Monroe Capital Corporation

Welcome to Monroe Capital Corporation's third quarter 2023 earnings conference call. Before we begin, I would like to take the 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, assumption, and projection, as of today, November 9, 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 factor described from time to time in a 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, the call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation. Please go ahead.

Good morning, and thank you to everyone who has joined our earnings call today. I am here with Mick Salamini, our CFO and Chief Investment Officer, and Alex Parmasek, our Deputy Portfolio Manager. Last evening, we issued our third quarter 2023 earnings press release and filed our 10-Q with the SEC. I am pleased to report that for the 14th consecutive quarter, our adjusted net investment income in the quarter covered our dividend. Our adjusted net investment income was $5.5 million, or $0.25 per share, compared to $6.1 million, or $0.28 per share, last quarter. We also reported NAV of $207.6 million, or $9.58 per share, as of September 30th, 2023, compared to $2.13 million, or $9.84 per share as of June 30th, 2023. The decline in NAV was primarily attributable to net unrealized losses on the portfolio, attributable to a few specific portfolio companies that were affected by idiosyncratic factors, as well as a decrease in value at SLF, which was driven by unrealized mark-to-market losses. the value of the remaining portfolio increased modestly. During the quarter, MRCC's debt-to-equity leverage increased from 1.54 times debt-to-equity to 1.60 times debt-to-equity. The increase in leverage was primarily driven by the aforementioned decrease in NAV. Before I turn the call over to Mick and Alex, I would like to share some insight to the economic environment and current market. In the face of an uncertain economic outlook, it continues to be an exciting time to deploy capital in direct lending where there are consistently attractive risk-adjusted returns. Direct lenders such as Monroe Capital remain the preferred solution to middle market companies seeking financing with an emphasis on providing a higher certainty of execution on new transactions and demonstrating ongoing support for portfolio companies. The volatile macroeconomic environment has resulted in lower New Deal activity than in prior years. Yet our new investment pipeline remains robust heading into the fourth quarter. This includes a steady flow of lower risk incumbency lending opportunities, which relate to add-on financings, which has allowed us to maintain highly selective approach when assessing and underwriting new investment opportunities. In order for the Fed to manage inflation, the interest rate environment will likely be higher for longer. Given GDP expansion, job growth statistics, and wage inflation, we see no signs of interest rate cuts on the horizon. At the same time, private equity and other middle market investors are facing heightened pressure to deploy dry powder and LP capital. This has led to an uptick in M&A and loan activity despite the higher cost of financing as direct lending volumes in the sponsored middle market increased 12% in the third quarter relative to the second quarter per refinitive. These dynamics provide compelling tailwinds to the private credit direct lenders as transactions being completed at lower leverage levels, more conservative attachment points, and with historically higher equity contributions. We believe this trend will continue in this fourth quarter and into 2024. We remain focused on capitalizing on these attractive market fundamentals and the growing opportunity set within private credit. Throughout 2023, the economy has shown more resiliency than many had anticipated. In turn, we have seen solid overall financial performance across our borrowers, and our portfolio maintains a healthy average mark of nearly 97% as of the end of the quarter. Our portfolio companies have demonstrated strong top-line growth with continued EBITDA growth, although at a slightly lower margin. Our companies continue to adapt their business models to combat the lingering impacts of inflation, and have begun to realize those benefits. The portfolio's overall interest coverage remains sound, with sufficient cushion to weather an extended period of elevated interest rates and potentially a more challenging economic environment. Looking ahead, we anticipate that some combination of an economic slowdown, a higher for long-term interest rate environment, heightened volatility in the capital markets, and geopolitical uncertainty around the globe seems inevitable. Companies are facing higher borrowing costs against a potential challenging economic environment. In addition to leaning on our defensive and diversified portfolio construct, we continue to emphasize our portfolio management and focus on capital preservation. We believe that our defensive portfolio is well positioned to navigate a potentially prolonged economic downturn, We have nominal exposure to highly cyclical industries, and our portfolio is predominantly comprised of first-lane senior secured loans and conservative loan-to-value attachment points. Our portfolio's modest average loan-to-value and portfolio company leverage provides comfort given the meaningful equity value cushions below our debt. Complementing the portfolio's risk-averse composition is our deep and highly experienced portfolio management team. Our portfolio team continues to actively monitor real-time performance and cash flows at our portfolio companies while regularly engaging with the management teams to stay informed on key operating and industry trends. Our portfolio management playbook, which has been time-tested over the course of nearly two decades, allow us to identify challenges early and to proactively develop strategies to maximize our outcomes. We believe that the portfolio stands to benefit from Tailwind's In the private credit and lower middle market segment, MRCC enjoys a strong strategic advantage in being affiliated with the best-in-class middle market private credit asset management firm with nearly $18 billion in assets under management and approximately 240 employees with over 100 dedicated investment professionals as of September 30, 2023. We continue to focus on generating adjusted net investment income that meets or exceeds our dividend and restoring the portfolio to positive long-term NAV performance. I am now going to turn the call over to Mick, who will walk through our financial results in greater detail.

Thank you, Ted. As of September 30th, 2023, our investment portfolio totaled $518.3 million. an increase of $2.9 million from $515.4 million as of June 30th, 2023. At the end of the quarter, our investment portfolio consisted of debt and equity investments in 99 portfolio companies, unchanged from the end of the prior quarter. During the quarter, we made an investment in one new portfolio company, funding $2 million at an effective interest rate of 12.6%. We also made a nominal equity investment in this new portfolio company. Further, we had revolver or delayed draw fundings and add-ons to existing portfolio companies totaling $10.7 million. We received one full payoff for a nominal amount and incurred normal course paydowns totaling $6.7 million. At the end of the third quarter, we had total borrowings of $331.1 million, including $201.1 million outstanding under our floating rate revolving credit facility, and $130 million of our 4.75 percent fixed rate 2026 notes. Total borrowings outstanding increased nominally during the quarter. The revolving credit facility had $53.9 million of availability, subject to borrowing-based capacity. Now, turning to our financial results, adjusted net investment income, a non-GAAP measure, was $5.5 million, or 25 cents per share this quarter, compared to $6.1 million, or 28 cents per share in the prior quarter. Our weighted average portfolio effective yield increased from 12.2 percent as of June 30th to 12.5 percent as of September 30th. The positive effect from this increase in portfolio yield on adjusted net investment income was offset by a $1 million reversal of previously accrued fee income associated with our former loan investment in IT Global Holdings, a loan that was fully paid off in 2022. This incremental fee income was to be paid in conjunction with a future liquidity event of the company. However, unforeseen circumstances resulted in the company filing for Chapter 11 prior to a sale where we would have monetized that fee income. We have $512,000 of remaining accrued fee income from IT Global, and we are actively monitoring the bankruptcy process to assess the likelihood of recovery for this exposure. Excluding this one-time reversal of previously accrued fee income, our investment income increased by $300,000 from last quarter. Further, adjusted net investment income would have been 29 cents per share up from 28 cents per share last quarter due to an increase in portfolio yield driven by rising interest rates. At this level, our dividend coverage would have been nearly 1.2 times. When considering current leverage levels, The interest rate environment and the favorable percentage of our fund leverage at a fixed rate, we believe that on a run rate basis, our adjusted net investment income will continue to cover the current 25 cent per share quarterly dividend, all things being equal, all other things being equal. As of September 30th, 2023, our net asset value was $207.6 million, which decreased from $213.2 million of NAV as of June 30th, 2023. And our corresponding net asset value per share decreased by 26 cents from $9.84 per share to $9.58 per share. The decline in net asset value this quarter was a result of net unrealized losses attributable to a few specific portfolio companies that were affected by market conditions and various idiosyncratic factors. The balance of the decrease to net asset value was the result of net mark-to-market unrealized losses that negatively impacted the value of SLF. I will now turn the call over to Alex, who will provide more details on our third quarter operating performance.