Monroe Capital Corporation

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.

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.

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.