Monroe Capital(MRCC) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements of Monroe Capital Corporation, including statements of assets and liabilities, operations, changes in net assets, cash flows, and detailed schedules of investments, along with comprehensive notes explaining accounting policies, fair value measurements, and transactions with related parties Consolidated Statements of Assets and Liabilities Presents the company's financial position as of March 31, 2021, and December 31, 2020, showing total assets, liabilities, and net assets. Key changes include a decrease in total investments and debt, and a slight increase in net assets Total Assets | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $544,473 | | December 31, 2020 | $585,123 | Total Investments, at fair value | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $521,379 | | December 31, 2020 | $547,039 | Total Liabilities | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $309,791 | | December 31, 2020 | $350,559 | Total Net Assets | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $236,163 | | December 31, 2020 | $234,434 | Net Asset Value per share | Date | Amount | | :--- | :--- | | March 31, 2021 | $11.08 | | December 31, 2020 | $11.00 | Consolidated Statements of Operations Details the company's operational performance for the three months ended March 31, 2021, and 2020. It shows a decrease in total investment income but a significant shift from a net loss to a net gain, primarily driven by a positive change in unrealized gains on investments Total Investment Income | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $13,213 | | 3 months ended Mar 31, 2020 | $15,002 | Total Operating Expenses | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $7,857 | | 3 months ended Mar 31, 2020 | $8,200 | Net Investment Income | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $5,326 | | 3 months ended Mar 31, 2020 | $6,782 | Net Realized Gain (Loss) | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $(3,018) | | 3 months ended Mar 31, 2020 | $75 | Net Change in Unrealized Gain (Loss) | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $4,747 | | 3 months ended Mar 31, 2020 | $(43,707) | Net Increase (Decrease) in Net Assets from Operations | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $7,055 | | 3 months ended Mar 31, 2020 | $(36,850) | Net Investment Income per share | Period | Amount | | :--- | :--- | | 3 months ended Mar 31, 2021 | $0.25 | | 3 months ended Mar 31, 2020 | $0.33 | Net Increase (Decrease) in Net Assets from Operations per share | Period | Amount | | :--- | :--- | | 3 months ended Mar 31, 2021 | $0.33 | | 3 months ended Mar 31, 2020 | $(1.81) | Consolidated Statements of Changes in Net Assets This statement outlines the changes in net assets for the three months ended March 31, 2021, and 2020. It shows an increase in total net assets in 2021, primarily due to net investment income and a positive change in unrealized gains, contrasting with a decrease in 2020 driven by significant unrealized losses - Total Net Assets at December 31, 2020: $234,434 thousand[14] - Net Investment Income (3 months ended Mar 31, 2021): $5,326 thousand[14] - Net Realized Gain (Loss) (3 months ended Mar 31, 2021): $(3,018) thousand[14] - Net Change in Unrealized Gain (Loss) (3 months ended Mar 31, 2021): $4,747 thousand[14] - Distributions to Stockholders (3 months ended Mar 31, 2021): $(5,326) thousand[14] - Total Net Assets at March 31, 2021: $236,163 thousand[14] Consolidated Statements of Cash Flows Provides a breakdown of cash flows from operating, investing, and financing activities for the three months ended March 31, 2021, and 2020. In 2021, operating activities generated cash, while financing activities used a significant amount, leading to a net decrease in cash and restricted cash Net Cash Provided by (Used in) Operating Activities | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $33,817 | | 3 months ended Mar 31, 2020 | $(16,357) | Net Cash Provided by (Used in) Investing Activities | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $(50,314) | | 3 months ended Mar 31, 2020 | $5,945 | Net Cash Provided by (Used in) Financing Activities | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $(16,497) | | 3 months ended Mar 31, 2020 | $(10,412) | Cash and Restricted Cash at End of Period | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $15,888 | | March 31, 2020 | $19,212 | Consolidated Schedules of Investments Provides a detailed breakdown of the company's investment portfolio as of March 31, 2021, and December 31, 2020, categorized by type (Senior Secured, Unitranche Secured, Junior Secured Loans, Equity Securities) and further by industry. It also includes information on derivative instruments (foreign currency forward contracts) - Total Investments, at fair value (March 31, 2021): $521,379 thousand[28] Composition of Investments by Type (March 31, 2021, Fair Value) | Investment Type | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | Non-Controlled/Non-Affiliate Company Investments | $372,493 | 71.4% | | Non-Controlled Affiliate Company Investments | $107,819 | 20.7% | | Controlled Affiliate Company Investments | $41,067 | 7.9% | - Total Investments, at fair value (December 31, 2020): $547,039 thousand[44] Composition of Investments by Type (December 31, 2020, Fair Value) | Investment Type | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | Non-Controlled/Non-Affiliate Company Investments | $398,040 | 72.8% | | Non-Controlled Affiliate Company Investments | $109,715 | 20.1% | | Controlled Affiliate Company Investments | $39,284 | 7.2% | - Unrealized Gain on Foreign Currency Forward Contracts (March 31, 2021): $221 thousand[30] - Unrealized Loss on Foreign Currency Forward Contracts (December 31, 2020): $(113) thousand[53] Notes to Consolidated Financial Statements Provides detailed explanations of the company's accounting policies, investment composition, fair value measurements, and transactions with affiliated and related parties. It also covers borrowings, derivative instruments, distributions, stock activities, commitments, and financial highlights, offering crucial context for the financial statements Note 1. Organization and Principal Business Monroe Capital Corporation is an externally managed BDC and RIC, focused on maximizing stockholder returns through investments in senior secured, junior secured, and unitranche secured debt, and to a lesser extent, unsecured subordinated debt and equity. It operates a wholly-owned SBIC subsidiary - Company Status: Externally managed, non-diversified, closed-end management investment company, elected as a Business Development Company (BDC) and Regulated Investment Company (RIC)[59] - Investment Objective: Maximize total return to stockholders via current income and capital appreciation[59] - Primary Investments: Senior secured, junior secured, and unitranche secured debt, with lesser focus on unsecured subordinated debt and equity[59] - SBIC Subsidiary: Wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP (MRCC SBIC), licensed as a Small Business Investment Company since February 28, 2014[60] Note 2. Summary of Significant Accounting Policies Outlines the key accounting principles and policies used in preparing the consolidated financial statements, including GAAP compliance, use of estimates, consolidation practices (including taxable subsidiaries), fair value measurements, revenue recognition for various investment types, non-accrual policies, distribution accounting, segment reporting, cash management, deferred financing costs, offering costs, foreign currency translation, derivative instrument accounting, and income tax treatment for RICs and taxable subsidiaries - Basis of Presentation: Consolidated financial statements prepared in accordance with GAAP, following ASC Topic 946 for investment companies[61] - Consolidation Policy: Generally does not consolidate portfolio companies, except for investment company subsidiaries or controlled operating companies providing services to the Company, including MRCC SBIC and Taxable Subsidiaries[63] - Fair Value Measurement: Applies fair value to substantially all financial instruments per ASC Topic 820, categorizing them into a three-level hierarchy[64] - Revenue Recognition: Interest and dividend income recorded on an accrual basis, with PIK income added to principal. Loan origination fees, OID, and market discounts are capitalized and amortized[67][70][71] - Non-accrual Policy: Loans or preferred equity securities are placed on non-accrual status when payments are materially past due or collection is doubtful[74] - Income Taxes: Elected RIC status, aiming to distribute at least 90% of taxable income to avoid corporate-level federal income taxes. Subject to 4% excise tax on undistributed taxable income[91] - Unamortized Deferred Financing Costs: $7,715 thousand as of March 31, 2021, amortized over the life of borrowings[83] - Foreign Currency Investments: Portfolio investments denominated in foreign currencies are translated at spot rates; fluctuations in fair value are included in net change in unrealized gain/loss[86][87] - Derivative Instruments: Foreign currency forward contracts are marked-to-market at fair value, with changes in unrealized gain/loss and realized gain/loss recorded in the statements of operations[89][90] Note 3. Investments Details the composition of the investment portfolio by type, geographic region, and industry, at both amortized cost and fair value. It also provides specific information on the MRCC Senior Loan Fund I, LLC (SLF), an unconsolidated co-investment vehicle Investment Portfolio Composition (March 31, 2021, Fair Value) | Investment Type | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | Senior secured loans | $392,399 | 75.2% | | Unitranche secured loans | $48,298 | 9.3% | | Junior secured loans | $11,999 | 2.3% | | LLC equity interest in SLF | $41,067 | 7.9% | | Equity securities | $27,616 | 5.3% | | Total | $521,379 | 100.0% | Geographic Composition (March 31, 2021, Fair Value) | Region | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | International | $29,440 | 5.6% | | Midwest | $142,285 | 27.3% | | Northeast | $112,437 | 21.6% | | Southeast | $126,011 | 24.2% | | Southwest | $27,535 | 5.3% | | West | $83,671 | 16.0% | | Total | $521,379 | 100.0% | Industry Composition (March 31, 2021, Fair Value) | Industry | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | High Tech Industries | $84,886 | 16.3% | | Banking, Finance, Insurance & Real Estate | $77,959 | 15.0% | | Services: Business | $62,071 | 11.9% | | Healthcare & Pharmaceuticals | $42,179 | 8.1% | | Investment Funds & Vehicles | $41,067 | 7.9% | | Media: Advertising, Printing & Publishing | $31,623 | 6.1% | | Chemicals, Plastics & Rubber | $28,879 | 5.5% | | Services: Consumer | $21,363 | 4.1% | | Beverage, Food & Tobacco | $21,767 | 4.2% | | Retail | $19,404 | 3.7% | | Construction & Building | $16,855 | 3.2% | | Wholesale | $14,102 | 2.7% | | Capital Equipment | $13,890 | 2.7% | | Environmental Industries | $13,218 | 2.5% | | Consumer Goods: Non-Durable | $9,061 | 1.7% | | Automotive | $9,603 | 1.9% | | Media: Diversified & Production | $6,889 | 1.3% | | Hotels, Gaming & Leisure | $2,651 | 0.5% | | Media: Broadcasting & Subscription | $2,335 | 0.4% | | Telecommunications | $1,102 | 0.2% | | Consumer Goods: Durable | $475 | 0.1% | | Containers, Packaging & Glass | $0 | 0.0% | | Total | $521,379 | 100.0% | - MRCC Senior Loan Fund I, LLC (SLF): Co-invests with LSW in senior secured loans. As of March 31, 2021, the Company and LSW each owned 50.0% of SLF's LLC equity interests. SLF had $100,000 thousand in equity commitments from members, of which $84,300 thousand was funded. The Company received $1,200 thousand in dividend income from SLF for the three months ended March 31, 2021[100][101][102] SLF Financial Summary (March 31, 2021) | Metric | Amount (in thousands) | | :--- | :--- | | Total Assets (fair value) | $202,560 | | Total Liabilities | $120,426 | | Members' Capital | $82,134 | | Net Increase in Members' Capital (3 months ended Mar 31, 2021) | $5,967 | Note 4. Fair Value Measurements Explains the company's methodology for fair value measurements, adhering to ASC Topic 820, which categorizes financial instruments into a three-level hierarchy based on input observability. It details the valuation process for Level 3 investments, primarily using income and market approaches, and provides quantitative disclosures of significant unobservable inputs - Fair Value Hierarchy: Investments are classified into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable and significant inputs). All investments, except those measured at NAV, were categorized as Level 3 as of March 31, 2021, and December 31, 2020[123][124] - Valuation Process for Level 3 Investments: Involves initial evaluation by MC Advisors, independent appraisals, review by MC Advisors' investment committee, audit committee review, and final determination by the Board[131] - Valuation Techniques: Primarily uses the income approach (discounted cash flow models) and market approach (enterprise value methodology, often based on EBITDA or revenue multiples). Considers credit quality, market yields, collateral, and economic conditions[125][126][127] - Impact of COVID-19: The Board acknowledges potential future negative impacts on fair value due to ongoing market volatility caused by the pandemic[129] - Foreign Currency Forward Contracts: Valued based on the difference between forward and current exchange rates, categorized as Level 2[132] - Total Level 3 Assets (March 31, 2021): $466,551 thousand[139] - Total Level 3 Assets (December 31, 2020): $492,188 thousand[140] Net Change in Unrealized Gain (Loss) on Level 3 Investments | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $2,993 | | 3 months ended Mar 31, 2020 | $(33,632) | Note 5. Transactions with Affiliated Companies Details transactions with affiliated companies, defined as entities where the Company holds 5% or more of voting securities, including controlled affiliates (over 25% voting securities). It provides a reconciliation of fair value changes, purchases, sales, and income from these investments - Definition of Affiliated Company: Company in which the Company has an ownership interest of 5% or more of its voting securities[145] - Definition of Controlled Affiliate Company: Company in which the Company has an ownership interest of more than 25% of its voting securities[145] Total Non-controlled Affiliate Company Investments (Fair Value) | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $107,819 | | December 31, 2020 | $109,715 | Total Controlled Affiliate Company Investments (Fair Value) | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $41,067 | | December 31, 2020 | $39,284 | Investment Income from Non-controlled Affiliate Companies | Period | Interest Income (in thousands) | Dividend Income (in thousands) | | :--- | :--- | :--- | | 3 months ended Mar 31, 2021 | $2,587 | $42 | | 3 months ended Mar 31, 2020 | $1,195 | $25 | Investment Income from Controlled Affiliate Companies (MRCC Senior Loan Fund I, LLC) | Period | Dividend Income (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $1,200 | | 3 months ended Mar 31, 2020 | $1,150 | Note 6. Transactions with Related Parties Describes the company's relationships and transactions with its investment adviser (MC Advisors) and administrator (MC Management), including details on base management fees, incentive fees (with a waiver and limitation), and administrative service fees - Investment Advisory Agreement: With MC Advisors, covering investment advisory services[149] Base Management Fees | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $2,334 | | 3 months ended Mar 31, 2020 | $2,551 | - Base management fee is calculated at an annual rate of 1.75% of average invested assets, with a reduced rate of 1.00% for assets exceeding 200% of average net assets[150] - Incentive Fee: Two parts: 20% of "pre-incentive fee net investment income" quarterly (subject to 2% hurdle and "catch up" feature, and a total return requirement), and 20% of cumulative realized capital gains annually (net of realized losses and unrealized depreciation)[152] Total Incentive Fees, net of incentive fee waiver | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $193 | | 3 months ended Mar 31, 2020 | $0 | - Incentive Fee Waiver: MC Advisors waived $637 thousand in part one incentive fees for the three months ended March 31, 2021[153][155] - Administration Agreement: With MC Management, for overhead and administrative services[156] Administrative Expenses | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $842 | | 3 months ended Mar 31, 2020 | $784 | - License Agreement: With Monroe Capital LLC for royalty-free use of the "Monroe Capital" name[157] Note 7. Borrowings Details the company's various debt instruments, including its revolving credit facility, 2023 Notes, 2026 Notes, and SBA debentures. It covers terms, covenants, outstanding balances, interest rates, and recent repayment activities - Asset Coverage Ratio: 206% as of March 31, 2021, and 200% as of December 31, 2020, exceeding the 150% requirement[159] - Revolving Credit Facility: Agent: ING Capital LLC. Size: $255,000 thousand, with an accordion feature up to $400,000 thousand. Maturity: March 1, 2024[160] - Outstanding Borrowings (March 31, 2021): $70,700 thousand (U.S. dollar) and £16,100 ($22,191 thousand U.S. dollars)[163] - Weighted Average Interest Rate (March 31, 2021): 3.2%[164] - 2023 Notes: $109,000 thousand redeemed on February 18, 2021, resulting in a realized loss of $2,335 thousand[165] - 2026 Notes: Private offering of $130,000 thousand on January 25, 2021. Maturity: February 15, 2026. Interest Rate: 4.75% annually, payable semi-annually[166] - SBA Debentures: $28,100 thousand repaid on March 1, 2021, resulting in a realized loss of $439 thousand[170] SBA Debentures Outstanding | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $86,900 | | December 31, 2020 | $115,000 | Total Interest and Other Debt Financing Expenses | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $4,453 | | 3 months ended Mar 31, 2020 | $4,830 | Note 8. Derivative Instruments Discusses the company's use of foreign currency forward contracts to mitigate exposure to foreign exchange rate fluctuations, detailing unrealized and realized gains/losses - Purpose: Mitigate impact of adverse changes in foreign exchange rates on future interest cash flows from foreign currency denominated investments[173] - Counterparty: Bannockburn Global Forex, LLC[173] Net Change in Unrealized Gain (Loss) on Foreign Currency Forward Contracts | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $334 | | 3 months ended Mar 31, 2020 | $98 | Net Realized Gain (Loss) on Foreign Currency Forward Contracts | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $(38) | | 3 months ended Mar 31, 2020 | $(4) | Note 9. Distributions Provides a summary of distributions declared to stockholders, including per share amounts and the impact of the dividend reinvestment plan (DRIP) Total Distributions Declared | Period | Amount (in thousands) | Per Share | | :--- | :--- | :--- | | 3 months ended Mar 31, 2021 | $5,326 | $0.25 | | 3 months ended Mar 31, 2020 | $7,155 | $0.35 | - Dividend Reinvestment Plan (DRIP): Adopted in October 2012, allows automatic reinvestment of cash dividends into additional common stock unless opted out[77] Note 10. Stock Issuances and Repurchases Details the company's ATM equity distribution agreements for common stock issuances - ATM Program: Entered into on May 12, 2017, with JMP Securities LLC and FBR Capital Markets & Co., allowing sales of up to $50,000 thousand of common stock[178] - Activity: No stock issuances through the ATM Program during the three months ended March 31, 2021, and 2020[178] Note 11. Commitments and Contingencies Outlines the company's outstanding commitments to fund investments, unfunded commitments to SLF, indemnification obligations, and exposure to credit, counterparty, and market risks. It also notes the absence of material legal proceedings - Outstanding Commitments to Fund Investments: $50,135 thousand as of March 31, 2021 (excluding SLF)[179] - Unfunded Commitments to SLF: $7,850 thousand as of March 31, 2021[179] - Liquidity for Commitments: Management believes available cash and revolving credit facility provide sufficient funds[179] - Indemnifications: Enters into contracts with general indemnifications; risk of future obligations is remote[180] - Credit and Counterparty Risk: Arises primarily from the potential inability of counterparties to perform in accordance with the terms of the contract[181] - Market Risk: Investments and borrowings are subject to market risk due to market changes, volatility, and liquidity[182] - Legal Proceedings: Not currently aware of any material legal or regulatory proceedings[183] Note 12. Financial Highlights Presents key financial performance metrics per share and various ratios for the three months ended March 31, 2021, and 2020, including net asset value, investment income, total return, and expense ratios Net Asset Value at End of Period | Period | Amount | | :--- | :--- | | March 31, 2021 | $11.08 | | March 31, 2020 | $10.04 | Net Investment Income per share | Period | Amount | | :--- | :--- | | March 31, 2021 | $0.25 | | March 31, 2020 | $0.33 | Net Increase (Decrease) in Net Assets from Operations per share | Period | Amount | | :--- | :--- | | March 31, 2021 | $0.33 | | March 31, 2020 | $(1.81) | Total Return Based on Market Value | Period | Return | | :--- | :--- | | March 31, 2021 | 28.09% | | March 31, 2020 | (31.20)% | Ratio of Net Investment Income to Average Net Assets | Period | Ratio | | :--- | :--- | | March 31, 2021 | 9.43% | | March 31, 2020 | 12.00% | Ratio of Total Expenses, net of incentive fee waiver, to Average Net Assets | Period | Ratio | | :--- | :--- | | March 31, 2021 | 13.34% | | March 31, 2020 | 14.54% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides a comprehensive discussion and analysis of the company's financial condition, results of operations, and liquidity for the three months ended March 31, 2021, compared to the prior year. It covers investment activities, portfolio quality, operating expenses, and market trends, highlighting the impact of the COVID-19 pandemic Overview Monroe Capital Corporation is an externally managed BDC and RIC focused on providing financing solutions to lower middle-market companies in the US and Canada, primarily through senior secured, junior secured, and unitranche secured debt, with some equity co-investments. The portfolio composition shifted slightly towards senior secured and equity, and away from unitranche and junior secured loans, from December 2020 to March 2021 - Company Status: Externally managed, closed-end, non-diversified management investment company, elected as a BDC and RIC[197] - Investment Focus: Primarily senior secured, junior secured, and unitranche secured debt for lower middle-market companies in the US and Canada[197][199] - Investment Size: Generally $2.0 million to $25.0 million per investment[199] Portfolio Composition (March 31, 2021, Fair Value) | Investment Type | % of Portfolio | | :--- | :--- | | Senior secured loans | 75.2% | | Unitranche secured loans | 9.3% | | Junior secured loans | 2.3% | | Equity securities | 13.2% | Portfolio Composition (December 31, 2020, Fair Value) | Investment Type | % of Portfolio | | :--- | :--- | | Senior secured loans | 74.1% | | Unitranche secured loans | 11.7% | | Junior secured loans | 2.6% | | Equity securities | 11.6% | - SBIC Subsidiary: MRCC SBIC, a wholly-owned subsidiary, licensed as an SBIC since February 28, 2014[201] Investment Income The company generates investment income primarily from interest on debt investments (senior secured, unitranche, junior secured), which typically have 3-7 year terms and bear fixed or floating rates. Income also includes PIK interest, prepayment premiums, and various fees. Loan origination fees and discounts are amortized as interest income. Dividend income from equity securities is recognized on an accrual basis or record date, with distributions from LLCs/LPs evaluated as income or return of capital - Sources of Income: Interest income from debt investments (senior secured, unitranche, junior secured), PIK interest, prepayment premiums, and various fees (commitment, origination, amendment, structuring, due diligence, managerial assistance, consulting)[202] - Debt Investment Terms: Typically 3-7 years, fixed or floating rates[202] - Fee Accounting: Loan origination fees, OID, and market discounts are capitalized and amortized as interest income. Service-related fees are recognized when earned[202] - Equity Income: Dividend income on preferred equity is accrued; common equity dividends are recorded on the record date. LLC/LP distributions are evaluated as dividend income or return of capital based on accumulated tax-basis earnings[203] Expenses The company's main operating expenses include base management and incentive fees paid to MC Advisors, administrative fees to MC Management, and interest expense on its debt - Primary Operating Expenses: Base management and incentive fees to MC Advisors, administrative fees to MC Management, and interest expense on indebtedness[205] Net Gain (Loss) The company recognizes realized gains or losses from investment dispositions based on the difference between net proceeds and cost basis. Changes in fair value of investments and foreign currency instruments are recorded as net change in unrealized gain (loss) - Realized Gains/Losses: Calculated as the difference between net disposition proceeds and investment cost basis[206] - Unrealized Gains/Losses: Reflects current period changes in fair value of investments, foreign currency forward contracts, and other foreign currency transactions[206] Portfolio and Investment Activity In Q1 2021, the company invested $21.5 million in five new portfolio companies and $22.2 million in 17 existing ones, with net sales and repayments of $32.1 million. This contrasts with Q1 2020, which saw $18.3 million in net investments. Portfolio yields and composition remained relatively stable from December 2020 to March 2021, with senior secured loans making up the largest portion - Q1 2021 Investment Activity: - Invested $21.5 million in 5 new portfolio companies - Invested $22.2 million in 17 existing portfolio companies - Net sales and principal repayments: $32.1 million[207] - Q1 2020 Investment Activity: - Invested $41.3 million in 6 new portfolio companies - Invested $29.8 million in 34 existing portfolio companies - Net investments: $18.3 million[208] Portfolio Yield by Security Type (March 31, 2021) | Security Type | Weighted Average Annualized Contractual Coupon Yield | Weighted Average Annualized Effective Yield | | :--- | :--- | :--- | | Senior secured loans | 8.3% | 8.3% | | Unitranche secured loans | 5.1% | 5.4% | | Junior secured loans | 8.7% | 8.7% | | Preferred equity securities | 1.4% | 1.4% | | Total | 7.7% | 7.7% | Portfolio Composition (March 31, 2021, Fair Value) | Investment Type | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | Senior secured loans | $392,399 | 75.2% | | Unitranche secured loans | $48,298 | 9.3% | | Junior secured loans | $11,999 | 2.3% | | LLC equity interest in SLF | $41,067 | 7.9% | | Equity securities | $27,616 | 5.3% | | Total | $521,379 | 100.0% | Portfolio Asset Quality MC Advisors closely monitors all credits using an internal proprietary risk rating system (1-5 grades). Investments rated 3, 4, or 5 trigger increased monitoring and action plans. As of March 31, 2021, 78.4% of investments were rated Grade 2 (acceptable risk), while 5.5% were Grade 4 and 0.7% were Grade 5 (substantially below expectations). Non-accrual loans increased to $27.3 million (5.2% of total investments) from $22.3 million (4.1%) at December 31, 2020 - Monitoring Process: MC Advisors' portfolio management staff monitors credits daily, weekly, monthly, and quarterly, evaluating performance against expectations[215] - Investment Performance Risk Rating System: Internal proprietary system with 5 grades: - Grade 1: Least risk, performing above expectations - Grade 2: Acceptable risk, performing as expected - Grade 3: Performing below expectations, increased risk, may be out of compliance with covenants - Grade 4: Materially below expectations, materially increased risk, payments may be past due (up to six months) - Grade 5: Substantially below expectations, substantially increased risk, payments substantially delinquent, not anticipated to be repaid in full[216] Distribution of Investments by Risk Rating (March 31, 2021, Fair Value) | Risk Rating | Amount (in thousands) | Percentage of Total Investments | | :--- | :--- | :--- | | 1 | $1,592 | 0.3% | | 2 | $408,562 | 78.4% | | 3 | $78,708 | 15.1% | | 4 | $28,600 | 5.5% | | 5 | $3,917 | 0.7% | | Total | $521,379 | 100.0% | - Non-Accrual Status: - March 31, 2021: 12 borrowers, $27.3 million fair value (5.2% of total investments) - December 31, 2020: 12 borrowers, $22.3 million fair value (4.1% of total investments)[218] Results of Operations The company's net assets increased significantly in Q1 2021 compared to a decrease in Q1 2020, primarily due to a positive shift in net unrealized gains on investments. Investment income decreased due to lower loan balances and LIBOR, while expenses also decreased due to lower interest and base management fees, despite an increase in incentive fees. Debt extinguishments resulted in realized losses Net Increase (Decrease) in Net Assets from Operations | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $7,055 | | 3 months ended Mar 31, 2020 | $(36,850) | Investment Income | Period | Amount (in thousands) | Change | | :--- | :--- | :--- | | 3 months ended Mar 31, 2021 | $13,213 | $(1,789) | | 3 months ended Mar 31, 2020 | $15,002 | | - Investment income decreased primarily due to lower average outstanding loan balances and declines in LIBOR, partially offset by increased prepayment gains and fee income[221] Operating Expenses | Period | Amount (in thousands) | Change | | :--- | :--- | :--- | | 3 months ended Mar 31, 2021 | $7,857 | $(343) | | 3 months ended Mar 31, 2020 | $8,200 | | - Operating expenses decreased primarily from lower interest expense and base management fees, partially offset by increased incentive fees (net of waiver)[223] Net Realized Gain (Loss) | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $(3,018) | | 3 months ended Mar 31, 2020 | $75 | - Net realized gain (loss) includes $2.8 million net loss on extinguishment of debt in Q1 2021 due to repayment of 2023 Notes and SBA debentures[228] Net Change in Unrealized Gain (Loss) | Period | Amount (in thousands) | | :--- | :--- | | 3 months ended Mar 31, 2021 | $4,747 | | 3 months ended Mar 31, 2020 | $(43,707) | - Q1 2021 Net Change in Unrealized Gain (Loss): - Approximately $5.1 million unrealized gain from broad market movements and tightening credit spreads - Offset by ($0.5) million from specific credit performance[231] - Q1 2020 Net Change in Unrealized Gain (Loss): - Approximately $25.6 million unrealized loss from broad market movements and widening credit spreads (including $11.1 million from SLF) - Approximately $19.5 million from specific credit performance due to COVID-19[232] Liquidity and Capital Resources The company's liquidity as of March 31, 2021, included $7.7 million in cash, $8.2 million in MRCC SBIC cash, and $162.1 million available on its revolving credit facility. It maintains a 206% asset coverage ratio, exceeding the 150% requirement. Cash flows in Q1 2021 were positive from operations but negative from financing due to debt repayments and distributions. The company relies on future security offerings, borrowings, and operational cash flows for capital - Cash and Restricted Cash (March 31, 2021): - Cash: $7.7 million - Cash at MRCC SBIC: $8.2 million[235] - Total Debt Outstanding (March 31, 2021): - Revolving credit facility: $92.9 million - 2026 Notes: $130.0 million - SBA debentures: $86.9 million[235] - Available Borrowings: $162.1 million on revolving credit facility[235] - Asset Coverage Ratio: 206% as of March 31, 2021 (vs. 200% at Dec 31, 2020), exceeding the 150% requirement[236] - Cash Flow from Operating Activities (3 months ended Mar 31, 2021): Provided $33.8 million[237] - Cash Flow from Financing Activities (3 months ended Mar 31, 2021): Used $50.3 million (due to net repayments on revolving credit facility, 2023 Notes, SBA debentures, and stockholder distributions, partially offset by 2026 Notes proceeds)[238] - Capital Resources: Future offerings of securities, borrowings, and cash flows from operations[239] - Stock Issuances: No stock issuances through the ATM Program in Q1 2021 or Q1 2020[242] SBA Debentures Outstanding | Date | Amount (in thousands) | | :--- | :--- | | March 31, 2021 | $86,900 | | December 31, 2020 | $115,000 | - Distributions: $5.3 million ($0.25 per share) in Q1 2021 and $7.2 million ($0.35 per share) in Q1 2020[258] - MRCC Senior Loan Fund I, LLC (SLF): - Equity Commitments: $100.0 million from members (aggregate), $84.3 million funded - Company's Funded Equity: $42.2 million - Dividend Income from SLF: $1.2 million for both Q1 2021 and Q1 2020 - SLF Credit Facility: $170.0 million with Capital One, N.A., maturing March 22, 2023, bearing interest at LIBOR (three-month) plus 2.25% - SLF Total Assets (Fair Value): $202.6 million (March 31, 2021) vs. $209.7 million (Dec 31, 2020) - SLF Non-Accrual Investments: $1.1 million (March 31, 2021) vs. $1.0 million (Dec 31, 2020)[261][262][263][265] Related Party Transactions The company has various business relationships with affiliated parties, including its investment adviser (MC Advisors), administrator (MC Management), and Monroe Capital LLC for name licensing. Key personnel hold positions across these entities - Investment Advisory Agreement: With MC Advisors for investment management[284] - Administration Agreement: With MC Management for office facilities and administrative services[284] - SLF Administration Agreement: SLF has an administration agreement with MC Management for loan servicing and administrative functions[284] - Key Personnel Overlap: Theodore L. Koenig (CEO & Chairman) is also a manager of MC Advisors and President/CEO of MC Management. Aaron D. Peck (CFO & CIO) is a director and managing director of MC Management[284] - License Agreement: With Monroe Capital LLC for royalty-free use of the "Monroe Capital" name[284] Commitments and Contingencies and Off-Balance Sheet Arrangements The company has outstanding commitments to fund investments and unfunded commitments to SLF, totaling $50.1 million and $7.8 million respectively as of March 31, 2021. It also has general indemnification obligations but no other off-balance sheet financings or liabilities - Outstanding Commitments (excluding SLF): $50.1 million as of March 31, 2021[286] - Unfunded Commitments to SLF: $7.8 million as of March 31, 2021[286] - Indemnifications: Enters into contracts with general indemnifications; risk of loss is remote[286] - Off-Balance Sheet Arrangements: None, other than contractual commitments and legal contingencies[287] Market Trends The COVID-19 pandemic has caused significant disruptions and volatility in global markets, impacting the company's portfolio companies and operations. Key market trends include a strong demand for debt capital from middle-market companies, specialized lending requirements, and increased competition from alternative lenders, which may lead to lower yields and weaker covenants - COVID-19 Impact: Caused disruptions in global markets, negatively impacting portfolio companies' businesses, supply chains, demand, and operations. Government and central bank responses have been implemented[288] - Target Market: Small and middle-market companies ($10.0 million - $2.5 billion annual revenues) represent a significant growth segment with substantial capital needs[289] - Specialized Lending Requirements: Lending to middle-market companies is labor-intensive, requires specific due diligence, and extensive monitoring[290] - Demand for Debt Capital: Large pool of uninvested private equity capital for middle-market companies, expected to leverage investments with senior secured and mezzanine debt[291] - Competition from Other Lenders: Traditional banks de-emphasized middle-market lending, creating opportunities for alternative funding sources, but increased capital in middle-market lending has intensified competition, potentially leading to lower yields and weaker covenants[292] - Pricing and Deal Structures: Market volatility and bank regulations have reduced access to capital for middle-market companies, potentially creating favorable investment opportunities despite increased competition[293] Significant Accounting Estimates and Critical Accounting Policies Details critical accounting policies, including revenue recognition for various investment types (interest, PIK, dividends, fees) and the comprehensive valuation process for illiquid portfolio investments. The valuation process involves a multi-step approach by the Board, utilizing income and market approaches with significant unobservable inputs, and acknowledges the ongoing impact of the COVID-19 pandemic on valuations - Revenue Recognition: Interest and fee income accrued when collectible; PIK interest not accrued if uncollectible. Loan origination fees, OID, and market discounts amortized as interest income. Dividend income accrued or recorded on record date; LLC/LP distributions evaluated as income or return of capital[294][295] - Valuation of Portfolio Investments: - Responsibility: Board is solely responsible for determining fair value of illiquid investments - Process: Multi-step quarterly process involving MC Advisors' evaluation, independent appraisals, review by MC Advisors' investment committee, audit committee review, and final Board determination - Techniques: Primarily income approach (discounted cash flow) and market approach (enterprise value methodology using EBITDA/revenue multiples). Considers credit quality, market yields, collateral, and economic conditions - COVID-19 Impact: Acknowledges that future valuations may be lower due to pandemic volatility, and long-term impacts may not be fully reflected[297][298][299][300][302][304] - Net Realized/Unrealized Gain or Loss: Realized gain/loss is difference between sale proceeds and amortized cost. Unrealized gain/loss reflects changes in fair value, including foreign currency fluctuations[305] - Capital Gains Incentive Fee: Accrued quarterly as 20% of cumulative incentive fee capital gains (realized gains net of realized losses and unrealized depreciation), but only payable upon actual realization[306][307] New Accounting Pronouncements The company is evaluating the impact of ASU 2020-04 (Reference Rate Reform) on its financial statements and disclosures, but did not utilize its optional expedients in Q1 2021 - ASU 2020-04 (Reference Rate Reform): Issued March 2020, provides optional expedients for contracts and hedging relationships affected by reference rate reform[309] - Company Status: Management is currently evaluating the impact; did not utilize optional expedients in Q1 2021[309] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to financial market risks, particularly interest rate fluctuations due to its floating-rate loans and revolving credit facility, and the potential impact of LIBOR's phase-out. It also has foreign currency exposure, which it mitigates through borrowings in foreign currencies and forward contracts - Financial Market Risks: Subject to changes in interest rates and investment portfolio valuations[310] - COVID-19 Impact: Uncertainty from the pandemic has introduced significant volatility in financial markets, potentially impacting market risks[310] - Interest Rate Risk: - Majority of loans have floating interest rates (based on LIBOR) with re-set provisions and interest rate floors - Revolving credit facility has floating interest rates; SBA debentures and 2026 Notes have fixed rates - LIBOR Phase-out: The UK's Financial Conduct Authority intends to phase out LIBOR by end of 2021. This could adversely impact LIBOR-linked securities, require renegotiation of agreements, and potentially affect interest rates on loans and credit facilities[310][311] Annualized Impact of Hypothetical Base Rate Changes (March 31, 2021) | Change in Interest Rates | Net increase (decrease) in net investment income (in thousands) | | :--- | :--- | | Down 25 basis points | $9 | | Up 100 basis points | $(30) | | Up 200 basis points | $3,098 | | Up 300 basis points | $6,456 | - Foreign Currency Exposure: - Exposure to Great Britain pound and Australian dollar from certain investments - Mitigated by borrowing in Great Britain pounds under the revolving credit facility (e.g., £16.1 million / $22.2 million outstanding as of March 31, 2021) - Uses foreign currency forward contracts (e.g., £1.6 million and AUD 14.5 million as of March 31, 2021) to hedge future interest payments[314] Item 4. Controls and Procedures The company's management, including the CEO and CFO, evaluated the effectiveness of its disclosure controls and procedures as of March 31, 2021, concluding they were effective in providing reasonable assurance for timely and accurate financial reporting. No material changes to internal control over financial reporting occurred during the quarter - Disclosure Controls and Procedures: Evaluated by CEO and CFO, deemed effective as of March 31, 2021, providing reasonable assurance for timely and accurate SEC filings[315] - Internal Control Over Financial Reporting: No material changes occurred during the three months ended March 31, 2021[317] PART II. OTHER INFORMATION Item 1. Legal Proceedings Neither the company, its subsidiaries, nor its investment adviser are currently involved in any material legal proceedings - Status: No material legal proceedings currently affecting the company, its subsidiaries, or investment adviser[319] Item 1A. Risk Factors Updates the risk factors from the Annual Report, emphasizing the severe and ongoing disruptions caused by the COVID-19 pandemic. These disruptions have negatively impacted portfolio companies' operations, liquidity, and ability to make payments, leading to increased non-accruals and potential further write-downs. The pandemic also poses operational risks and may affect investment activity. Additionally, the company highlights risks associated with increased leverage under the SBCAA and the potential impact of LIBOR's phase-out - COVID-19 Pandemic Impact: - Caused severe disruptions in the global economy, negatively impacting portfolio companies' businesses, supply chains, demand, and operations - Led to increased draws on revolving lines of credit, requests for amendments/waivers, and increased defaults - Adversely impacted fair value of investments; potential for further negative impacts and write-downs - Affected investment activity pace and led to increased credit spreads - Introduced operational risks from remote work and reliance on third-party service providers[321][325][326][327][328] - Leverage Risk: - Company elected to be subject to a lower asset coverage requirement of 150% (effective June 21, 2018), increasing leverage risk - Leverage magnifies potential for loss on investments and invested equity capital[331][332] Hypothetical Effect of Leverage on Returns (December 31, 2020) | Assumed Return on Portfolio (Net of Expenses) | Corresponding Return to Common Stockholder | | :--- | :--- | | -10% | -31.02% | | -5% | -18.54% | | 0% | -6.06% | | 5% | 6.42% | | 10% | 18.90% | - Requires at least 2.43% annual return on total portfolio assets to cover interest payments[338] - Revolving Credit Facility Risks: - Imposes conditions limiting distributions (generally 115% of RIC-required distributions) - Requires compliance with financial and operational covenants (e.g., 1.5:1 asset coverage, 2:1 senior debt coverage) - Limits investment sales if it causes covered debt to exceed borrowing base - Declines in collateral fair value may reduce borrowing availability[339][340][341][342] - LIBOR Transition Risk: Phase-out of LIBOR by end of 2021 could adversely impact LIBOR-linked securities, require renegotiation of agreements, and potentially affect interest rates on loans and credit facilities[311] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds to report - Status: None[343] Item 3. Defaults Upon Senior Securities No defaults upon senior securities to report - Status: None[344] Item 4. Mine Safety Disclosures No mine safety disclosures to report - Status: None[345] Item 5. Other Information No other information to report - Status: None[346] Item 6. Exhibits Lists the exhibits filed with the Form 10-Q, including articles of incorporation, bylaws, supplemental indenture, global note form, and certifications - Key Exhibits: - Amended and Restated Articles of Incorporation, Bylaws - Second Supplemental Indenture, Form of Global Note for 4.75% Notes due 2026 - Various certifications (CEO, CFO, Sarbanes-Oxley Act)[348] Signatures Signatures The report is duly signed on behalf of Monroe Capital Corporation by Theodore L. Koenig (Chairman, CEO, and Director) and Aaron D. Peck (CFO, CIO, and Director) on May 4, 2021 - Signatories: Theodore L. Koenig (Chairman, CEO, and Director) and Aaron D. Peck (CFO, CIO, and Director)[351] - Date: May 4, 2021[351]