Monroe Capital Corp (MRCC) 2015 Q3 法說會逐字稿

Good afternoon, and welcome to Monroe Capital Corporation's third-quarter 2015 earnings conference call.

Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call today may contain forward-looking statements. Including statements regarding our goals, strategies, beliefs, future potential, operating results or cash flows.

Although we believe these statements reasonable based on management's estimates, assumptions, projections as of today, November 9, 2015. These statements are not guarantees of future performance, further time sensitive information may no longer be accurate as of the time of any replays or listening. Actual results may differ materially as the result of risks, uncertainties and 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.

I'll turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Good afternoon, and thank you to everyone has who joined us on our earnings call today. I'm joined by Aaron Peck, our CFO and Chief Investment Officer.

This morning, we issued our third-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 to provide some closing remarks.

We are very pleased to have announced another strong quarter of financial results. For the quarter, we generated net investment income of $0.36 per share, covering our third quarter dividend of $0.35 per share. This represents the sixth consecutive quarter that net investment income has covered our dividend. Our consistent dividend coverage continues to separate us from the pack of the BDCs that have either cut their dividends, or have been unable to generate net investment income in excess of their most recent dividend.

Our book value per share increased again to $14.21 per share as of September 30, a $0.03 per share increase from the book value per share at June 30. Primarily as a result of our net unrealized gains in the portfolio, and also earnings in excess of the dividend paid in the quarter.

In summary, for the metrics that I think are the most relevant in differentiating BDC platforms, for the third quarter, we, one, have dividends in excess of our dividend. And two, our book value per share has increased. This has all occurred as we have grown and expanded our loan portfolio outstandings.

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 grew significantly in the quarter, and we have continued to generate high-yielding opportunities which has allowed us to maintain a high level of weighted average yield in the portfolio. As of September 30, the portfolio was at $329.7 million at fair value, an increase of approximately $47 million since the prior quarter end.

At September 30, we had total borrowings of $116.2 million under our revolving credit facility, and SBA debentures payable of $40 million. The increase in outstandings under the revolver are the result of portfolio growth.

We utilized the proceeds from our second quarter capital raise to immediately pay down the revolver. And we have since reborrowed under the revolver, as we continued to put this capital to work during the third quarter. During the quarter, we also announced an increase in the capacity under our revolver to $135 million, a $25 million increase over the accordion feature of the credit facility.

As of September 30, our net asset value was $179.9 million, which increased slightly from the $176.5 million in net asset value as of June 30. Primarily as a result of capital raises under our ATM program during the quarter. On a per share basis, our NAV per share increased slightly from $14.18 at June 30 to $14.21 per share as of September 30.

Turning to our results for the quarter ended September 30. Net investment income was $4.5 million or $0.36 per share, a decrease of $0.07 per share when compared to the prior quarter. At this level, we continue to cover our quarterly dividend of $0.35 per share.

Additionally this quarter, we generated net income of $4.7 million or approximately $0.38 per share a decrease from the net income in the prior quarter of $0.43 per share. The decrease in per share NII and net income from the second quarter was primarily due to the significant reduction in prepayment fees and pay down gains during the quarter, as repayment activity was minimal. Stripping out fee income and pay down gains, our per share core net investment income was basically flat to the prior quarter.

As we have discussed in prior calls, we generally have a robust level of prepayment activity in the portfolio, which is additive to earnings and returns. But quarter-to-quarter, this activity can be volatile and unpredictable. What is important to note is that our core earnings in the quarter continue to support the current dividend level.

Looking to our statement of operations, total investment income for the quarter was $9.1 million compared to $9.5 million in the prior quarter. This decrease in investment income is primarily as a result of reduced prepayment fees and pay down gains, partially offset by additional income associated with our recent asset growth.

Total expenses of $4.7 million included $1.4 million of interest and other debt financing expenses, $1.4 million of base management fees, $1.1 million in incentive fees, and $746,000 in general, administrative and other expenses. Of the $1.4 million in interest and other debt financing expense, approximately $1.2 million was cash interest expense, with the remainder representing non-cash amortization of the up front costs associated with establishing our credit facility and SBA debentures. As well as the interest expense associated with the secured borrowings recording under ASC 860.

Turning to the portfolio, during the quarter, we continue to put to work the proceeds from our recent capital raise primarily through proprietary direct originations. As previously discussed, many of the new liquid investments added during the second quarter were second lien assets, as we saw some attractive opportunities in that part of the market.

We would expect to sell a portion of these liquid assets at some point in the future, as we seek to optimize our portfolio. Our expectation is that future optimization of the portfolio will likely result in an increase in the percentage of first lien loans in our total portfolio when compared to today's level.

As for our liquidity, as of September 30, we had approximately $19 million of capacity under our revolving credit facility. Our SBIC debentures were fully drawn at $40 million at the end of the quarter.

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

Thank you, Aaron.

The current pipeline for all of the funds at Monroe continues to be very strong. Our focus on proprietary national lower middle market origination has continued to provide our funds under management with unique, attractive investment opportunities with high risk adjusted returns.

We have continued to generate solid earnings and cover our dividend at a time when many of our peers have experienced declining net investment income trends, and struggle to cover earnings to cover their dividends. We attribute our success to our differentiated origination platform, and the depth of the entire Monroe Capital organization which has supported a high effective yield and strong credit performance in our portfolio.

As many of you are aware, last week, we announced the formation of our new industry vertical in the retail and consumer products asset based lending area. This compliments our existing vertical lending groups in health care, technology, and media. These industry verticals create differentiated, proprietary, high yield deal flow through the entire Monroe Capital platform, including our BDC MRCC.

We remain very excited about our Company's prospects. With a dividend yield greater than 9%, fully supported by net investment income, and a stable and growing book value, we believe that Monroe Capital Corporation provides a very attractive investment opportunity for our shareholders and other investors.

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

(Operator Instructions)

Our first question comes from Bob Napoli with William Blair.

Good afternoon. Nice quarter. What level, Aaron, of transitional portfolio do you have or liquid portfolio? What's the dollar amount that you would look to I guess replace over time with what I would call a core product I guess?

It really depends, Bob, on the market and what opportunities we see in this space. To be clear to people on the call, every deal we buy, whether it be in the liquid book or the proprietary book, is a book that we're comfortable holding for the long term. That we think provides attractive risk adjusted return, that we think is a good asset, that we have diligence, that we understand, that we follow and that we're very careful when we do that.

So there are some assets that are more liquid that we could choose to sell at the right time, at the right price, if we saw opportunities in the proprietary book that were accretive. And when I think about those loans, I think of them somewhere around $23 million to $25 million in the near term. And then over the longer term, it's probably more like $40 million of assets that are somewhat liquid that we could consider in that transitional portfolio.

A lot of them are second liens. Some of them are first liens.

And where would be the yield on those portfolios, and what would be the yield on -- that would be the benefit I guess as you move the process?

So I don't have a weighted average yield in front of me on these. But they tend to be lower than the average yield portfolio. So it would be expected to be accretive, and we would really only do it to create accretion in the yield of the book.

We wouldn't sell these assets otherwise, unless we saw a credit reason to sell them. Because they are assets that we like, and that we underwrote. So if I was just eye balling it, it's probably between 8.5% and 9.5% yield on average for the portfolio that we would look to sell, and it's going to be largely assets below 9% or 10% yields.

Okay, and then credit quality. You guys have had in very strong credit quality really since you IPO'd. And I think most of your peers now and then there's a hiccup here or there that -- and but you guys haven't really had any.

And looking at your rating system and your non-accruals, it doesn't look like there's anything near term. What are you seeing? Why have you been able to maintain that level of credit, and what should we expect over the medium term on the credit side?

Yes, Bob this is Ted. I'll take a stab at that.

We've been doing this now as a team for about 15 years. We've had very, very little turnover. We look at lots of deals in any given year. We've got about 220 companies in and across our portfolio as a Firm. So the way I look at things, nobody is immune from a credit event. And it happens, and it's going to happen at some point to us and with us. But at the end of the day, I think in my heart of hearts that we have a better underwriting and credit model than most of our competitors. And our performance over the last 15 years bears that out. So I would anticipate that to continue.

And then the last comment I'll make is, that we tend not to do things as a Firm that we don't really understand. So if you look at our portfolio, lots of our competitors have exposure in the oil and gas area, just to pick one particular industry. We have very, very little exposure if any in that space. And that's just because we're not looking to chase incremental yield in areas where there's credit challenges. We generate incremental yield from having 9 offices throughout North America with 20 originators, and I'd prefer to look at things on or near the fairway in terms of our origination instead of chasing in the rough.

All right, thank you. Last question. Just from, Aaron, what level of additional loans could you put on? What would it be?

What are you comfortable with and capable of maximum leverage? You must be getting pretty near where you would like to be.

Yes, we have some room. I think the way I have always talked about it on this call is that we target regulatory leverage capping out between 0.75 and 0.8 to 1 and I think today we're about 0.65 or something like that in that neighborhood. So that calculation would tell you we've probably got another $20 million or so of room on our current capital base. And then obviously, we've made selective use of the ATM. So to the extent that we're at a place to do that, that will be incremental.

All right, thank you.

Your next question comes from Mickey Schleien with Ladenburg.

Good afternoon, Ted and Aaron. First question is, what drove the markup of Rockdale Blackhawk? I couldn't find any news or anything on that. Can you give us some color there?

Sure. Rockdale Blackhawk is a healthcare investment that we made about eight, nine months ago, or maybe a little less. It's a company that is a very well run healthcare business in the hospital space, and they have a lot of ancillary medical services. And frankly, their EBITDA just keeps going up.

So the company had a much lower EBITDA level when we first got into the deal, and they have performed exceedingly well. And when you do a fair value, it's a pretty low levered company with a lot of performance. And so our fair-value estimate on the equity as prepared by an independent third party showed a considerable markup as they continue to do better and better.

Aaron, do they provide services or do they own facilities or both?

They are facility-based healthcare provider. They have both hospitals as well as physician practices and other practices around general healthcare for individuals.

Maybe they can go and buy that Forest Park deal down in San Antonio that's in trouble. If you back that out though, then obviously, that most, well not most, there were many debt investments that were marked down. I'm just curious whether that was due -- how much of that was due to deterioration of underlying credit?

Yes, it's a good question. Generally speaking, as you know, spreads have widened in the period. So some of that movement down of debt is more general, because the discount rates that our evaluation firms used increased slightly in the quarter as spreads widened, so similar to that. And then there are some individual credits where there's been some credit deterioration. In most cases, honestly, there hasn't been a lot of near term credit deterioration. There's some more changes in approach to valuation as forecasted improvements have not really come to fruition yet in some of these names.

So there's nothing on individual names that has changed dramatically in our thinking in terms of how these individual credits are performing. Everything in the book, by and large, we still expect to see a full recovery on and we're still expecting those names to improve. And there's nothing that we're looking at in the near term that we have any expectations to go on non-accrual, so there's nothing that we're looking at today that's materially different than if you'd asked me about any of these names a quarter ago.

Okay. My last question is in the previous quarter, you made an opportunistic investment in Answer Corp., but it's mark declined further from June to September. So can you give us an update on the outlook for that investment?

Yes, we're doing our diligence on it, and we've been following it very carefully. It's a name that is liquid. I think there is a combination of things happening in this name. One is, that the market is clearly weaker, generally in the liquid market. And this is a name that has had some decline in its performance. But when we got involved in this name, it was just at the time where a large private equity sponsor had put just a ton of money into this company behind us.

We are very low on a loan-to-value basis, based on where their investment is. And it's a very smart sponsor that I just believe knows what's going on, and feels confident about the future of the company. They had a little bit of a hiccup as there were some changes to the Google algorithm with regards to their business, and how their business appears on mobile devices. But we still feel really, really solid about the company, and we're taking a hard look at what we might want to do here going forward given the decline in the mark. There's not a lot of trading volume around it. There's some, but we still feel really confident about the name.

So you might actually increase your exposure to that name at these prices?

You never know. We're always looking at every name. And if we see a name we like, we always consider buying it. And if we see a name that we like the price and don't like the name, we always consider selling it. So we'll always be opportunistic, and I'd put that in the same category as anyone we look at.

Okay. And I just thought of one more question. Ted, I always like to ask you where you think we are in the credit cycle. I think you've pretty consistently said we're fairly deep into the process. Is that still your view, or have you seen any changes in the last three months?

No, I think it's consistent with what I said in last quarter. I think we're in the later innings of it, seventh or eighth inning. I don't see any real deterioration though. There's no outside shock issue that I see happening. Middle market companies, the area that we play in, are valued fairly still. There's lots of capital. Very high level of transaction activity, lots of undrawn powder, dry powder, from the private equity. And something that has really come to roost this year, more so than any of the last few years, is the strategic buyers have really perked up and are outbidding the private equity buyers in the market quite a bit. So all healthy from a deal-flow standpoint.

Very good. Thanks for your time this afternoon.

Thank you, Mick.

Our next question comes from Christopher Nolan with FBR & Company.

Hey, guys. Ted, on the origination platform, I know you've got 9 offices, 20 originators. As we enter into the late cycles here, how do you -- do you increase your origination platform as the economy gets weaker? Is your plan to actually try to source more deal flow? What's the thinking there?

Well, from my standpoint, Chris, I've been focused on increasing our market share in deals that we want to do. So if you look at what we've done in the last year, we opened a Toronto office recently because I think there's lots of opportunities in Canada that other firms are not going to be able to take advantage of. I think that I'm always looking to add to our vertical strategies.

We recently announced a retail and consumer products focus in the asset-based lending area. I think what you can expect is probably not opening more offices. With nine offices now, I think we comfortably cover the US relatively well, as well as now Canada. I think what you may see from us as time goes on some more vertical practice group niche focused origination. That's the one thing that really sets our platform apart from the rest is that not only do we have the geographic coverage where most don't. We have a really deep following in some various industry verticals, and that gives us a real strategic advantage in terms of originating high quality product.

And follow-up question on the SBA, any consideration of increasing the allocation to the BDC in terms of capital?

Well, if everybody does their thing in Washington, it's that the act just got out of committee to increase allocations and family of funds limits. So if our wonderful politicians do their job in DC, I think that could be a 2016 event for us.

Finally, Aaron, how much spillover income was there in the quarter?

The question is about spillover income. In the quarter itself, there wasn't a ton. We had a $0.35 dividend, so we added just a little bit to the spillover in terms of what we spilled over in this quarter in terms of adding to that. I think it was about $230,000 of additional income that is spillover. It gets us to a cumulative year to date of about $1.7 million of undistributed NII.

Great, thank you.

(Operator Instructions)

Our next question comes from Bryce Rowe with Robert W. Baird.

Hi, good afternoon. Wanted to, Ted, ask you a question about capital. Appreciate that your stock and I'm sure you appreciate trading at a premium when many of your peers are struggling to reach book value from a stock price perspective.

What's your inclination in this current environment? Would you prefer to maybe raise a little bit more capital to put to work as the origination pipeline is strong enough to possibly support a capital raise if the stock price cooperated? Thanks.

Hi Bryce. How are you? Thanks for your question.

As you know, we completed an accretive raise of capital in April of this year. We continue to monitor the stock price as well as the market, and we always consider all of our options in terms of capital raising. And this is one of several.

Okay, thanks, guys.

I'm not showing any further questions at this time. I'd like to turn the call back over to management.

Thank you all for joining us on the call today. We look forward to a busy fourth quarter, and we wish you well and your families health, happiness and prosperity in the fourth quarter. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.