Monroe Capital Corp (MRCC) 2016 Q1 法說會逐字稿

Good morning and welcome to Monroe Capital Corporation's first-quarter 2016 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, and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions and projections as of today, May 11, 2016, 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 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 will now turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Hello and thank you to everyone who has joined us on our earnings call today. I am joined by Aaron Peck our CFO and Chief Investment Officer.

Last evening we issued our first-quarter 2016 earnings press release and filed our 10-Q with the SEC. I will provide an 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 very strong quarter of financial results. For the quarter we generated adjusted net investment income of $0.47 per share, comfortably covering our first-quarter dividend of $0.35 per share. This represents the eighth consecutive quarter we have fully 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 or are covering their dividends artificially by temporarily reducing their management fees.

Our book value per share increased substantially to $14.45 per share as of March 31. A $0.26 per-share increase from the book value per share at December 31. The increase in per share book value is the result of our earnings in excess of dividends paid, as well as the net increased valuation of our portfolio during the quarter.

The fourth quarter of 2015 and the first quarter of 2016 were challenging for some BDCs experiencing credit write-downs, realized and unrealized losses and in several cases double-digit percentage declines in per-share NAV. Many BDCs have exposure to oil and gas exploration and metals and mining companies which have experienced severe financial distress. We have none of that direct exposure. Zero. We don't have exposure in those industries for two major reasons which we have discussed on prior calls.

The first reason is that we have an extraordinary origination engine which provides us a very large pipeline of opportunities to choose from when selecting which deals to close and which deals to pass on. In 2015 alone we looked at approximately 1,700 potential transactions. When we have a high level of unique and proprietary deal flow we can afford to be very selective and we are.

The second reason is the strength and experience of our credit underwriting team. This experienced team picks the very best transactions with the very best management teams among the approximately 1,700-plus deals we see each year and those are the ones we close and fund.

Another explanation for NAV write-downs experienced by our peers is related to position in the capital stack. Our portfolio was heavily concentrated in senior-secured loans in particular first-lien secured loans. 94% of our portfolio is secured loans and over 75% is first-lien secured. BDCs that have a significant amount of their investments in second-lien and unsecured mezz loans are much more likely to take markdowns in their portfolios and experience losses when the economy takes a negative turn.

As you may recall last quarter we told you that we expected to be one of the first groups to be able to access additional SBA debentures under the increase in the family-of-funds cap on SBA guaranteed debentures from $225 million to $350 million for an affiliated manager group of SBICs. As we announced a couple of weeks ago, MRCC was recently approved for $75 million in additional SBA debentures. These additional low-cost SBA debentures offer a real tangible benefit that will allow us to continue to profitably grow 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 remained stable during 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 March 31 the portfolio was at $343.5 million at fair value, a slight increase of approximately $2.4 million since the prior-quarter end. At March 31 we had total borrowings of $134.7 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 at our BDC parent company. This portfolio growth was offset by deals that repaid in our SBIC subsidiary during the period which explains why we had a significant restricted cash balance of $14.7 million as of March 31. We would expect to invest that restricted cash in SBIC eligible deals within the next several quarters.

As of March 31 our net asset value was $187.9 million which increased from the $184.5 million in net asset value as of December 31, primarily as a result of increases in the market value of our portfolio and in earnings in excess of dividends paid during the quarter. On a per-share basis our NAV per share increased from $14.19 at December 31 to $14.45 per share as of March 31.

Turning to our results for the quarter ended March 31. Adjusted net investment income a non-GAAP measure was $6.1 million or $0.47 per share, an increase of $0.07 per share when compared to the prior quarter. At this level we continue to comfortably cover our quarterly dividend of $0.35 per share. The increase in per-share adjusted NII from the fourth quarter was primarily due to the increase in dividend income in the quarter. The increase in dividend income during the quarter was due to substantial distributions from our equity stake in Rockdale Blackhawk.

Based on the company's performance, we expect this level of dividend income could recur in successive quarters as long as we continue to hold the equity and the company performance remains strong. We acknowledge that if this investment were to be sold in the future we would not be able to easily replace this level of dividend income. If you backed out all of the distributions from Rockdale Blackhawk during the quarter from adjusted NII our adjusted NII without Rockdale Blackhawk distributions would still cover the dividend of $0.35 per share in the quarter. Separately, if you were to strip out fee-income and paydown gains from adjusted NII, our per-share core net investment income was higher than the prior quarter and comfortably covered the dividend.

Additionally this quarter we generated net income of $7.9 million or approximately $0.61 per share, a significant increase from the net income in the prior quarter of 33% per share. This increase is primarily due to the increase in net realized and unrealized gains during the quarter, coupled with a strong NII performance.

Looking to our statement of operations, total investment income for the quarter was $11.5 million compared to $10.1 million in the prior quarter. The increased investment income is primarily as a result of the increase in dividend income during the quarter. Total expenses of $5.8 million included $1.7 million of interest and other debt financing expenses, $1.5 million in base management fees, $1.7 million in incentive fees and $821,000 in general administrative and other expenses.

Of the $1.7 million in interest and other debt financing expense, approximately $1.5 million was cash interest expense with the remainder representing non-cash amortization of the upfront costs associated with establishing and maintaining our credit facility and our SBA debentures, as well as the interest expense associated with the secured borrowings recorded under ASC-860. As for our liquidity as of March 31 we had approximately $25 million of capacity under our revolving credit facility. While our SBIC debentures were fully drawn at $40 million at the end of the quarter we did have $14.7 million of restricted cash available for reinvestment in our SBIC subsidiary due to recent repayments. As Ted mentioned in his remarks, MRCC was recently approved for $75 million in additional SBA debentures, which once drawn would bring MRCC to a total of $115 million in debentures.

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 our funds at Monroe Capital continues to be very strong. Our focus on proprietary national lower-middle market origination has continued to provide our funds with unique attractive investment opportunities with high-risk adjusted returns. We have continued to generate solid earnings and cover our dividend with real earnings, at a time when many of our peers struggle to do this. 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 BDC portfolio.

With our stock trading at a discount to our most recent NAV and a dividend yield around 10% fully supported by net investment income and an increased per-share book value, we believe that Monroe Capital Corporation provides one of the most attractive investment opportunities for our shareholders and other investors in this space.

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

(Operator Instructions)

Bob Napoli with William Blair.

Thank you. And nice job on the quarter. Question on Rockdale Blackhawk.

Ted, you guys have and that's obviously been a home run investment for you guys. It's a medical practice. This business is cash flowing so strongly they can pay out these dividends on a quarterly basis and you don't have control over it.

Do you would you have interest in selling your piece or do you know if the private equity investors are likely to sell the business at some point in the near future?

Hey, Bob, this is Aaron. Thanks for the question. Rockdale is doing exceedingly well. As you pointed out we do not control the company or when they make distributions. The distributions that the company has been making have been tax distributions.

So it is not a voluntary distribution. It's really just based on what they expect their tax needs to be and because we are an equity holder, we get our pro rata share of the tax distributions and we are not a tax paying entity as you know. So that flows through as dividend income and so we don't control the timing.

As I said in the remarks if they continue the way they are going we would expect these to recur for some period of time. But it's difficult to know how long that will continue if the company were to be sold we would have the sale of our equity position and we would lose those dividends. We would have a big recovery or big return on the equity which we would obviously provide for shareholders.

So it is not owned by a private equity firm. It's privately owned. I think that they are going about their strategy and trying to -- continuing to try to execute. They are executing well and it's difficult to know what they are going to do with regards to possibly monetizing the company in the future.

We don't as you said we really don't control it. We do hear from them. We are in contact with them closely but they make independent decisions.

Okay. Thank you. Then the SBA, the extension of the SBA, do you -- the equity that you need, the $37 million of equity to be able to fully draw the $75 million. Can you overtime do that from internal equity sources?

As some loans fall off and -- or obviously if your stock moves up you might consider doing an equity offering to fund that. But do you need to do an equity offering to fund that or you can you -- would you be able to obtain those funds without doing an equity deal?

Good question, Bob. So we can certainly begin to capitalize that license with internally generated cash and with cash in the portfolio and with sales of certain assets that are liquid.

Over time we would expect that we would need to consider some form of capital raise whether that be equity if we are in a position to equity. Or some other sort of capital raise, be it a bond offering or some sort of convert.

We will look at all those options but that's not anything we need to look at or think about in the immediate near-term. We can start capitalizing that license immediately with internal cash and we have the flexibility to do some of that immediately without a need for capital raise.

Just a follow up on that, Bob, I think as Aaron mentioned in our press release in our 10-Q we can access at least 1-to-1 leverage using our own cash of $37.5 million given where we are today with the SBA. As time goes on over the next couple quarters I would expect us to start utilizing this new leverage, the debentures.

Great and then just last question. How do you guys view the economy. I know you're not in some of the sectors that have been the hardest hit but it doesn't seem like overall the economy is -- I just love your view on by looking at your companies how you feel the US economy is doing.

Good question. I get this question a lot and I will tell you that from our perspective we have about 220 companies in our portfolio and we look at this and every Monday I go through our portfolio with our team and the one word I'll use is stable.

There's a number of flashpoints in certain industries. Luckily we've been able to avoid those industries. And the industries that we are heavily involved in seem to be stable.

And again as the year goes on I think we will see more of the same. I think I start to get a little more concerned when I look out into 2017 than in 2016.

Great. I appreciate it. Thank you for the comments.

Mickey Schleien of Ladenburg.

Good afternoon everyone. Going back to Rockdale. That's an amazing return on equity.

I think you booked about $1.6 million dividend on something you valued at around $10 million. So looking at it another way, if this thing's going to continue to generate dividends of that level, wouldn't this thing be valued -- wouldn't the equity be valued much higher than where you have it?

Excellent question, Mickey. As you know we use an independent third-party to value all of our holdings including Rockdale Blackhawk equity. They are certainly aware of the distributions that we have received and the company's performance.

This is what they believe is the fair value of our investment today. I think it's safe to say that if the distributions continue or to get higher or if the company's EBITDA performance continues to improve, I'm sure they would look again at that valuation and consider increasing the valuation again. And similarly if for some reason performance went the other direction they would I'm sure look at the valuation again and possibly reduce it. I do think that they recognize that we don't control the investment. That we are a minority holder and most normally you would expect it to get some sort of discount and evaluation for that sort of position because you might want to monetize an investment when the management team doesn't.

You don't always have the ability to go out and make use of the high watermark on the value. I'm sure that's in their thinking. I know that it's in their thinking in terms of how they value the asset and we will just stay tuned on future valuation that the company continues to perform but it's a fair question.

Aaron when you characterize that dividend as a tax payment, are you implying that this is either an S Corp or an LLC or something like that and these are distributions to shareholders or partners.

That's correct. The other 75% are largely individual holders that own the interest and so they get distributions in order to make estimated tax payments based on the income.

I understand. A couple portfolio questions. Can either one of you walk us through the TPP situation?

This was formally a unitranche deal and now it is senior secured. It looks like you may have taken out the bank ahead of you and put in a little bit of money if I'm correct and I'd like to understand your outlook on that.

Sure. You are correct we did have a bank in the first half position in front of us that we took out. We do that to control a situation when there's some stress and a potential workout. It's one of the provisions that we put in every unitranche loan in which there is a first out so that we can make sure that the bank doesn't have a quick trigger and do something that's good for them but bad for us.

So in the case of Picture People we did take out the first out bank and that we are the only -- the Monroe funds are the only lender to TPP and we are also the owner of TPP at this point because the sponsor quite a while ago handed the keys over. So we are going through a repositioning of the company.

We brought in very capable and skilled management and a lot of advisors to help get the company in the right direction. We feel very positive about the company's outlook in terms of this repositioning but it's been a challenge and it's been something that we've had to work through but that's really most of what I can really say about TPP on an open call.

Remind me what's the name of the operating company? I think you just mentioned it.

They do business as The Picture People.

The Picture People. Okay. Lastly, any color update you can give us on Answers Corp. and BlueStream.

In the case of Answers that is a deal that is a somewhat syndicated market transaction. As we have talked about in the past there is really not much change from prior calls. The company has seen a big change in a part of their business which is the Answers part of their business, Answers. com.

They have a software business that remains stable. We always entered this company with a view that we were covered by the value of the software business and that if the Answers business ever had trouble that, that was not something that would impact our recovery.

I think in this case the market doesn't like the trends. It's heavily owned by CLOs. I suspect there's concerns about downgrades for CLO holders since they did some technical selling. The company has not performed well.

Their Answers.com part of the business has struggled but the other part of their business is stable and continues to sort of support our going in thesis that the software business has the value to support our loan and has a very high-quality sponsor who has put a lot of money and at the time we did the deal and continues to manage the company well. There's no liquidity concerns. There's no issues.

There's no risk that I can see today with any nonaccrual or nothing paid current interest or principal. Everything is going smoothly but clearly not performing at the level that was underwritten and I think that is what has led to some of the technical selling in the name.

And BlueStream?

BlueStream is more of just a market move. Second lien assets strayed down for a while and BlueStream has traded -- there's really no individual credit issues that we can perceive.

I got it. Those are all my questions today. Terrific quarter. Thank you for your time.

Thank you.

Thanks Mickey.

Chris York of JMP Securities.

Good morning, gentlemen. And thanks for taking my questions. Just to follow up here on Rockdale, the maturity is a ways out and the debt is marked well above par. So if it prepays would you expect any prepayment fees or material OID acceleration?

Yes. I think that you could expect both if they were to prepay. The company had pretty standard prepayment fees attached to it and we are only just over a year into the investment.

I do think it's a substantial prepayment penalty remaining on the name and there is some OID left that could flip if it ever prepaid. Those are both things that could occur in the future if that were to happen.

Great, that's what I thought. And secondly so dividend income you already provided the contribution was predominately from Rockdale but was there anything else or was dividend income all from Rockdale this quarter?

No. We have a preferred holding you'll see on our SOI and so it's really -- I think we have talked about it in the past, it's a company called ECA. We had to structure our deal as a preferred for regulatory reasons.

It is a company in the education space and it does pay a current dividend that is attached to the preferred equity piece. It's pretty substantial, 12%. So that's what flows through as dividend and you could expect that as long as the company performs that should recur because it's a contractual dividend payment.

Great that's helpful. Lastly maybe for Ted here. We know that Monroe has been successful in raising private money [at the manager] in similar strategies to MRCC. So do you expect any financial benefits to MRCC shareholders from these successful raises.

Yes. A quick answer, yes, and longer answer is that Monroe has been very successful as a platform in raising additional capital. We recently closed about $660 million of our -- we call it our 2016 fund. We have several other funds in process and MRCC gets an allocable share of each of the transactions that are suitable for MRCC as we grow the other portfolios.

So one of the messages that we continue to discuss here, the reason that MRCC is in such a unique position is that while it is overall a relatively small part of the Monroe platform, roughly in the neighborhood of 10% of its total assets. It gets a far, far disproportionate benefit from being part of the Monroe platform because it sees and has access to every single transaction that the Monroe platform is funding.

And on the cost side, Chris, there are some benefits. For example, as more funds are added and they share valuation that reduces the per name valuation costs and third-party valuations is already getting benefit from that and will continue to at the [BDC] level and then there are certain other allocable expenses that are -- that get allocated that we expect some reduction associated with having more AUMs outside the BDC.

Great. That's helpful. And then lastly maybe some comments on the pipeline and activity post the end of the first quarter.

Yes. We got a very active pipeline at the Monroe level. I can tell you that it's about a $500 million pipeline. That is consistent quarter to quarter. MRCC will continue to see its share of deal flow here in Q2 and beyond.

As for post quarter activity there's nothing material that is worthy of any disclosure. We continue to be active post quarter end and continue to invest and you can assume we continue to put to work some of that restricted cash on the SBIC subsidiary.

Great. That's it for me. Congrats on the quarter.

Thanks Chris.

Thanks Chris.

Bryce Rowe of Baird.

Thank you. Just a modeling question, Aaron and Ted. You guys mentioned the additional leverage on the SBA. Congratulations on that.

I wanted just to understand how you think we might model out additional use of the SBA debentures at least over the next couple quarters. Do you expect to draw more debentures here over the near term?

Yes. Good question, Bryce. Just on -- big picture. We've always said that we expect on a regulatory basis our leverage to be somewhere between 0.7 and 0.8 depending on the mix of the portfolio. We don't change our view on that really.

As for the SBIC sub it's difficult to predict. Obviously we've seen a lot of deal flows. Some of it is eligible some of it is not eligible.

We have some cash that we can put down for the sub. We would expect to put some cash down to the sub and draw on a one-to-one basis over the next couple of quarters.

We are going to take our time in ramping the sub and make sure we get the best assets in there as we do with the rest of our business and so I would say it's not a race. We are doing just fine as we are today in terms of covering the dividend and so unlike some others that may be feel the need to race to do something to get to a coverage level. We can take our time and make sure we are just putting the right assets in and so I wouldn't expect that you'd want to be a terribly aggressive with your expectations with regard to the ramp of the SBIC sub.

That's great. I really appreciate it. Good quarter guys. Thanks.

Thanks, Bryce.

Christopher Testa of National Securities.

Good morning guys. Thanks for taking my questions. Just more on the TPP acquisition -- notes the fair value marks improved very slightly. Just wondering if there has been any underlying improvement at the company and what that improvement if any has been quarter to date and your outlook on that.

Yes. Thanks, Chris. Yes. We did see a small pickup in the value this quarter that was largely due to an updated forecast and better-than-expected near-term performance.

We are -- I can't get into too many specifics but we are working on a pretty nice change in expansion of the strategy of TPP. As you may recall from prior calls, it has historically been primarily a mall based retail company.

Overtime we are looking to change that strategy and expand into non-mall related places where we can get percentage rent deals and so that's part of what we are doing in terms of execution and that has improved the outlook. That strategy is starting to bear fruit and that I think is what is reflected in the pickup of the valuation.

Okay great. And we just saw some credits moved into a risk rating [three] a bit. Could you just give some color on that. Which companies moved in there and how concerned if at all you are about those?

Just generally big picture. We have a pretty quick trigger to move something to a three and so I wouldn't necessarily panic or get terribly concerned about a big migration of names into the three category from the two category. We are very reticent to move something from a three to a two or a two to a one. A good example is Rockdale where most people would think that ought to maybe be considered a one.

We really haven't moved it up to a one at this point just because there's really not a lot of upside in that. There's just a couple of names that have -- we still feel comfortable that we are covered and that we are going to have a full recovery of value but we've just been a little bit more conservative with regards to how we position them in terms of the risk rating. Just to make sure we are giving it its due focus and time and attention.

Got it. And just given the comments on the pipeline and where regulatory leverage is, if you were trading at a decently sizable discount to NAV, is this the type of environment where you would be inclined to issue equity?

Probably not. It's a good question. We've taken the position that everything we do we are going to try and do on a nondilutive basis.

So we have got some other options here going forward that are not dilutive and those are the options that we are probably going to focus on.

Right. So it's going to be more just ramping the increased SBA allowance that you're allowed to issue as opposed to issuing equity?

Yes and potentially some other things that Aaron mentioned in his remarks.

Got it. And just with the junior secured loans I know you guys have done a small amount of purchases recently. Is this just opportunistic or are you seeing better value there as opposed to first lien? Just any thoughts on that.

Yes. I think you characterized it correctly, which is we saw some opportunistic times that we could put some money to work in names that we knew and liked in the second lien space. I wouldn't take that to mean that we have a focus in going out and doing more of that. I think we are kind of where we want to be with regards to that mix barring any major market shift.

If we saw names that we really like get hit really hard and we could get our hands around why and feel comfortable that there were opportunities or if the market widened and new second liens came that were really attractive yields, we might consider making an investment there but as we sit here today we really sort of are where we want to be with regards to allocation into second lien.

Got it. And do you guys expect a pickup in M&A activity in the second half of the year potentially driving higher prepayments.

Yes. We will tell you that if you look at the top last 10 years as a benchmark, the third quarter is always busier than the second quarter and the fourth quarter is always busier than the third quarter. So consistent with that I would expect a pickup in total transaction volume related to M&A.

Got it. Last one for me. Just on the dividend income coming from Rockdale, should we look at what Rockdale threw off to you guys in the first quarter as sort of a run rate going forward or should that be much more lumpy?

It's a good question and it's one I wish I could answer. We look at it as we have this equity investment in Rockdale. The company is doing exceedingly well.

We expect that they are going to continue to need to make tax distributions to their shareholders and we would be the recipient of our pro rata share. How that comes in, when that comes in, how much that looks like on a quarter to quarter basis is very difficult for us to predict.

I would say based on what we know today it's probably not going to be zero but I can't give you a lot more than that to know what it's going to look like next quarter or the quarter after. It's really not in our control and it really has to do with how the management team there want to look at their taxes with their tax accountants.

I think Chris we have taken a relatively conservative position in kind of how we look at our entire equity portfolio of investments. It is probably wise to do that in your position too over the long run. If there is something that good happens, you'll hear about it from us.

Got it. Thanks guys. That's all for me.

I would now like to turn the conference over to Mr. Ted Koenig for closing remarks.

I want to thank everyone for joining us on the call this afternoon. We certainly appreciate your involvement and to the extent you have any further questions, as always please feel free to contact Aaron or I directly and with that enjoy the rest of the afternoon.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.