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MC

MONROE CAPITAL Corp (MRCC)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 results missed Street: NII/share was $0.19 vs $0.27 consensus*, and total investment income (“revenue”) was $11.64M vs $13.76M consensus*, as lower effective yields, base rate declines, and a smaller average portfolio reduced income .
  • NAV/share fell 2.5% sequentially to $8.63 on net unrealized losses in select legacy names and the SLF JV; leverage improved to 1.45x from 1.53x as repayments funded revolver paydown .
  • Dividend held at $0.25/share; management acknowledged NII is currently below the dividend and is being supported by $0.53/share of spillover income, while fee limitations/waivers and balance sheet capacity provide near‑term flexibility .
  • Strategic context/catalysts: new US$1.7B middle‑market lending JV with SMBC and MA Financial could enhance origination and future deployment as spreads widen, while SLF remains in de‑risk/rundown mode for now .

What Went Well and What Went Wrong

  • What Went Well

    • Balance sheet de‑risking: debt-to-equity declined to 1.45x (from 1.53x) on $22.7M lower debt outstanding, preserving dry powder .
    • Credit quality stabilizing: non‑accruals held at 3.4% of fair value with favorable internal rating migration; several watch‑list exits executed .
    • Platform tailwinds: management highlighted an attractive prospective vintage (widening spreads, lender‑friendly terms) and a focus on incumbency lending to reduce underwriting risk .
    • Quote: “We remain confident in the resilience of our portfolio… and our ability to navigate near‑term income volatility with a strong balance sheet, ample spillover income and a conservative credit posture” .

  • What Went Wrong

    • Income pressure: total investment income fell to $11.64M from $14.02M QoQ on a lower effective yield (9.2% vs 10.2%) and smaller average assets as base rates and spreads declined in late 2024/early 2025 .
    • Valuation/mixed marks: net loss on investments of $(3.55)M; avg portfolio mark declined 110 bps to 91.1% of cost on idiosyncratic legacy names and SLF marks .
    • Dividend coverage: management said NII is “shy” of the dividend currently; ~$0.06/share of spillover was used to support the Q1 payout .
    • Analyst concern: share repurchases not prioritized versus portfolio support and leverage objectives despite stock trading below NAV .

Financial Results

MetricQ3 2024Q4 2024Q1 2025
Total Investment Income ($USD)$15,695,000 $14,023,000 $11,638,000
Net Investment Income ($USD)$6,481,000 $6,022,000 $4,086,000
Adjusted Net Investment Income ($USD)$6,617,000 $6,185,000 $4,206,000
NII per share ($)$0.30 $0.28 $0.19
Adjusted NII per share ($)$0.31 $0.29 $0.19
NAV per share ($)$9.18 $8.85 $8.63
Weighted Avg Effective Yield (%)11.0% 10.2% 9.2%
Debt-to-Equity (x)1.50x 1.53x 1.45x

Estimates vs Actuals (Q1 2025)

MetricConsensus*ActualSurprise (Abs.)Surprise (%)Outcome
NII per share (EPS proxy)$0.27*$0.19 -$0.08-29.6%Miss
Total Investment Income ($)$13,764,750*$11,638,000 -$2,126,750-15.5%Miss
Values with asterisk retrieved from S&P Global.

Segment/Asset Mix and Portfolio Health

MetricQ3 2024Q4 2024Q1 2025
First Lien (% of FV)80.0% 79.1% 77.3%
Junior Secured (% of FV)6.4% 6.5% 7.5%
Equity (% of FV)13.6% 14.4% 15.2%
Portfolio Companies (count)94 91 85
Non‑Accrual (% of FV)3.1% 3.4% 3.4%

KPI and Liquidity Snapshot

MetricQ3 2024Q4 2024Q1 2025
Investments at FV ($)$474,259,000 $457,048,000 $430,571,000
Cash & Equivalents ($)$4,070,000 $9,044,000 $6,463,000
Revolver Outstanding ($)$169,000,000 $163,900,000 $141,200,000
2026 Notes Outstanding ($)$130,000,000 $130,000,000 $130,000,000
Revolver Availability ($)$86,000,000 $91,100,000 $113,800,000
Avg Portfolio Mark (% of Cost)93.9% 92.2% 91.1%
SLF FV ($)$32,900,000 $32,700,000 $31,900,000
SLF Borrowings ($)$41,500,000 $38,200,000 $21,800,000

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Quarterly Dividend/Distribution ($/share)Q2 2025$0.25 (Q1 2025 declared) $0.25 (declared June 4, 2025) Maintained
Dividend Coverage CommentaryNear‑term (Q2 2025)N/ANII “shy of dividend”; using $0.53/share spillover to support payout Cautionary (maintain payout via spillover)
Incentive Fee Limitation/WaiversNear‑term (Q2 2025)N/AExpect at least partial fee limitations to persist; manager continues to support MRCC Maintained/Continuing

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3–Q4 2024)Current Period (Q1 2025)Trend
Interest rates/yield dynamicsEffective yield fell to 11.0% in Q3 and 10.2% in Q4 as base rates declined and some non‑accrual additions .Effective yield 9.2%; TII down QoQ on lower yields and smaller average assets .Continued pressure from lower base rates; early 2025 spreads beginning to widen .
Credit quality/non‑accrualsNon‑accruals: 3.1% (Q3) to 3.4% (Q4) of FV; idiosyncratic unrealized losses .Non‑accruals stable at 3.4%; favorable rating migration; exits of prior watch‑list names .Stabilizing/slightly improving composition.
Deployment/M&ALower average assets; slower M&A into Q4 .Slower M&A; emphasis on incumbency/follow‑ons; rotated out of 7 legacy assets ($37.6M payoffs) .Selective, incumbency‑focused, preparing for better vintage.
SLF strategySLF marks edged down, assets/borrowings declining in Q3–Q4 .Further reduction; not constructive on upper‑middle‑market exposure; allowing deleveraging .De‑risk/rundown bias persists.
Dividend policyQ4 dividend $0.25 declared .Dividend maintained; near‑term coverage via spillover; fee limits continue .Maintained, coverage supplemented.
Strategic partnershipsN/A in Q3–Q4 earnings releases.New US$1.7B lending JV with SMBC & MA Financial to enhance origination/capacity .Positive strategic optionality.
Tariffs/macroNot discussed in releases.Portfolio largely insulated from potential tariffs given services tilt .Monitoring; risk currently limited.

Management Commentary

  • “Our first quarter dividend of $0.25 per share was supported in part by our accumulated spillover income… approximately $0.53 per share… which continues to offer a cushion for future distributions.” – Theodore Koenig, CEO .
  • “The decline in effective yield was largely due to lower spreads on certain assets and decline in interest rates… we currently expect at least partial limitations on our incentive fees to persist throughout this quarter.” – Lewis (Mick) Solimene, CFO/CIO .
  • “We will lean into incumbency lending opportunities… has proven to reduce underwriting risk… incremental and follow‑on investments… accounted for a majority of MRCC’s capital deployment.” – Management .
  • “We have spoken with every borrower and sponsor… we have… relatively insulated from potential tariff impacts… more heavily weighted to services‑oriented companies.” – Management .
  • “During the first quarter… invested $7.6 million in one new portfolio company and $8.8 million in delayed draw/add‑ons… rotated out of 7 legacy assets ($37.6 million of payoffs).” – Management .

Q&A Highlights

  • Dividend sustainability: Management expects near‑term NII below the $0.25 dividend and is using spillover income (~$0.53/share) to bridge; ~ $0.06/share spillover used in Q1 .
  • Buybacks: Not prioritized given leverage and focus on supporting the portfolio; management is monitoring valuation versus NAV and strategic options .
  • Fee waivers/limitations: Manager reiterated ongoing support; fee waivers have occurred and will continue as needed alongside spillover utilization .
  • SLF direction: Portfolio has been allowed to decline; management is not constructive on that exposure and is comfortable with ongoing deleveraging rather than re‑levering near term .
  • Strategic evolution with Wendel partnership: Monroe remains autonomous; will pursue strategic avenues to create shareholder value across the platform, including MRCC .

Estimates Context

  • Q1 2025 NII/share: $0.19 vs $0.27 consensus* → miss driven by lower effective yields, base rate declines, certain asset‑specific softness, and a smaller average portfolio .
  • Q1 2025 total investment income: $11.64M vs $13.76M consensus* → miss on same drivers; expenses benefited from lower interest expense and fee limitations .
  • Target price consensus stood at $8.25* around the period. Values with asterisk retrieved from S&P Global.

Key Takeaways for Investors

  • Near‑term earnings headwinds persist from lower effective yields and smaller average assets; watch for deployment re‑acceleration as spreads widen and as incumbency activity translates into income .
  • Dividend is maintained but not fully covered by current NII; spillover and fee limitations/waivers bridge the gap—monitor trajectory of spillover balance and any forward commentary on payout policy .
  • Balance sheet flexibility improved (1.45x leverage; >$100M revolver availability) creating capacity to redeploy repayments into a more favorable vintage; execution on redeployment is a key upside lever .
  • SLF remains a drag (lower marks) and is effectively in de‑risk/rundown; any stabilization there would be incrementally positive, but base case assumes continued cautious posture .
  • Strategic JV with SMBC and MA Financial (US$1.7B) could enhance medium‑term originations and fee/shareholder economics; monitor initial deployments and whether MRCC can co‑invest to drive NII growth .
  • Credit quality is stable with steady non‑accruals and some favorable rating migration; idiosyncratic legacy issues still create mark volatility—watch watch‑list exits and realized outcomes .
  • For estimate revisions, expect downward adjustments to near‑term NII/“revenue” until yields/portfolio size recover; dividend policy is a key narrative driver for the stock given current coverage dynamics .