Monroe Capital (NASDAQ:MRCC) Q3 2024 Earnings Call Transcript November 13, 2024 11:00 AM ET

Company Participants

Ted Koenig - CEO
Mick Solimene - CFO and CIO
Alex Parmacek - Deputy Portfolio Manager

Conference Call Participants

Christopher Nolan - Ladenburg Thalmann
Robert Dodd - Raymond James

Operator

Welcome to Monroe Capital Corporation's Third Quarter 2024 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, November 13, 2024. 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.

Ted Koenig

Good morning, and thank you to everyone who has joined us today. Welcome to our third quarter 2024 earnings call. I am here with Mick Solimene, our CFO and Chief Investment Officer; and Alex Parmacek, our Deputy Portfolio Manager. Last evening, we issued our third quarter 2024 earnings press release.

[Technical Difficulty]

Mick Solimene

For folks on the line, it looks like Ted has been disconnected temporarily. So we'll give him a moment. So he'll be rejoining shortly.

Ted Koenig

Okay. I am back. Sorry about that. I got dropped from the call before -- can you hear me, Mick?

Mick Solimene

We can.

Ted Koenig

Okay. All right. So let's pick up again where I left off. Good morning, and thank you to everyone. Welcome to our third quarter earnings 2024 call. I'm here with Mick Solimene, our CFO, and Chief Investment Officer; and Alex Parmacek, our Deputy Portfolio Manager. Last evening, we issued our third quarter 2024 press release and filed our 10-Q with the SEC. On today's call, I'll begin by providing an overview of our third quarter results and then share some commentary on the recently announced strategic transaction with the Wendel Group.

I am pleased to report that for the 18th consecutive quarter, our adjusted net investment income covered our $0.25 per share dividend. MRCC delivered a total annualized dividend yield on our trading price of over 12% using our November 11, 2024, closing share price. We are proud of our long-standing track record of delivering stable and consistent dividends to our shareholders.

In the third quarter of 2024, our adjusted net investment income was $6.6 million or $0.31 per share, which was a nominal decrease from $6.7 million last quarter and stable on a per share basis at $0.31 per share. Our adjusted net investment income once again covered our $0.25 per share dividend by nearly 1.25 times. We reported NAV of $198.9 million or $9.18 per share as of September 30, 2024, compared to NAV of $199.3 million or $9.20 per share as of June 30, 2024. The slight decline in NAV was primarily the result of net unrealized losses attributable to certain portfolio companies, offset by net investment income in excess of the dividend paid during the quarter.

MRCC's debt-to-equity leverage decreased from 1.54 times at June 30, 2024, to 1.50 times at September 30, 2024, driven by several payoffs that occurred throughout the quarter as well as proceeds from various investment sales and paydowns. We continue to focus on managing and supporting our existing investment portfolio companies with add-on lending opportunities while maintaining a highly selective and disciplined approach when deploying capital from payoffs into attractive investment opportunities and new portfolio company relationships.

Our ability to grow with our existing portfolio companies that we know well allows us to remain highly selective with new investment opportunities. Our incumbency lending ability has proven to reduce underwriting risk and has historically generated some of our most attractive risk-adjusted returns.

During the third quarter, we received three full payoffs of older vintage assets. While we invested in three new portfolio companies, we also made numerous incremental investments in various existing portfolio companies. During the quarter, over half of our new fundings were in support of growth initiatives of our existing borrowers.

Before I turn the call over to Mick and Alex, I want to provide commentary on the strategic partnership that Monroe announced several weeks ago. As you know, Monroe, the owner of MRCC's external advisor, announced plans to partner with the Wendel Group, a French investment company. Wendel is purchasing a majority ownership interest in Monroe and will commit $1 billion of new seed capital to support new and existing investment strategies for the Monroe platform. The Wendel Group is a 320-year-old investment firm based in Paris. They are a publicly held company now, but controlled by the Wendel family, who owns 52% of the firm and voting control. They are transitioning from an old line industrial holding company to an asset management company, and Monroe is a significant step for them in making this transition. They are led by Laurent Mignon, who was previously the CEO of Natixis Investment Management, a diversified European multi-manager boutique. Monroe's strategy is to acquire interest in asset managers in the following secondaries and infrastructure. Monroe will be their private credit management platform. Monroe and by extension, our external adviser, will continue to operate autonomously and independently and its investment process, strategy and operations will remain the exact same. Wendel will not have a role in the Monroe investment process. MRCC expects to benefit from the additional capital, scale and commitment of the partnership between Monroe and the Wendel Group. The transaction is expected to close in the first quarter of 2025.

I am now going to turn the call over to Mick, who is going to walk you through our financial results in greater detail.

Mick Solimene

Thank you, Ted. At quarter end, our investment portfolio totaled $474.3 million, an $11.5 million decrease from $485.8 million at the end of last quarter. Our investment portfolio consisted of debt and equity investments in 94 portfolio companies, consistent with the end of the prior quarter.

In the third quarter, we saw middle market loan volumes rise, primarily driven by increased private equity sponsor activity. According to LSEG LPC's third quarter 2024 middle market analysis, middle market direct lending M&A volumes were up 43% compared to the prior year and middle market LBO lending volume was up 52% compared to the last quarter alone. Additionally, sponsors continue to exhibit demand for capital solutions that can be used to support strategic initiatives for existing portfolio companies and to ultimately position those companies for exits. LSEG's report further indicated that delayed draw term loan funded volumes in the third quarter of 2024 were up 62% compared to the third quarter of 2023.

Our investment activity across our platform at MRCC in the quarter is reflective of those industry dynamics. Incremental investments made towards existing portfolio companies accounted for nearly 60% of our investment activity in the quarter. During the quarter, we invested $11.1 million in three new portfolio companies while we had revolver delayed draw fundings and add-ons to existing portfolio companies totaling $14.7 million. We expect a more active deal environment in the middle market throughout the balance of 2024 and into 2025. Supporting this trend is the acceleration of sponsored transaction activity as private equity managers are benefiting from lower interest rates, while at the same time, are under pressure to return capital to their LPs. A more active deal environment will allow MRCC to rotate out of legacy assets and selectively redeploy capital into new assets in more attractive vintages.

In the quarter, we received three full payoffs aggregating to $11.4 million and incurred partial and normal course paydowns totaling $26 million. We also received $1 million in proceeds relating to the full sale of one equity position and a partial sale of another equity position.

At September 30, 2024, we had total borrowings of $299 million, including $169 million outstanding under our floating rate revolving credit facility and $130 million of our 4.75% fixed rate 2026 notes. At quarter end, revolving credit facility had $86 million of availability subject to borrowing base capacity.

Now turning to our financial results. Adjusted net investment income, a non-GAAP measure, was $6.6 million or $0.31 per share this quarter compared to $6.7 million or $0.31 per share in prior quarter. Excluding the impact of incentive fee limitations of $700,000 and $1 million for the third and second quarters, respectively, adjusted net investment income would have been $5.9 million or $0.27 per share in the quarter ended September 30, 2024, up from $5.7 million or $0.26 per share in the quarter ended June 30, 2024. Even without the benefit from the incentive fee limitation, adjusted net investment income generated in the past two quarters exceeded our $0.25 per share quarterly dividend.

As a result of the shareholder friendly total return requirement within MRCC's incentive fee calculation, we currently expect limitations on our incentive fees to persist at levels over the next two quarters. The weighted average effective yield on the portfolio's debt and preferred equity investments was 11%, which compares to 11.9% a quarter ago. The decline in effective yield was largely due to the 50 basis point decline in base rates during the quarter as well as the addition of one investment to nonaccrual status.

As of September 30, 2024, our NAV was $198.9 million, which decreased slightly from $199.3 million as of June 30, 2024. Our corresponding NAV per share decreased by $0.02 from $9.20 per share to $9.18 per share. The decline in NAV this quarter was primarily the result of net unrealized losses attributable to certain portfolio companies that have mostly been impacted by idiosyncratic factors. These mark-to-market unrealized losses were partially offset by net investment income in excess of the dividend paid during the quarter.

I will now turn it over to Alex, who will provide more details on our third quarter operating performance.

Alex Parmacek

Thank you, Mick. Looking to our statement of operations. Investment income totaled $15.7 million during the third quarter of 2024, a slight increase from $15.6 million in the second quarter of 2024. The $100,000 increase in investment income was primarily due to an increase in fee income, which stemmed from various portfolio investment realizations during the quarter, which was included in other income. This increase was partially offset by a decline in interest income, resulting from placing an additional portfolio investment on nonaccrual status and a decrease in the average invested assets during the quarter. With the addition of one new investment being placed on nonaccrual during the quarter, our total investments on nonaccrual status represented 3.1% of the portfolio at fair market value as of September 30, 2024. The challenges we have seen in the portfolio have been, for the most part, due to idiosyncratic factors of specific borrowers and are not indicative of broader pattern or stress within the portfolio. The balance of our predominantly first lien senior secured portfolio continues to demonstrate resiliency.

MRCC's portfolio companies continue to maintain sound interest coverage, supported by healthy revenue and EBITDA growth trends. We will continue to leverage our deep roster of investment professionals and our proven underwriting and portfolio management playbook. We maintain over a 20-year track record of navigating various market and economic environments and remain confident that we can continue to maximize outcomes and deliver value for our shareholders.

Now shifting over to the expense side. Total expenses for the third quarter of 2024 were $9.2 million compared to $9.1 million of total expenses for the second quarter. Excluding the impact of the incentive fee limitations during both periods, total expenses decreased by $200,000 during the third quarter, primarily due to lower interest and other debt financing expenses driven by a decline in our average debt outstanding. Our net loss for the quarter was $1.5 million compared to a net loss of $3.3 million for the prior quarter. These net losses for the quarter ended September 30, 2024, were primarily attributable to the unrealized mark-to-market losses on certain portfolio companies that have underlying credit performance concerns, partially offset by a modest net gain on the balance of our portfolio. The average mark on the portfolio decreased slightly by approximately 50 basis points from 94.4% of cost at June 30, 2024, to 93.9% of cost at September 30, 2024.

Turning now to SLF. As of September 30, 2024, the SLF had investments in 36 different borrowers, aggregating to $98.7 million at fair value. 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. In the quarter, the average mark on the SLF portfolio decreased slightly by approximately 1.3% from 88.3% of amortized cost as of June 30, 2024, to 87% of amortized costs as of September 30, 2024. Consistent with the prior quarter, MRCC received income distributions from SLF totaling $900,000. As of September 30, 2024, SLF had borrowings under its nonrecourse credit facility of $41.5 million and $68.5 million of available capacity, subject to borrowing base availability.

At this point, I will now turn the call back over to Ted for some closing remarks before we open up the line for some questions.

Ted Koenig

Thank you, Alex. Looking forward, our focus will be twofold. First, on selectively redeploying capital from payoffs into both accretive investment opportunities as well as into incumbent portfolio companies. Second, on portfolio management, where we can leverage our deep and experienced team of investment professionals to execute our portfolio management playbook.

MRCC continues to offer stable and consistent dividends to our shareholders as this quarter marked the 18th consecutive quarter where our adjusted net investment income has met or exceeded our $0.25 per share dividend. MRCC enjoys a strong strategic advantage in being affiliated with an award-winning best-in-class middle market private credit manager with approximately $20 billion in assets under management, supported by a team consisting of over 275, including 117 dedicated investment professionals as of October 1, 2024.

Going forward, we will continue to focus on generating investment income that meets or exceeds our dividend and achieving positive long-term NAV performance. We believe our new partnership with the Wendel Group will offer our shareholders and limited partners the benefit of significant new investment into the Monroe Capital overall platform. We believe that our predominantly first lien portfolio, which carries an average effective yield of 11%, positions us well to continue delivering attractive risk-adjusted returns to our investors as highlighted by our 12.3% dividend yield based on the November 11, 2024, closing price. We believe the Monroe Capital Corporation continues to provide an attractive investment opportunity to our shareholders and to other investors.

Thank you all for your time today, and this concludes our prepared remarks. I am going to ask the operator to open the call now for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan

Hi, thank you for taking my questions. Ted, I would respectfully suggest a third focus should be expense control. I applaud the fee waivers experienced over the last two quarters and I’ve noticed that the stock price for MRCC has climbed. And I respectfully suggest that going forward, a major focus for MRCC should be containing operating expenses because I think it would impact the share price positively. No real question. That's all I want to say.

Ted Koenig

Thank you.

Operator

Your next question comes from the line of Robert Dodd with Raymond James. [Operator Instructions] Mr. Robert Dodd, please go ahead.

Robert Dodd

Hi, thanks for taking the question. A question on the Wendel partnership. I mean you talked about they're going to seed new strategies at Monroe, the parent, to expand the private credit footprint even further. Is it -- I mean, obviously, it's early days, but would it be your expectation that any of the originations in those newer strategies, would they potentially be appropriate for inclusion in the BDC and diversify the type of lending strategies that the BDC does? Or is it more -- and I'm talking obviously about the MRCC BDC because you also have a venture BDC that you own in a sense. So I mean, just any thoughts on that? Is it going to expand the footprint of the BDC? Or are these strategies going to be more broad-based for the institutional side of the platform and maybe not impact the BDC?

Ted Koenig

That's a good question, Robert. MRCC will get the benefit of any additional strategies or investments that the Monroe platform will undertake. We're going to look at strategies that are synergistic and easily digestible for the Monroe platform. We've got several that we're looking at. And I think MRCC will stand to benefit from each of those strategies because there'll be higher interest earning and create additional diversification.

Robert Dodd

Got it. Thank you for that. Just the other one kind of on the theme to Chris' question. I mean, the manager has been very supportive of MRCC over the years in terms of waiving fees if -- obviously, that is not a necessity right now with rates where they are and maybe they're going to stay more elevated for a longer period of time. But you emphasized 18 consecutive quarters of earning that dividend. Some of those were a consequence of the manager being supportive. Would it be your expectation that if necessary, right, I mean, rates have to come down. Would the manager -- do you expect the manager to be supportive in the same manner going forward?

Ted Koenig

The answer, I believe, is yes. I mean we've shown a history of being very investor friendly and shareholder friendly and supporting MRCC. We think it's very important for the Monroe platform to continue to support MRCC.

Robert Dodd

Got it. Thank you.

Operator

[Operator Instructions] Seeing as there are no further questions at this time, I will now turn the call back over to Ted Koenig for closing remarks. Please go ahead.

Ted Koenig

I want to thank everyone for joining us on the call today. Monroe Capital is a best-in-class platform and we are going to continue to do everything possible to support MRCC and continue to drive differentiated and high-quality assets into MRCC. So, to the extent anyone has questions, please don't wait until the next quarter, contact Mick or Alex. I look forward to speaking to everyone again on the next quarterly call. Thank you.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.