MONROE CAPITAL Corp Q1 FY2025 earnings call

• Declared and paid a $0.25 per share dividend in the first quarter of 2025, with an annualized dividend yield of 14.3% based on May 6, 2025 closing share price. • Adjusted net investment income was $4.2 million or $0.19 per share. • NAV was $186.9 million or $8.63 per share at March 31, 2025, and leverage was 1.45 times debt to equity. • Portfolio companies reported solid revenue and EBITDA growth, supporting the portfolio's interest coverage ratio. • Focus on maintaining asset quality, having exited several investments from the credit watch list. • Utilizing proceeds from portfolio exits to redeploy into attractive vintages. • MRCC's lower middle market direct lending approach well positioned amid market volatility, with portfolio relatively insulated from tariff impacts. • Incremental and follow-on investments to existing portfolio companies accounted for majority of investment activity. • Monroe Capital completed partnership with Wendel Group, operating autonomously.

In the first quarter of 2025, Monroe Capital Corporation's investment portfolio totaled $430.6 million, a $26.4 million decrease from $457 million at the end of the fourth quarter of 2024. The investment portfolio consisted of debt and net investments in 85 portfolio companies compared to 91 at the end of the prior quarter. During the first quarter, $7.6 million was invested in one new portfolio company, and $8.8 million was invested in delayed draw fundings and add-ons to existing portfolio companies. Additionally, $37.6 million of legacy assets were rotated out. Adjusted net investment income was $4.2 million or $0.19 per share. NAV was $186.9 million or $8.63 per share at March 31, 2025, and leverage was 1.45 times debt to equity.

• Continue to be selective with investment approach, believing spread to be widening and lender firms favorable. • Anticipate NII to be on the softer side of dividend levels, relying on previously accumulated spillover income totaling $0.53 per share or $11.5 million. • Consider strategic options including stock buybacks, but focus is on supporting portfolio companies. • Will continue to evolve strategically to create value for shareholders across the board, including MRCC.

• Market volatility and uncertain macroeconomic backdrop. • Potential tariff impacts on some portfolio borrowers. • Slower-than-expected M&A activity. • Uncertainty regarding the sustainability of the dividend given NII levels.

Q: My questions are centered on the sustainability of the dividend. And quite to your credit, you stood by the $0.25 quarterly dividend for a long time. But the portfolio continues to contract in size and thus generating less income to support the dividend. Should we expect some sort of change in that contraction trajectory? Otherwise, should we assume at some point that the dividend will be cut?

A: We are continuing to evaluate our dividend in light of earnings level. Based on the current rate environment and portfolio composition, at least in the short run, we anticipate that the NII will be on the softer side of our dividend levels. We've decided to support the dividend through previously accumulated spillover income, which today totals about $0.53 per share, or about $11.5 million. We used around $0.06 of spillover income this quarter to support our dividend and would anticipate having access to that spillover income in the near-term for sure.

Q: And as a follow-up, given where the stock is trading right now, and the dividend yield where it is, why aren't you buying back more stock?

A: We historically have not been in the market to support our stock. Our focus, given especially where our leverage has been, is to use our capital to support a portfolio of companies and maintain it at current levels. But we, given that the stock is trading, are certainly cognizant of all strategic options, including where the stock is trading relative to pay.

Q: In the past, the manager has been very supportive of the BDC in terms of waiving fees in order to allow NII to meet the dividend even if -- while we were going through some transition periods before. So I take it from the commentary here that we should know or investors should no longer expect to manage to waive fees to make that, and it's just going to be the spillover issue and no fee waivers to be expected in voluntary fee way because obviously, there's look backs and the catch-ups and there's various other things. But is that a reasonable conclusion to your comments?

A: I don't think that's a good reasonable conclusion. We've done it in the past. We've done it. We continue to do that. You look, we've waived any incentive fees this quarter, and we've done it in the prior quarters. The manager has consistently supported MRCC, and we will continue to support MRCC in the future. At this time, we made the decision this quarter to use some of the spillover income from prior periods. And I think that was a quarter decision. I think as we continue here I'm very committed from a manager standpoint to maintaining and supporting MRCC.

Q: When I look at the SLF, it's kind of the amount of assets in it, the borrowing of that vehicle has been trending down fairly significantly over the last, call it, 18 months and more pronounced kind of this quarter. Is the SLF type structures? Are those expected to be a continued go-forward part of the model? Or is that vehicle effectively in London at this point?

A: As we talked about in previous quarters, we've not been constructed around this end of the market. And this is a portfolio that was mostly consistent or upper middle market gains at lower spreads, lower recovery rates. And I've not been very constructive on it. And as you point out, we have a lot this portfolio to decline over the course of the last several quarters to the point where today, we have around 30 borrowers in our portfolio down pretty significantly from peak. We are certainly evaluating today whether we're going to continue to allow or allow continuing to run off of the portfolio or possibly new matter of the portfolio. But at the present time, we are not constructive around kind of this end of the asset class and be comfortable in allowing the portfolio to rapidly delever.

Q: The deal with Wendel, as you said, closed on March 31. I mean Monroe is still independent, operates autonomously. I guess it's the right way to put it. But I mean, has that -- given the new partnership and the expanded -- potential Spanish reach of the whole platform as a whole, has there been any -- so is the strategy beyond the things we've already talked about, is the strategy of the BDC likely the public likely to evolve over the next couple of years? Or is what we see, what's likely to stay with the caveat that we talked about, the SLF, et cetera?

A: We've got a very dynamic platform, has grown significantly. We have, today, probably over $5.5 billion, close to $6 billion in kind of, I'll call it, the wealth high net worth channel, which include the BDC MRCC. We're going to continue to evolve strategically and do everything we can to create value for our shareholders. And we're looking at -- we're constantly looking at ways to do this, but you can assume, I think, that we're going to continue to strategic ways to create value for our shareholders across the board, including MRCC.