Welcome to Monroe Capital Corporation's Third Quarter 2022 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. Although we believe these statements are reasonable based on management's estimates, assumptions and projections as of today, November 8, 2022, 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, uncertainty 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 conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Good morning, and thank you to everyone who has joined us on our call today. Welcome to our third quarter 2022 earnings conference call. I am joined by Mick Solimene, our CFO and Chief Investment Officer. Last evening, we issued our third quarter 2022 earnings press release and filed our 10-Q with the SEC. The M&A and financing markets maintained a cautious tone during the third quarter as concerns around slowing economic growth mounted in the face of inflationary and rising interest rate pressures. Since the end of the quarter, the Fed raised interest rates 225 basis points inclusive of the 75 basis point rate increase announced last week in response to an annualized inflation rate that now stands at 8.2%. According to Refinitiv, middle market financing value and totaled almost $212 billion through the first nine months of the year, flat compared to nine months of last year. Middle market loan spreads and the LCD middle market index continued to widen down approximately 27 basis points during the third quarter, but at a slower pace than during the second quarter when spreads widened by more than 100 basis points. Market volatility was much more pronounced in the public and leveraged financing markets, where transaction volumes dropped significantly. And this created compelling opportunities for us in private credit. To provide certainty of execution to our clients on more lender friendly pricing and terms. We believe that the market dynamic will remain for the foreseeable future and we are prepared to be a trusted financial partner to our clients. As a firm, we made over $3.7 billion of new investments through the first three quarters of 2022. The lower middle market remains active and current market conditions are showing us somewhat lower leverage levels and better priced investment opportunities across our…

Thank you, Ted. As of September 30 2022, our investment portfolio totaled $508 million, down $28 million from $536 million as of June 30 2022. Our investment portfolio consisted of debt and equity investments in 98 portfolio companies on September 30, as compared to debt and equity investments in 98 portfolio companies at June 30. During the quarter, we made investments in five new portfolio companies with funding totaling $15.2 million. In addition, we had revolver, add on or delayed draft fundings to 25 existing portfolio companies totaling $36.2 million. During the quarter, we received five full payoffs totaling $45 million and had ordinary course loan repayments aggregating $28.5 million. We are well positioned to redeploy this capital carefully into attractive assets that will benefit from increases in interest rates through participating in the substantial pipeline of opportunities generated at Monroe. At September 30, we had total borrowings of $301.2 million, including $171.2 million outstanding under our floating rate, revolving credit facility, and $130 million of our 4.75% fixed rate 2026 notes. Total borrowings outstanding decreased by $18.8 million during the quarter, to revolving credit facility had $83.8 million of availability as of September 30, subject to borrowing base capacity. Now, turning to our results, for the quarter ended September 30 2022, adjusted net investment income, a non-GAAP measure was $7.1 million, or $0.33 per share, compared to $5.4 million or $0.25 per share in the prior quarter. This increase in adjusted net investment income is primarily the result of the receipt of previously unaccrued interest income associated with repayment of an investment that had been on non-accrual status and advance of its repayment and the increase in the average portfolio yield during the quarter. When considering our target leverage, the rising interest rate environment a favorable percentage of our…

Thank you, Mick. We feel that MRCC is well positioned to deliver stable and consistent dividends for our shareholders, especially where our earnings and dividend would benefit from an increase in market interest rates. We have made substantial progress on portfolio matters over the past couple of years, including the most recent quarter where we achieved meaningful realization above our cost and carry on. And we saw our investment performance risk rating distribution improved. This has been a consistent pattern with our workout names in terms of recovery. We believe our purposely defensive portfolio strategy is well positioned for potential economic volatility under the watch of a seasoned senior leadership team that has managed credit through multiple economic and business cycles. Our external manager is a team of approximately 100 investment professionals for us to draw upon. Our investment strategy remains focused on providing well protected and well-structured senior secured first lien loans to companies with defendable market positions, resilient business models, strong management teams and reliable sponsors and owners. We will continue to selectively deploy capital in sectors with resiliency to economic cycles and headwinds including technology healthcare, business services, and opportunistic. Our overall Monroe Capital platform is a strong pipeline in excess of $2 billion of high quality and selective investment opportunities for all funds at Monroe, including MRCC. We are excited about our investment portfolio and our prospects and continue to believe that Monroe Capital Corporation, which is affiliated with an award winning best-in-class external manager provides a very attractive opportunity to our shareholders and other investors. Thank you all for your time today. And this now concludes our prepared remarks. I am going to ask the operator to open the call up now for questions.

[Operator Instructions] Kevin Futz with JMP Securities your line is open.

Hi, good afternoon, and thank you for taking my questions. I wanted to dig in a bit on portfolio company metrics. Just curious, you could talk about where weighted average EBITDA interest coverage and portfolio company leverage were at quarter end and how that's trended over the last few quarters.

So thanks for the question, Kevin. We don't disclose interest coverage metrics, and we don't disclose weighted average leverage. What I can say is that over the course of the quarter from a performance perspective, we saw, generally companies increase their top line. So revenues were up on both a unit basis and on a price basis. Margins were generally flat, year-to-date and quarter-over-quarter or slightly down in the context of a rising interest rate environment, where you can imagine, as we saw a slight decline in kind of interest coverage metrics among our borrowers. But when we underwrite our loans, and when we have performed surveillance on our loans, we are Uber focused on making sure that coverage cushions remain adequate and comfortable. And as we look at the portfolio, we feel that our interest coverage ratios, or interest coverage cushions are more than solid in this environment.

Okay, that's helpful color Mick. And then my follow up was on non-accrual that came off during the quarter. First, congratulations on the positive resolution of Curion. I felt that TJ came off non-accrual and it looks like the stub situations are written off prior to maturity, is that correct?

That is correct.

Okay, and then just one more quick one on amendment requests. Just curious, have you seen any pickup in amendment requests? And can you discuss your expectation for that to potentially pick up in the near term?

Sure. So, we've seen a modest increase or pickup in kind of amendment activity around financial covenants, or contrast that with the COVID period of a couple of years ago, where it was significantly greater than it is today. But we have seen, kind of a modest pickup from our borrowers, with respect to amendment activity and request with respect to financial covenants.

Okay, I'll leave it there. Thank you for taking my questions. And congratulations on a nice quarter.

Thanks, Kevin.

Robert Dodd with Raymond James, your line is open.

Congratulations on the revolving non-accruals and Kevin done recovering that. On my kind of follow-up on the amendment request. Can you give us any color kind of conceptually? Like what -- with financial covenants, maybe there's going to be a little bit more pressure on those as we go forward. What kind of brings the PE firm to -- because it's largely sponsor back transaction to the table, I mean, do they come early, do they wait until it's close. And obviously, it's not going to be a general problem in the portfolio. Is there only going to be a handful of borrower's maybe. So how much incremental information, can you squeeze out of the sponsor when they come with an amendment request, just trying to get a real handle long. Is this just about the interest rates? Or is there something else going on?

I think I'll try that one, Robert. Thanks for the question. So here's the way it works in practice. In our market, we have covenants in all of our transactions. And the covenants we tend to have are relatively similar. We have debt service, we have leverage, and we generally have some EBITDA covenants. So let's assume that those three covenants, then they're each designed to protect us against different elements of potential deterioration in profitability increased leverage and the ability to service our debt. We monitor our borrowers generally on a monthly basis. So we're watching our portfolio management group is watching our clients on a monthly basis so that we can anticipate quarterly covenant initiatives. We set covenants on a quarterly basis, but we monitor monthly. So unlike public companies or large companies or large upper middle market companies that report quarterly. But generally 60 days after the end of the quarter, we're receiving information 10 days after the end of each month on a flash basis so that we can anticipate where we are on a quarterly basis. I will tell you that across the portfolio, we've seen no material covenant or amendment request activity yet. And again, we're speaking as of November 2022. My estimation is that the overall economy will deteriorate somewhat in Q4 and Q1 as interest rates continue to rise. I think we've done most everything we can do in our position to protect our portfolio by rotating out of highly cyclical industries, moving away from consumer-facing brand products, retail, restaurants, the things that tend to be more consumer-driven or more immediately affected by a slowdown in the economy. So we feel good about where the portfolio is. I will tell you that we've been monitoring things closely over the last several months…

I really appreciate. It was very helpful. Sorry it was a bit long. So I really appreciate that. Thank you. Flipping to the other side, if I can, quickly to follow up. I mean you said you're probably going to take up leverage. You're seeing a lot of opportunities. I mean what areas are particularly attractive right now for deploying new capital? Or do you expect that to mainly be follow-ons to existing portfolios? Are you talking about taking up leverage for the new companies or just expanding the existing relationships?

Both ways. So what we did purposely this quarter and the quarter before is we've been stockpiling capacity. And in an increasing interest rate environment, we've been doing this for 20 years at Monroe. So I can give you some perspective on history in an increasing interest rate environment or coming out of a downturn. We did this after the financial crisis. We did it after a couple of recessions. We did it after COVID. We try to stockpile a little bit of liquidity because the deals get better. The new deals get better. Existing deals were always funding add-on opportunities, but those have already been priced or the add-ons where you have the opportunity to move the needle in our business is to do new transactions at lower leverage attachment points at higher price spreads. So all of the deals that we're doing today are virtually being done at 50 to 100 basis points of current return higher than we were doing a couple of quarters ago. So when I talk about optimism for the future and for MRCC, I'm looking at what we're doing today and what the pipeline we have today and the pipeline that we're putting dollars to work at a 50 to 100 basis points higher in terms of interest rate margin than we were doing six months ago.

And what that means from a sector perspective, Ted, is focused on technology and recurring revenue deals, healthcare services deals and opportunistic deals that have more kind of idiosyncratic characteristics. And if you look at the deals we funded in the third quarter, there were deals in those sectors at spreads at greater spread levels that Ted described as well.

Got it. Thank you.

[Operator Instructions] Christopher Nolan with Ladenburg Thalmann. Your line is open.

Hey guys, congratulations on Terry on. You guys are getting a good reputation for working through these trust pools. On that note, Vinci Brands, it's another large portfolio you had to farm. Can you give us any color what your expectations are for resolution of that, please?

Sure, Chris. Good question. Vinci Brands, which is previously known as Incipio, we have a credit position in the borrower, that is a borrower that is in the throes of consumer as well as some macroeconomic headwinds right now. They make telephone cases for phones and particularly iPhones. And if you've been watching the news, you're seeing what's happening with the iPhone launch, the new iPhone, the demand supply imbalance, Foxconn is having some issues in China right now supplying all the demand. The good news is that Apple is experiencing the highest level of demand for their new phones that they've ever seen. The bad news is that because of COVID restrictions, local governments in China are closing down vast areas of manufacturing, and that's affected Foxconn tremendously in terms of being able to satisfy that demand. So we've got some market headwinds there. We have basically a company doing $140 million or so of revenue. So we've got a good company or a real company, making a real product that is in the middle of a little bit of a headwind with getting iPhones made and some supply chain issues. So we continue to work hard on that. I will tell you that that's a high priority item for us. And we're doing everything that we can do on that credit. But right now, there are some factors beyond our control that we're hoping and we're waiting on and time is going to help us there. We just have to get through some of these COVID restrictions in China and Apple's got to be able to produce and sell and then we've got to be able to provide cases for the new phones that are being sold. So again, long answer to an easy question. We're hopeful that as time goes on, we'll be able to improve overall recovery on that particular credit.

Great. Thanks for the detail. As a follow-up, given that you have a fair amount of adjustable rate funding in terms of your bank facility, as interest rates go up, does that put a pricing disadvantage against other BDCs, which may have more fixed rate funding.

Not really. Not really because if you look at the other BDCs that have fixed rate funding today, it's generally a much higher fixed rate funding. We still have on a relative basis because of the way we've established our capital staff between fixed and floating, we're still floating off of some lower bank lines of credit rates, and there's still a positive arbitrage for us to do that. And we're going to hold down into that positive arbitrage until we see rates move back in our favor before we think about doing any type of fixed rate debt.

Okay, that’s it for me. Thanks guys.

Thank you, Christopher.

Bryce Rowe with B Riley, your line is open.

Thanks, good afternoon, Mick and Ted. I was curious if maybe you could speak to the improvement in the portfolios internal risk weightings. Is that more a function of non-accruals getting resolved? Or were there some other factors at play?

Yes. Good question, actually, Bryce. There's 2 -- I'm going to let Mick speak to it in detail, but there's two things that really move and affect that. Number one is non-accruals getting resolved. And if you look at our history over the last eight quarters. I will tell you and Robert Dodd is really the kind of the policeman here that's been watching this for everybody. We've done, I think, a really good job at moving non-accruals down and cleaning up some historical portfolio companies and some sponsors that have had some challenges. So that's number one. But the second way things move in risk ratings as migration, both be it positive and negative, and we've experienced some positive migration and companies, which means that we're doing a good job in our portfolio management and holding companies speak to the fire and holding sponsors speak to the fire. So Mick, can I think, speak more specifically on the migration, but I think that's a really good question.

No. That's absolutely right. Those are the two components, non-accruals and net credit migration. We talked about the non-accrual topic with Purion being resolved during the course of the quarter, a very, very positive. On the net migration front, we think about this in a couple of ways. First is exiting transactions from our portfolio. And during the quarter, we were successful in migrating out of the portfolio, a credit that was in that risk rating category of three. So we were happy with that event. And then in terms of portfolio kind of movements that result from kind of upgrades and downgrades we had a net positive experience in terms of that net upgrade net downgrade activity during third the course of the quarter. So it was a good quarter in terms of credit quality.

Okay. That's helpful commentary. And then maybe a question on the SLF. The dividend coming into Monroe from the SLF has been stable here at $900,000. Just curious with rates moving higher. Is there an opportunity for income generated from the SLF to increase here in future quarters?

So all things being equal, we'd expect the SLF to perform at higher bottom line net income levels. So by extension, we would expect performance of that portfolio to be accretive.

Got it. Thanks so much. That’s all for me. Appreciate the comments.

There are no further questions at this time. I'll now turn the call back over to the presenters for closing comments.

Okay. I just want to thank everybody for taking the time out today to catch up. It's an exciting time, I think, in our business, generally, from a firm standpoint, we continued our firm's growth at the manager level. And it's very exciting, I think, for the BDC industry right now. Those managers that have the workout portfolio management or asset management capabilities, I think, can reap some rewards as rates continue to increase. And that's certainly what our intention is to do here in the near term. So thank you all. We'll speak to you again next quarter. And to the extent you have any questions on an interim basis, feel free to reach out to Mick Solimene or to myself at any time. Thank you all. Bye-bye.

This concludes today's call. We thank you for your participation. You may now disconnect.