Monroe Capital Corp (MRCC) 2014 Q2 法說會逐字稿

Good morning and welcome to the Monroe Capital Corporation's Second-Quarter 2014 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, or cash flow. Although we believe these statements are reasonable based on management's estimates, assumptions, and projections as of today, August 11, 2014, 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, uncertainties, or other factors including, but not limited to, the 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. As a reminder, this conference is being recorded.

I will now turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital.

Good morning, and thank you to everyone who has joined us on our earnings call today. I am joined by Aaron Peck, our Chief Financial Officer and Chief Investment Officer.

Earlier today we issued our second quarter earnings press release, and filed our 10-Q with the SEC. I will first provide a brief overview of the quarter before turning the call over to Aaron to go through the results in more detail. He will then turn the call back to me, and I will update you on the current market conditions for our business.

As in the past, we have provided an update of the Company's asset growth to demonstrate the progress we have made since our IPO on October 24, 2012. As you can see in the bar graphs attached to our press release, on a par value basis, we have more than tripled the size of our investment portfolio, growing from $67.6 million at the time of our IPO to approximately $240 million as of June 30, 2014. We have grown the number of unique portfolio companies as well, from 15 at launch to 42 as of the end of June. We have continued to be focused on safety and security, with approximately 89% of our assets representing senior secured loans as of June 30, 2014.

As we have previously announced, on April 24, we received a commitment letter from the SBA for SBA-guaranteed debentures, which allow us to begin to access the leverage in our SBIC subsidiary. We have been approved to receive SBA leverage on a two-to-one debt-to-equity basis, subject to funding the full amount of regulatory capital of $20 million.

As we have discussed, we believe that the SBIC subsidiary license will provide an opportunity to grow the portfolio and generate additional returns for our investors, which should be a huge positive and create real value for our shareholders. At the end of June, we have drawn $8 million in SBIC debentures. All other things being equal, over time, accessing the leverage in the SBI subsidiary should have a materially positive impact on our net investment income per share.

Turning to our results for the quarter ended June 30, 2014, adjusted net investment income, a non-GAAP measure, was $3.3 million, or $0.35 a share, an increase of $0.02 per share when compared to the first quarter of 2014. Net investment income was $3.5 million, or $0.37 per share, an increase of $0.05 when compared to the prior quarter. Additionally, we generated net income of $2.7 million, or approximately $0.28 per share, down from the net income in the first quarter due to a reduction in the fair value of certain assets in the portfolio.

As we discussed previously, we have reached a milestone in that our adjusted net NII per share has exceeded our quarterly dividend for the first time since our IPO in late 2012, as we have been able to achieve both growth in the size of the portfolio as well as continued growth in the weighted average yield. This was achieved primarily through true core earnings, not large one-time non-recurring fees.

Our book value per share at June 30 was $13.93 per share, down slightly when compared to the book value per share at March 31, primarily as a result of the small net decrease in fair value of our portfolio.

I am now going to turn the call over to Aaron, who is going to discuss the financial results in more detail.

Thank you, Ted.

Our investment portfolio continues to grow and aggregated $237.7 million at fair value as of June 30, 2014, an increase of approximately $13 million from the prior quarter end. We had total borrowings of $95.5 million at quarter end under our revolving credit facility, and SBA debentures payable of $8 million.

As of June 30, 2014, our net asset value was $133.2 million, which decline from the $135.1 million in book value as of March 31, 2014. This decrease in book value was primarily due to share repurchases under our previously-announced share repurchase plan, as well as the net decrease in the fair value of the portfolio. As a result, net asset value per share decreased slightly from $13.99 per share at March 31, 2014, to $13.93 per share as of June 30.

Looking to our statement of operations, total investment income for the quarter was $7 million, compared to $6.5 million in the prior quarter. Total expenses of $3.5 million included $1.1 million of interest and other debt financing expenses, $1 million in base management fees, $667,000 in incentive fees, and $720,000 in general administrative and other expenses.

Of the $1.1 million in interest and other debt financing expense, approximately $878,000 was cash interest expense, with the remainder representing non-cash amortization of the up-front costs associated with establishing our credit facility and our SBA debentures, as well as the interest expense associated with secured borrowing recorded under ASE-860. We also had net depreciation on investments and secured borrowings of approximately $1.1 million in the quarter, due to some markdowns in the fair value of certain portfolio assets.

Turning to the portfolio, we have continued to focus on senior secured first-lien lending, with approximately 51% of our investments representing senior secured first-lien loans, and 38% representing first-lien unitranche or one-stop loans. Approximately 11% of the portfolio investments were junior secured loans, and equity co-investments represented approximately 0.5%.

As we predicted in last quarter's earnings call, the second quarter saw a pick up in deal closings when compared to the first quarter, which has allowed us to grow the portfolio and continue our focus on the optimization of our assets.

Going forward, we expect most of our near-term growth to come from growth in our SBIC subsidiary. We would expect to have access to up to $40 million of SBIC debentures, based on our expectation of reaching $20 million in regulatory capital during the third quarter. Which would allow us to grow the SBIC subsidiary portfolio from approximately $20 million in assets as of June 30, 2014, to up to $60 million of assets in the future.

I will now turn the call back to Ted for some closing remarks before we open the line for questions.

Thanks, Aaron.

As Aaron just mentioned, we remained focused on growing and optimizing our portfolio for the measurable future, with a goal of increasing our per-share net investment income. The addition of our recently-licensed SBIC subsidiary has provided us with liquidity to grow the portfolio, and should help grow our net investment income over time. The third quarter is shaping up to be another active quarter for us in terms of new deal originations, which should result in portfolio growth and continued portfolio optimization.

On our last quarterly call, we told you that we are singularly focused on growing our NII per share. Our results this quarter demonstrate the success we have had in fulfilling that commitment. In a competitive market for lending, we have been able to make solid asset growth in the continued optimization of the portfolio in order to grow our average effective yield.

We have grown our adjusted per share NII by $0.02 per share in each of the last two quarters, at a time when many of our peers are experiencing declining NII trends. We attribute this to our differentiated origination platform, which has supported an increased effective yield on our portfolio at a time when many have experienced declining yields. As we access additional SBIC debentures and grow the SBIC subsidiary, we expect to continue the success we have had in growing our NII per share.

We remain very excited about our Company's prospects. And we believe that our managers, extensive investments, and high-quality origination and underwriting staff will continue to provide the Company with unique, high-quality, high-yielding investment opportunities.

With a predominantly first-lien, senior-secured investment portfolio, a greater than 10% dividend yield fully supported by net investment income, and a stock price trading below our book value per share, we believe that Monroe Capital Corporation provides a very attractive investment opportunity for investors and continues to be significantly undervalued.

Thank you all for your time today. With that, I'm going to ask the operator to open the call for questions.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Good afternoon, Ted and Aaron. I just wanted to touch on the unrealized portfolio depreciation. I was curious whether that was driven more by comparable valuation, or whether there were credit issues at particular borrowers that you wanted to highlight?

Thanks, Mickey. It's Aaron. It's a combination of things. I think that we had some general changes in assumptions under the valuations, which took a couple of our portfolio, or several of our portfolio assets, down a half point here and there just on general market trends.

Then we do have a couple of write-downs in a couple of our names on a fair-value basis which is really interesting, because for several of these names I feel like they're actually doing pretty well and maybe better than they have in the past, but it's sort of as you start seeing trailing 12-month earnings tick down, even though there's turn-arounds in some these companies, we still take a marked-to-market hit for a short-term period. It's a combination.

We continue to have I think a very good portfolio. Everything's performing relatively well in general. In general, we are still receiving interest on all of our -- off all of our portfolio assets. All the loans are still accruing, and we feel pretty good about the portfolio. But you will see when you go through the statement of investments, you'll see a couple names that did take a bit of a marked-to-market hit for the quarter.

Okay. Thank you, Aaron.

Bob Napoli, William Blair.

Hi. Good afternoon. A question just on your capital availability. Was the capital that you have available today with the SBIC, how large can you -- how much more can you grow your investment portfolio? Is it essentially somewhere in the $40 million to $50 million range without needing to increase your equity base?

Bob, it's Aaron. Good question, and I'd say that's right. We have $20 million of assets in our SBIC subsidiary today that can move up to another $40 million effectively of assets. We do have some room under our credit facility, which would allow us to also increase in the parent Company a little bit. But I think a good guidance area, focus area, is the number you threw out, probably another $40 million to $50 million on the current equity basis, probably as much as we'd expect to see the portfolio grow on the current equity basis.

Then the NII -- still $0.05 or so, something like that, as you said on that additional portfolio assuming the quality -- the credit quality?

Yes. All things being equal, if all other things being equal growing, that SBIC subsidiary should really drop down to the NII per share number nicely, because that's all sort of incremental.

Okay. Just beyond -- what are the yields that you're getting today? Are you seeing on the new originations any deterioration in that yield? What percentage of your loans you are putting on today are directly originated?

That's a great question. I'll just talk about the second quarter as the best example. In the second quarter, we put on new assets of about -- just under $34 million, all of which were direct originations where we're the agent. If you go through the numbers -- and you can pull this -- you can figure this out by going through the Q1 on your own, but I'll just tell you, the effective yield on a weighted average basis average for those assets was about 11.6%.

Then we sold out of, or got re-payments on assets as we optimized the portfolio of about $10 million -- excuse me, about $15.8 million. The weighted average yield -- effective yield on the assets that went off the books, was about 7.5%. You can see that we're still maintaining a yield increase as we're originating. While the market continues to be competitive, we still pick our spots. We're still finding good yield to add to our business. All the assets I just mentioned are really first-lien, senior-secured assets. The quality is still there in terms of the safety of the portfolio and the spreads we're seeing.

Thank you. Finally, the fee income in the quarter -- and I haven't had a chance to look at the Q yet, but what level of fee income did you have? Is there -- it what you had considered to be a relatively normal level?

Sure. You could find all this in the queue, but I'll help you with it. We had total interest income in the quarter of a $0.74 per share, or $7 million. We would call about $6.5 million of that, or $0.68 of it, normal interest income. But -- the rest you would call, for that $0.05 a share, sort of fee-related income. But if you look back, it's not any one big fee. It's stuff we've earned every quarter. We are increasing the fees that -- we are increasing the interest income. The core interest income is quite a bit higher from last quarter.

Some of the stuff -- some of that is -- if you look at the components, the standard interest income's about $0.66, and another $0.02 of pick. It's about $0.683 of interest income, which is what we're calling that normal interest income. If you look at the other things, $0.016 cents is the amortization of premium discounts. That's something you'd expect every quarter, because we're just amortizing in the up-front fees.

We've got some amendment fees, a couple cents of amendment fees. Then some pay-down noise, gain and loss of about $0.01 or $0.015, which was about $0.02 last quarter. You can see it's stuff that we would expect on a day -- sort of a quarter-in and quarter-out basis that we have seen every quarter.

Great. Thank you very much. Appreciate it.

Sure.

Christopher Nolan, MLV & Company.

Hi, guys. Quick question, do you anticipate SBA borrowings to drive balance-sheet growth in the second half of 2014?

The answer to that is yes, Chris.

Do you expect that asset growth should accelerate in the second half of the year?

I would say the answer to that is also yes. We have -- obviously all things are sort of subject to what we see on the repayment side. But we do have a very nice pipeline. It continues to be extremely strong. We do have access to the SBIC leverage. We would expect to see continued growth throughout the balance of the year.

Great.

Historically, Chris, the second half of the year tends to be seasonally more active, particularly Q4 in our business.

That's good color. Final question, guys. Share repurchases -- I know you guys have been very active on it, and right now the share price is roughly 5% discount to NAF. Given that you're investing in assets that typically yield roughly 11%, and your cost of funds under the SBA is roughly 4%, isn't it a wash at the share price at this point to actually keep on buying back stock, particularly since you might start becoming more stretched on the equity capital front as you go towards the end of the year?

Good question, Chris. Obviously we can't provide you any guidance on what we will or won't do with regards to the share repurchase plan. I'll remind you that we were authorized for $7.5 million. You can see through the numbers that we've used a fair amount of it. We do have a limited amount under that authorization left.

We look at all the same things you do when we think about when and if we should be buying back stock. We are mindful of all the things that you would expect us to be mindful of, including how we could put the money to work, and where we could put it to work, and what the yields would be, and what's best for NII, and what's best for looking at the book value dilution and accretion. We're thinking about all the things you'd want us to. That's really the only way I can answer that question without giving any guidance.

Okay, great. Thanks Aaron, and nice quarter.

Thank you.

Bryce Rowe, Robert W. Baird.

Thank you, and congratulations on the milestone of earning the dividend.

Thanks, Bryce.

I wanted to ask you guys, you talked about the continued optimization of the portfolio. Maybe and Aaron and Ted, could you talk about what's left within the portfolio that could be optimized out of into some of the higher-yielding investments you made, similar to what you made this quarter?

Sure. If you look at the scheduled investments, it's kind of anything that's sort of under that 11% is a candidate. It's hard to pinpoint one thing here or there, but there are some obvious things that roll out when you look at this. If you look at all of our second-lien portfolio, for example, the junior-secured portfolio, those are all liquid, relatively liquid, other than the one Rocket Dogs position.

Those opportunities are there. Those are a little bit higher-yielding that some of the first-lien positions. There are opportunities in the first-lien portfolio, as well. Basically you just look at the junior-secured loan portfolio, and the sort of sub-9% loans that are in the senior-secured loan category, and those are all candidates.

Okay, that's helpful. A question on the SBA and the SBIC. You talked about having capacity to go up to $40 million of SBA ventures once you get fully capitalized. Should we assume that the $40 million is -- will be the max of SBA debenture capacity within the BDC, and the remaining portion of the second license would go to other parts of Monroe Capital?

Ted, do you want to address that?

Yes, I think -- I can't say anything for sure, but I think that's probably a pretty good operating assumption as of now.

Thanks, Ted. That's helpful.

Jeff Rudner, UBS.

Thank you for taking my question. Most importantly, congratulations both Ted and Aaron on an excellent quarter -- as pointed out previously, covering the dividend for the first time since you've been a public Company. You've pointed out that the NII has increased by approximately $0.02 a quarter for the last number of quarters. It begs a question. At what point in time would you consider raising the dividend?

That's a great question.

Good question Jeff.

I told you last year that we are singularly focused on increasing our NII and moving our book value. We continue to be focused very much on growing NII and moving our book value. The neat thing about the business from our standpoint is when you look at the peer group, which seems to get larger each year, our earnings that we've covered the dividend with have been core earnings, mostly blocking and tackling --

Right.

As opposed to pre-payment fees or warrant gains, or anything else. We've got a lot of that stuff in the portfolio, it just hasn't realized. We're very focused on doing what we need to do to grow the business for the benefit of our shareholders. Your question is a good one. When the time comes I'm sure we'll consider that. But as of right now, it's all systems go on doing what we need to do.

Okay. Thank you very much, gentlemen.

Thanks Jeff.

Thank you. With no further questions in queue, I'd like to turn the conference back over to Mr. Koenig for any final remarks.

I want to thank everyone for joining us today and continuing to follow us. I mentioned last year that our intention here is to cover our dividend and to generate net income. If you look at our last four quarters you'll see a nice trend line. Our plan is going to be to continue to work hard and grow this business. Keep watching. I think you'll like what you see to come.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.