you look at where we were two years ago, if you look at where we were a year ago, we've done exactly what we said we were going to do. So I anticipate we will continue to make progress on that front in 2022. And, you know, once we do that, I think you're going to see income go up. I think you'll see a lot of good things from MRCC, and we can make those decisions, you know, as appropriate.
Aaron Peck
Great. And I'll just add, Chris, on the leverage side, I don't think we're really looking at leverage as tied to what happens with our non-accrual assets. So I don't think you would see any material change in our leverage strategy with regards to a reduction in non-accruals. I think we would continue to be targeting the range that Mick talked about in our presentation of 1.3 to 1.4 times total leverage. That's the current expectation.
Christopher Nolan
Okay. Thanks, Aaron.
Operator
Next question is from the line of Kevin Full of JMP Securities. Your line is now open.
Kevin Full
Hi, good morning, and thank you for taking my question. First question, originations were understandably light in the first quarter given the slowdown in M&A activity and a seasonally slower quarter overall. Can you give us a sense how origination activity is tracking so far this quarter?
Ted Koenig
Yeah, I can talk about the platform. I mean, we're seeing a fair amount of demand still. Usually what happens is Q1 and Q2 are heavy demand quarters, and then things slow a little bit in Q3, and then they pick up in Q4. We're seeing a little bit of a drop-off in Q2 from Q1, and I think that's got to do more with interest rates rising and some uncertainty over the future in the near term. There's $2.2 trillion of PE dry powder sitting on the sidelines, and there's about $750 billion of dry powder in private credit. So that's a three-to-one ratio in PE dry powder to private credit dry powder, where usually the cake-making recipe is kind of a one-to-one ratio. So there's going to be a big tailwind behind private credit. It's, I think, a function of just getting comfortable with the market. You know, there's a bunch of industries that are doing well that had kind of a COVID bump. There's other industries that have had a COVID challenge. And we transitioned our portfolio pretty much towards more of a market economy, business services, software industry. you know, things that generate consistent earnings and defensible positions. So, you know, I think we'll continue to see a steady stream of new business and originations. I know our pipeline internally has, you know, out through the end of Q2 and into Q3 a pretty full list of deals. And it's really going to be a geopolitical question. I think if you see more coming out of Russia and Ukraine, which is what the newspapers are quoting this morning, I think that's going to potentially be a driver for a more measured approach to deal flow in the U.S.
Aaron Peck
Kevin, I'll just add, MRCC specifically, we don't need to put a lot of new assets into MRCC to hit our targeted leverage. I think the challenge is always, and we talk about this every quarter, is we can absolutely control what comes in the front door, but it's more difficult to control what goes out the back door. So we try to allocate deals to MRCC that are both accretive on the yield side, accretive from a diversity standpoint, accretive from all the things Ted talked about, or positive from an industry choice based on the environment we're in, but we just don't know what's going to come out the back door. And oftentimes it comes out on the refinancing side at the very end of the quarter. And so it shows up in our ending quarter leverage. It's very common we see those repayments at end of month or end of quarter. So, you know, we're still feeling really good, even with reduced origination activity, should that be the case, that we should have plenty of opportunities that fit MRCC to grow our portfolio, and then just a matter of whether the refinancing activity slows down on what's currently held at MRCC.
Kevin Full
Okay, that makes sense. I appreciate your comments there. And then just to follow up, in regards to portfolio positioning, are there any pockets or industries that you find particularly attractive in the current climate?
Ted Koenig
Yes, I'll take a quick run at that, and then Aaron, you can follow up if you want. We really like recurring revenue right now, and these tend to be data, iCloud, subscription-based models, business service-based models, because we found that during COVID-19, those industries tended to perform the best and were able to best predict the future in those industries. Long-term contracts, sticky revenue, sticky supply relationships, key business services, key software elements for businesses. That was a very good place to be during COVID, and we had really ramped up our as a platform, our firm's exposure in those areas. And we reduced our exposure to the highly cyclical industries relating to transport, travel, leisure, you know, some of the health, elective health. And, you know, we continue to feel we're in the right spot going forward.
Aaron Peck
Yeah, and I would just add, Ted, we still also like to invest in what we believe are non-correlated businesses and which takes advantage of some of the flow that we see in specialty finance, litigation finance, and some of the less traditional assets, which we put into all of our vehicles on a measured basis. So that's a nice yield pickup and adds non-correlated risks. So we carefully and selectively will add some of that origination and have been for many years.
Kevin Full
Okay, great. I'll leave it there. Congratulations on the quarter.
Operator
Thanks, Kevin. As a reminder, it's star one to ask a question over the phone or the pound key to withdraw your request. Speaker's next question is from the line of Robert Dodd of Raymond James. Your line is now open.
Kevin
Hi, guys. Going back to a topic you kind of touched on, Ted, on improvements in asset quality. I mean, the non-equals have come down. You've made a lot of progress. You indicated that you expect to – make additional progress this year. Can you give us any, without giving anything away, I guess, any kind of what your comfort level is on where that kind of progress is going to come from? I mean, obviously Vinci got marked down a little bit in the quarter, but that happens. But what are the dynamics that make you confident that you're going to see continued growth progress in those few troubled assets that are left?
Ted Koenig
I think it's a good question. And it's a particularly relevant question from you, Robert, because two years ago, you and I had this discussion on one of these calls. And I promised you then that we were going to deal with this aggressively. And that was my number one priority. And, you know, we dealt with it aggressively. And exactly what I said at the time two years ago has occurred. we've got a few credits, not a lot, but a few credits that we're very focused on. And as I mentioned to you before, as opposed to moving them out at a mark or less, we've decided as a firm the best thing to do is to generate the highest possible recovery that we can in those assets. Now, mind you, these assets are not only in MRCC. Many and most of all these assets are in other funds across the firm. MRCC has a small position. Other investment funds have larger positions. We have a portfolio management team of 10 people that are focused on our watch list and our high-risk credits. It's as good of a team as there is in the industry. If you look at what we've been able to do over the last two years... in bringing that exposure in instances where private equity firms, for one reason or another, have decided not to invest. We've taken over and very often changed out management, changed direction of businesses, added businesses, acquired businesses, supplemented management, brought in consulting, brought in new investment strategies. Across the board, our work I think has been validated by the success we've had in the last two years. You know, we've got a couple of positions left that, you know, we're making good progress on. There's a number of alternatives, decisions we're going to be making here over the next few quarters. And I'm hopeful that because of the hard work we've done over the last couple of years, that we're going to see some, some good results and nice results. So, You know, I can't tell you that it's a linear focus, but if you look at the last two years, you know, we've made a heck of a progress on, you know, reducing this. And my goal, like you say, is to get this down below 1% here in the near term.
Kevin
I appreciate that, and I do remember that conversation a while back. One additional one, if I can. I mean, you mentioned your recurring revenue loans. I mean, Monroe, the platform has, if I remember right, a recurring revenue loan. dedicated fund, obviously MRCC can participate in those deals as well, et cetera. How do you think you're positioned relative in your approach to ARR versus obviously, you know, at the large end of the, you know, there's mega platforms out there doing, you know, multi-billion dollar, you know, LBOs for SaaS businesses that you're not necessarily participating or focusing on. You can, but you're not, leading those kind of deals currently. How does your approach differ from that mega end of the market?
Ted Koenig
Yeah, good question. There's about a half dozen platforms, Monroe being one of them, that have developed a real expertise in SaaS lending and in ARR lending and in software. Like everything, we've chosen the market that we want to play in. And the market that we like to play in is the more fragmented middle market, lower middle market place. So as opposed to underwriting several billion-dollar transactions of SaaS investments, we're underwriting $200 million to $300 million to $400 million investments in the SaaS area. These are high-quality companies with high-quality sponsors. Very often, some of the larger sponsors are with dual strategies, one at the higher end of the market, one at the lower end of the market, to build these companies. The way SaaS companies get built today, it's very hard to go acquire a platform because most of these platforms are trading at 12 to 13 to 14 times revenue today. So the way most of the private equity firms are building SaaS platforms are to start with the smaller firms, something that they can acquire for between $200 and $500 million. And again, remember, it's usually 30% or so debt and 70% equity, and then doing a number of add-on transactions, tuck-ins, bolt-ons to create a very large platform. And we are very, very involved in that business. We did as a platform last year about $2.5 billion in investments in this space. We have a dedicated team based in San Francisco and Chicago with origination, sourcing, underwriting, credit, self-contained in that team. And then the larger Monroe platform brings its underwriting and consistent credit expertise to bear. and it's a significant part of our portfolio. I'd say probably of our $14 billion, $15 billion today, we're probably close to 25%, 30% in this asset class. So it's an important part of the overall firm. MRCC shares in all of those deals, and they've been our best-performing deals if you look at the last four or five years in the firm.
Kevin
I appreciate that, Carla. Thank you, Ted.
Operator
Thank you, participants. I'll now turn the conference back over to CEO Ted Koenig for final remarks.
Ted Koenig
Thank you all for joining us today. As I promised to you, we're going to continue to block and tackle and do what we do best, which is generate current return. I appreciate the questions. I appreciate the line of questions, even if they're multi-year questions, as Robert and I talk to from time to time. And I'm very much looking forward to speaking to all of you again next quarter. In the meantime, look for Aaron and Mick to reach out intra-quarter to chat further and provide you with more information that you'd like on a one-on-one basis. Thank you.
Operator
This concludes today's conference call. Thank you all for joining. You may now disconnect.
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