Welcome to Monroe Capital Corporation's Fourth Quarter and Full Year 2022 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, and cash flows. Although we believe these statements are reasonable based on management's estimates, assumptions, and projections as of today, March 2nd, 2023, 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, the 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. Please go ahead, sir.

Good morning and thank you to everyone who has joined us on our call today. Welcome to our fourth quarter and full year 2022 earnings conference call. I am joined by Mick Solimene, our CFO and Chief Investment Officer; and Alex Parmacek, our Deputy Portfolio Manager. Last evening, we issued our fourth quarter and full year 2022 earnings press release and filed our 10-K with the SEC. I'd like to open up with some thoughts and observations on the market and the general economic environment. In the fourth quarter of 2022 and in the early 2023 period, compelling opportunities for MRCC have begun to emerge in response to the market volatility and the wary tone of the M&A and financing markets. As M&A and financing markets work through today's macroeconomic trends and what we consider to be a year of transition, middle market financing volume totaled almost $280 billion in 2022 according to Refinitiv. This mark was approximately 12% behind the record-setting volume in 2021, but still well above historical averages. As a firm, Monroe made approximately $6 billion of new investments in 2022. In response to the current market volatility, we are executing on transactions that not only have enhanced economics, but that also come with reduced leverage as well as more favorable pricing terms and documentation, a trend that began in the third quarter of last year. With current market conditions showing us lower leverage levels, coupled with higher equity cushions, we will selectively pursue assets in attractive markets as older vintage assets we pay. Our view is that 2023 will present itself as one of the most attractive vintages for deploying private capital -- private credit capital and that MRCC is very well-positioned, especially as market share continues to move toward direct lenders away from traditional regulated…

Thank you, Ted. As of December 31st, 2022, our investment portfolio totaled $541 million, up $33 million from $508 million as of September 30th, 2022. Our portfolio consisted of debt and equity investments in 105 portfolio companies as of December 31st, 2022 as compared to debt and equity investments in 98 portfolio companies as of September 30th, 2022. During the quarter, we made investments in eight new portfolio companies with fundings totaling $21.7 million at a weighted average interest rate of 11.2%. We also made nominal equity investments in two of these portfolio companies. Further, we had revolver or delayed draw fundings and add-ons to various existing portfolio companies totaling $18.3 million. During the quarter, we received one full payoff, which is for a nominal immaterial amount. We also incurred partial and normal course paydowns of $9 million and had no sales this quarter. We are well-positioned to deploy capital from future repayments carefully and to attractive assets that will benefit from increases in interest rates and more favorable structures through participating in the substantial pipeline of opportunities generated at Monroe. As of December 31st, we had total borrowings of $334.6 million, including $204.6 million outstanding under our floating rate revolving credit facility and $130 million of our 4.75% fixed rate 2026 notes. Total borrowings outstanding increased by $33.4 million during the quarter. The revolving credit facility had $50.4 million of availability as of December 31st, subject to borrowing base capacity. Now, turning to our financial results for the quarter ended December 31st, 2022. Adjusted net investment income, a non-GAAP measure, was $5.6 million or $0.26 per share compared to $7.1 million or $0.33 per share in the prior quarter. While the average portfolio yield increased during the quarter ended December 31st, 2022, adjusted net investment income declined primarily as…

Thanks Mick. In closing, we believe that we are well-positioned to emerge from a transitional 2022 to capitalize on compelling opportunities for private credit and navigate the market uncertainty that may lie ahead. Our average portfolio asset yield is in excess of 11% on current deals, which portends well for the rest of 2023. The depth and experience of our originations and underwriting teams will allow us to continue to selectively deploy capital in sectors that we have demonstrated resiliency to economic cycles. As we remain active in the market, we expect to realize the benefits of heightened demand for private capital from lower and overall middle-market companies, including, but not limited to, receiving more favorable economics and deal structures. This strategy is consistent with our historical focus on providing well-protected, well-structured senior secured first lien loans to companies with insulated market positions and reliable business models, led by strong management teams and reliable sponsors. We will continue to lean on our team and core underwriting principles to generate attractive and differentiated risk-adjusted returns while navigating the uncertainties of 2023 and beyond. MRCC is well-positioned to deliver stable and consistent dividends for our shareholders, especially where our earnings and dividends stand to benefit from an increase in market interest rates. We are excited about our investment portfolio and our prospects to continue and continue to believe that Monroe Capital Corporation, which is affiliated with an award-winning best-in-class external manager, Monroe Capital, provides a very attractive investment opportunity to our shareholders and other investors. Thank you all for your time today. And this concludes our prepared remarks. I am going to ask the operator to open up the call now for questions.

Thank you. [Operator Instructions] We'll hear first today from Kevin Fultz with JMP Securities.

Hi, good morning and thank you for taking my questions. I noticed that PIK income represented about 14.7% of interest income in the fourth quarter, which was up meaningfully from 7.8% in the prior quarter. I'm curious if the increase is driven by new deals that were maybe structured with the PIK component or that was possibly amendment related any insight would be helpful?

Sure. Good morning Kevin. Thank you for the question. So, we did see an increase in PIK income during the course of the quarter. The primary reason for the increase in income was the election by one of our borrowers at its option to exercise that PIK plateau [ph] during the quarter. If I look at our kind of PIK income trends quarter-over-quarter, year-over-year, we've kind of been in that 12% to 15% range. So, we feel comfortable with kind of where our PIK income is as a component of our total investment income. But that was the main cause for the increase during the quarter.

Okay. Thanks. And I guess just to continue kind of on that line of questioning, I'm curious if you've seen an increase in amendment requests, I guess, in the December quarter and how that's trended recently?

Yes. Really good question, Kevin. During the fourth quarter, we didn't really see any meaningful notable increase in amendment activity in our portfolio. Most of the amendment activity was related to transaction activity related to add-on transactions and technical amendments related to SOFR and LIBOR transition, but no meaningful amendment activity across our portfolio.

Okay, that's great to hear. And then one more if I can. I noticed that other G&A expenses were up slightly in the fourth quarter. I guess, can you just discuss what drove the increase? I'm just trying to get a sense if we should be scaling G&A expense in our model?

Yes. So, nothing meaningful in terms of that slight G&A bump. I would guide you towards kind of a historical pattern on the G&A front as you think about your model.

Okay, great. I appreciate your time this morning. I'll leave it there.

Thanks Kevin.

We'll hear next from Christopher Nolan with Ladenburg Thalmann.

Hey guys. The SLF, any of the borrowings by the SLS secured by any MRCC investments in the main portfolio?

They are not.

Okay. And then I guess in terms of asset liability management, what you're thinking right now? I mean, if the view was -- if the Fed would start easing for whatever reason, would MRCC look ahead of time to get more fixed rate loans or put on hedges? What's the thinking around that?

Yes. So, we're mindful of kind of capital structure. We're -- we've got a very, very favorable capital structure in terms of that note we did that matures in 2026, the $4.375 fixed rate note. But we are -- we have an internally dedicated capital markets being that we work with quite closely to think about kind of the liability side of our balance sheet and are keeping an eye on the markets to see if and when we might fine-tune our approach to the right-hand side of our balance sheet, but nothing imminent.

Final question--

Yes, Christopher, this is -- from my perspective, I think we're going to see some -- continue to see some slight increases here and overall Fed funds increases. Inflation is still not where they want it and they've signaled that we're likely to see more upside in interest rates than downside right now in the near-term.

And then I guess final question is strategy related. Monroe Capital announced recently acquiring the management of another BDC. What strategy overall there? And how will the BDC and MRCC work together, if at all together?

Good question. We've gotten a fair amount of discussions with media on this. About two weeks ago, we announced that Monroe, the private asset management company will acquire the investment adviser of another BDC Horizon Technology Finance NASDAQ, HRZN, that's a venture debt business. The management team there is comprised of about 38 people. They've been in business for about 20 years, best-in-class track record history. They manage about $1 billion today in a combination of their BDC and institutional capital. And I've been looking at the space for quite a while on behalf of Monroe. I think that the venture debt space in general is attractive in private credit, particularly in times when the IPO markets are closed, exits are difficult, fundraising is difficult for venture firms. Instead of doing large down round equity financings, many of these high-growth companies will look to credit instead. Pricing is good. Leverage is good on enterprise value, low enterprise value risk. So, it's a -- it was an acquisition and opportunistic acquisition opportunity for us as a firm to continue to develop asset class categories that we can offer our institutional investors. I don't think this will be an MRCC investment. I think it's a different type of asset class. But for our other funds and our institutional investors at our adviser level at Monroe, this represents a very attractive opportunity for us to take advantage of a tactical place in the market where we can earn excess alpha.

Great. Thanks Ted. That’s it from me.

Thanks Chris.

[Operator Instructions] We'll hear now from Robert Dodd with Raymond James.

Hi guys. Question on the SLF, the earnings, obviously -- I mean, its portfolio is very sensitive as well. So, the earnings within that SLF have increased about north of 20% from Q1 to Q4, but the dividend has improved. Obviously, there's been markdowns within the SLF. But should we think of the dividend opportunity from the SLF to MRCC is kind of having a high watermark or something like that where as in book equity has to get back above $80 million before you get 50% of the earnings because obviously, in the fourth quarter, the payout ratio was the dividend to you is like 37% of the earnings that you own 50% of it. So, can you give us any color on how we should think about that given that the earnings at the SLF are quite rate sensitive as the MRCC?

They are quite rate sensitive. You are right, I would guide you towards our kind of $900,000 per quarter level as a run rate for the SLF. That's the guidance I would offer you on that front.

But could you give us any color about why -- is it the markdowns and those need to be recovered? Or what's the decision? I realize it's not solely your decision or the MRCC decision. But there is -- obviously, there has been an increasing mismatch between the earnings power within that and the dividend paid out? Is this a scenario where that changes?

Yes, I think we're mindful of, obviously, future performance potential of the portfolio. We did have a realized loss in the portfolio last quarter in the form of Port Townsend and when we consider our dividend distribution from the SLF to both partners, both us and National Life. We consider portfolio performance in the context of that distribution yield and it's something that we assess as we always do when we make that dividend determination.

Got it. Okay. I appreciate that. And then just back to the horizon, Chris already asked the question, but I mean is there -- I mean you have some recurring revenue software business within MRCC. You obviously have an entirely different fund that focuses on that. So, MRCC has sometimes taken opportunity to take advantage of other areas of expertise within Monroe. I mean that is the place. So, is there room -- is MRCC grew a small sleeve of venture debt? Or is that just something you don't consider appropriate for this vehicle at all?

That's a great question, Robert. We manage $16 billion across our platform. MRCC gets the benefit of the entire platform. And what we try to do is in our allocation policies, provide allocations of each deal we do across the platform when it's appropriate for the specific fund for the investment vehicle. I anticipate that from time-to-time, there's going to be highly attractive and accretive deals that we originate across the platform, whether it's from Horizon, whether it's in our software lending vertical, health care, sports, media, entertainment, and when the appropriate investment fits within the MRCC mandate as managed by our portfolio managers, Mick and Alex, you may see these assets. But we've been pretty good historically it's sticking to our knitting and MRCC and developing a high-quality senior secured portfolio that's got low leverage and good interest coverage. As you know, venture debt businesses don't necessarily have those two qualities. We may have good growth prospects. We may have good loan to value, good loan against enterprise value, but interest coverage and leverage are not usually the cornerstones of a venture debt portfolio. So, we're going to tread slowly, I think, with MRCC in the venture debt area.

Got it. Thank you for that.

And from B. Riley, we'll hear next from Bryce Rowe.

Hi, good morning. I wanted to ask about balance sheet leverage and maybe just future visibility into repayment activity to help fund newer investments. So, obviously, you have a balance sheet leverage tick up above the high end of your range, certainly understand that can happen from time-to-time, but just curious if we should expect balance sheet leverage to stay at current levels or if you have some visibility into repayment activity that made you comfortable kind of going above the high end of the target?

So, good morning Bryce and great question. So, as we manage the portfolio, we're looking into the future in terms of repayments we expect from our borrowers were in close contact with our over 100 borrowers. We're also looking into our originations pipeline, and we're trying to the kind of cadence those two things, if you will. We had really, really strong origination activity during the fourth quarter, and our payoffs -- projected payoffs came lighter than expected as we looked at our payout pipeline. So, we came in at the end of the year above our leverage targets. But the way we think about this going forward is we still maintain our long-term leverage target of 1.3 to 1.4 and would guide you in the short term to kind of the top end of that range, which is where we are targeting to manage the portfolio.

Okay, that's helpful. And then maybe one more for you, Mick, just around credit quality. I mean obviously, you had a pretty steady non-accrual number, and I think 1 investment kind of makes up the bulk of what's left there in that non-accrual bucket. But beyond that, can you talk about maybe any kind of positive or negative migration you saw within the quarter and how it might relate to kind of internal risk ratings.

Yes. So, we did make further -- a little bit more further progress on non-accruals during the quarter. We received about a $600,000 of pay down on Bluestem Brands, which is one of our four non-performers. So, pleased with that. In terms of portfolio migration during the course of the quarter, if you look at our rating distribution, we were up about $7 million or $8 million in our three rated category during the course of the quarter. So, we had a couple of a few credits that migrated into our three rating during the quarter. You recall that we rate deals on a one through five basis, but had a few names migrate into the three category during the quarter. But overall, I feel really comfortable with the quality of the portfolio, the coverage ratio on an interest basis at our portfolio companies are reporting and believe that the portfolio is generally sound.

Okay, that's helpful. And then just maybe a follow-up to that, Mick. What -- the ones that did migrate into the three, what -- is there -- I assume that's idiosyncratic. What's going on there that--

Yes. So, good question. So, the oil companies are still experiencing some effect from rising input costs, rising freight costs, things like that. So the companies that have migrated in that kind of three category have seen some margin impact because of that. And in those cases, those companies are very, very focused on margin improvement by the kinds of actions that companies typically take, passing price increases ultimately along to their customer, strategically reducing costs or things like that. What you don't see in our kind of broad portfolio risk rating distributions that we actually -- also during the quarter had migration out of the three into the two category as some of our companies that experienced some of the early effects of inflation and supply chain, we're able to effectively pass along price increases, execute strategic investment initiatives and get margins kind of back in line. So, we continue to see kind of an evolving landscape as companies adapt and adjust to market in economic conditions.

Got it. It makes a ton of sense. Appreciate the comments this morning. Thanks.

Thank you.

And with no other questions at this time, I'd like to turn things back to the company for closing remarks.

Thank you all for joining us today. We enjoy the conversation as well as the questions and we look forward to speaking again next quarter. So, be safe and we'll speak to you soon. And like always, to the extent anyone has any questions in the interim before our next quarterly call, feel free to reach out to Mick directly. And we're always willing and wanting to engage. So, thank you all. Have a good day.

And that will conclude today's conference. Again, thank you all for joining us. You may now disconnect.