MONROE CAPITAL Corp Q4 FY2023 earnings call

• Adjusted net investment income covered the $0.25 per share dividend for the 15th consecutive quarter. - NAV declined 1.9% primarily due to mark-to-market unrealized losses from specific legacy portfolio companies. - Debt-to-equity leverage improved from 1.60x to 1.50x. - Broader lending market saw M&A and loan volumes down in 2023 but rebound in Q4; direct lending dominated middle market. - Monroe's flexible capital solutions are a differentiator. - NAV per share decreased from $9.58 to $9.40 due to net unrealized losses in the portfolio. - SLF had 4 non-accruals at quarter end, with net migration in non-accrual category flat quarter-over-quarter.

In the fourth quarter of 2023, adjusted net investment income was $5.6 million, or $0.26 per share, a slight increase from $5.5 million, or $0.25 per share, last quarter. NAV was $203.7 million, or $9.40 per share, as of December 31, 2023, down from $207.6 million, or $9.58 per share, as of September 30, 2023. Debt-to-equity leverage decreased from 1.60x to 1.50x. The investment portfolio totaled $488.4 million as of December 31, 2023, a decrease from $518.3 million as of September 30, 2023. SLF had investments in 49 different borrowers, aggregating $139.9 million at fair value with a weighted average interest rate of 10.2%.

• Anticipate M&A and loan volume trend to continue into 2024 as inflation and interest rates stabilize. - Private credit market provides favorable tailwinds, with pricing leveled off but LTV and leverage points attractive. - Expect adjusted net investment income to cover the $0.25 per share quarterly dividend on a run rate basis.

• Mark-to-market unrealized losses from specific legacy portfolio companies due to macroeconomic and idiosyncratic challenges. - Higher-for-longer interest rates could impact the portfolio. - Non-accrual investments in SLF could affect performance.

Q: On the SLF, I noticed that there are four non-accruals, and I believe last quarter was one. It's going to be Monroe's responsibility to work through those?

A: Hi, Chris. Good question. So, just to clarify, non-accruals at SLF were four at this quarter end. It added a new non-accrual, a company called Cano Health. Last quarter, we also had four non-accruals. We took one off, a company called Bromford, which got realized. So, the net migration in the non-accrual category was basically flat quarter-over-quarter. And yes, while these are, you know, upper middle market credits, which have a little bit of a different profile than the direct middle market loans in the rest of MRCC, we are actively participating in the resolution of these non-accruals, much like we do in our direct portfolio.

Q: Does the level of non-accruals sort of affect the amount of leverage that SLF can take on and thus the income that MRCC would yield from that?

A: To a certain extent, it does. You know, we've deliberately kind of maintained the status quo at SLF in terms of just being a kind of a more reluctant participant in kind of the 2023 vintage, given that, you know, these are companies that are kind of in the upper end of the middle market, where structures are a little less favorable. Terms are a little less favorable. Yields are a little less favorable. But, you know, the non-accruals themselves hasn't really affected either our leverage or our borrowing capacity. We have, though, decided to maintain a pretty cautious approach in terms of the leverage structure in this vehicle. And that's why you've seen kind of over the course of 2023, leverage levels at the SLF fund level generally coming down.