MONROE CAPITAL Corp Q3 FY2023 earnings call

Economic Environment

• Uncertain economic outlook with attractive risk-adjusted returns in direct lending. Volatile macroeconomic environment led to lower new deal activity but robust new investment pipeline in Q4 including lower-risk incumbency lending.

Portfolio Performance

• Economy showed more resilience, portfolio maintains a healthy average of nearly 97%. Borrowers have strong top-line growth and EBITDA growth though at slightly lower margin. Portfolio's interest coverage remains sound.

Strategy

• Focus on capitalizing on private credit market fundamentals. Defensive and diversified portfolio construct with nominal exposure to cyclical industries, predominantly first lien senior secured loans at conservative loan-to-value. Deep experienced portfolio management team actively monitors portfolio companies.

Affiliation

• Affiliated with best-in-class middle market private credit asset management firm with nearly $18 billion in assets under management.

As of September 30, 2023, the investment portfolio totaled $518.3 million, an increase of $2.9 million from $515.4 million as of June 30, 2023. The portfolio consisted of debt and equity investments in 99 portfolio companies. Adjusted net investment income in the third quarter was $5.5 million or $0.25 per share, compared with $6.1 million or $0.28 per share last quarter. Net asset value as of September 30, 2023 was $207.6 million, down from $213.2 million as of June 30, 2023, with net asset value per share decreasing from $9.84 to $9.58 per share. The decline was due to net unrealized losses on specific portfolio companies and mark-to-market losses at SLF.

Dividend Coverage

• Adjusted net investment income is expected to continue covering the $0.25 per share quarterly dividend on a run rate basis.

Market Trends

• Believes trend of private equity and middle market investors deploying dry powder leading to uptick in M&A and loan activity will continue into Q4 2023 and 2024.

Yield Outlook

• Average effective yield of approximately 12.5% on predominantly first lien portfolio portends well for remainder of 2023 and into 2024.

Economic Risks

• Potential economic slowdown, higher long-term interest rate environment, heightened capital markets volatility, and geopolitical uncertainty.

Portfolio Risks

• Net unrealized losses on specific portfolio companies affected by market conditions and idiosyncratic factors. Remaining accrued fee income from IT Global with uncertainty due to bankruptcy process. Valuation decline of SLF.

Q: On the SLF, given the decline in valuations, do the provisions of the SLF require you and your JV partner to put in more capital?

A: The provisions of the JV agreement did not require us to put in new capital. And at this point, we don't anticipate that any capital will be required for the vehicle.

Q: On IT Global, what's the time frame where you'll be able to evaluate whether the remaining $512,000 accrued fee income should be reversed or kept?

A: We'll have more clarity around this IT global receivable in the fourth quarter. It could slip into the first quarter. We are monitoring the bankruptcy process to assess the likelihood of recovery for this exposure, which will influence the ultimate treatment of the receivable.