Monroe Capital Corp (MRCC) 2020 Q4 法說會逐字稿

Welcome to Monroe Capital Corporation's Fourth Quarter and Full Year 2020 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 flows, particularly in light of the COVID-19 pandemic.

Also, we believe statements are reasonable based on management's estimates, assumptions and projections as of today, March 3, 2021. These statements are not guarantees of future performance. Further, time-sensitive information may no longer be accurate at 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, risk 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 call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Good morning, and thank you everyone, who has joined us on our call today. Welcome to our Fourth Quarter and Full Year 2020 Earnings Conference Call. I'm joined by Aaron Peck, our CFO and Chief Investment Officer.

Last evening, we issued our fourth quarter and full year 2020 earnings press release and filed our 10-K with the SEC. First and foremost, we hope you and your families remain healthy and safe. We are pleased to report another strong quarter of solid net investment income and increased NAV performance again during the fourth quarter of 2020.

We are also pleased to announce our quarterly dividend of $0.25 per share for the first quarter of 2021. During the fourth quarter, the financial markets remained strong and loan markets demonstrated continued resiliency. This can be seen in the performance of a couple of key markets. After being down as much as 30% for the year in late March, the S&P index shook off all effects of the COVID pandemic and ended up the year up over 15%. Price increases were also seen in traded credits investments as the S&P/LSTA leverage loan index, which was down as much as 22% in March, has fully rebounded, and it was up almost 2% for the year.

A continued reduction in credit spreads has benefited our portfolio marks, which have contributed to a significant improvement in our per share NAV over this period, including another increase in the fourth quarter. This normalization of the financial markets contributed to a resurgence of activity in the direct lending markets and for Monroe Capital specifically.

In fact, Monroe experienced a record quarter of originations, closing 20 new loan transactions and several add-ons to existing loans, which aggregated approximately $1.1 billion of total commitments in the fourth quarter of 2020. Monroe benefited from the significant -- MRCC benefited from this significant origination volume as evidenced by its strong portfolio growth in the fourth quarter, which was approximately 5% net of payoffs and ordinary course paydowns.

Turning now to fourth quarter results. We are pleased to report adjusted net investment income of $0.25 per share, slightly lower than the adjusted net investment income of $0.27 per share in the prior quarter. Aaron will go into more detail regarding the components of our net investment income later in the call.

We also reported a net increase in assets resulting from operations of $9.1 million or $0.42 per share during the quarter, which was driven primarily by the increase in the fair value of our investment portfolio. As a result, our NAV on a per share basis grew from $10.83 per share at September 30 to $11 per share at the end of the year, a 1.6% increase. This represents the third consecutive quarter of growth in NAV per share, which has increased nearly 10% since the end of the first quarter.

During the quarter, we increased MRCC's regulatory debt-to-equity leverage from 0.9x debt to equity to 1.0x. This increase in leverage was primarily driven by strong asset growth at the end of the quarter, partially offset by normal repayment activity as well as the increase in the fair value of our investments during the quarter. As much of the asset growth occurred near the end of the quarter, the resulting positive impact to NII has not yet fully materialized into our results for the fourth quarter.

We continue to focus on managing our investment portfolio at the appropriate risk-adjusted leverage level going forward and are continuing to target regulatory leverage and the ratio of 1.1 to 1.2x debt-to-equity in the near term. We have maintained investment-grade corporate rating and recently announced a refinancing of our unsecured bonds with new bonds that carried a coupon, which is a full percentage point, 100 basis below the bonds we recently redeemed, which should have a significant impact on our earnings going forward.

Given the substantial pipeline of new deals at Monroe, we would expect to increase the leverage of MRCC carefully over the next few quarters in order to reach our near-term leverage target, which should benefit adjusted net investment income for future periods.

Our focus for the next several quarters will be to make new investments in portfolio companies with compelling risk return dynamics, just as we have done at Monroe in the years following the last economic downturn in 2010 and 2011. We are very well positioned to do this. We will also remain dedicated to generating the best possible recovery underperforming assets in our portfolio.

We still have a couple COVID-related credits that we are in the process of working out. We have a strong track record in generating solid recoveries and we expect that to continue going forward. Recent examples of our portfolio management successes include the recovery we have generated on Rockdale Blackhawk and the significantly improved valuation on American Community Homes, just as examples.

We remain heavily focused on generating similar recoveries for most of the other lower-rated credits and are optimistic that we can achieve this type of recovery for many of them. Besides strong portfolio management experience, our success in generating recoveries comes from the fact that we are typically a control lender and our agents by more than 80% of our loans in our investments. We have good loan documentation with tight baskets regarding indebtedness and restricted payments with no collateral leakage potential. We have at least 2 and often more financial covenants on almost all of our deals, including maintenance and incurrence tests on leverage. This allows us to be proactively engaged with our borrowers and their financial sponsors, which can result in early intervention when performance begins to lag.

Our recovery prospects are also enhanced by the fact that we maintained conservative starting leverage and loan to values when we underwrite our loans, often in the neighborhood of 50% loan-to-value.

This morning an affiliate to our external manager, Monroe Capital, issued a press release announcing that it has sold a passive, nonvoting minority interest to Bonaccord Capital Partners. Bonaccord is the private Capital Markets group of Aberdeen Standard Investments, which is the largest asset management firm in the U.K. with approximately $600 billion in assets.

While we certainly expect this transaction to be beneficial to the continued growth, the asset management platform at Monroe Capital, we also expect it to have benefits available to the MRCC shareholders and MRCC as it will open a window into the European market and shareholders to purchase MRCC and enjoy the consistent and stable dividend that we've been paying.

MRCC enjoys a strong strategic advantage in being affiliated with a best-in-class middle market private credit asset management firm with almost $10 billion in assets under management and over 130 employees as of January 1, 2021. We will continue to focus on generating adjusted net investment income and positive NAV performance just as we have shown in the last 3 consecutive quarters.

I am now going to turn the call over to Aaron, who is going to walk you through our financial results in more detail.

Thank you, Ted. During the quarter, we funded a total of approximately $46.9 million in investments, which consisted of $32.3 million in fundings to 13 new portfolio companies and $14.6 million of revolver and delayed draw fundings to existing portfolio companies. This solid portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $31.2 million during the quarter.

At December 31, we had total borrowings of $350.6 million, including $126.6 million outstanding under our revolving credit facility, $109 million of our 2023 notes and SBA debentures payable of $115 million. Our outstandings under our revolver increased by approximately $27.2 million during the quarter as we increased our leverage during the period. We are well situated to continue to carefully grow our portfolio through participating in a substantial pipeline of opportunities generated at Monroe.

The ING-led revolving credit facility had $128.4 million of availability as of December 31, subject to borrowing base capacity. Additionally, in January 2021, we issued $130 million in senior unsecured notes at an interest rate of 4.75%. These proceeds were used to redeem all of the $109 million in outstanding 5.75% 2023 notes and repaid a portion of the outstandings on our revolving credit facility. Any future portfolio growth, revolver draws or advances to existing borrowers will predominantly be funded by the availability remaining under our revolving credit facility.

Turning to our results. For the quarter ended December 31, adjusted net investment income, a non-GAAP measure, was $5.4 million or $0.25 per share, a decrease from the prior quarter's adjusted net investment income of $5.8 million or $0.27 per share. The reduction in per share adjusted NII was predominantly as a result of a decrease in our average investment portfolio size during the quarter, as a majority of the new fundings occurred late in the fourth quarter. While total assets were higher at the end of the quarter, the weighted average level of total assets declined from the previous quarter.

The external manager voluntarily waived approximately $430,000 in base management fees at $712,000 in incentive fees to generate net investment income in line with our dividend. When considering our targeted leverage, the refinance of our bonds and the current credit performance at MRCC, we continue to believe that on a run rate basis, our adjusted net investment income can cover the $0.25 per share quarterly dividend without significant fee waivers in the future, all other things being equal.

LIBOR rates remained basically flat during the period and 3-month LIBOR, as an example, was approximately 24 basis points as of December 31. We maintain LIBOR floors in nearly all of our deals with the majority of floors at a level of at least 1%.

As of December 31, our net asset value was $234.4 million, which was up approximately 1.6% from the $230.7 million in net asset value as of September 30. Our NAV per share increased from $10.83 per share at September 30 to $11 per share as of December 31. We estimate that of the $0.17 per share in net gains during the quarter, approximately $0.29 per share was attributable to increases in the portfolio valuation, primarily as a result of the tightening of credit spreads during the period, unrelated to individual credit performance.

During the quarter, according to Refinitiv LPC, all-in yields for first lien and institutional middle-market loans tightened by over 100 basis points to 6.57% in the fourth quarter compared to 7.62% in the third quarter of 2020. Of that $0.29 per share of NAV increased primarily attributable to spread tightening, approximately $0.21 per share or around 70% was attributable to assets held directly by us, while $0.08 per share or 30% was as a result of net markups on assets held in the MRCC senior loan fund joint venture.

During the quarter, we also experienced a decrease in book value of approximately $0.05 per share attributable to net reductions in the valuation of our portfolio companies that have a risk rating of grade 3, 4 or 5 on our internal risk rating system. A significant portion of which was as a result of the residual impact of the COVID-19 pandemic on these borrowers.

Finally, approximately $0.07 per share of the decrease in book value is associated with other losses primarily associated with unrealized foreign currency fluctuations on our borrowings denominated in British pounds. These borrowings were used to finance investments denominated in pounds. And as such, we have corresponding gains in the fair value of these assets, which is part of the positive marks described earlier.

Looking to our statement of operations. Total investment income decreased during the quarter, primarily due to a decrease in interest income due to the smaller average portfolio size during the quarter. This decrease was partially offset by an increase in dividend income from the SLF during the period. During the quarter, we placed no additional positions on nonaccrual status.

Total nonaccruals now approximate 4.1% of the portfolio at fair value, which compares to 5.2% as of September 30. The decrease in nonaccruals at fair market value is primarily because of the increase in the size of the investment portfolio during the period as well as the reduction in the fair value of the nonaccrual assets as of December 31.

Moving over to the expense side. Total expenses for the quarter decreased, primarily driven by the partial waiver of base management fees in the quarter and the lower average debt outstanding, which reduced interest and other debt financing expenses.

At the end of the quarter, our regulatory leverage was approximately 1.0 debt to equity, a small increase from the regulatory leverage of nearly 0.9 at the end of the prior quarter. The increase in regulatory leverage is primarily due to the portfolio growth at the end of the quarter. The current level of regulatory leverage is below the targeted leverage range we have guided you to on prior calls.

We are currently comfortably in compliance with the SEC asset coverage ratio limitations and slightly below our previously discussed near-term target leverage -- regulatory leverage level of 1.1 to 1.2x debt to equity. As Ted discussed in his prior remarks, we would expect to grow our portfolio at a measured pace and slightly increase our regulatory leverage over the next few quarters.

We also announced that on March 1, we prepaid $28.1 million in SBIC debentures with excess available cash at the SBIC subsidiary. This should have the effect of removing the cash drag we've experienced due to prepayments and income generated at our SBIC subsidiary. We have made no decision regarding any additional near-term debenture repayments at this time. The result of this repayment will not impact regulatory leverage, but will slightly reduce our total leverage calculation on a pro forma basis.

As of December 31st, the SLF had to investments in 57 different borrowers, aggregating $205.7 million at fair value with a weighted average interest rate of approximately 5.8%. The SLF had borrowings under its nonrecourse credit facility of $131.5 million and $38.5 million of available capacity under this credit facility, subject to borrowing base availability. We do not expect to significantly grow the assets held in the SLF at this time, and the SLF continues to be in compliance with all covenants in its credit facility. As discussed earlier, the loans held in the SLF saw significant unrealized mark-to-market increases during the period as a result of continued market spread tightening.

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

Thank you, Aaron. In closing, we continue to benefit from the resiliency of the financial markets and the strong proprietary origination network at Monroe, to create differentiated risk-adjusted returns for our shareholders.

Our overall Monroe Capital platform closed a record amount of new loan origination in the fourth quarter and continues to maintain a very strong pipeline of high-quality investment opportunities for all funds at Monroe, including MRCC.

As a result, we are excited about our investment portfolio and our prospects. The key is our conservative underwriting, a purposefully defensive portfolio and our access to a large and experienced portfolio management team with experience managing through multiple economic cycles.

We have a defensively positioned portfolio with solid loan documentation and a lot of control over our own destiny in terms of risk management. As such, we continue to believe that Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders.

Our dividend remains fully covered by net investment income and we have sufficient liquidity to continue to play offense in this market. We believe that MRCC is affiliated with an award-winning best-in-class external manager, which has decades of experience, over 130 highly skilled employees and almost $10 billion of assets under management.

We would like to thank our shareholders for their loyalty and confidence. I would also like to thank the entire team at Monroe Capital organization for their hard work and dedication through 2020, which was a tough COVID year as well as a work remote year.

Thank you for all your time today, and that concludes our prepared remarks. I'm going to ask the operator to open the call now for questions.

(Operator Instructions) Our first question comes from the line of Devin Ryan with JMP Securities.

This is Kevin Fultz on for Devin.

My first question, the current deal environment has been described as frothy on a number of earnings calls this quarter. Can you discuss the attractiveness of deals you're seeing in the lower middle market from a risk reward perspective?

Sure. Sure. Thanks for the question, Kevin. The market generally is frothy overall. There's a lot of loan demand that we saw -- that we would have seen in Q2 and Q3 in 2020 was put off. PE firms put off acquisitions, platform acquisitions as well as add-ons, until they really could get their hands around the COVID effects and adjustments.

Once we got into Q4, primarily towards the back half of Q4, we started to see things open up again. And from an activity level, the market really took off probably towards early December. And through the first quarter, it hasn't stopped. So we're seeing a lot of pent up, I think, demand from 2020 that's fallen over into '21. We're starting to see a fair amount of new sponsor platform acquisitions, but a ton of add-on tuck-ins, bolt-on type transactions.

So we've been very disciplined in terms of how we're looking at the market. We've got COVID now in our rearview mirror. So we've had the ability to analyze COVID effects. But also more importantly, we've got the ability from an underwriting standpoint to remain disciplined in terms of our covenants, leverage covenants, debt service coverage, interest, EBITDA covenants, collateral packages. In the lower middle market where we play, we're not burdened by a lot of the high-yield market or some of the bigger players that are doing deals with no covenants. So that's how we're differentiating what we do at Monroe as well as our investment portfolio.

Okay. That's helpful, Ted. And then just a follow-on there, are there any pockets that you find particularly attractive right now?

Yes. We've really focused on some of the business services opportunities, the software opportunities, data storage, cloud, computing, things that don't tend to have in-person need of interpersonal reaction. We're trying to stay away from health clubs, proprietary leisure-type things, the orange theories, the pure bars of the world, restaurants. Things -- we're still not out of the woods yet with COVID, and we're still not sure how long it's going to take for the vaccine to take effect. So we're very, very focused on things that have shown resiliency and have performed well during the last 9 months.

Okay. That's helpful. I appreciate that.

And then pivoting to pick income, as a percent of total investment income, it rose sharply quarter-over-quarter of about, I think, 29%.

Can you discuss what caused the increase? I don't know if that was amendment driven or possibly new investments that were structured with a pick component? And then your overall level of concern with elevated pick income?

Yes. I'll let Aaron address that.

Yes. So yes, you're right. In the quarter, pick interest went up $7 million, I think, of the quarter, which is compared to about $6 million in the previous period. It really comes from 3 portfolio companies. It's not the change. Familia Dental, and then a couple of the HFZ Capital entities. And so some of this is -- I would consider about $1 million of this to be what I would consider nonrecurring sort of onetime pick interest that we got in connection with some restructuring activities.

So we did like, for example, we did a restructuring that was very favorable on Familia, where we refinanced out a significant portion of our debt. And got some pick interest as a result and then took back considerable amount of upside equity as it applied to that deal. And so that income is not likely to reoccur.

And then on HFZ and HFZ Member RB, we did a restructuring there as well. It was also favorable. The valuations are still very strong, and we took in some pick interest that was kind of onetime associated with it. There is some of that interest that will recur but some will not. And I'd say that makes up sort of another, call it, $500,000 or so of nonrecurring.

So that's what was the reason for the pickup. So we don't expect it to continue at this level, all things being equal. But it doesn't give us great concern because we're very confident this is exactly where those came from and why they arose, and we're confident with those workouts.

Our next question comes from the line of Robert Dodd with Raymond James.

Congratulations on breaking away through 2020. A couple of semi housekeeping first. I mean, Ted, you said, obviously, that a lot of the asset growth occurred at the end of the quarter.

Can you give us any color on where the prepayments occurred because, obviously, the portfolio grew, nonaccruals fell, portfolio looks in better shape, but income dropped. So can you give us an idea of like kind of how much lower the weighted average portfolio size was this quarter versus, say, Q3? Anything on that.

It's Aaron. I'll try to answer this, Ted. So yes, you're right. I mean that's exactly what went on. We had a significant amount of pickup very near the end of the quarter, and the repayment activity was a little bit more spread out over the quarter.

I don't have in front of me the exact weighted average portfolio balance for the quarter. But -- and so I understand that it's challenging for you to see that. But given that the effective yield in the portfolio is basically flat or a little bit up from last period. And you can see kind of where we were at the end of the year on portfolio balance. That should give you a pretty good idea of the capability of the portfolio to generate yield going forward.

I can't really, unfortunately, on this call, reconcile specifically for you exactly what the weighted average change was. I think if I were guessing, I'd say the weighted average portfolio size in the quarter was probably $30 million or $40 million less than the prior quarter's average portfolio size. I think that's a pretty good number to use. So it's probably -- and this is me guessing, it's probably $530 million of weighted average portfolio balance for the quarter would be a reasonable number to use.

Got it. That's really helpful. I appreciate that. On -- just to go back to the picking compass, the press release indicates some of it was reclassification rather than -- it doesn't mention one-time in the press release. So is -- can you count $1.5 million of that was onetime? Or was that onetime that was reclassified? Or can you clarify exactly? Interesting sum, $1.8 million higher or how did the move around? Sorry. Go ahead.

Yes. No, no, no. Good question. And it's not $1.5 million that I would categorize as recurring, just to be clear, it would be about $1 million that I would consider to be nonrecurring. And so the answer is that basically, it's stuff that we previously recorded as cash that we ultimately ended up capitalizing into the position for those particular restructuring. So that's why we said reclassify. So it's things that we had already taken in as expected cash income we accrued as cash, and then we ended up with capitalizing into the position related to the restructuring.

Understood. Understood. Got it.

Ted, if I can go back to your prepared -- I mean, you talked about, obviously, the goal is best possible recovery. Obviously, that's not always 100%, sometimes it is. But you currently got unrealized depreciation of the portfolio. So a little over $2.

How much of that do you think you can get back? I mean, not next quarter, obviously, but over time, how much of that do you think is truly recoverable?

Is -- I mean, basically, is it 100% would be the best possible on all of that? Or is it lower than any kind of idea on the time frame of that?

Yes. So you know how this works, Rob. What we do is we get -- we take current valuations. And we have independent third parties provide current valuations. The independent third parties don't look at the future, and they don't look at some of our strategies that we have employed.

We've shown a very strong history of recovering close to 100% in a lot of our assets. If you look at -- we took a big depreciation hit on a company called Rockdale. We took a big depreciation hit on a company called American Community Homes.

So we feel confident that our underwriting thesis was good on these companies, and we've got several ways out. Unfortunately, COVID threw us for a loop on a couple of the companies. And we're working through right now, some COVID-related strategies on a few of the companies.

I'm bullish overall generally on our recoveries. We've got a couple of portfolio companies that are consumer-facing that we're very focused on, and we're focused on strategies, not only for the company today in terms of its doing business, but also thinking about how we can transform those companies. And perhaps, there's acquisitions. There's joint ventures. There's European partners. The advantage that we have is that we've got a lot of resources at the firm to dig down and to find ways to maximize value that may not be apparent to a firm that's doing a quarterly valuation based upon historical EBITDA for the quarter, historical revenues.

And I can assure you that, that's my #1 priority in terms of resources that we're putting on MRCC because the best way to increase value for MRCC and to create value for our shareholders is to do exactly what you just asked me about, is to take that unrealized depreciation and turn that into recovery dollars.

If I could just add to that. Bob, is it the case that every single asset that has been marked down has a high probability of getting back to par? No.

But I think what I would say is if you look at our history and Rockdale is a great example of it, there are assets in this group that are marked below par today that we believe with the kind of work that we do have the opportunity to recover for us greater than par.

And so it's a difficult question to answer as to what is the potential recovery amount that we could get from those unrealized losses because some of them may be at a premium. And so on an aggregate basis, we still feel really good about our ability to recover considerable amount of the unrealized losses, but that doesn't mean that's true for every single name. It just means as a portfolio of 3, 4 and 5 rated credits. We're confident that we can recover a significant portion of potentially all of that unrealized loss by good portfolio management skills and by not looking at or setting a goal line at just a recovery of our principal, but looking at what is the most recovery we can generate, and we did that on Rockdale, and we'll do it on other assets.

We got a couple assets -- Rob, we had a couple of assets that we think that based upon what we've done to date, we've got a substantial recovery built in for MRCC over par.

I appreciate the answer. Yes, I understand it's not an easy question, but I like to fish in, yes, it doesn't get factored in by the third-party guys today, obviously.

One more, if I can, congratulations on the relationship with Aberdeen, that's a -- it's a pretty big play out globally. Should we expect that -- I mean, in principle, I mean, that can result in obviously seeing more international deals. You see some, we have some in the U.K. already.

Are we going to see more international deals in the portfolio, maybe in the JV? Since, obviously, they're not qualified assets. I mean, can you give us any...

I would say that's not -- our goal for the partnership today is to create more international exposure. I think we've got plenty. I mean, as a firm, we did over $2 billion of investments last year. Our -- we never had an issue with generating flow for the firm in North America, the U.S. So I think we're going to be okay there.

The real benefit of this Aberdeen Standard relationship from my view, which I think is going to be very, very powerful, is that we have the largest asset management firm in all of the U.K. now as our joint venture partner with distribution throughout the U.K., Europe and Asia. And they need the Monroe Capital investment current income products. They don't have anything like the products what we have in terms of the quality and the consistency of current income. So we expect this relationship to open up a whole another group of potential investors to various Monroe Capital products, including MRCC, for investors throughout the world.

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann.

On the follow-up to Robert's question. Any particular nonaccrual assets which we should keep an eye on for a possible earlier resolution?

Good question, Chris. I'd say we aren't -- we haven't really disclosed anything specifically with regards to individual assets and near-term recoveries. I think it's kind of a dangerous game to play because you're often in a very protracted negotiation and workout.

And you don't ever want to be out there specifically showing the world your cards when it comes to what you're trying to do.

But there are assets that I can talk about that should be in a position to generate income again. ACH would be the one that I would point to as a pretty good-sized holding MRCC, which has been on nonaccrual, but has seen a massive recovery. I'm sorry, I'll take that back. It is on accrual status. I'm confusing that.

It's just -- but other than that I mean, there's really not one that I could point you to say specifically that we expect to come back other than to say, there's plenty of things in the portfolio we expect to see recovery on and repurpose those dollars into accruing assets and in the near term. But I'd be remiss to talk specifically about individual credits.

Great. And as a follow-up, Aaron, on the comments that there's no need for the waiver in coming quarters to cover the dividend. Will that be from higher leverage in the portfolio, lower expenses? Could you give a little color on that?

Yes, sure. So I think what I said specifically is that given where the portfolio is and what we expect to see and given the current status of our portfolio workouts and our accrual status that we believe when you put everything into the soup that we are generating -- we will be able to generate enough NII to cover the $0.25 per share dividend. Obviously, lots of things can change positive and negative, but that's our current belief.

And that would come from taking the leverage -- continuing to take the leverage up a little bit to where we targeted. It's from just what we did at the end of the quarter, materializing into our NII and it's from getting the benefit of the lower cost of money on our debt facility. All those things together are what gives me the viewpoint that I think we can cover the dividend without waivers today on a run rate basis.

(Operator Instructions) Our next question comes from the line of Sarkis Sherbetchyan with B. Riley Securities.

You talked about gradual growth in the portfolio in the prepared remarks. I just wanted to see if you can speak to the cadence of origination activity or repayments or prepayments as fiscal '21 progresses.

Ted, do you want me to handle that?

Yes. Why don't you take there.

Okay. Great question, Sarkis. So the portfolio had grew a lot in the fourth quarter. On a gross basis, we did have some money come back to us. But we saw significant new origination and was back-end loaded, as we mentioned. The pipeline in Monroe remains incredibly strong. And when I look out to the first quarter, for example, we are seeing a little bit of a similar dynamic in the first quarter, where a lot of our expected closings do seem to be pushing to the end of the quarter. So that could occur again this quarter, but there is a significant amount earmarked to go into MRCC, which would go a long way to continue to increase the leverage to the targeted level.

So I think, look, I think we're looking to get that leverage up to the range that we discussed as reasonably quickly as it makes sense from the deal flow. And right now, the deal flow is very strong, and we'd expect to chip away at that leverage increase relatively quickly.

What we can never predict, as you know, is what goes out the back door, right? There's always opportunities for us to be refinanced out of deals. And we certainly have seen some of that in the quarter. I wouldn't say it's a materially large number for MRCC, but we see it. And so that's what we can't control, and we don't always get a lot of advanced notice. So I think the takeaway is there's no lack of great deal flow from the Monroe Capital origination engine to feed MRCC, to get us to our leverage target relatively quickly. And the one thing that toggles that down is whatever might go out in terms of refinance activity, which we really can't control.

Yes. What I'll add to Sarkis, and that is that 2020 was an aberrational year. We had Q2 and Q3 and the early part of Q4 that the market was really an edge, and we were very careful in terms of underwriting because we wanted to see effects of COVID run through portfolio companies.

I think you're going to see 2021 with MRCC, come back to more of a normalized year, like an '18 or a '19, where we've got significant pipeline demand that we generate. On an average year, we'll probably put $3 billion in the ground as a firm, and we'll have plenty of capacity to allocate to MRCC. No names on a more ratable basis.

Now, as Aaron mentioned, deals may close early in the quarter, mid-quarter, late quarter, but those are quarter-to-quarter dynamics. But if you smooth it out over the year, I anticipate that 2021 is going to be a very good year for us.

Great. Thank you for the extra color. I really appreciate that. And I guess as you kind of look towards the pipeline as it sits today, maybe if you can talk about some of the underwritten yields or potential underwritten yield on the various security types. I think as you kind of see spreads tighten, are you sacrificing some on the yield side to get better quality assets in the book? Just trying to get your sense of what you're seeing real-time in the market environment?

I'll make a comment and then I'll let Aaron give you some specifics. What we're trying to do is we're trying to take the best quality assets we can and put them into our various funds. Now the key to that is having a very wide funnel. Remember, we do both sponsored transactions and nonsponsored transactions.

During a COVID year, there's going to be very little in the way of nonsponsored transactions. So in 2020, we saw very little nonsponsored transactions, the deals that we did were primarily sponsored.

What we're seeing now in '21, we're seeing much more nonsponsored transactions come into play. Those nonsponsor transactions tend to be 300 to 400 basis points of overall return higher than the sponsor transactions. So while on the sponsor side, we're looking for quality. We're looking for some type of excess spread, sometimes it's in industries, sometimes it's in companies, sometimes it's because of a proprietary relationship. But we're also looking to sprinkle in a little more nonsponsored into the overall portfolio to drive some additional yield.

Yes. And the only thing I would add, Sarkis, is we do always think about risk. It's the first and foremost consideration before we would close the deal across the portfolio and across the entire platform. And we aren't -- we don't put a line in the sand on yield. What we try to do is be a good portfolio manager and manage our portfolios to a blended yield and a blended risk.

And what you've seen us do over the last several years is you've seen our yield come down. Some of that has been market environment, but some of that has been a shift in the portfolio since inception, away from higher risk types of structures like last out transactions, which we still like and still do. But the portfolio is much more turned towards straight first lien senior secured loans.

And if you look at what we're originating these days and has been true for the last couple of years, from Monroe, on average, in our new origination, we're typically attaching at around 50% loan-to-value and leverage levels that are relatively conservative when compared to the broad market of on average, maybe 4 to 4.25x EBITDA. So I think you'll see us continue to take advantage of the great origination network at Monroe, which has trended towards kind of lower-risk structures and straight first lien loans.

And I don't necessarily think that's going to result in us seeing a reduction in our effective yield. I think it's been relatively consistent in terms of what we've put on to the book over the last couple of periods, and we hope to keep it relatively consistent going forward.

Thank you. There are no further questions. I will now turn the call back to Ted Koenig for any further remarks.

I just want to say thank you to everyone on the call today. We really appreciate your time, your questions. It's important to us to make sure we answer your questions. As you can tell, the market is back, deals are back. There's lots of activity. We're very busy across the firm. And I'm very excited about 2021. I think the year is going to be a really good vintage in credit. And we've got a significant market share, and we expect to take a fair amount from the market this year.

So we will talk to you next quarter, and as always, to the extent you have any individual questions, please don't hesitate to reach out to us in the interim. But thank you. We wish you all a safe and happy and healthy 2021.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.