Monroe Capital Corporation

Welcome to Monroe Capital Corporation's second quarter 2022 earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call 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, August 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, uncertainty, or other factors, including but not limited to 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.

Good morning, and thank you to everyone who has joined us on our call today. Welcome to our second quarter 2022 earnings conference call. I am joined by Mick Salamini, our CFO and Chief Investment Officer. Last evening, we issued our second quarter 2022 earnings press release and filed our 10Q with the SEC. The negative economic backdrop and the more aggressive Fed action during the second quarter increased both risk premiums and volatility across asset classes, especially in the more liquid public markets. Negative segment and sentiment was also felt in the private markets, but with lower levels of volatility. Credit spreads widened in the various loan markets with the leverage loan 100 index falling 534 basis points from 97.35% of par at March 31st to 92.01% of par at June 30th. And the LCD middle market loan index declining 348 basis points from 97.06% of par at March 31 to 93.50% of par at June 30. The M&A and related financing markets had a more cautious tone in the first half of the year. According to Refinitiv, U.S. middle market loan volume totaled approximately $133 billion for the first half of the year, approximately 58% lower than 2021's full year. Activity levels though were up during the second quarter in the face of widening credit spreads and an increase in 30-day LIBOR rates from 45 basis points at March 31 to 179 basis points at June 30. Monroe's pipeline of quality actionable financing opportunities at the platform level remains strong in the face of today's economic headwinds. The Monroe platform's ability to offer underwritten solutions is a real advantage for our clients during periods of market uncertainty. Turning now to the second quarter results, we are pleased to report adjusted net investment income of $5.4 million or 25 cents per share. This is consistent with adjusted net income of $5.4 million or 25 cents per share for the first quarter. We also reported NAV of $232.1 million or $10.71 per share as of June 30th, 2022, a decrease of 59 cents per share from NAV of $244.9 million or $11.30 per share as of March 31, 2022. The decline in NAV was substantially the result of net unrealized losses on the portfolio, primarily due to market volatility and spread widening throughout the quarter. During the quarter, MRCC's debt to equity leverage increased from 1.30 times debt to equity to 1.38 times debt to equity. New origination activity at Monroe remained strong, and we expect to maintain leverage within our targeted leverage range of 1.3 to 1.4 times debt to equity. The portfolio is well positioned to benefit from an increase in the short-term interest rates, as substantially all of our borrowers were above their interest rate floors going into the third quarter. Therefore, any additional increases in interest rates should proportionally benefit our investment 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 portfolio and underwriting focuses, 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 the best in class middle market private credit asset management firm with approximately $14 billion in assets under management and over 175 employees as of June 30th, 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 Mick, who is going to walk you through our financial results.

Thank you, Ted. As of June 30th, 2022, our investment portfolio totaled $536 million, down $10 million from $546 million as of March 31st, 2022. Our investment portfolio consisted of debt and equity investments in 98 portfolio companies at June 30th, 2022, as compared to debt and equity investments in 97 portfolio companies at March 31st, 2022. During the quarter, we made investments in four new portfolio companies with fundings totaling $11.6 million. We also made a $500,000 capital contribution to SLF. In addition, we had revolver, add-on, or delayed draw fundings to existing portfolio companies totaling $9.2 million. During the quarter, we received two full payoffs totaling $9.6 million and had loan sales and other ordinary course loan repayments aggregating $9.9 million. Subsequent to the end of the second quarter and the filing of the 10-Q, we had repayments of approximately $27.9 million net of investment activity. We are well positioned to redeploy this capital carefully into attractive assets that will benefit from increases in interest rates through participating in the substantial pipeline of opportunities generated at Monroe. At June 30th, we had total borrowings of $320 million including $190 million outstanding under our revolving credit facility, and $130 million of our 2,026 notes. Total borrowings increased slightly by $1.7 million during the quarter. The revolving credit facility had $65 million of availability as of June 30th, subject to borrowing base capacity. Turning to our results. For the quarter ended June 30, 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 bid leverage and the current credit performance at MRCC, we believe that on a run rate basis, our adjusted NII will cover the $0.25 per share quarterly dividend, all other things being equal. As of June 30th, our net asset value was $232.1 million, which decreased from $244.9 million in net asset value as of March 31st. Our NAV per share decreased from $11.30 per share at March 31st to $10.71 per share as of June 30th. The $0.59 per share NAV decrease was substantially the result of market volatility and spread widening, which increased net unrealized losses. We experienced the same effect approximately two years ago at the outset of COVID-19. Looking to our statement of operations, total investment income was $13 million during the second quarter up from $12.5 million in the first quarter due to higher fee income partially offset primarily by lower interest income. During the second quarter, we placed no additional borrowers on non-accrual status. Total non-accruals approximate 2% of the portfolio at fair value at June 30th, down from 2.2% of the portfolio at fair value at March 31st. At June 30th, The effective yield on our debt and preferred equity portfolio was 8.5%, up from 8% at March 31st. LIBOR rates, which had been at historically low levels, rose during the quarter with one month LIBOR at approximately 179 basis points as of June 30th versus approximately 45 basis points as of March 31st. We maintain interest rate floors in nearly all our deals with the majority of floors at a level of at least 1%. As interest rates did not exceed the majority of our floors until the rate reset date at the end of June, the second quarter did not include a significant benefit in interest income from this rising rate environment. And we expect to see a more sizable impact during the third quarter. All other things being equal, a rising interest rate environment will improve the yield on our investment portfolio and increase net investment income as reference rate levels exceed interest rate floor levels. On most amendments and on virtually all of our newly originated deals, we are focused on pricing our deals as a spread to the secured overnight financing rate, or SOFR, in advance of LIBOR going away. which is expected to occur in 2023. Moving over to the expense side, total expenses for the quarter increased from $7.1 million in the first quarter to $8 million in the second quarter, primarily driven by higher incentive fees, net of associated fee waivers, and income taxes, including excise taxes, partially offset by lower interest and debt financing expense as a result of the repayment of our SBA debentures during the first quarter. Net loss for the second quarter totaled $12.4 million compared to a net loss of $4.6 million in the first quarter. Net unrealized losses on investments were $13.4 million for the second quarter, primarily driven by the market volatility and spread widening, partially offset by unrealized gains approximating $1 million on foreign currency forward contracts. As of June 30th, the SLF had investments in 62 different borrowers aggregating $195.2 million at fair value with a weighted average interest rate of 7.1%. The SLF's underlying investments are loans to middle market borrowers that are generally larger and more sensitive to market spread movements than the rest of MRC's portfolio. which is focused on lower middle market companies. The SLF's portfolio decreased in value by 3.1 percent during the quarter from 97.9 percent of amortized cost as of March 31st to 94.8 percent of amortized cost as of June 30th. During the second quarter, MRCC received income distributions from SLF of $900,000 consistent with the first quarter. As of June 30, 2022, the SLF had borrowings under its non-recourse credit facility of $129.6 million and had $45.4 million of available capacity under its credit facility subject to borrowing-based availability. I will now turn the call back to Ted some closing remarks before we open up the line for questions.