This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Good day, everyone. You're holding for today's Monroe Capital Corporation's fourth quarter and full year 2022 earnings conference call. At this time, we're still admitting additional participants and should be starting shortly. We do appreciate your patience and please continue holding. Thank you. Welcome to Monroe Capital Corporation's fourth quarter and full year 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 forward-looking statements, including statements regarding our goals, strategies, beliefs, future potential, operating results, and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions, and projections, as of today, March 2, 2023, 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 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 these forward-looking statements. I will now turn the call over to Ted Kamig, Chief Executive Officer of Monroe Capital Corporation. Please go ahead, sir.
spk06: Good morning, and thank you to everyone who has joined us on our call today. Welcome to our fourth quarter and full year 2022 earnings conference call. I am joined by Nick Salamini, our CFO and chief investment officer, and Alex Parmasek, our deputy portfolio manager. Last evening, we issued our fourth quarter and full year 2022 earnings press release and filed our 10K with the SEC. I'd like to open up with some thoughts and observations on the market and the general economic environment. In the fourth quarter of 2022 and in the early 2023 period, compelling opportunities for MRCC have begun to emerge in response to the market volatility and the wary tone of the M&A and financing markets. As M&A and financing markets work through today's macroeconomic trends in what we consider to be a year of transition, Middle market financing volume totaled almost two hundred and eighty billion dollars in two thousand twenty two according to Refinitiv. This mark was approximately twelve percent behind the record setting volume in two thousand twenty one but still well above historical averages. As a firm Monroe made approximately six billion dollars of new investments in two thousand twenty two. In response to the current market volatility, we are executing on transactions that not only have enhanced economics, but that also come with reduced leverage as well as more favorable pricing terms and documentation, a trend that began in the third quarter of last year. With current market conditions showing us lower leverage levels coupled with higher equity cushions, we will selectively pursue assets in attractive markets as older vintage assets repay. Our view is that 2023 will present itself as one of the most attractive vintages for deploying private capital, private credit capital and that MRCC is very well positioned especially as market share continues to move toward direct lenders away from traditional regulated lenders. While we are excited about the opportunities ahead, we are also mindful that the higher interest rate environment and anticipated broader macroeconomic headwinds could potentially present stress within private credit loan portfolios. We've intentionally built a portfolio at MRCC that is focused on investments at the top of the capital structure with meaningful equity value cushions across resilient sectors, recession resilient sectors. We are confident that our defensive portfolio has been constructed to withstand those challenges, and we are already seeing signs of resilience. Many of our borrowers have begun to experience relief as input costs and the supply chain have altered course towards normalization from what we've seen last year. As such, our portfolio has been able to demonstrate credit quality stability despite the substantial interest rate increases from last year. To supplement the defensive portfolio makeup, we maintain a deep and experienced portfolio management team. This team works in conjunction with our core investment teams to execute a key component of our portfolio management strategy, which is early intervention. This allows us to get ahead of potential challenges, and we will continue to take a proactive approach to navigating through this uncertain environment. Ultimately, we believe that we are positioned to actively maximize outcomes while remaining a trusted financial partner to our clients. I will now transition to a snapshot of our fourth quarter results. Adjusted net investment income was $5.6 million or 26 cents per share down from adjusted net income of $7.1 million or 33 cents per share for the third quarter, which included one-time benefits of the receipt of previously unrecorded interest income on the successful repayment of our investment in Curion Holdings. Excluding the impact of this one-time benefit from the receipt of previously unaccrued interest income associated with Curion during the third quarter, adjusted net investment income in the fourth quarter grew by 1.8 percent. We also reported any V of two hundred and twenty five million dollars or ten dollars and thirty nine cents per share as of December thirty first two thousand twenty two. A decrease of four cents per share from any V of two hundred and twenty six million. Or ten dollars and forty three cents per share as of September thirtieth two thousand twenty two. This decline. And NAV was substantially the result of mark-to-market losses on the investment in MRCC Senior Loan Fund 1, which we refer to as our SLF. The decrease in value at the SLF was driven by these mark-to-market unrealized losses on SLF investments, which are loans to traditional upper-middle-market borrowers and have continued to experience higher volatility in valuations as a result of more recent interest rate increases. On a net basis, the valuations on the remainder of the portfolio remained relatively flat to September 30th, 2022. During the quarter, MRCC's debt to equity leverage increased from 1.33 times debt to equity to 1.49 times debt to equity, slightly above our long-term target range of 1.3 to 1.4 times. The increase in leverage was primarily driven by strong investment activity during the fourth quarter, coupled with lighter than expected portfolio payoff activity. We continue to focus on managing our investment portfolio and selectively redeploying capital resulting from repayments. The significant majority of our 105 portfolio companies are performing in line with expectations. Based on current and forecasted market interest rates, interest coverage is generally solid across our existing portfolio. In addition, we believe that the modest weighted average loan to value in the portfolio provides us with strong downside protection and cushion to these investments. And our portfolio will continue to benefit from the meaningful amount of equity invested in our companies. New deals continue to undergo a comprehensive underwriting process that includes downside stress scenarios to assess performance volatility, and cushion from rising interest rates, margin pressures, and an overall economic slowdown. MRCC enjoys a strong strategic advantage in being affiliated with the best-in-class award-winning middle market private credit asset management firm with approximately $16 billion in assets under management and approximately 200 employees as of December 31st, 2022. Our dividend coverage continues to trend positively. We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive long-term NAV performance despite anticipated macro market headwinds and mark-to-market unrealized adjustments. At this point, I will turn the call over to Mick who is going to walk you through the financial results in greater detail.
spk02: Thank you, Ted. As of December 31st, 2022, our investment portfolio totaled $541 million, top $33 million from $508 million as of September 30th, 2022. Our portfolio consisted of debt and equity investments in 105 portfolio companies as of December 31st, 2022, as compared to debt and equity investments in 98 portfolio companies as of September 30th, 2022. During the quarter, we made investments in eight new portfolio companies with fundings totaling $21.7 million at a weighted average interest rate of 11.2 percent. We also made nominal equity investments in two of these portfolio companies. Further, we had revolver or delayed draw fundings and add-ons to various existing portfolio companies, totaling $18.3 million. During the quarter, we received one full payoff, which was for a nominal immaterial amount. We also incurred partial and normal course paydowns of $9 million and had no sales this quarter. We are well positioned to deploy capital from future repayments carefully into attractive assets that will benefit from increases in interest rates and more favorable structures through participating in the substantial pipeline of opportunities generated at Monroe. As of December 31st, we had total borrowings of $334.6 million, including $204.6 million outstanding under our floating rate revolving credit facility and $130 million of our 4.75% fixed rate 2026 notes. Total borrowings outstanding increased by $33.4 million during the quarter. The revolving credit facility had $50.4 million of availability as of December 31st subject to borrowing base capacity. Now turning to our financial results for the quarter ended December 31st, 2022. Adjusted net investment income, a non-GAAP measure was $5.6 million or 26 cents per share compared to $7.1 million or 33 cents per share in the prior quarter. While the average portfolio yield increased during the quarter ended December 31st, 2022, adjusted net investment income declined primarily as a result of a one-time benefit of the receipt of previously unaccrued interest income associated with the repayment of Curion Holdings that had previously been on non-accrual status. which occurred in the quarter ending September 30th, 2022. Excluding the one-time benefit of Curion from the third quarter results, adjusted net investment income increased by 1.8 percent or $100,000 during the fourth quarter. When considering our targeted leverage, the rising interest rate environment, the favorable percentage of our fund leverage at a fixed rate, and the current credit performance at MRCC, we believe that on a run rate basis, our adjusted net investment income will comfortably cover the current quarterly dividend, all things being equal. As of December 31st, our net asset value was $225 million, which decreased from the $226 million in net asset value as of September 30th. our NAV per share decreased from $10.43 per share at September 30th to $10.39 per share as of December 31st. The $0.04 per share NAV decrease was substantially the result of mark-to-market losses on the investment in MRCC Senior Loan Fund 1. The decrease in value at the SLF was driven by these mark-to-market losses on the SLF investments, which are loans to traditional upper-middle market borrowers and have continued to experience higher volatility in valuations. Valuations on the remainder of the portfolio remain relatively flat on a net basis compared to the prior quarter. Looking to our statement of operations, Total investment income was $15.2 million during the fourth quarter, down from $15.9 million in the third quarter. Excluding the one-time third-quarter benefit of $2 million in interest income on Curion, investment income actually increased by $1.3 million, or 9.4 percent, primarily as a result of increase in portfolio yield and average portfolio size. In addition, During the quarter, we continued to see the impact of increases in interest rates on our investment income as all of the portfolio borrowers exceeded their benchmark interest rate floors during the quarter, and we were fully benefiting from base rate increases across the portfolio during the fourth quarter. At December 31st, the effective yield on our debt and preferred equity portfolio was 11%, up from 9.9% at September 30th. SOFR rates, which have continued to increase in the latter half of the year, rose during the quarter with one month SOFR at approximately 406 basis points as of December 31st versus approximately 314 basis points as of September 30th. All things being equal, a rising interest rate environment will continue to improve the yields on our investment portfolio and increase net investment incomes. At December 31st, we had four investments on non-accrual status, representing .5 percent of the portfolio at fair market value, compared to four investments on non-accrual status, which represented .7 percent of the portfolio at fair market value at September 30th. Our performance has steadily improved in this area as we have been working out the underperforming companies in our portfolio as we said we would on previous calls. This is the direct result of the turnaround and workout capabilities of our external manager, Monroe Capital, and the resources they have provided to us. During the fourth quarter, we placed no additional borrowers on non-accrual status. Further, the investment performance risk rating distribution has remained relatively stable. Moving over to the expense side, total expenses slightly decreased from $9.7 million in the third quarter to $9.6 million in the fourth quarter, primarily driven by lower income taxes, primarily associated with blocker entities that hold certain of the company's equity investments and lower incentive fees. These decreases were mostly offset by an increase in interest and other debt financing expenses due to the rising interest rate environment and higher average debt outstanding. Net loss for the quarter totaled $1 million compared to a net loss of $7 million in the third quarter. Net realized and unrealized losses on investments were $300,000 for the fourth quarter. Other net losses totaling approximately $700,000 during the fourth quarter were related to foreign currency forward contracts used to hedge currency exposure on certain investments. As of December 31st, the SLF had investments in 60 different borrowers aggregating $183.2 million at fair value with a weighted average interest rate of 9.7 percent. 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 MRCC's portfolio, which is focused on lower middle market companies. The SLF portfolio decreased nominally in value by 10 basis points during the quarter from 93.6 percent of amortized costs as of September 30th to 93.5 percent of amortized costs as of December 31st. Additionally, SLF realized on its previously recorded unrealized loss on Port Townsend Holding Company during the quarter. During the fourth quarter, MRCC received income distributions from SLF of $900,000, consistent with the prior quarters. As of December 31st, 2022, the SLF had borrowings under its non-recourse credit facility of $122.2 million and $52.8 million of available capacity under its credit facility, subject to borrowing base availability. At this point, I will turn the call back to Ted for some closing remarks before we open the line for questions.
spk06: Thanks, Mick. In closing, we believe that we are well positioned to emerge from a transitional 2022 to capitalize on compelling opportunities for private credit and navigate the market uncertainty that may lie ahead. Our average portfolio asset yield is an excess of 11% on current deals which portends well for the rest of 2023 the depth and experience of our originations and underwriting teams will allow us to continue to selectively deploy capital in sectors that we have demonstrated resiliency to economic cycles as we remain active in the market we expect to realize the benefits of heightened demand for private capital from lower and overall middle market companies including but not limited to receiving more favorable economics and deal structures this strategy is consistent with our historical focus on providing well protected well-structured senior secured first lien loans to companies with insulated market positions and reliable business models led by strong management teams and reliable sponsors we will continue to lean on our team and core underwriting principles to generate attractive and differentiated risk-adjusted returns while navigating the uncertainties of 2023 and beyond. MRCC is well positioned to deliver stable and consistent dividends for our shareholders, especially where our earnings and dividends stand to benefit from an increase in market interest rates. We are excited about our investment portfolio And our prospects to continue and 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 am going to ask the operator to open up the call now for questions.
spk12: Thank you. At this time, if you do have a question, please signal us by pressing star 1. If you would like to withdraw your question, please press star 1 again. Again, that will be star 1 for questions. We'll pause for just a moment. We'll hear first today from Kevin Fultz with JMP Securities.
spk18: Hi, good morning and thank you for taking my questions. I noticed that PIC income represented about 14.7% of interest income in the fourth quarter, which was up meaningfully from 7.8% in the prior quarter. I'm curious if the increase is driven by new deals that were maybe structured with a PIC component, or if that was possibly amendment-related. Just any insight would be helpful.
spk02: Sure. Good morning, Kevin, and thank you for the question. So we did see an increase in PIC income during the course of the quarter. The primary reason for the increase in PIC income was the election by one of our borrowers and its option to exercise that PIC toggle during the quarter. If I look at our kind of PIC income trends quarter over quarter, year over year, we've kind of been in that, you know, 12 to 15% range. So we feel comfortable with kind of where our PIC income is as a component of our total investment income. But that was the main cause for the increase during the quarter.
spk18: Okay, thanks. And I guess just to continue kind of on that line of questioning, I'm curious if you've seen an increase in amendment requests, I guess, in the December quarter and how that's trended recently.
spk02: Yeah, really good question, Kevin. During the fourth quarter, we didn't really see any meaningful, notable increase in amendment activity in our portfolio. Most of the amendment activity was related to, you know, transaction activity related to you know, add-on transactions and technical amendments related, you know, SOFR and LIBOR transitions, but no meaningful amendment activity across our portfolio.
spk18: Okay, that's great to hear. And then one more if I can. You know, I noticed that other G&A expenses were up slightly in the fourth quarter. I guess, can you just discuss what drove the increase?
spk17: I'm just trying to get a sense if we should be scaling G&A expense in our model.
spk02: Yeah, so nothing meaningful in terms of that slight G&A bump. I would guide you towards kind of a historical pattern on a G&A front as you think about your model.
spk18: Okay, great. I appreciate your time this morning. I'll leave it there.
spk09: Thanks, Kevin.
spk12: We'll hear next from Christopher Nolan with Leidenberg-Fallman.
spk11: Hey, guys. The SLF, any of the borrowings by the SLF secured by any MRCC investments in the main portfolio?
spk07: They are not.
spk11: Okay. And then I guess in terms of asset liability management, what you're thinking right now, I mean, if the view was if the Fed would start easing for whatever reason, would MRCC look ahead time to get more fixed rate loans or put on hedges? What's the thinking around that?
spk02: Yeah. So we're, you know, we're, we're, we're mindful of, you know, kind of capital structure. We're, you know, we've got a very, very favorable capital structure in terms of that note. We did that, that, that matures in 2026, the 4.375 fixed rate note, but we are, you know, we have an internally dedicated capital markets team that we work with quite closely to think about kind of, you know, the liability side of our balance sheet and our, you know, keeping an eye on the markets to see, you know, if and when, you know, we might fine tune our approach to the right hand side of our balance sheet, but nothing in that.
spk01: Final question.
spk06: Yeah, Christopher, you know, this is from my perspective, I think we're going to see some continue to see some slight increases here. And overall, Fed funds increases. Inflation is still not where they want it. And they've signaled that we're likely to see more upside in interest rates than downside right now in the near term.
spk11: And then I guess the final question is strategy related. Monroe Capital announced recently acquiring the management of another BDC company. What's the strategy overall there, and how will this BDC and MRCC work together, if at all, together?
spk06: Good question. We've gotten a fair amount of discussions with media on this. About two weeks ago, we announced that Monroe, the private asset management company, will acquire the investment advisor of another BDC, Horizon Technology Finance, NASDAQ, HRCN. That's a venture debt business. The management team there is comprised of about 38 people. They've been in business for about 20 years. Best in class track record history. They manage about a billion dollars today in a combination of their BDC and institutional capital. And I've been looking at the space for quite a while on behalf of Monroe. I think that the venture debt space in general is attractive in private credit, particularly in times when the IPO markets are closed, exits are difficult, fundraising is difficult for venture firms. Instead of doing large down round equity financings, many of these high growth companies will look to credit Instead, pricing is good, leverage is good, and enterprise value, low enterprise value risk. So, it's a, it was an acquisition, an opportunistic acquisition opportunity for us as a firm to continue to develop asset class categories that we can offer our institutional investors. I don't think this will be an MRCC. I think it's a different type of asset class, but for our other funds and our institutional investors at our advisor level at Monroe, this represents a very attractive opportunity for us to take advantage of a tactical place in the market where we can earn excess alpha.
spk09: Great. Thanks, Ted. That's it for me. Thanks, Chris.
spk12: And again, for questions at this time, that is star one. We'll hear now from Robert Dodd with Raymond James.
spk05: Hi, guys. Question on the SLF. The earnings, obviously, I mean, its portfolio is rate sensitive as well. So the earnings within that SLF have increased about, yeah, north of 20% from Q1 to Q4. But the dividend hasn't moved. Obviously, there's been markdowns within the SLF. But should we think of the dividend opportunity from the SLF to MRCC as kind of having a high watermark or something like that, where, you know, the book equity has to get back above $80 million before you get 50% of the earnings, because obviously in the fourth quarter, the payout ratio was, the dividend to you is like 37% of the earnings, that'd be around 50% of it. So can you give us any color on how we should think about that, given that the earnings at the SLF are quite rate sensitive as they are at MRCC?
spk02: They are quite rate sensitive, you are right. I would I would guide you towards our kind of $900,000 per quarter level as a run rate for the SLF. That's the guidance I would offer you on that front.
spk05: But can you give us any color about why? Is it the markdowns and those need to be recovered or what's the decision? I realize it's not solely your decision. or the MRCP decision. But there is obviously, there has been an increasing mismatch between the earnings power within that and the dividend paid out.
spk04: Is there a scenario where that changes?
spk02: Yeah, I think we're mindful of obviously future performance potential of the portfolio. We did have a realized loss in the portfolio last quarter. uh in the form in the form of port townsend and when we consider our you know our our dividend uh distribution from the slf uh to both both partners uh both us and in national life we consider portfolio performance uh in the context of that of that of that distribution yield um and it's something that we assess you know you know as we always do when we make that dividend determination.
spk05: Got it, got it. Okay, I appreciate that. And then just back to the horizon, Chris already asked the question, but I mean, is there, I mean, you have some recurring revenue software businesses within MRCC. You obviously have an entirely different fund that focuses on that. So, you know, MRCC has sometimes taken opportunity to take advantage of other areas of expertise within Monroe. I mean, that is the place. So is there room within MRCC for a small sleeve of venture debt, or is that just something you don't consider appropriate for this vehicle at all?
spk06: That's a great question, Robert. We manage $16 billion across our platform. MRCC gets the benefit of, you know, the entire platform. And, you know, what we try to do is, you know, our allocation policies provide allocations of each deal we do across the platform when it's appropriate, you know, for the specific fund or the investment vehicle. I anticipate that from time to time, there's going to be highly attractive and accretive deals that we originate across the platform, whether it's, you know, from Horizon, whether it's in our software lending vertical, healthcare, sports, media, entertainment. And when the appropriate investment fits within the MRCC mandate as managed by our portfolio managers, Mick and Alex, You know, you may see, you know, these assets, but, you know, we've been pretty good historically at sticking to our knitting in MRCC and developing a high-quality senior secured portfolio that's got low leverage and good interest coverage. You know, as you know, venture debt businesses don't necessarily have those two qualities. We may have good growth prospects. We may have good loan-to-value, good loan-against-enterprise value, but interest coverage and leverage are not usually the cornerstones of a venture debt portfolio. So we're going to tread slowly, I think, with MRCC in the venture debt area.
spk09: Got it. Thank you for that comment.
spk10: And from B. Riley, we'll hear next from Bryce Rowe.
spk13: Hi. Good morning. I wanted to ask about balance sheet leverage and maybe just future visibility into repayment activity to help fund newer investments. So obviously you had balance sheet leverage tick up above the high end of your range. Certainly understand that can happen, you know, from time to time, but just curious if we should expect, you know, balance sheet leverage to stay at current levels, or if you have some visibility into repayment activity that made you comfortable, you know, kind of going above the high end of the target.
spk02: So, good morning, Bryson. Great question. So, you know, as we manage the portfolio, we're looking at, you know, we're looking into the future in terms of repayments we expect from our borrowers. We're, you know, in close contact with our, you know, over 100 borrowers. We're also looking into our origination pipeline, and we're trying to, you know, to kind of cadence those two things, if you will. We had really, really strong origination activity during the fourth quarter, and our payoffs, projected payoffs, came lighter than expected as we looked at our payoff pipeline. So we came in at the end of the year, you know, above our leverage targets. But the way I would think about this going forward is we still maintain our long-term, you know, leverage target of, you know, 1.3 to 1.4 and would guide you in the short term to kind of the top end of that range, which is where we, you know, are targeting to manage a portfolio. Okay. Okay. That's helpful.
spk13: And then maybe one more for you, Mick, just around credit quality. I mean, obviously you had a pretty steady non-accrual number, and I think one investment kind of makes up the bulk of what's left there in that non-accrual bucket. But beyond that, can you talk about maybe any kind of positive or negative migration you saw within the quarter and how it might relate to kind of internal risk ratings?
spk02: Yeah, so... You know, we did make further, you know, a little bit more further progress on non-accruals during the quarter. We received about a $600,000 pay down on Bluestem Brands, which is one of our four non-performers. So, you know, pleased with that. In terms of portfolio migration during the course of the quarter, if you look at our rating distribution, we were up about $7 or $8 million in our three-rated category during the course of the quarter. So we had a couple of a few credits that migrated into our three rating during the quarter. You recall that we rate deals on a one through five basis, but had a few names migrate into the three categories during the quarter. But overall, you know, feel really comfortable with, you know, the quality of the portfolio, the coverage ratio on an interest basis that our portfolio companies are reporting, and believe that the portfolio is generally sound.
spk13: Okay. That's, that's helpful. And I mean, just to maybe a follow-up to that, Nick, um, what, you know, the, the, the ones that did migrate into the three, um, what is there, I assume that's idiosyncratic. What's, what's going on there that, um, you know, that, that.
spk02: Yeah. So, so, so, so, so good. So, so good question. So, um, you know, the, you know, the oil companies are still experiencing, you know, uh, some effect from, you know, rising input costs, rising freight costs, things like that. So the companies that, you know, have migrated in that kind of three category have seen some margin impact because of that. And in those cases, you know, those companies are very, very focused on, you know, margin improvement by, you know, the kinds of actions that companies typically take. passing price increases ultimately along to their customer, strategically reducing costs, things like that. What you don't see in our kind of broad, you know, portfolio risk rating distributions is that we actually also during the quarter had migration out of the three into the two category. as some of our companies that experienced some of the early effects of inflation and supply chain were able to effectively, you know, pass along price increases, execute strategic initiatives, and get margins kind of back in line. So, you know, we continue to, you know, see kind of an evolving, you know, landscape as companies, you know, adapt and adjust to market and economic conditions.
spk13: Got it. That makes a ton of sense. Appreciate the comments this morning.
spk12: Thanks.
spk09: Thank you.
spk12: And with no other questions at this time, I'd like to turn things back to the company for closing remarks.
spk06: Thank you all for joining us today. We enjoyed the conversation as well as the questions, and we look forward to speaking again next quarter. So be safe, and we'll speak to you soon. And like always, to the extent anyone has any questions in the interim before our next quarterly call, feel free to reach out to Mick directly. And we're always willing and wanting to engage.
spk09: So thank you all. Have a good day.
spk12: And that will conclude today's conference. Again, thank you all for joining us. You may now disconnect. you Thank you. Thank you. Thank you. Thank you.
spk00: Bye.
spk12: Welcome to my World Capital Corporation's fourth quarter and full year 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 forward-looking statements, including statements regarding our goals, strategies, beliefs, future potential, operating results, and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions, and projections, as of today, March 2, 2023, 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 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 these forward-looking statements. I will now turn the call over to Ted Kamig, Chief Executive Officer of Monroe Capital Corporation. Please go ahead, sir.
spk06: Good morning, and thank you to everyone who has joined us on our call today. Welcome to our fourth quarter and full year 2022 earnings conference call. I am joined by Nick Salamini, our CFO and chief investment officer, and Alex Parmasek, our deputy portfolio manager. Last evening, we issued our fourth quarter and full year 2022 earnings press release and filed our 10K with the SEC. I'd like to open up with some thoughts and observations on the market and the general economic environment. In the fourth quarter of 2022 and in the early 2023 period, compelling opportunities for MRCC have begun to emerge in response to the market volatility and the wary tone of the M&A and financing markets. As M&A and financing markets work through today's macroeconomic trends in what we consider to be a year of transition, Middle market financing volume totaled almost two hundred and eighty billion dollars in two thousand twenty two according to Refinitiv. This mark was approximately twelve percent behind the record setting volume in two thousand twenty one but still well above historical averages. As a firm Monroe made approximately six billion dollars of new investments in two thousand twenty two. In response to the current market volatility, we are executing on transactions that not only have enhanced economics, but that also come with reduced leverage as well as more favorable pricing terms and documentation, a trend that began in the third quarter of last year. With current market conditions showing us lower leverage levels coupled with higher equity cushions, we will selectively pursue assets in attractive markets as older vintage assets repay. Our view is that 2023 will present itself as one of the most attractive vintages for deploying private capital, private credit capital, and that MRCC is very well positioned, especially as market share continues to move toward direct lenders away from traditional regulated lenders. While we are excited about the opportunities ahead, we are also mindful that the higher interest rate environment and anticipated broader macroeconomic headwinds could potentially present stress within private credit loan portfolios. We've intentionally built a portfolio at MRCC that is focused on investments at the top of the capital structure with meaningful equity value cushions across resilient sectors, recession resilient sectors. We are confident that our defensive portfolio has been constructed to withstand those challenges, and we are already seeing signs of resilience. Many of our borrowers have begun to experience relief as input costs and the supply chain have altered course towards normalization from what we've seen last year. As such, our portfolio has been able to demonstrate credit quality stability despite the substantial interest rate increases from last year. To supplement the defensive portfolio makeup, we maintain a deep and experienced portfolio management team. This team works in conjunction with our core investment teams to execute a key component of our portfolio management strategy, which is early intervention. This allows us to get ahead of potential challenges, and we will continue to take a proactive approach to navigating through this uncertain environment. Ultimately, we believe that we are positioned to actively maximize outcomes while remaining a trusted financial partner to our clients. I will now transition to a snapshot of our fourth quarter results. Adjusted net investment income was $5.6 million, or 26 cents per share, down from adjusted net income of $7.1 million, or 33 cents per share, for the third quarter, which included one-time benefits of the receipt of previously unrecorded interest income on the successful repayment of our investment in Curion Holdings. Excluding the impact of this one-time benefit from the receipt of previously unaccrued interest income associated with Curion during the third quarter, adjusted net investment income in the fourth quarter grew by 1.8 percent. We also reported any V of two hundred and twenty five million dollars or ten dollars and thirty nine cents per share as of December thirty first two thousand twenty two. A decrease of four cents per share from any V of two hundred and twenty six million. Or ten dollars and forty three cents per share as of September thirtieth two thousand twenty two. This decline. And NAV was substantially the result of mark-to-market losses on the investment in MRCC Senior Loan Fund 1, which we refer to as our SLF. The decrease in value at the SLF was driven by these mark-to-market unrealized losses on SLF investments, which are loans to traditional upper-middle-market borrowers and have continued to experience higher volatility in valuations as a result of more recent interest rate increases. On a net basis, the valuations on the remainder of the portfolio remained relatively flat to September 30, 2022. During the quarter, MRCC's debt to equity leverage increased from 1.33 times debt to equity to 1.49 times debt to equity, slightly above our long-term target range of 1.3 to 1.4 times. The increase in leverage was primarily driven by strong investment activity during the fourth quarter, coupled with lighter than expected portfolio payoff activity. We continue to focus on managing our investment portfolio and selectively redeploying capital resulting from repayments. The significant majority of our 105 portfolio companies are performing in line with expectations. Based on current and forecasted market interest rates, interest coverage is generally solid across our existing portfolio. In addition, we believe that the modest weighted average loan to value in the portfolio provides us with strong downside protection and cushion to these investments. And our portfolio will continue to benefit from the meaningful amount of equity invested in our companies. New deals continue to undergo a comprehensive underwriting process that includes downside stress scenarios to assess performance volatility, and cushion from rising interest rates, margin pressures, and an overall economic slowdown. MRCC enjoys a strong strategic advantage in being affiliated with the best-in-class award-winning middle market private credit asset management firm with approximately $16 billion in assets under management and approximately 200 employees as of December 31st, 2022. Our dividend coverage continues to trend positively. We will continue to focus on generating adjusted net investment income that meets or exceeds our dividend and positive long-term NAV performance despite anticipated macro market headwinds and mark to market unrealized adjustments. At this point, I will turn the call over to Mick who is going to walk you through the financial results in greater detail.
spk02: Thank you, Ted. As of December 31st, 2022, our investment portfolio totaled $541 million, top $33 million from $508 million as of September 30th, 2022. Our portfolio consisted of debt and equity investments in 105 portfolio companies as of December 31st, 2022, as compared to debt and equity investments in 98 portfolio companies as of September 30th, 2022. During the quarter, we made investments in eight new portfolio companies with fundings totaling $21.7 million at a weighted average interest rate of 11.2 percent. We also made nominal equity investments in two of these portfolio companies. Further, we had revolver or delayed draw fundings and add-ons to various existing portfolio companies, totaling $18.3 million. During the quarter, we received one full payoff, which was for a nominal immaterial amount. We also incurred partial and normal course paydowns of $9 million and had no sales this quarter. We are well positioned to deploy capital from future repayments carefully into attractive assets that will benefit from increases in interest rates and more favorable structures through participating in the substantial pipeline of opportunities generated at Monroe. As of December 31st, we had total borrowings of $334.6 million, including $204.6 million outstanding under our floating rate revolving credit facility and $130 million of our 4.75% fixed rate 2026 notes. Total borrowings outstanding increased by $33.4 million during the quarter. The revolving credit facility had $50.4 million of availability as of December 31st subject to borrowing base capacity. Now turning to our financial results for the quarter ended December 31st, 2022. Adjusted net investment income, a non-GAAP measure was $5.6 million or 26 cents per share compared to $7.1 million or 33 cents per share in the prior quarter. While the average portfolio yield increased during the quarter ended December 31st, 2022, adjusted net investment income declined primarily as a result of a one-time benefit of the receipt of previously unaccrued interest income associated with the repayment of Curion Holdings that had previously been on non-accrual status. which occurred in the quarter ending September 30th, 2022. Excluding the one-time benefit of Curion from the third quarter results, adjusted net investment income increased by 1.8 percent or $100,000 during the fourth quarter. When considering our targeted leverage, the rising interest rate environment, the favorable percentage of our fund leverage at a fixed rate and the current credit performance at MRCC, we believe that on a run rate basis, our adjusted net investment income will comfortably cover the current quarterly dividend, all things being equal. As of December 31st, our net asset value was $225 million, which decreased from the $226 million in net asset value as of September 30th. our NAV per share decreased from $10.43 per share at September 30th to $10.39 per share as of December 31st. The $0.04 per share NAV decrease was substantially the result of mark-to-market losses on the investment in MRCC Senior Loan Fund 1. The decrease in value at the SLF was driven by these mark-to-market losses on the SLF investments, which are loans to traditional upper-middle market borrowers and have continued to experience higher volatility in valuations. Valuations on the remainder of the portfolio remain relatively flat on a net basis compared to the prior quarter. Looking to our statement of operations, Total investment income was $15.2 million during the fourth quarter, down from $15.9 million in the third quarter. Excluding the one-time third-quarter benefit of $2 million in interest income on Curion, investment income actually increased by $1.3 million, or 9.4 percent, primarily as a result of increase in portfolio yield and average portfolio size. In addition, During the quarter, we continued to see the impact of increases in interest rates on our investment income as all of the portfolio borrowers exceeded their benchmark interest rate floors during the quarter, and we were fully benefiting from base rate increases across the portfolio during the fourth quarter. At December 31st, the effective yield on our debt and preferred equity portfolio was 11%, up from 9.9% at September 30th. SOFR rates, which have continued to increase in the latter half of the year, rose during the quarter with one month SOFR at approximately 406 basis points as of December 31st versus approximately 314 basis points as of September 30th. All things being equal, a rising interest rate environment will continue to improve the yields on our investment portfolio and increase net investment incomes. At December 31st, we had four investments on non-accrual status, representing .5 percent of the portfolio at fair market value, compared to four investments on non-accrual status, which represented .7 percent of the portfolio at fair market value at September 30th. Our performance has steadily improved in this area as we have been working out the underperforming companies in our portfolio as we said we would on previous calls. This is the direct result of the turnaround and workout capabilities of our external manager, Monroe Capital, and the resources they have provided to us. During the fourth quarter, we placed no additional borrowers on non-accrual status. Further, the investment performance risk rating distribution has remained relatively stable. Moving over to the expense side, total expenses slightly decreased from $9.7 million in the third quarter to $9.6 million in the fourth quarter, primarily driven by lower income taxes, primarily associated with blocker entities that hold certain of the company's equity investments and lower incentive fees. These decreases were mostly offset by an increase in interest and other debt financing expenses due to the rising interest rate environment and higher average debt outstanding. Net loss for the quarter totaled $1 million compared to a net loss of $7 million in the third quarter. Net realized and unrealized losses on investments were $300,000 for the fourth quarter. Other net losses totaling approximately $700,000 during the fourth quarter were related to foreign currency forward contracts used to hedge currency exposure on certain investments. As of December 31st, the SLF had investments in 60 different borrowers aggregating $183.2 million at fair value with a weighted average interest rate of 9.7%. 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 MRCC's portfolio, which is focused on lower middle market companies. The SLF portfolio decreased nominally in value by 10 basis points during the quarter from 93.6 percent of amortized costs as of September 30th to 93.5 percent of amortized costs as of December 31st. Additionally, SLF realized on its previously recorded unrealized loss on Port Townsend Holding Company during the quarter. During the fourth quarter, MRCC received income distributions from SLF of $900,000 consistent with the prior quarter. As of December 31st, 2022, the SLF had borrowings under its non-recourse credit facility of $122.2 million and $52.8 million of available capacity under its credit facility subject to borrowing base availability. At this point, I will turn the call back to Ted for some closing remarks before we open the line for questions.
spk06: Thanks, Mick. In closing, we believe that we are well positioned to emerge from a transitional 2022 to capitalize on compelling opportunities for private credit and navigate the market uncertainty that may lie ahead. Our average portfolio asset yield is an excess of 11%. on current deals, which portends well for the rest of 2023. The depth and experience of our originations and underwriting teams will allow us to continue to selectively deploy capital in sectors that we have demonstrated resiliency to economic cycles. As we remain active in the market, we expect to realize the benefits of heightened demand for private capital from lower and overall middle market companies including but not limited to receiving more favorable economics and deal structures this strategy is consistent with our historical focus on providing well-protected well-structured senior secured first lien loans to companies with insulated market positions and reliable business models led by strong management teams and reliable sponsors we will continue to lean on our team and core underwriting principles to generate attractive and differentiated risk-adjusted returns while navigating the uncertainties of 2023 and beyond. MRCC is well positioned to deliver stable and consistent dividends for our shareholders, especially where our earnings and dividends stand to benefit from an increase in market interest rates. We are excited about our investment portfolio And our prospects to continue and 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 am going to ask the operator to open up the call now for questions.
spk12: Thank you. At this time, if you do have a question, please signal us by pressing star 1. If you would like to withdraw your question, please press star 1 again. Again, that will be star 1 for questions. We'll pause for just a moment. We'll hear first today from Kevin Fultz with JMP Securities.
spk18: Hi, good morning and thank you for taking my questions. I noticed that PIC income represented about 14.7% of interest income in the fourth quarter, which was up meaningfully from 7.8% in the prior quarter. I'm curious if the increase is driven by new deals that were maybe structured with a PIC component, or if that was possibly amendment-related. Just any insight would be helpful.
spk02: Sure. Good morning, Kevin, and thank you for the question. So we did see an increase in PIC income during the course of the quarter. The primary reason for the increase in PIC income was the election by one of our borrowers and its option to exercise that PIC toggle during the quarter. If I look at our kind of PIC income trends, quarter over quarter, year over year, we've kind of been in that, you know, 12 to 15% range. So we feel comfortable with kind of where our PIC income is as a component of our total investment income. But that was the main cause for the increase during the quarter.
spk18: Okay, thanks. And I guess just to continue kind of on that line of questioning, I'm curious if you've seen an increase in amendment requests, I guess, in the December quarter and how that's trended recently.
spk02: Yeah, really good question, Kevin. During the fourth quarter, we didn't really see any meaningful notable increase in amendment activity in our portfolio. Most of the amendment activity was related to, you know, transaction activity related to you know, add-on transactions and technical amendments related, you know, SOFR and LIBOR transitions, but no meaningful amendment activity across our portfolio.
spk18: Okay, that's great to hear. And then one more if I can. You know, I noticed that other G&A expenses were up slightly in the fourth quarter. I guess, can you just discuss what drove the increase?
spk17: I'm just trying to get a sense if we should be scaling G&A expense in our model.
spk02: Yeah, so nothing meaningful in terms of that slight G&A bump. I would guide you towards kind of a historical pattern on a G&A front as you think about your model.
spk18: Okay, great. I appreciate your time this morning. I'll leave it there.
spk09: Thanks, Kevin.
spk12: We'll hear next from Christopher Nolan with Leidenberg-Fallman.
spk11: Hey, guys. The SLF, any of the borrowings by the SLF secured by any MRCC investments in the main portfolio?
spk07: They are not.
spk11: Okay. And then I guess in terms of asset liability management, what you're thinking right now, I mean, if the view was if the Fed would start easing for whatever reason, Would MRCC look ahead of time to get more fixed rate loans or put on hedges? What's the thinking around that?
spk02: Yeah, so we're mindful of capital structure. We've got a very, very favorable capital structure in terms of that note we did that matures in 2026, the 4.375 fixed rate note. But we are, you know, we have an internally dedicated capital markets team that we work with quite closely to think about kind of, you know, the liability side of our balance sheet and are, you know, keeping an eye on the markets to see, you know, if and when, you know, we might fine tune our approach to the right hand side of our balance sheet. But nothing in it.
spk01: Final question.
spk06: Yeah, Christopher, you know, this is from my perspective, I think we're going to see some, continue to see some slight increases here. And overall, Fed funds increases. Inflation is still not where they want it. And they've signaled that we're likely to see more upside in interest rates than downside right now in the near term.
spk11: And then I guess the final question is strategy related. Monroe Capital announced recently acquiring the management of another BDC company. What's the strategy overall there, and how will this BDC and MRCC work together, if at all, together?
spk06: Good question. We've gotten a fair amount of discussions with media on this. About two weeks ago, we announced that Monroe, the private asset management company, will acquire the investment advisor of another BDC, Horizon Technology Finance, NASDAQ, HRCN. That's a venture debt business. The management team there is comprised of about 38 people. They've been in business for about 20 years. Best in class track record history. They manage about a billion dollars today in a combination of their BDC and institutional capital. And I've been looking at this space for quite a while on behalf of Monroe. I think that the venture debt space in general is attractive in private credit, particularly in times when the IPO markets are closed, exits are difficult, fundraising is difficult for venture firms. Instead of doing large down round equity financings, many of these high growth companies will look to credit Instead, pricing is good, leverage is good, and enterprise value, low enterprise value risk. So, it's a, it was an acquisition, an opportunistic acquisition opportunity for us as a firm to continue to develop asset class categories that we can offer our institutional investors. I don't think this will be an MRCC. I think it's a different type of asset class, but for our other funds and our institutional investors at our advisor level at Monroe, this represents a very attractive opportunity for us to take advantage of a tactical place in the market where we can earn excess alpha.
spk09: Great. Thanks, Ted. That's it for me. Thanks, Chris.
spk12: And again, for questions at this time, that is star one. We'll hear now from Robert Dodd with Raymond James.
spk05: Hi, guys. Question on the SLF. The earnings, obviously, I mean, its portfolio is rate sensitive as well. So the earnings within that SLF have increased about, yeah, north of 20% from Q1 to Q4. But the dividend hasn't moved. Obviously, there's been markdowns within the SLF. But should we think of the dividend opportunity from the SLF to MRCC as kind of having a high watermark or something like that, where, you know, the book equity has to get back above $80 million before you get 50% of the earnings, as I was saying, the fourth quarter, the payout ratio was the dividend to like 37% of the earnings, 50% of it. So can you give us any color on how we should think about that, given that the earnings at the SLF are quite rate sensitive as they are at MRCC?
spk02: They are quite rate sensitive. You're right. I would I would guide you towards our kind of $900,000 per quarter level as a run rate for the SLF. That's the guidance I would offer you on that front.
spk05: But can you give us any color about why? Is it the markdowns and those need to be recovered or what's the decision? I realize it's not solely your decision. or the MRTC decision. But there is obviously, there has been an increasing mismatch between the earnings power within that and the dividend paid out.
spk04: Is there a scenario where that changes?
spk02: Yeah, I think we're mindful of obviously future performance potential of the portfolio. We did have a realized loss in the portfolio last quarter. uh in the form in the form of port townsend and when we consider our you know our our dividend uh distribution from the slf uh to both both partners uh both us and in national life we consider portfolio performance uh in the context of that of that of that distribution yield um and it's something that we assess you know you know as we always do when we make that dividend determination.
spk05: Got it, got it. Okay, I appreciate that. And then just back to the horizon, Chris already asked the question, but I mean, is there, I mean, you have some recurring revenue software businesses within MRCC. You obviously have an entirely different fund that focuses on that. So, you know, MRCC has sometimes taken opportunity to take advantage of other areas of expertise within Monroe. I mean, that is the place. So is there room within MRCC for a small sleeve of venture debt, or is that just something you don't consider appropriate for this vehicle at all?
spk06: That's a great question, Robert. We manage 16 billion across our platform.
spk09: MRCC gets the benefit of, you know, the entire platform.
spk06: And, you know, what we try to do is in our allocation policies provide allocations of each deal we do across the platform when it's appropriate, you know, for the specific fund or the investment vehicle. I anticipate that from time to time, there's going to be highly attractive and accretive deals that we originate across the platform, whether it's, you know, from Horizon, whether it's in our software lending vertical, healthcare, sports, media, entertainment. And when the appropriate investment fits within the MRCC mandate, as managed by our portfolio managers, Mick and Alex, You know, you may see, you know, these assets, but, you know, we've been pretty good historically at sticking to our knitting in MRCC and developing a high-quality senior secured portfolio that's got low leverage and good interest coverage. You know, as you know, venture debt businesses don't necessarily have those two qualities. You know, we may have good growth prospects. We may have good loan-to-value prospects. good loan against enterprise value, but interest coverage and leverage are not usually the cornerstones of a venture debt portfolio. So we're going to tread slowly, I think, with MRCC in the venture debt area.
spk09: Got it. Thank you for that, Tom.
spk10: And from B. Reilly, we'll hear next from Bryce Rowe.
spk13: Hi, good morning. I wanted to ask about balance sheet leverage and maybe just future visibility into repayment activity to help fund newer investments. So obviously you had balance sheet leverage tick up above the high end of your range. Certainly understand that can happen from time to time, but just curious if we should expect, you know, balance sheet leverage to stay at current levels, or if you have some visibility into repayment activity that made you comfortable, you know, kind of going above the high end of the target.
spk02: So, good morning, Bryson. Great question. So, you know, as we manage the portfolio, we're looking at, you know, we're looking into the future in terms of repayments we expect from our borrowers. We're, you know, in close contact with our, you know, over 100 borrowers. We're also looking into our origination pipeline, and we're trying to, you know, kind of cadence those two things, if you will. We had really, really strong origination activity during the fourth quarter, and our payoffs, projected payoffs came lighter than expected as we looked at our payout pipeline. So we came in at the end of the year, you know, above our leverage targets. But the way I would think about this going forward is we still maintain our long-term, you know, leverage target of, you know, 1.3 to 1.4 and would guide you in the short term to kind of the top end of that range, which is where we, you know, are targeting to manage a portfolio. Okay. Okay.
spk13: That's helpful. And then maybe one more for you, Mick, just around credit quality. I mean, obviously you had a pretty steady non-accrual number, and I think one investment kind of makes up the bulk of what's left there in that non-accrual bucket. But beyond that, can you talk about maybe any kind of positive or negative migration you saw within the quarter and how it might relate to kind of internal risk ratings?
spk02: Yeah, so... You know, we did make further, you know, a little bit more further progress on non-accruals during the quarter. We received about a $600,000 pay down on Bluestem Brands, which is one of our four non-performers. So, you know, pleased with that. In terms of portfolio migration during the course of the quarter, if you look at our rating distribution, we were up about $7 or $8 million in our three-rated category during the course of the quarter. So we had a couple of a few credits that migrated into our three rating during the quarter. You recall that we rate deals on a one through five basis, but had a few names migrate into the three categories during the quarter. But overall, you know, feel really comfortable with, you know, the quality of the portfolio, the coverage ratio on an interest basis that our portfolio companies are reporting, and believe that the portfolio is generally sound.
spk13: Okay. That's, that's helpful. And I mean, just to maybe a follow-up to that, Nick, um, what, you know, the, the, the ones that did migrate into the three, um, what is there, I assume that's idiosyncratic. What's, what's going on there that, um, you know, that, that.
spk02: Yeah. So, so, so, so, so good. So, so good question. So, um, you know, the, the, you know, the polo companies are still experiencing, you know, uh, some effect from, you know, rising input costs, rising freight costs, things like that. So the companies that, you know, have migrated in that kind of three category have seen some margin impact because of that. And in those cases, you know, those companies are very, very focused on, you know, margin improvement by, you know, the kinds of actions that companies typically take. passing price increases ultimately along to their customer, strategically reducing costs, things like that. What you don't see in our kind of broad, you know, portfolio risk rating distributions is that we actually also during the quarter had migration out of the three into the two category. as some of our companies that experienced some of the early effects of inflation and supply chain were able to effectively, you know, pass along price increases, execute strategic initiatives, and get margins kind of back in line. So, you know, we continue to, you know, see kind of an evolving, you know, landscape as companies, you know, adapt and adjust to market and economic conditions.
spk13: Got it. That makes a ton of sense. Appreciate the comments this morning.
spk12: Thanks.
spk09: Thank you.
spk12: And with no other questions at this time, I'd like to turn things back to the company for closing remarks.
spk06: Thank you all for joining us today. We enjoyed the conversation as well as the questions, and we look forward to speaking again next quarter. So be safe, and we'll speak to you soon. And like always, to the extent anyone has any questions in the interim before our next quarterly call, feel free to reach out to Mick directly. And we're always willing and wanting to engage. So thank you all. Have a good day.
spk12: And that will conclude today's conference. Again, thank you all for joining us.
Disclaimer