Monroe Capital Corporation Price & Performance (MRCC)

Last Friday, we filed our 10 ks with the SEC and this morning, we issued our fourth quarter and full year 2024 earnings press release. On today's call, I'll begin by providing an overview of our financial results, and then share some commentary on the current market environment and provide an update on Monroe's partnership with the Wendell Group I am pleased to report that our adjusted net investment income covered our $0.25 per share dividend for the quarter MRCC delivered a total annualized dividend yield at our trading price of 11.4% using our 02/28/2025 closing share price.

We are proud of our long standing track record of delivering attractive risk adjusted returns to our shareholders across a variety of economic landscapes and market environments. In the fourth quarter of twenty twenty four, our adjusted net investment income was $6,200,000 or $0.29 per share which was a slight decrease from $6,600,000 or $0.31 per share last quarter. We reported NAV of $191,800,000 or $8.85 per as of December 31, 2024, compared to NAV of $198,900,000 or $9.01 $8 per share as of 09/30/2024. The 3.6% decline in an AV this quarter was primarily the result of net unrealized losses attributable to a specific portfolio company partially offset by net investment income in excess of the dividend paid during the quarter. MRCC's leverage increased from 1.5 times debt to equity at 09/30/2024 to 1.53 tons at 12/31/2024. The increase was due to the timing of certain quarter end portfolio company pay downs that were not applied to reduce the outstanding borrowings on our revolving credit facility until after year end. As market conditions continue to evolve, we remain dedicated to prudent portfolio management of our predominantly first lien portfolio are maintaining a highly selective investment approach. Our portfolio companies have benefited from a positive economic coupled with declining interest rates and steadying inflation, In the fourth quarter and throughout 2024, Our portfolio companies demonstrated healthy revenue and EBITDA growth trends further increasing the portfolios sound interest coverage ratio.

Our portfolio management team continues to focus on maintaining the asset quality of the portfolio. In the second half of twenty twenty four, we successfully exited several investments that were previously on our credit watch list.

We believe that MRCC's portfolio companies are positioned well to benefit from a favorable market outlook. In 2024, we invested in seven Newport These new portfolio companies operate in resilient industries and the transactions we're executing at compelling spreads as well as at conservative loan to value attachment points. However, our ability to grow with our existing portfolio companies is what allows us to remain highly selective with new investments as well as provides us with attractive incumbency lending opportunities. Deploying capital into existing portfolio companies that we know well has proven to reduce underwriting risk [indiscernible] historically generated some of our most attractive risk adjusted returns. In a year where middle market experienced significant spread compression, incremental and follow on investments made to our had attractive spreads accounted for over 65% of MRCC's capital deployment. The lower interest rates improved economic outlook and accelerated sponsor M and A activity are dynamics that we expect to support a sustainable and highly active dealing We will continue to lean on our leading in house originations platform rigorous underwriting standards to capitalize on private credit and middle market lending tailwinds We will be focused on selectively redeploying capital from legacy investment payoffs into attractive new and existing portfolio company relationships.

Before I turn the call over to Mick and Alex, I want to provide a quick update on the strategic partnership with Lindell Group that Monroe announced late last year As you may recall, Monroe, the owner of MRCC's external [indiscernible] plans to partner with the Wendell Group a French investment company one of Europe's leading investment [indiscernible] When Dell is purchasing a majority ownership interest in Monroe Monroe, and will commit $1,000,000,000 of new seed capital to support new and existing investment strategies of the Monro platform. On February 21, 2025, MRCC shareholders approved the new investment advisory and management agreement that was required for consummation of the transaction. While the approval of a new investment advisor and management by shareholders was required as a result of the transaction, there are no changes to the terms. Including fee structure, and services provided. Monroe Monroe by extension our external advisor will continue to operate autonomously and independently and its investment process strategy and operations remain the exact [indiscernible] When Dell will not have a role, in the Monroe investment process. On behalf of Monroe and the MRCC Board, I would like to thank our shareholders for your voting participation and the strong support that we received in approving the new investment advisory [indiscernible] We believe that this is an important step in driving value for our shareholders.

The transaction is expected to close later in the first quarter of twenty twenty five. I am now going to turn the call over to Mick who's going to walk you through MRCC's financial results in greater detail. Thank you, Ted. At year end, our investment portfolio totaled $457,000,000 a $17,300,000 decrease from $474,300,000 at the end of the last quarter our investment portfolio consisted of debt and equity investments in 91 portfolio companies compared to 94 portfolio companies at the end of the prior quarter, In the fourth quarter of twenty twenty four, we saw middle market loan volumes continue to rise primarily driven by increased private equity sponsor activity. According to LSEG LPC's fourth quarter twenty twenty four middle market analysis middle market direct lending M and A volumes in the fourth quarter of twenty twenty four represented the strongest quarterly results since the fourth quarter of twenty twenty one. This led to an 85% sponsored direct lending volumes in 2024 a new record for annual growth. Direct lenders such as Monroe continue to play a critical role in supporting sponsored middle market transactions offering sponsors compelling capital solutions that can be used to support strategic initiatives for existing portfolio companies and to ultimately position those companies for exits.

In 2024, private credit middle market deal issuance was 2.9 times greater than syndicated deal lending. LSEG's report further indicated that much of this growth in issuance was driven by delayed drop term loan funding volumes to support existing investments. Delayed draw term loan fundings were 2.4 times greater in 2024 than in 2023. Which was also a new annual record. Investment activity across our platform and at MRCC has been generally reflected reflected of those industry dynamics.

MRCC's affiliation with a best in class scale platform in Monroe Capital allows us to remain competitive to remain competitive and commit to portions of transactions inquisitive and growing portfolio companies. With strong private responses. Further, incremental investments made to our existing portfolio companies accounted for much of our investment activity in the fourth quarter and throughout 2024. During the year, we invested $30,400,000 in seven new portfolio companies, and $57,600,000 through existing portfolio companies. During the fourth quarter, we invested $2,200,000 in one new portfolio company and $14,200,000 to existing portfolio companies. A more active deal environment will allow MRCC to rotate out of legacy assets and redeploy capital into new assets from more attractive vintages as well as into higher performing existing portfolio companies that are seeking to execute on key strategic initiatives. Throughout 2024, MRCC had $115,000,000 in up from $103,000,000 in 2023. In the fourth quarter, we received five full payoffs aggregating $14,500,000 and incurred partial and normal course pay downs totaling $14,500,000 At December 31, 2024, we had total borrowings of $293,900,000 including $163,900,000 outstanding under floating rate revolving credit facilities and $130,000,000 of our 4.7% fixed rate 2026 notes. At 12/31/2024, our leverage was Monroe point three Monroe point five three times debt to equity.

A slight increase from 1.5 times debt to equity at 09/30/2024. However, in the January, in the January 2025, we used excess cash on hand for Cheyos that occurred at the end of the quarter to pay down debt At year end, the revolving credit facility had 91,100,000.0 availability to borrowing base capacity. Now turning to our financial results. Adjusted net investment income a non GAAP measure, was $6,200,000 or $0.29 per share this quarter compared to $6,600,000 or $0.31 per share the prior quarter. Excluding the impact of incentive fee limitations, of $1,200,000 and $700,000 for the fourth quarter and third quarters respectively adjusted net investment income would have been $5,000,000 or $0.23 per share in in quarter ended 12/31/2024, and $5,900,000 or $0.27 per share per share in the quarter ended 09/30/2024. The decrease of $900,000 or $0.04 per share in adjusted net investment income was primarily due to a decline in effective interest rates driven by base rate decreases. As well as the decline in the average size of the portfolio and lower other income. 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 throughout the next quarter.

The weighted average effective yield on the portfolio's debt and preferred equity investments was 10.2% which compares to 11% a quarter ago.

The decline in effective yield was largely due to the decline in base rates during the quarter. As well as the addition of one time investment of one investment to non accrual status As of 12/31/2024, our NAV was $191,800,000 which decreased by 3.6% from $198,900,000 as of 09/30/2024, Our corresponding NAV per share decreased by $0.33 or $9.18 per share to $8.85 per share.

The decline in NAV this quarter was primarily the result of net unrealized losses attributable to a specific portfolio company. While this portfolio company has generally demonstrated solid performance, the fair market value which is determined via discounted cash flow model, was impacted by expected timing related to the monetization of the asset. The mark to market unrealized loss in the quarter partially offset by net investment income in excess of the dividend paid. I will now turn it over to Alex who will provide more details on our fourth quarter operating performance. Thank you, Nick. Looking to our statement of operations, investment income totaled $14,000,000 during the fourth quarter of twenty twenty four, a decrease from $15,700,000 in the third quarter of twenty twenty The $1,700,000 decrease in investment income was primarily the result of a declining interest rate environment. Which led to lower base interest rates on our investment portfolio In the second half of twenty twenty four, the SITREP amounted to nearly a 100 basis point decline in base rates, This coupled with six consecutive quarters of spread compression in the market has continued to put pressure on interest yields for direct lenders. However, in the fourth quarter of twenty twenty four, we saw spreads widen for the first time since the first quarter of twenty twenty three.

While the pricing increase was indeed modest, we believe that the reversal could potentially indicate the leveling off in spreads. In addition to the impact of the decline in the interest rate environment, the placement of an additional portfolio company on non accrual status and lower average investment assets during the quarter also contributed to the decrease in investment income. Our total investments on non accrual status represented 3.4% of the portfolio of fair market value, as of December 31, 2024, a slight increase from 3.1% of the portfolio fair market value as of 09/30/2024 The challenges we have seen in the portfolio have been for the most part due to idiosyncratic factors of specific borrowers, that are not indicative of a broader pattern or stress within the portfolio. We will continue to leverage our deep roster of investment professionals and our proven underwriting and portfolio management playbook to maintain a stable asset base in a dynamic market environment. Now shifting over to the expense side. Total expenses for the fourth quarter of twenty twenty four were $8,000,000 compared to $9,200,000 of total expenses for the third quarter of twenty twenty four excluding the impact of incentive fee limitations during both periods.

Total expenses decreased by $700,000 during the fourth quarter primarily due to lower interest and other debt financing expenses driven by a decrease in our average debt outstanding decline in base rates on our borrowing under the revolving credit facility. Our net loss on the portfolio for the quarter was $7,700,000 compared to a net loss of $1,500,000 for the prior quarter These net losses for the quarter ended 12/31/2024 were primarily attributable to an unrealized mark to market loss associated with the change in fair value related to the portfolio company that Mick mentioned earlier in his remarks. While the remainder of the portfolio is generally stable, The average mark on the portfolio decreased by approximately 1.7% from 93.9% of cost at 09/30/2024, the 92.2% of cost as of December 31, 2024, Despite the slight decrease in the average borrower, portfolio companies rated two on our internal risk rating scale accounted for over 81% of the fair value consistent with the end of last quarter and relatively in line with our trailing eight quarter average. Starting now to SLF. As of 12/31/2024, the Epsilon Hyde investments in 36 different borrowers aggregating $98,000,000 in fair value the SLS 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 core by approximately 14 basis points from 87% of amortized cost as of 09/30/2024, to 86.9% of amortized costs as of December 31, 2024. Consistent with the prior quarter, MRCC received income distributions from SLF of $900,000 As of December 31, 2024, the SLF had borrowings under its non recourse credit facility of $38,200,000 and $71,800,000 in available capacity subject to borrowing based 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. Thank you, Alex. As we focus on 2025, we remain committed to delivering long term value for our stockholders through leveraging our deep credit experience, rigorous underwriting standards and time tested portfolio management playbook. A predominantly first lien portfolio which carries an effective average yield of over 10.2% continues to produce strong risk adjusted returns resulting in 11.4% annualized dividend yield, MRC enjoys a strong strategic advantage in being affiliated with an award winning best in class middle market private credit manager with over $20,000,000,000 in assets under management supported by a team consisting of over two seventy five employees including approximately 120 dedicated investment professionals as of January 1. 2025, we believe that 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'm going to ask the operator to open the call now for questions. [indiscernible] Thank you. We will pause for just a moment to compile the Q and A roster. Your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Hi, thanks for taking my question. First of all, congratulations because the share on par with the NAV per share. So and that's real improvement. Going forward, given everything that you guys highlighted in terms of the lower portfolio yields slightly decreasing leverage early in the quarter the first quarter The smaller portfolio what is the strategy here to grow earnings, to grow the portfolio? [indiscernible] you've been contracting the portfolio for I think almost two years now and just see whether or not there might be a reversal in the cards. Chris, good question. You're on top of it. The plan was to put ourselves in the right size place [indiscernible] clean up some of the old legacy portfolio issues allow the markets to understand that I think as you mentioned, our stock price right now is very close to our NAV. And I'm hopeful that Now we're in a position to play some offense and stuff on the accelerator. We're working on a couple of internal plans right now to do that. And I think you'll see some you'll see some effort to grow the portfolio here. And to do some interesting things over 2025. Great. And then I guess you have some non accrual investments which have been on non accrual for a very long time.

And could we see some resolutions on some of these larger names in coming quarters? Nick, why don't you take that one?

Not sure.

So our non accruals, we've got circa 10 names on non accrual and includes some legacy assets that have been on our books for a while. Those include a couple of litigation matters we are in the process of finalizing basically its proceeds, held and trust and otherwise that we've been working on for a while. But we are actively working on on our non accrual names to rotate them out of the portfolio to put in our cash into more accretive newer vintage assets. But I can assure you that we're kind of actively working on this on these non accruals with our dedicated portfolio management and workout team. And hope to make real progress on this 2025.

Great. Final question, you guys are unique among BDCs in terms of you have a heavy reliance on bank credit facilities for your debt structure now.

And some of the non bank other non bank lenders, which I cover, but mostly commercial real estate focus are starting to see real headwinds in terms of the commercial real estate valuations. And in turn, that generally is not a good sign for regional banks. And I just want to see in light of the any consideration in terms of swapping out the bank credit facilities for baby bonds or something.

That's always a consideration. Chris, we're not real estate. Real estate is very different [indiscernible] Right now, I've never seen more interest from financial institutions both regulated and non, in providing capital and credit to well diversified middle market first lien loan portfolios. So I think we've got lots of options in that regard. But we're always looking at unsecured provided we think that the arbitrage works.

Yes. No, my point being commercial real estate is and area of vulnerability for regional banks. For you guys.

And so if commercial real estate price [indiscernible] in terms of the availability of your credit facilities. And that's just something I'm just raising. So it's It's a good thought. Process and we're always focused on it. And as I said, Nick and Alex are very focused on optimizing Our capital structure We're always looking at Good.

Yes. So to me, we're not heavily we're not really heavily dependent on one regional bank. Our credit facilities are fairly well diversified.

Okay. Okay. Thanks guys. Thanks, Chris.

Seeing as we do not have any more I will now turn the call back over to Ted Koenig for closing remarks.

Thank you all for joining us today. As I mentioned earlier, we're excited about prospects for 2025. We're working at a number of interesting things. And to the extent you have questions, that weren't answered today, please feel free to contact Nick or Alex. We're always interested and willing to speak about our business and I look forward to our next call or next quarter. So thank you and have a good day.

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