Monroe Capital - Earnings Call - Q4 2024

Executive Summary

• Q4 delivered Adjusted NII of $6.2m ($0.29/share), covering the $0.25 dividend; however, NAV fell 3.6% QoQ to $8.85/share on an unrealized mark tied to a single portfolio company, and investment income declined with lower base rates.
• Portfolio yield and mix softened: weighted average effective yield fell to 10.2% (from 11.0% in Q3), non‑accruals ticked up to 3.4% of fair value (from 3.1%), and investments at fair value declined to $457.0m (from $474.3m).
• Management expects incentive fee limitations to continue next quarter (supportive of NII) and signaled intent to “play some offense” and pursue portfolio growth in 2025 as deal activity improves.
• The Board declared a Q1 2025 distribution of $0.25/share; strategic partnership with Wendel received shareholder approval and is expected to close in Q1 2025, with no change to adviser fee terms—potential catalysts alongside resolution of legacy non‑accruals.
• Wall Street consensus (S&P Global) estimates were unavailable at the time of analysis; beat/miss assessment vs. consensus could not be performed (see Estimates Context) [GetEstimates error].

What Went Well and What Went Wrong

• What Went Well

  • Dividend coverage sustained: “adjusted net investment income covered our $0.25 per share dividend for the quarter,” supporting an 11.4% annualized dividend yield at the Feb 28 price.
  • Expense tailwinds and fee limits: total expenses fell QoQ; incentive fee limitation under the total return hurdle continued to support NII and is expected to persist into next quarter.
  • Strategic positioning and pipeline: management sees improving sponsor M&A and a more active direct lending environment in 2025; plans to redeploy capital selectively and leverage incumbency advantages.

• What Went Wrong

  • NAV decline and unrealized losses: NAV/share fell 3.6% QoQ to $8.85 due to an unrealized mark on a specific portfolio company, partially offset by NII in excess of the dividend.
  • Yield compression: weighted average effective yield fell to 10.2% (from 11.0% in Q3) on Fed cuts (~100 bps in H2) and prior spread compression; investment income declined by $1.7m QoQ.
  • Non‑accruals edged up: investments on non‑accrual rose to 3.4% of fair value (from 3.1% in Q3); management continues working toward resolutions on legacy names.

Transcript

Operator (participant)

Welcome to Monroe Capital Corporation's Fourth Quarter and Full Year 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, March 3rd, 2025, 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.

Theodore Koenig (CEO)

Good morning, and thank you to everyone who has joined us today. Welcome to our fourth quarter and full year 2024 earnings call. I am here with Mick Solimene, our CFO and Chief Investment Officer, and Alex Parmacek, our Deputy Portfolio Manager. Last Friday, we filed our 10-K 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 Wendel 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 February 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 2024, our Adjusted Net Investment Income was $6.2 million or $0.29 per share, which was a slight decrease from $6.6 million or $0.31 per share last quarter. We reported NAV of $191.8 million or $8.85 per share as of December 31st, 2024, compared to NAV of $198.9 million or $9.18 per share as of September 30, 2024. A 3.6% decline in NAV 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 1.50x debt to equity at September 30, 2024, to 1.53x at December 31st, 2024.

The increase was due to the timing of certain quarter-end portfolio company paydowns 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 and are maintaining a highly selective investment approach. Our portfolio companies have benefited from a positive economic backdrop 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 portfolio's sound interest coverage ratio. Our portfolio management team continues to focus on maintaining the asset quality of the portfolio. In the second half of 2024, 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 new portfolio companies. These new portfolio companies operate in resilient industries, and the transactions were executed 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 and has 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 existing portfolio companies at attractive spreads accounted for over 65% of MRCC's capital deployment. The lower interest rates, improved economic outlook, and accelerated sponsor M&A activity are dynamics that we expect to support a sustainable and highly active deal environment throughout 2025.

We will continue to lean on our leading in-house originations platform and 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 Wendel Group that Monroe announced late last year. As you may recall, Monroe, the owner of MRCC's external advisor, plans to partner with the Wendel Group, a French investment company and one of Europe's leading investment firms. 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 of the Monroe platform.

On February 21st, 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 advisory and management agreement by shareholders was required as a result of the transaction, there are no changes to the terms, including fee structure and services provided. Monroe, and by extension our external advisor, 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. 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 and management agreement. 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 2025. 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.

Mick Solimene (CFO and Chief Investment Officer)

Thank you, Ted. At year-end, our investment portfolio totaled $457 million, a $17.3 million decrease from $474.3 million 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 2024, we saw middle market loan volumes continue to rise, primarily driven by increased private equity sponsor activity. According to LSEG LPC's fourth quarter 2024 middle market analysis, middle market direct lending M&A volumes in the fourth quarter of 2024 represented the strongest quarterly results since the fourth quarter of 2021. This led to an 85% year-over-year increase in 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 2.9x greater than syndicated deal lending. LSEG's report further indicated that much of this growth in issuance was driven by delayed draw term loan funding volumes to support existing investments. Delayed draw term loan fundings were 2.4x greater in 2024 than in 2023, which was also a new annual record. Investment activity across our platform and at MRCC has been generally reflective of those industry dynamics.

MRCC's affiliation with a best-in-class scaled platform in Monroe Capital allows us to remain competitive and commit to portions of transactions in acquisitive and growing portfolio companies with strong private equity sponsors. 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 $30.4 million in seven new portfolio companies and $57.6 million through existing portfolio companies. During the fourth quarter, we invested $2.2 million in one new portfolio company and $14.2 million through existing portfolio companies. A more active deal environment will allow MRCC to rotate out of legacy assets and redeploy capital into new assets for 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 million in aggregate sales and repayments, up from $103 million in 2023. In the fourth quarter, we received five full payoffs aggregating to $14.5 million and incurred partial and normal course paydowns totaling $14.5 million. At December 31st, 2024, we had total borrowings of $293.9 million, including $163.9 million outstanding under our floating rate revolving credit facilities and $130 million of our 4.7% fixed rate 2026 notes. At December 31st, 2024, our leverage was 1.53x debt to equity, a slight increase from 1.50 x debt to equity at September 30, 2024. However, in the first week of January 2025, we used excess cash on hand for payoffs that occurred at the end of the quarter to pay down debt. At year-end, the revolving credit facility had $91.1 million of availability subject to borrowing base capacity.

Now, turning to our financial results, Adjusted Net Investment Income, a non-GAAP measure, was $6.2 million or $0.29 per share this quarter, compared to $6.6 million or $0.31 per share in the prior quarter. Excluding the impact of incentive fee limitations of $1.2 million and $700,000 for the fourth quarter and third quarters, respectively, Adjusted Net Investment Income would have been $5 million or $0.23 per share in quarter-ended December 31, 2024, and $5.9 million or $0.27 per share in quarter-ended September 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 a 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 declining base rates during the quarter, as well as the addition of one investment to non-accrual status. As of December 31st, 2024, our NAV was $191.8 million, which decreased by 3.6% from $198.9 million as of September 30, 2024. Our corresponding NAV per share decreased by $0.33 from $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 a 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 was 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.

Alex Parmacek (Deputy Portfolio Manager)

Thank you, Mick. Looking to our statement of operations, investment income totaled $14 million during the fourth quarter of 2024, a decrease from $15.7 million in the third quarter of 2024. The $1.7 million 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 2024, the Fed cuts 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 2024, we saw spreads widen for the first time since the first quarter of 2023. While the pricing increase was indeed modest, we believe that the reversal could potentially indicate a leveling off in spreads.

In addition to the impact of the declining interest rate environment, the placement of an additional portfolio company on non-accrual status and lower average invested 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 fair market value as of December 31st, 2024, a slight increase from 3.1% of the portfolio fair market value as of September 30th, 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 2024 were $8 million, compared to $9.2 million of total expenses for the third quarter of 2024, 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 and declines in base rates on our borrowing under the revolving credit facility. Our net loss on the portfolio for the quarter was $7.7 million, compared to a net loss of $1.5 million for the prior quarter.

These net losses for the quarter-ended December 31st, 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 September 30th, 2024, to 92.2% of cost as of December 31st, 2024. Despite the slight decrease in the average mark, portfolio companies rated 2 on our internal risk rating scale, accounting for over 81% of the fair value, consistent with the end of last quarter and relatively in line with our trailing eighth quarter average. Turning now to SLF. As of December 31st, 2024, the SLF had investments in 36 different borrowers aggregating $98 million in 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 nominally by approximately 14 basis points from 87% of amortized cost as of September 30th, 2024, to 86.9% of amortized cost as of December 31st, 2024. Consistent with the prior quarter, MRCC received income distributions from SLF of $900,000. As of December 31st, 2024, the SLF had borrowings under its non-recourse credit facility of $38.2 million and $71.8 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.

Theodore Koenig (CEO)

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 an 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 billion in assets under management, supported by a team consisting of over 275 employees, including approximately 120 dedicated investment professionals as of January 1st, 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. This concludes our prepared remarks.

I am going to ask the operator to open the call now for questions.

Operator (participant)

If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead.

Christopher Nolan (SVP of Equity Research)

Hi. Thanks for taking my question. First of all, congratulations because the share price is almost on par with the NAV per share. That's a real improvement. Going forward, given everything that you guys highlighted in terms of the lower portfolio yield, 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? Because you've been contracting the portfolio for, I think, almost two years now. Just see whether or not there might be a reversal in the cards.

Theodore Koenig (CEO)

Chris, good question. You're on top of it. The plan was to put ourselves in a right-sized place and clean up some of the old legacy portfolio issues, allow the market to understand that. I think, as you mentioned, our stock price right now is very close to our NAV. I'm hopeful that now we're in a position to play some offense and step on the accelerator. We're working on a couple of internal plans right now to do that. I think you'll see some effort to grow the portfolio here and to do some interesting things over 2025.

Christopher Nolan (SVP of Equity Research)

Great. I guess you have some non-accrual investments, which have been non-accrual for a very long time. Could we see some resolutions on some of these larger names in coming quarters?

Theodore Koenig (CEO)

Mick, why don't you take that one?

Mick Solimene (CFO and Chief Investment Officer)

Not sure. Our non-accruals, we've got circa 10 names on non-accrual. It includes some legacy assets that have been on our books for a while. Those include a couple of litigation matters that we are in the process of finalizing, basically. It's proceeds held in trust and otherwise that we've been working on for a while. We are actively working on our non-accrual names to rotate them out of the portfolio to put our cash into more accretive, newer vintage assets. I can assure you that we're kind of actively working on these non-accruals with our dedicated portfolio management and workout team and hope to make real progress on this during the course of 2025.

Christopher Nolan (SVP of Equity Research)

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. Some of the 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. In turn, that generally is not a good sign for regional banks. I just want to see, in light of this, any consideration in terms of swapping out the bank credit facilities for baby bonds or something?

Theodore Koenig (CEO)

That's always a consideration, Chris. We're not real estate. Real estate is very different than corporate. 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. I think we've got lots of options in that regard. We're always looking at unsecured, provided we think that the arbitrage works.

Christopher Nolan (SVP of Equity Research)

Yeah. No, my point being, commercial real estate is an area of vulnerability for regional banks, not for you guys. If commercial real estate crisis really hits, a wave really hits, then it could have a knock-on effect in terms of the availability of your credit facilities. That's just something I'm just raising. It's.

Theodore Koenig (CEO)

It's a good thought process, and we're always focused on it. As I said, Mick and Alex are very focused on optimizing our capital structure. We're always looking at.

Christopher Nolan (SVP of Equity Research)

Good. That's it for me.

Mick Solimene (CFO and Chief Investment Officer)

Yeah. We're not really heavily dependent on one regional bank. Our credit facilities are fairly well-diversified.

Christopher Nolan (SVP of Equity Research)

Okay. Okay. Thanks, guys.

Mick Solimene (CFO and Chief Investment Officer)

Thanks, Chris.

Operator (participant)

Again, if you would like to ask a question, press star one on your telephone keypad. We will pause for just a moment. Seeing as we do not have any more questions at this time, I will now turn the call back over to Ted Koenig for closing remarks.

Theodore Koenig (CEO)

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

Operator (participant)

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