Monroe Capital(MRCC) - 2024 Q4 - Annual Report

Investment Portfolio - As of December 31, 2024, the largest industry concentrations of investments were in FIRE: Real Estate (18.2%), Healthcare & Pharmaceuticals (17.5%), and Services: Business (11.2%) [52] - The total fair value of investments in the FIRE: Real Estate industry is $83.0 million, accounting for 18.2% of total investments [71] - The company has invested approximately$ 2.0 million to $35.0 million in the securities of middle-market companies, with a total fair value of the ten largest portfolio company investments amounting to$ 161.8 million, representing 35.4% of total investments [70] - Monroe Capital's investment professionals have invested in over 2,200 loans and related investments totaling over $47.7 billion since its formation in 2004 [56] - The company reviewed more than 2,100 investment opportunities during 2024, allowing for selective loan commitments [58] - The total fair value of investments as of December 31, 2024, was$ 457,048 [82] - The total fair value of investments as of December 31, 2023, was $488,386, with Grade 2 investments at$ 405,888 (83.1%) and Grade 3 at $74,224 (15.2%) [82] Investment Risk Management - The expected average maturity for target directly originated senior and unitranche secured debt is between three to seven years, with interest rates ranging from 9% to 16% [52] - The investment strategy includes a focus on secured loans with a covenant package that provides for full or partial repayment upon asset sales and restructurings [54] - The company maintains a disciplined portfolio management approach, which includes ongoing credit monitoring and regular investment committee meetings [60] - The company aims to limit downside potential by selecting investments with a very low probability of loss and negotiating covenants that preserve capital while allowing flexibility for portfolio companies [67] - MC Advisors employs a structured process for credit evaluation, focusing on downside scenarios to minimize risks [76] - The monitoring process includes regular assessments of investment risk profiles and updates for the investment committee for higher-risk ratings [80] - The investment performance risk rating system includes five grades, with Grade 1 indicating the least risk and Grade 5 indicating substantial risk [80] Financial Performance and Fees - The base management fee is now set at an annual rate of 1.75% for average invested assets, reducing to 1.00% for assets exceeding 200% of average net assets [95] - The incentive fee consists of two parts: a quarterly fee based on pre-incentive fee net investment income and an annual capital gains incentive fee [97][105] - The pre-incentive fee net investment income must exceed a hurdle rate of 2% per quarter (8% annually) for any incentive fee to be payable [100][106] - The cumulative net increase in net assets resulting from operations over the current and preceding 11 quarters must exceed cumulative incentive fees accrued for an incentive fee to be payable [98][111] - The capital gains incentive fee is calculated as 20% of realized capital gains, adjusted for any previous fees paid [105][114] - In the case of a loss, an incentive fee may still be paid if pre-incentive fee net investment income exceeds the hurdle rate [99] - The management fee is calculated at 0.4375% and other expenses are estimated at 0.2% [108][111] - The "catch-up" provision allows for 20% of pre-incentive fee net investment income exceeding 2.5% to be paid as an incentive fee [106][112] - The total return requirement limits the incentive fee based on cumulative net increases in net assets [98][111] - The incentive fee calculations are adjusted for any share issuances or repurchases during the quarter [101][104] - The cumulative aggregate capital gains fee received by the investment advisor is$ 6.4 million, which is effectively greater than $5 million (20% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation of$ 25 million) [1] Administrative and Governance Matters - For the years ended December 31, 2024, 2023, and 2022, the company incurred $2.9 million,$ 2.8 million, and $3.1 million in administrative expenses, respectively, with$ 1.0 million, $0.9 million, and$ 1.2 million related to MC Management overhead and salary allocation [123] - The Investment Advisory and Management Agreement will continue in effect from year to year if approved annually by the Board or by a majority of the holders of outstanding voting securities [119] - The Board concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided [128] - The Board reviewed the investment performance and determined that MC Advisors was delivering results consistent with the investment objective [131] - The Administration Agreement may be terminated by either party without penalty upon 60 days' written notice [122] Tax and Regulatory Compliance - The company has elected to be treated as a RIC under Subchapter M of the Code, which allows it to avoid corporate-level U.S. federal income taxes on distributed income [142] - The company must meet the Annual Distribution Requirement, which requires distributing at least 90% of its investment company taxable income to maintain RIC status [142] - The company may face challenges in meeting the Annual Distribution Requirement due to the nature of its income, which may include original issue discount that is recognized before cash is received [150] - The company is subject to financial covenants that could limit its ability to make distributions to stockholders, impacting its RIC qualification [155] - The company may need to liquidate investments to meet distribution requirements, which could result in gains or losses that affect shareholder distributions [158] - The company monitors its investment practices to mitigate potential adverse tax effects from complex U.S. federal income tax provisions [159] - The company intends to monitor its investments in equity securities treated as partnerships to prevent disqualification as a RIC [160] - If the company fails to qualify as a RIC, it would be subject to U.S. federal income tax on all taxable income at regular corporate rates, which could adversely affect stockholder distributions [163] Competitive Landscape - The company faces intensified competition in the middle-market investment sector, with competitors having greater financial and technical resources, which may affect investment opportunities [137] - The company utilizes the expertise of MC Advisors to assess investment risks and pricing for its loan portfolio, enhancing its competitive position in the market [138] Investment Flexibility and Structure - The company has received exemptive relief from the SEC, allowing it to exclude certain debts from the asset coverage test under the 1940 Act, providing increased investment flexibility [170] - The company may invest up to 100% of its assets in securities acquired directly from issuers in privately negotiated transactions [166] - The company must maintain at least 70% of its total assets in qualifying assets to comply with the 1940 Act [172] - The company has dissolved its subsidiary MRCC SBIC, which previously allowed it to obtain leverage through SBA debentures [168] - The company is permitted to issue multiple classes of indebtedness and one class of stock senior to its common stock if asset coverage is at least 150% immediately after issuance [179] - The company does not intend to enter into repurchase agreements with a single counterparty in excess of 25% of total assets to meet diversification tests [177] - The company provides significant managerial assistance to portfolio companies to ensure their securities qualify as qualifying assets [175] Risk Factors - The company is subject to financial market risks, including valuation risk, interest rate risk, currency risk, and inflation and supply chain risk [550] - The majority of the loans in the company's portfolio have floating interest rates, which are typically based on a floating SOFR [553] - A hypothetical 300 basis points increase in interest rates could lead to a net increase in investment income of $6,054,000 [554] - As of December 31, 2024, the company held no investments in foreign currencies or foreign currency forward contracts [556] - U.S. inflation rates remain well above historical levels, adversely affecting consumer spending and economic growth [557] - The company may hedge against interest rate fluctuations using standard hedging instruments, although this may limit benefits from lower interest rates [555] Compliance and Ethics - The company has adopted written policies to prevent violations of federal securities laws and reviews these policies annually [189] - The company restricts access to nonpublic personal information about stockholders to employees with a legitimate business need [193] - The company intends to make its Annual Report and other filings publicly available free of charge on its website [204] - The company has a non-exclusive, royalty-free license to use the name "Monroe Capital" as long as MC Advisors remains the investment advisor [125]