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.
spk01: Thank you for standing by. Today's conference will begin in approximately one minute to allow as many participants as possible to join. We thank you for your patience. Welcome to Monroe Capital Corporation's first quarter 2023 earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward-looking statements, including statements regarding our goals, strategies, beliefs, future potential, operating results, and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions and projections as of today, May 11, 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 risks, 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 conference call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation. Please go ahead.
spk10: Good morning and thank you to everyone who has joined us on our earnings call today. Welcome to our first quarter 2023 earnings conference call. I am joined by Mick Salamini, our CFO and Chief Investment Officer, and Alex Parmasuk, our deputy portfolio manager. Last evening, we issued our first quarter 2023 earnings press release and filed our 10Q with the SEC. An uncertain macroeconomic backdrop and turmoil in the regional banking system led to increased market volatility and a decline in M&A transaction activity in the first quarter of 23. According to Refinitiv, middle market deal volume and the quarter fell 39% from the fourth quarter of last year to its lowest level since the height of the pandemic in the third quarter of 2020. Economic growth slipped amid still high inflation and rising interest rates, and the general expectation that the Fed will remain diligent in combating inflation towards its long-run trend of around 2%. These dynamics point to a more challenging economic environment for the remainder of 2023 and a general tightening of credit conditions, particularly among the regulated banking industry. Against this backdrop, Monroe's ability to offer a variety of underwritten solutions with a certainty of execution remains a distinct advantage for our clients. We remain mindful and cautious, however, that a slowing economy may create more stress within the portfolio and in the broader market. Yet as we discussed on previous calls, this period of market dislocation presents a unique and compelling opportunity for MRCC and private credit to thrive. Historically, Monroe has outperformed in similar periods of economic volatility. While there was a slowdown in transaction activity in the first quarter, direct lenders continue to dominate share of overall LBO volumes. Consistent with Refinitiv's first quarter 2023 private deals analysis, we continue to see leverage and loan-to-value levels in the lower middle market decline with a corresponding increase in spreads. Further, deal terms, pricing, structures, and documentation have shifted favorably to the lenders. These dynamics put Monroe in a strong position to utilize our rigorous underwriting platform and broad capabilities to add attractive assets in recession resilient sectors as older vintage assets repay. As we navigate this period of volatility, our focus will be twofold. We will be concentrated on maintaining portfolio quality, where we lean on our deep and experienced portfolio management team and our early intervention playbook to get ahead of potential challenges and develop strategies to maximize our outcomes. Concurrently, we will look to capitalize on the market share and pricing opportunities presented to private credit. Despite slowdown in the M&A markets, the number of deals we have assessed are in line with historical levels. Our focus will be on maintaining a disciplined, highly selective approach to our new deal originations as we look to redeploy capital and new assets that come with favorable structures and attractive yields. I will now transition to highlight our first quarter results. We are pleased to report adjusted net investment income of $6.9 million, or 32 cents per share, representing a 28% year-over-year increase to the first quarter of 2022 and a 23% increase from last quarter. This increase is primarily the result of increases in effective rates on the portfolio from the rising interest rate environment. We also reported NAV, of $223 million or $10.29 per share as of March 31, 2023 compared to $225 million or $10.39 per share as of December 31, 2022. The decline, the slight decline in NAV was primarily the result of net unrealized losses on the portfolio that were primarily attributable to a couple specific portfolio companies that saw declining financial performance resulting from macroeconomic factors. On a net basis, the valuations on the remainder of the portfolio remained relatively flat during the quarter. During the quarter, MRCC's debt to equity leverage was unchanged at 1.49 times debt to equity, slightly above our long-term target range of 1.3 times to 1.4 times. We continue to focus on managing our investment portfolio and selectively redeploying capital resulting from repayments. We believe that our purposefully defensive portfolio will be able to navigate the higher interest rate environment and increasingly challenging economic macro environment. The weighted average interest coverage remains generally sound across our existing portfolio and has cushioned to sustain further rate hikes. Further, the portfolio continues to maintain a modest weighted average loan to value, and we believe that this, coupled with the relationships we have developed with high-quality sponsors, with a track record of demonstrating strong support of their portfolio companies, provides us with meaningful downside protection on our portfolio. Our loan underwriting focus continues to be on those companies with defensible market positions, resilient business models, exceptional management teams, and strong sponsors or owners. By selectively redeploying capital from payoffs into new investments with attractive risk return dynamics, we will be able to recycle older vintage assets with new assets that benefit from lower risk profiles and higher yields, enhancing the quality of the overall portfolio. MRCC enjoys strong strategic advantage in being affiliated with the best-in-class middle market private credit asset management firm with approximately $16 billion in assets under management and approximately 200 employees as of March 31, 2023. We 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. At this point, I will turn the call over to Mick, who is going to walk you through the financial results in greater detail.
spk04: Thank you, Ted.
spk13: As of March 31st, 2023, our investment portfolio totaled $532.1 million, a decrease of $8.9 million from $541 million as of December 31st. Our investment portfolio consisted of debt and equity investments in 102 portfolio companies as of March 31st, 2023 as compared to debt and equity investments in 105 portfolio companies as of December 31st, 2022. During the quarter, We made investments in two new portfolio companies with fundings totaling $9.6 million at a weighted average interest rate of 11.7%. We also made nominal equity investments in both new portfolio companies. Further, we had revolver or delayed draw fundings and add-ons to 29 existing portfolio companies totaling $12.7 million. During the quarter, we received five full payoffs totaling $20.3 million. We also incurred normal course paydowns and partial syndications totaling $10.1 million. Outside of a small syndication, we had no sales of portfolio investments this quarter. At March 31st, 2023, we had total borrowings of $332.8 million, including $202.8 million outstanding under our floating rate revolving credit facility and $130 million of our 4.75% fixed rate 2026 notes. Total borrowings outstanding decreased nominally during the quarter. The revolving credit facility had $52.2 million of availability as of March 31st, 2023, subject to borrowing-based capacity. Now turning to our financial results for the quarter ended March 31st, 2023. Adjusted net investment income, a non-GAAP measure, was $6.9 million, or 32 cents per share this quarter, compared to $5.6 million, or 26 cents per share in the prior quarter. This result was driven primarily by an increase in the average portfolio yield during the quarter ended March 31st, 2023, on higher average asset levels. When considering our target 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 25 cents per share quarterly dividend, all other things being equal. As of March 31st, 2023, our net asset value was $223 million, which decreased slightly from the $225 million in net asset value as of December 31st, 2022. Our net asset value per share decreased slightly from $10.39 per share as of December 31st to $10.29 per share as of March 31st. The 1% decrease was substantially the result of net mark-to-market unrealized losses of a couple specific portfolio companies during the period, partially offset by our net investment income outperformance of our dividend. I will now turn it over to Alex who will provide more details on our first quarter operating performance.
spk11: Thank you, Mick. Looking to our statement of operations, total investment income was $16.8 million during the first quarter of 2023, up from $15.2 million in the fourth quarter of 2022. During the quarter, we continue to see the impact of interest rate increases on our investment income. At March 31st, the effective yield on our debt and preferred equity portfolio was 11.6%, up from 11% at December 31st. SOFR rates continued to increase in the first quarter of the year, with one month SOFR rising from 436 basis points at the end of 2022 to 480 basis points by the end of March 2023. All other things being equal, a rising interest rate environment will continue to improve the yield on our investment portfolio and increase net investment income. At March 31, 2023, we had three investments on non-accrual status, representing 0.4% of the portfolio of fair market value, compared to four investments on non-accrual status which represented 0.5% of the portfolio at fair market value at December 31st. The reduction in non-accruals was due to restoring BLST operating company to accrual status during the quarter. This was due to sustained positive operating performance. During the first quarter, we placed no additional borrowers on non-accrual status. Moving over to the expense side. Total expenses slightly increased to $10.2 million in the first quarter of 2023 from $9.6 million in the fourth quarter of 2022, driven by an increase in interest and other debt financing expenses resulting from the higher interest rate environment, as well as an increase in incentive fees associated with the increase in net investment income. Our net loss for the first quarter was $3.3 million. compared to net losses of $1 million for the quarter ended December 31st, 2022. Net realized and unrealized losses on investments were $3.5 million for the quarter. The net losses during the quarter were primarily attributable to fundamental performance of a couple specific portfolio companies. These losses were partially offset by $0.2 million of net unrealized gains on foreign currency forward contracts used to hedge currency exposure on investments that are denominated in foreign currency as of march 31st the slf had investments in 59 different borrowers aggregating to 178.2 million dollars at fair value with a weighted average interest rate of 10.3 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 just four basis points during the quarter from 93.49% of amortized costs as of December to 93.45% of amortized costs as of March 31st. Additionally, SLF realized on its previously recorded unrealized loss on CBC Restaurant Corp during the quarter. As of March 31st, SLF had no investments on non-accrual status. During the quarter, MRCC received income distributions from SLF of $900,000, consistent with the prior quarter. As of March 31, 2023, the SLF had borrowings under its non-recourse credit facility of $115.7 million and $59.3 million of available capacity subject to borrowing base availability. At this point, I will turn the call back to Ted for some closing remarks before we open up the line for some questions.
spk04: Thanks, Mick and Alex.
spk10: In conclusion, we remain dedicated to maintaining the portfolio quality in the face of potential Q3 and Q4 economic headwinds. But we believe that our purposely defensive portfolio composition and experienced investment team will allow us to take advantage of an increasingly volatile market environment. The market dislocation that has recently accelerated due to the ongoing banking crisis has further enhanced our view that this year represents a unique and compelling opportunity for MRCC and private lending. Prior similar periods of volatility have created the very best of vintages for private credit. Our ability to provide certainty of execution and flexibility, capital solutions to lower middle market companies has become increasingly valuable in this time of tighter credit conditions and constrained liquidity at banks. This dynamic will allow us to redeploy capital into sectors with solid cash flow characteristics and demonstrated resiliency to economic cycles while benefiting from favorable deal terms pricing and structures further our effective yield and our predominantly first lean portfolio is 11.6 percent which portends well for the remainder of 2023 and monroe capital corporation continues to be well positioned to deliver stable and consistent dividends for our shareholders. We are confident in our investment portfolio and its positioning to navigate the economic environment ahead. We believe that Monroe Capital Corporation, MRCC, which is affiliated with an award-winning, best-in-class external private credit fund manager with approximately $16 billion in assets under management, provides a very attractive investment opportunity to our shareholders and other investors, particularly at the levels that our stock is currently trading. Thank you for all of your time today. And this concludes our prepared remarks. I'm going to ask the operator to open up the call now for questions.
spk01: Thank you. If you have a question, please press star one on your telephone keypad. If you wish to withdraw your question, you simply press star one again. And your first question comes from the line of Sean Paul Adams with Raymond James. Please go ahead.
spk12: Good morning, guys, and congrats on a great quarter. My only question is regarding your adjusted net investment income for 2Q 2024 and 1Q 2024. With the way the SOFR curve is currently updated, It's actually trended a little bit lower since the end of 1Q2023. If it goes down another 25 to 50 basis points, there is a risk that your adjusted net investment income will not exceed the dividend by a gap of about three cents. Do you guys have any current concerns on that? And what do you view the current curve to be going into 2024?
spk04: Mick, why don't you take that one? Sure.
spk13: So, as, you know, kind of in terms of view of, you know, the interest rate curve, you know, we're kind of in line with, you know, kind of where market sentiment is. We do expect, you know, over time that, you know, the curve will moderate and on a lagged basis, you know, contracts will reset. Those contracts are based on sober benchmarks. We believe that our adjusted net investment income, which is primarily driven by our investment income, will remain at comfortable levels in the context of even and levels that support our dividend, even in the context of, you know, a slight downshift in the curve. If you look at kind of a historical performance in terms of ANII dividend coverage or NII dividend coverage, you know, we've maintained, you know, a 25-cent dividend for the past 13 consecutive quarters, including in the third quarter, where rates were around 3% on the benchmark and we were able to cover that dividend without any fee waivers. So we feel confident as we look at the curves into the intermediate term that we will comfortably be able to cover our dividend.
spk10: There's two parts to that, Sean. What you haven't factored into is the spread. If you look at, you know, there's two pieces to SOFRN and our spread in terms of overall yield. Our spreads have continued to move north, and I anticipate that the rest of 2023 and into 2024, we're going to see some good trends in spread as well.
spk02: Thank you for that, Collar. I appreciate it.
spk01: Your next question comes from the line of Christopher Nolan with Ladinburg-Fellman. Please go ahead.
spk07: Hey, guys. Do you expect this quarterly EPS to be a decent run rate for the rest of 2023?
spk04: Hey, Chris, could you repeat the question?
spk03: Yeah, I apologize. I'm just trying to see whether or not the first quarter earnings is a good run rate for the rest of the year.
spk13: Yeah, the way I would think about kind of Q1, we believe we're coming certainly to the peak of the rate cycle. Our leverage is slightly above our range. I think about expenses kind of more on a run rate basis. But we had a really good first quarter at maybe you know, as we come to the peak of this rate cycle and feel really comfortable about, you know, our earnings possibilities.
spk04: Great. Thank you.
spk01: Once again, ladies and gentlemen, if you have a question, it is star 1 on your telephone keypad. Your next question comes from the line of Bryce Rowe with B. Reilly. Please go ahead.
spk05: Thanks. Good morning. I wanted to ask a question about the SLF to start. It indicated that you've got some capacity on that vehicle's credit facility and given some of the commentary around wider spreads and attractive investment opportunities. Any thought to trying to take, you know, balance sheet leverage at the SLF up a little bit in this environment?
spk13: That's a really good question. So, as we look at, you know, SLF, which is a different portfolio than MRCC. SLF is, you know, upper middle market and includes also kind of broadly syndicated loans in that portfolio. We're a little more cautious, candidly, in that end of the market. You'll find that leverage multiples are a little higher. Loan-to-values are a little higher. Spreads aren't quite as attractive, and there's probably a little more volatility in that. So as we look at kind of prosecuting transactions in the SLF, we're really mindful of that. You know, we are considering kind of how to, you know, best effectively kind of utilize leverage within the SLF portfolio for sure. But we probably have a little more of a cautious tone around that end of the market than we do in kind of our core middle market where we're able to get, you know, better credit metrics, loan-to-values, leverage, better spreads, and, you know, pretty decent covenant protections. But we'll continue to assess this as we move forward. progress through the year. And as we look at, you know, pipeline possibilities that come into the SLF, but it is definitely something that we are, you know, looking at closely.
spk05: That's helpful, Nick. Let's see, wanted to maybe turn to credit, credit quality, and maybe a couple questions around that. So, you know, you've seen continued movement lower in the number of non-accruals, obviously working hard to, you to address the troubled situations. Maybe you can speak to that, any kind of further progress beyond the one that came off here in the last quarter. And then just you made some comment around weakness at a couple portfolio companies that drove some depreciation. Just any color around that, kind of what the outlook might be from this point forward. Thanks.
spk13: For sure. Great, great question. So as you noted, we have made significant progress in, you know, reducing our non-performing levels over time. We did during the first quarter place back on accrual, boost them brands due to kind of continuing positive operating performance. We have three kind of legacy non-performers that we are still in the process of working out. So, you know, stay tuned on that. As I look at, you know, we did mention we had a couple of specific credits that gave rise to most of our unrealized loss change during the course of the quarter. In one of those cases, the decline in kind of company performance is driven by the interest rate environment that directly impacted its revenues. The company's a leader in its field. Working closely with the management team, they're doing all the right things in terms of rightsizing their P&L and are actually kind of taking market share, interestingly, in the context of this market. The other portfolio company that showed some weakness and led to some valuation decline was a business or is a business that has exposure to kind of a lower income consumer. It's a business in the retail and discretionary consumer product space. management team and the sponsor are acutely focused on kind of inventory management, liquidity management, and, you know, candidly are doing kind of all the right things. So those are the two names that showed some weakness from a valuation perspective. The rest of the credit fundamentals in the portfolio are pretty strong. If you look at our average mark quarter over quarter, it was slightly down by a little under 60 basis points. We did have some migration into the three category from the two category and a handful of names. As we kind of x-ray into that, most of it was candidly idiosyncratic, not related to kind of what's going on in the inflationary world and the interest rate world, but feel strong about kind of credit fundamentals in our portfolio where we're seeing companies continue to grow revenue continue to grow EBITDA all the way at a kind of slower pace than we saw in the fourth quarter.
spk04: Okay. That's good color.
spk05: One more from me. It's nice to see some repayment activity. I mean, I think across the space, we've certainly seen some repayments at some BDCs more so than others. Were you surprised to see the five full payoffs here in the quarter and, you know, any kind of visibility into, you know, repayment activity for either the next quarter or the balance of the year?
spk13: Yeah, so another good question. So we had, you know, five full payoffs that totaled 20, a little over $20 million for the quarter. In some ways, they were a surprise. In some ways, they weren't. You know, we have visibility into our pipeline. We know pretty accurately kind of if companies are you know, upper sale and whether we're going to get repaid or whether we're going to get refinanced. And, you know, in the case of the five repayments, they were a result primarily of M&A activity. So, you know, those were pleasant surprises and payoffs, as you know, are good for us because we can recycle capital, generally accelerate, you know, things like fees and stuff like that. So, you know, we're, you know, had anticipated some of this activity, certainly in the first quarter. As we look at potential repayment activity from here on out, the repayment pipeline is average, I would say. We don't see any M&A transactions accelerating for sure. I don't know that it'll be as high as we saw in the first quarter. But, you know, we are seeing, you know, generally a pickup in M&A activity that started really kind of post the end of the first quarter. As Ted said in his opening remarks, Q1 is pretty light in terms of M&A activity. You know, we're seeing some pickup, and that will translate twofold to us. One is, you know, higher levels of repayments. And then, you know, secondly, obviously, financing opportunities, you know, we believe at favorable terms, at favorable rates.
spk04: That's good stuff, Mick. I appreciate it. You're welcome.
spk01: And there are no further questions at this time. I will turn the call back to Ted Koenig.
spk10: Thank you all for attending our call today and asking the questions. We appreciate the opportunity to answer any questions you have. To the extent that there are any going forward, please feel free to contact Nick or Alex. And we look forward to speaking again on our next quarterly call. So thanks and have a good day.
spk01: This concludes today's conference call. You may now disconnect your lines. Thank you. you Thank you. Thank you. Thank you.
spk00: Yeah.
spk01: Welcome to Monroe Capital Corporation's first quarter 2023 earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward-looking statements, including statements regarding our goals, strategies, beliefs, future potential, operating results, and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions, and projections as of today, May 11, 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 risks, 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 conference call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation. Please go ahead.
spk10: Good morning, and thank you to everyone who has joined us on our earnings call today. Welcome to our first quarter 2023 earnings conference call. I am joined by Mick Salamini, our CFO and Chief Investment Officer, and Alex Parmasuk, our Deputy Portfolio Manager. Last evening, we issued our first quarter 2023 earnings press release and filed our 10Q with the SEC. An uncertain macroeconomic backdrop and turmoil in the regional banking system led to increased market volatility and a decline in M&A transaction activity in the first quarter of 23. According to Refinitiv, middle market deal volume and the quarter fell 39% from the fourth quarter of last year to its lowest level since the height of the pandemic in the third quarter of 2020. Economic growth slipped amid still high inflation and rising interest rates, and the general expectation that the Fed will remain diligent in combating inflation towards the end of 2020. excuse me, remain diligent combating inflation towards its long run trend of around 2%. These dynamics point to a more challenging economic environment for the remainder of 2023 and a general tightening of credit conditions, particularly among the regulated banking industry. Against this backdrop, Monroe's ability to offer a variety of underwritten solutions with a certainty of execution remains a distinct advantage for our clients. We remain mindful and cautious, however, that a slowing economy may create more stress within the portfolio and in the broader market. Yet as we discussed on previous calls, this period of market dislocation presents a unique and compelling opportunity for MRCC and private credit to thrive. Historically, Monroe has outperformed in similar periods of economic volatility. While there was a slowdown in transaction activity in the first quarter, direct lenders continue to dominate share of overall LBO volumes. Consistent with Refinitiv's first quarter 2023 private deals analysis, we continue to see leverage and loan-to-value levels in the lower middle market decline with a corresponding increase in spreads. Further, deal terms, pricing, structures, and documentation have shifted favorably to the lenders. These dynamics put Monroe in a strong position to utilize our rigorous underwriting platform and broad capabilities to add attractive assets in recession-resilient sectors as older vintage assets repay. As we navigate this period of volatility, our focus will be twofold. We will be concentrated on maintaining portfolio quality, where we lean on our deep and experienced portfolio management team and our early intervention playbook to get ahead of potential challenges and develop strategies to maximize our outcomes. Concurrently, we will look to capitalize on the market share and pricing opportunities presented to private credit. Despite slowdown in the M&A markets, the number of deals we have assessed are in line with historical levels. Our focus will be on maintaining a disciplined, highly selective approach to our new deal originations as we look to redeploy capital and new assets that come with favorable structures and attractive yields. I will now transition to highlight our first quarter results. We are pleased to report adjusted net investment income of $6.9 million, or 32 cents per share, representing a 28% year-over-year increase to the first quarter of 2022 and a 23% increase from last quarter. This increase is primarily the result of increases in effective rates on the portfolio from the rising interest rate environment. We also reported NAV of $223 million or $10.29 per share as of March 20, March 31, 2023, compared to $225 million or $10.39 per share as of December 31, 2022. The decline, the slight decline in NAV was primarily the result of net unrealized losses on the portfolio that were primarily attributable to a couple specific portfolio companies that saw declining financial performance resulting from macroeconomic factors. On a net basis, the valuations on the remainder of the portfolio remained relatively flat during the quarter. During the quarter, MRCC's debt to equity leverage was unchanged at 1.49 times debt to equity slightly above our long-term target range of 1.3 times to 1.4 times. We continue to focus on managing our investment portfolio and selectively redeploying capital resulting from repayments. We believe that our purposefully defensive portfolio will be able to navigate the higher interest rate environment and increasingly challenging economic macro environment. The weighted average interest coverage remains generally sound across our existing portfolio and has cushioned to sustain further rate hikes. Further, the portfolio continues to maintain a modest weighted average loan to value, and we believe that this, coupled with the relationships we have developed with high-quality sponsors with a track record of demonstrating strong support of their portfolio companies, provides us with meaningful downside protection on our portfolio. Our loan underwriting focus continues to be on those companies with defensible market positions, resilient business models, exceptional management teams, and strong sponsors or owners. By selectively redeploying capital from payoffs into new investments with attractive risk return dynamics, we will be able to recycle older vintage assets with new assets that benefit from lower risk profiles and higher yields, enhancing the quality of the overall portfolio. MRCC enjoys strong strategic advantage in being affiliated with the best-in-class middle market private credit asset management firm with approximately $16 billion in assets under management and approximately 200 employees as of March 31st, 2023. We 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. At this point, I will turn the call over to Mick, who is going to walk you through the financial results in greater detail.
spk04: Thank you, Ted.
spk13: As of March 31st, 2023, our investment portfolio totaled $532.1 million, a decrease of $8.9 million from $541 million as of December 31st. Our investment portfolio consisted of debt and equity investments in 102 portfolio companies as of March 31st, 2023 as compared to debt and equity investments in 105 portfolio companies as of December 31st, 2022. During the quarter, we made investments in two new portfolio companies with fundings totaling $9.6 million at a weighted average interest rate of 11.7%. We also made nominal equity investments in both new portfolio companies. Further, we had revolver or delayed draw fundings and add-ons to 29 existing portfolio companies totaling $12.7 million. During the quarter, we received five full payoffs totaling $20.3 million. We also incurred normal course paydowns and partial syndications totaling $10.1 million. Outside of a small syndication, we had no sales of portfolio investments this quarter. At March 31st, 2023, we had total borrowings of $332.8 million, including $202.8 million outstanding under our floating rate revolving credit facility and $130 million of our 4.75% fixed rate 2026 notes. Total borrowings outstanding decreased nominally during the quarter. The revolving credit facility had $52.2 million of availability as of March 31st, 2023, subject to borrowing-based capacity. Now turning to our financial results for the quarter ended March 31st, 2023. Adjusted net investment income, a non-GAAP measure, was $6.9 million, or 32 cents per share this quarter, compared to $5.6 million, or 26 cents per share in the prior quarter. This result was driven primarily by an increase in the average portfolio yield during the quarter ended March 31st, 2023, on higher average asset levels. When considering our target 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 25 cents per share quarterly dividend, all other things being equal. As of March 31st, 2023, our net asset value was $223 million, which decreased slightly from the $225 million in net asset value as of December 31st, 2022. Our net asset value per share decreased slightly from $10.39 per share as of December 31st to $10.29 per share as of March 31st. The 1% decrease was substantially the result of net mark-to-market unrealized losses of a couple specific portfolio companies during the period, partially offset by our net investment income outperformance of our dividend. I will now turn it over to Alex who will provide more details on our first quarter operating performance.
spk11: Thank you, Mick. Looking to our statement of operations, total investment income was $16.8 million during the first quarter of 2023, up from $15.2 million in the fourth quarter of 2022. During the quarter, we continue to see the impact of interest rate increases on our investment income. At March 31st, the effective yield on our debt and preferred equity portfolio was 11.6%, up from 11% at December 31st. SOFR rates continued to increase in the first quarter of the year, with one month SOFR rising from 436 basis points at the end of 2022 to 480 basis points by the end of March 2023. all other things being equal a rising interest rate environment will continue to improve the yield on our investment portfolio and increase net investment income at march 31st 2023 we had three investments on non-accrual status representing 0.4 percent of the portfolio of fair market value compared to four investments on non-accrual status which represented 0.5% of the portfolio at fair market value at December 31st. The reduction in non-accruals was due to restoring BLST operating company to accrual status during the quarter. This was due to sustained positive operating performance. During the first quarter, we placed no additional borrowers on non-accrual status. Moving over to the expense side. Total expenses slightly increased to $10.2 million in the first quarter of 2023 from $9.6 million in the fourth quarter of 2022, driven by an increase in interest and other debt financing expenses resulting from the higher interest rate environment, as well as an increase in incentive fees associated with the increase in net investment income. Our net loss for the first quarter was $3.3 million. compared to net losses of $1 million for the quarter ended December 31, 2022. Net realized and unrealized losses on investments were $3.5 million for the quarter. The net losses during the quarter were primarily attributable to fundamental performance of a couple of specific portfolio companies. These losses were partially offset by $0.2 million of net unrealized gains on foreign currency forward contracts used to hedge currency exposure on investments that are denominated in foreign currency. As of March 31st, the SLF had investments in 59 different borrowers, aggregating to $178.2 million at fair value, with a weighted average interest rate of 10.3%. 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 just four basis points during the quarter from 93.49% of amortized costs as of December to 93.45% of amortized costs as of March 31st. Additionally, SLF realized on its previously recorded unrealized loss on CBC Restaurant Corp during the quarter. As of March 31st, SLF had no investments on non-accrual status. During the quarter, MRCC received income distributions from SLF of $900,000, consistent with the prior quarter. As of March 31, 2023, the SLF had borrowings under its non-recourse credit facility of $115.7 million and $59.3 million of available capacity subject to borrowing base availability. At this point, I will turn the call back to Ted for some closing remarks before we open up the line for some questions.
spk04: Thanks, Mick and Alex.
spk10: In conclusion, we remain dedicated to maintaining the portfolio quality in the face of potential Q3 and Q4 economic headwinds. But we believe that our purposely defensive portfolio composition and experienced investment team will allow us to take advantage of an increasingly volatile market environment. The market dislocation that has recently accelerated due to the ongoing banking crisis has further enhanced our view that this year represents a unique and compelling opportunity for MRCC and private lending. Prior similar periods of volatility have created the very best of vintages for private credit. Our ability to provide certainty of execution and flexibility, capital solutions to lower middle market companies has become increasingly valuable in this time of tighter credit conditions and constrained liquidity at banks. This dynamic will allow us to redeploy capital into sectors with solid cash flow characteristics and demonstrated resiliency to economic cycles while benefiting from favorable deal terms pricing and structures further our effective yield and our predominantly first lean portfolio is 11.6 percent which portends well for the remainder of 2023 and monroe capital corporation continues to be well-positioned to deliver stable and consistent dividends for our shareholders. We are confident in our investment portfolio and its positioning to navigate the economic environment ahead. We believe that Monroe Capital Corporation, MRCC, which is affiliated with an award-winning, best-in-class external private credit fund manager with approximately $16 billion in assets under management, provides a very attractive investment opportunity to our shareholders and other investors, particularly at the levels that our stock is currently trading. Thank you for all of your time today. And this concludes our prepared remarks. I'm going to ask the operator to open up the call now for questions.
spk01: Thank you. If you have a question, please press star one on your telephone keypad. If you wish to withdraw your question, you simply press star one again. And your first question comes from the line of Sean Paul Adams with Raymond James. Please go ahead.
spk12: Good morning, guys, and congrats on a great quarter. My only question is regarding your adjusted net investment income for 2Q 2024 and 1Q 2024. With the way the SOFR curve is currently updated, It's actually trended a little bit lower since the end of 1Q 2023. If it goes down another 25 to 50 basis points, there is a risk that you're adjusting that investment income will not exceed the dividend by a gap of about three cents. Do you guys have any current concerns on that? And what do you view the current curve to be going into 2024?
spk04: Mick, why don't you take that one? Sure.
spk13: So, as, you know, kind of in terms of view of, you know, the interest rate curve, you know, we're kind of in line with, you know, kind of where market sentiment is. We do expect, you know, over time that, you know, the curve will moderate, and on a lagged basis, you know, contracts will reset. Those contracts are based on sober benchmarks. We believe that our adjusted net investment income, which is primarily driven by our investment income, will remain at comfortable levels in the context of even and levels that support our dividend, even in the context of, you know, a slight downshift in the curve. If you look at kind of our historical performance in terms of ANII dividend coverage or NII dividend coverage, you know, we've maintained, you know, a 25-cent dividend for the past 13 consecutive quarters, including in the third quarter, where rates were around 3% on the benchmark and we were able to cover that dividend without any fee waivers. So we feel confident as we look at the curves into the intermediate term that we will comfortably be able to cover our dividend.
spk10: There's two parts to that, Sean. What you haven't factored into is the spread. If you look at, you know, there's two pieces to SOFR and our spread in terms of overall yield. Our spreads have continued to move north, and I anticipate that the rest of 2023 and into 2024, we're going to see some good trends in spread as well.
spk02: Thank you for that, Collar. I appreciate it.
spk01: Your next question comes from the line of Christopher Nolan with Ladinburg-Fellman. Please go ahead.
spk07: Hey, guys. Do you expect this quarterly EPS to be a decent run rate for the rest of 2023?
spk03: Hey, Chris, could you repeat the question? Yeah, I apologize. I'm just trying to see whether or not the first quarter earnings is a good run rate for the rest of the year.
spk13: Yeah, the way I would think about, you know, kind of, you know, Q1, you know, we're, you know, we believe we're coming certainly to the peak of the, you know, of the rate cycle. Our leverage, you know, is slightly above our, you know, our range. I think about expenses kind of more on a run rate basis. But we had a really good, you know, first quarter, you know, at maybe the you know, as we come to the peak of this rate cycle and feel really comfortable about, you know, our earnings possibilities.
spk04: Great. Thank you.
spk01: Once again, ladies and gentlemen, if you have a question, it is star 1 on your telephone keypad. Your next question comes from the line of Bryce Rowe with B. Riley. Please go ahead.
spk05: Thanks. Good morning. Wanted to kind of ask a question about the SLF to start. You know, indicated that you've got some capacity on that vehicle's credit facility and kind of given some of the commentary around wider spreads and attractive investment opportunities. Any thought to Trying to take, you know, balance sheet leverage at the SLF up a little bit in this environment.
spk13: That's a really good question. So, as we look at, you know, SLF, which is a different portfolio than MRCC. SLF is, you know, upper middle market and includes also kind of broadly syndicated loans in that portfolio. We're a little more cautious, candidly, in that end of the market. You'll find that leverage multiples are a little higher, loan devalues are a little higher, spreads aren't quite as attractive, and there's probably a little more volatility in that. So, as we look at, you know, kind of prosecuting transactions in the SLF, we're really mindful of that. You know, we are considering kind of how to, you know, best effectively kind of utilize leverage within the SLF portfolio for sure. But we probably have a little more of a cautious tone around that end of the market than we do in kind of our core middle market where we're able to get, you know, better credit metrics, loan to values, leverage, better spreads, and, you know, pretty decent covenant protections. But we'll continue to assess this as we progress through the year and as we look at, you know, pipeline possibilities that come into the SLF. But it is definitely something that we are you know, looking at closely.
spk05: That's helpful, Mick. Let's see, wanted to maybe turn to credit quality and maybe a couple questions around that. So, you know, you've seen continued movement lower in the number of non-accruals, obviously working hard to address the troubled situations. You know, Mick, maybe you can speak to that, any kind of further progress beyond the the one that came off here in the last quarter. And then just you made some comment around weakness at a couple portfolio companies that drove some depreciation. Just any color around that, kind of what the outlook might be from this point forward. Thanks.
spk13: For sure. Great, great question. So as you noted, we have made significant progress in reducing our non-performing levels over time. We did during the first quarter, place back on accrual, boost them brands due to continuing positive operating performance. We have three legacy non-performers that we are still in the process of working out. So stay tuned on that. As I look at, we did mention we had a couple of specific credits. that gave rise to most of our unrealized loss change during the course of the quarter. And both of those credits were impacted by kind of what's going on in the marketplace today. In one of those cases, the decline in kind of company performance is driven by the interest rate environment that directly impacted its revenues. The company's a leader in its field, working closely with the management team. They're doing all the right things. in terms of rightsizing their P&L and are actually kind of taking market share, interestingly, in the context of this market. The other portfolio company that showed some weakness and led to some valuation decline was a business or is a business that has exposure to kind of a lower income consumer. It's a business in the retail and discretionary consumer product space. management team and the sponsor are acutely focused on kind of inventory management, liquidity management, and, you know, candidly are doing kind of all the right things. So those are the two names that showed some weakness from a valuation perspective. The rest of the credit fundamentals in the portfolio are pretty strong. If you look at, you know, our average mark quarter over quarter, it was slightly down by a little under 60 basis points. We did have some migration into the three category from the two category and a handful of names. As we kind of x-ray into that, most of it was candidly idiosyncratic, not related to kind of what's going on in the inflationary world and the interest rate world, but feel strong about kind of credit fundamentals in our portfolio where we're seeing companies continue to grow revenue continue to grow EBITDA all the way at a kind of slower pace than we saw in the fourth quarter.
spk04: Okay. That's good color.
spk05: One more from me. It's nice to see some repayment activity. I mean, I think across the space, we've certainly seen some repayments at some BDCs more so than others. Were you surprised to see the five full payoffs here in the quarter and any kind of visibility into repayment activity for either the next quarter or the balance of the year?
spk13: Yeah, so another good question. So we had five full payoffs that totaled a little over $20 million for the quarter. In some ways, they were a surprise. In some ways, they weren't. We have visibility into our pipeline. We know pretty accurately kind of if companies are you know, up for sale and whether we're going to get repaid or whether we're going to get refinanced. And, you know, in the case of the five repayments, they were a result primarily of M&A activity. So, you know, those were pleasant surprises and payoffs, as you know, are good for us because we can recycle capital, generally accelerate, you know, things like fees and stuff like that. So, you know, we're, you know, had anticipated some of this activity certainly in the first quarter. As we look at potential repayment activity from here on out, the repayment pipeline is average, I would say. We don't see any M&A transactions accelerating for sure. I don't know that it'll be as high as we saw in the first quarter. But, you know, we are seeing, you know, generally a pickup in M&A activity that started really kind of post the end of the first quarter. As Ted said in his opening remarks, Q1 is pretty light in terms of M&A activity. You know, we're seeing some pickup, and that will translate twofold to us. One is, you know, higher levels of repayments. And then, you know, secondly, obviously, financing opportunities, you know, we believe at favorable terms and favorable rates.
spk04: That's good stuff, Mick. I appreciate it. You're welcome.
spk01: And there are no further questions at this time. I will turn the call back to Ted Koenig.
spk10: Thank you all for attending our call today and asking the questions. We appreciate the opportunity to answer any questions you have. To the extent that there are any going forward, please feel free to contact Nick or Alex. And we look forward to speaking again on our next quarterly call. So thanks and have a good day.
spk01: This concludes today's conference call. You may now disconnect your lines.
Disclaimer