Monroe Capital Corporation Posts Solid Quarter and Underlying Trends

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Monroe Capital’s net investment income of $0.31 exceeded our $0.28 forecast, primarily due a large prepayment fee, which more than offset our forecasts for a slightly smaller investment portfolio, higher interest expense, and higher operating expenses.

Portfolio growth was strong, up 23% from the prior quarter, to $208 million, but shy of our $220 million estimate. The yield on assets was 13.6%, above our 11.1% estimate, primarily due to fees associated with a prepayment. As the portfolio seasons, we anticipate the frequency of prepayments—though lumpy by quarter—to increase slightly, driving upward pressure on the total asset yield.

Leverage remains low at 0.44 times debt to equity, net of cash. We believe Monroe is comfortable with leverage up to 0.75 times, excluding the SBIC license, and slightly more than 1.0 times with the SBIC. Increasing leverage is obviously accretive to earnings. We forecast the portfolio to grow 30% in 2014. We estimate an increase in the leverage ratio, excluding the SBIC debt, to 0.75 times. And assuming $50 million of SBIC debt fully levered at two-to-one debt-to-equity, we would add about $0.10 to our earnings estimate in 2015.

The SBA recently approved Monroe for its second SBIC license, which allows an additional $75 million of 10-year, 5% (“all-in”) fixed-rate debentures that can be levered (debt-to-equity) two-to-one. Monroe has applied for exemptive relief from the SBIC debt in its regulatory leverage calculations. Receiving such approval (which is typical) from the SEC would allow Monroe to effectively leverage more than the one-to-one leverage limitation for business development companies (BDCs). We forecast Monroe to use $50 million of SBIC debt. Monroe has $150 million of SBIC debentures in a private fund it manages and might use some of the new license for its private funds as well. It is possible that Monroe will get more debt out of the SBIC if the maximum amount permitted by investment families is increased.

Monroe repurchased 84,803 shares in the fourth quarter for $1.0 million. Subsequent to quarter end, Monroe repurchased an additional 217,000 shares, reducing the share count to 9.701 million shares as of March 5. We believe purchasing shares well below book value is an important shareholder-friendly move. We assume Monroe repurchases 337,000 shares for $4.4 million over the course of 2014.

The weighted average credit rating grade as of December 31 was 2.09 (one is best on a scale ranging from one to five), which compares with 2.07 at the end of the prior quarter. Net realized and unrealized losses of about $672,000 exceeded our $243,000 loss estimate. Grade 2 loans (which meet expectations) accounted for 91% of the portfolio, down from 93% in the prior quarter. Grade 3 loans (which are below expectations) increased to 9% of the total portfolio from 7% in the prior quarter. There were no loans on non-accrual.

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