Monroe Capital(MRCC) - 2024 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for the quarter ended March 31, 2024 Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements of Monroe Capital Corporation for the quarter ended March 31, 2024, and comparative periods. It includes 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 related party transactions Consolidated Statements of Assets and Liabilities This statement details the Company's financial position, including total investments, cash, and liabilities, as of March 31, 2024, and December 31, 2023 Total Assets (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :----------------------------- | :------------- | :---------------- | | Total investments, at fair value | $500,889 | $488,386 | | Cash and cash equivalents | $4,856 | $4,958 | | Interest and dividend receivable | $20,885 | $19,349 | | Other assets | $858 | $493 | | Total assets | $527,488 | $513,186 | Total Liabilities (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :------------------------------------------ | :------------- | :---------------- | | Revolving credit facility | $191,700 | $174,100 | | 2026 Notes | $130,000 | $130,000 | | Total debt, less unamortized deferred financing costs | $318,792 | $300,865 | | Interest payable | $1,621 | $3,078 | | Management fees payable | $2,048 | $2,100 | | Incentive fees payable | $1,368 | $1,319 | | Accounts payable and accrued expenses | $2,081 | $2,100 | | Directors' fees payable | $76 | — | | Total liabilities | $325,986 | $309,462 | Net Assets (in thousands, except per share data) | Metric | March 31, 2024 | December 31, 2023 | | :---------------------- | :------------- | :---------------- | | Total net assets | $201,502 | $203,724 | | Net asset value per share | $9.30 | $9.40 | Consolidated Statements of Operations This statement outlines the Company's investment income, operating expenses, and net gain or loss for the three months ended March 31, 2024, and 2023 Investment Income (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Total investment income from non-controlled/non-affiliate company investments | $11,734 | $13,051 | | Total investment income from non-controlled affiliate company investments | $2,548 | $2,853 | | Total investment income from controlled affiliate company investments | $900 | $900 | | Total investment income | $15,182 | $16,804 | Operating Expenses (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Interest and other debt financing expenses | $5,507 | $5,514 | | Base management fees | $2,048 | $2,200 | | Incentive fees | $1,368 | $1,657 | | Professional fees | $268 | $128 | | Administrative service fees | $209 | $255 | | General and administrative expenses | $218 | $155 | | Directors' fees | $76 | $35 | | Total operating expenses | $9,694 | $9,944 | Net Investment Income and Net Gain (Loss) (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net investment income before income taxes | $5,488 | $6,860 | | Income taxes, including excise taxes | $18 | $233 | | Net investment income | $5,470 | $6,627 | | Net realized gain (loss) | $4 | $740 | | Net change in unrealized gain (loss) | ($2,279) | ($4,008) | | Net gain (loss) | ($2,275) | ($3,268) | | Net increase (decrease) in net assets resulting from operations | $3,195 | $3,359 | Per Common Share Data | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :-------------------------------------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net investment income per share - basic and diluted | $0.25 | $0.31 | | Net increase (decrease) in net assets resulting from operations per share - basic and diluted | $0.15 | $0.16 | | Weighted average common shares outstanding - basic and diluted | 21,666 | 21,666 | Consolidated Statements of Changes in Net Assets This statement tracks the changes in the Company's net assets, including income, gains, losses, and distributions, for the three months ended March 31, 2024, and 2023 Changes in Net Assets (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Balances at December 31, 2023 / 2022 | $203,724 | $225,019 | | Net investment income | $5,470 | $6,627 | | Net realized gain (loss) | $4 | $740 | | Net change in unrealized gain (loss) | ($2,279) | ($4,008) | | Distributions to stockholders | ($5,417) | ($5,417) | | Balances at March 31, 2024 / 2023 | $201,502 | $222,961 | Consolidated Statements of Cash Flows This statement presents the Company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2024, and 2023 Cash Flows from Operating Activities (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net increase (decrease) in net assets resulting from operations | $3,195 | $3,359 | | Purchases of investments | ($24,200) | ($22,314) | | Proceeds from principal payments, sales of investments and settlement of forward contracts | $12,087 | $30,441 | | Net cash provided by (used in) operating activities | ($12,285) | $8,724 | Cash Flows from Financing Activities (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Borrowings on revolving credit facility | $28,600 | $33,500 | | Repayments of revolving credit facility | ($11,000) | ($35,300) | | Stockholder distributions paid | ($5,417) | ($5,417) | | Net cash provided by (used in) financing activities | $12,183 | ($7,242) | Net Change in Cash and Cash Equivalents (in thousands) | Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net increase (decrease) in Cash and cash equivalents | ($102) | $1,482 | | Cash and cash equivalents, beginning of period | $4,958 | $5,450 | | Cash and cash equivalents, end of period | $4,856 | $6,929 | Consolidated Schedules of Investments This section provides a detailed breakdown of the Company's investment portfolio by type, fair value, and industry as of March 31, 2024, and December 31, 2023 Total Investments at Fair Value (March 31, 2024) | Investment Type | Fair Value (in thousands) | % of Net Assets | | :---------------------------------- | :------------------------ | :-------------- | | Non-controlled/non-affiliate company investments | $384,266 | 190.9% | | Non-controlled affiliate company investments | $83,633 | 41.3% | | Controlled affiliate company investments | $32,990 | 16.4% | | TOTAL INVESTMENTS | $500,889 | 248.6% | Total Investments at Fair Value (December 31, 2023) | Investment Type | Fair Value (in thousands) | % of Net Assets | | :---------------------------------- | :------------------------ | :-------------- | | Non-controlled/non-affiliate company investments | $371,723 | 182.7% | | Non-controlled affiliate company investments | $83,541 | 40.7% | | Controlled affiliate company investments | $33,122 | 16.3% | | TOTAL INVESTMENTS | $488,386 | 239.7% | Investment Portfolio Composition by Type (Fair Value) | Investment Type | March 31, 2024 (%) | December 31, 2023 (%) | | :------------------------ | :----------------- | :-------------------- | | Senior secured loans | 80.7% | 79.6% | | Unitranche secured loans | 1.2% | 2.8% | | Junior secured loans | 5.5% | 5.5% | | LLC equity interest in SLF | 6.6% | 6.8% | | Equity securities | 6.0% | 5.3% | - Top 3 Industries by Fair Value (March 31, 2024): * FIRE: Real Estate: $88,564 thousand (17.7%) * Healthcare & Pharmaceuticals: $78,105 thousand (15.6%) * Services: Business: $59,705 thousand (11.9%)[113] Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies, significant estimates, and financial disclosures underlying the consolidated financial statements. It covers the company's organization, revenue recognition, fair value measurements, related party transactions, borrowings, and commitments, offering crucial context for understanding the financial figures Note 1. Organization and Principal Business This note describes Monroe Capital Corporation's identity as a BDC and RIC, its investment objective, and primary business focus - Monroe Capital Corporation (the "Company") is an externally managed, non-diversified, closed-end management investment company, regulated as a Business Development Company (BDC) under the 1940 Act[80] - The Company's investment objective is to maximize total return to stockholders through current income and capital appreciation, primarily by investing in senior secured, junior secured, and unitranche secured debt, and to a lesser extent, unsecured subordinated debt and equity co-investments[80] - The Company has elected to be treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes[80] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles, consolidation policies, revenue recognition, and tax treatment applied in the financial statements - Financial statements are prepared in accordance with GAAP, specifically ASC Topic 946 – Financial Services – Investment Companies[81] - The Company generally does not consolidate portfolio company investments, except for investment company subsidiaries or controlled operating companies providing services to the Company. It consolidates wholly-owned taxable subsidiaries used for holding equity investments[83] - Interest and dividend income are recorded on an accrual basis, with Payment-in-Kind (PIK) interest/dividends added to principal. Loan origination fees, original issue discount, and market discount/premiums are capitalized and amortized as interest income[86][88][89] - Loans or preferred equity securities are placed on non-accrual status when payments are materially past due or collection is doubtful. Interest payments received on non-accrual loans may be recognized as income or applied to principal based on management's judgment[91] - The Company operates as a Regulated Investment Company (RIC), generally not subject to U.S. federal income taxes on distributed income. Consolidated Taxable Subsidiaries may be subject to U.S. federal and state corporate-level income taxes[105][107] Note 3. Investments This note details the composition, geographic distribution, and specific co-investment arrangements of the Company's investment portfolio Investment Portfolio Composition (in thousands) | Investment Type | March 31, 2024 Amortized Cost | March 31, 2024 Fair Value | December 31, 2023 Amortized Cost | December 31, 2023 Fair Value | | :------------------------ | :------------------------------ | :------------------------ | :------------------------------ | :------------------------ | | Senior secured loans | $409,506 | $404,051 | $393,723 | $388,882 | | Unitranche secured loans | $6,057 | $6,091 | $13,740 | $13,877 | | Junior secured loans | $29,832 | $27,427 | $29,372 | $26,594 | | LLC equity interest in SLF | $42,650 | $32,990 | $42,650 | $33,122 | | Equity securities | $37,613 | $30,330 | $31,391 | $25,911 | | Total | $525,658 | $500,889 | $510,876 | $488,386 | - Geographic Composition by Fair Value (March 31, 2024): * Midwest: 28.1% * Northeast: 22.7% * Southeast: 28.1%[112] - The Company co-invests with Life Insurance Company of the Southwest (LSW) in senior secured loans through MRCC Senior Loan Fund I, LLC (SLF), an unconsolidated Delaware LLC[114] - As of March 31, 2024, the Company and LSW each owned 50.0% of SLF's LLC equity interests. The Company had committed to fund $50.0 million of LLC equity interest subscriptions to SLF, of which $42.65 million had been called and contributed. SLF had a fair value of $33.0 million as of March 31, 2024, and the Company received $900 thousand in dividend income from SLF for the three months ended March 31, 2024[115][116][117] - SLF has a senior secured revolving credit facility with Capital One, N.A., allowing borrowing up to $110.0 million (reduced from $175,000 thousand on June 9, 2023), bearing interest at SOFR (three-month) plus 2.10%, and maturing November 23, 2031[118] Note 4. Fair Value Measurements This note explains the Company's methodology for fair value determination, including the three-level hierarchy and valuation techniques for illiquid assets - The Company classifies financial instruments into a three-level hierarchy based on input observability: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[143] - Effective September 30, 2022, MC Advisors was designated as the Valuation Designee, responsible for determining fair value in good faith, with Board oversight[142] - Valuation techniques for Level 3 assets include the Income Approach (discounted cash flow models for debt investments) and the Market Approach (enterprise value methodology using multiples of EBITDA or revenue)[145][146][147] Level 3 Assets at Fair Value (March 31, 2024, in thousands) | Asset Type | Fair Value | | :------------------------ | :--------- | | Senior secured loans | $404,051 | | Unitranche secured loans | $6,091 | | Junior secured loans | $27,427 | | Equity securities | $29,310 | | Total Level 3 Assets | $466,879 | - During the three months ended March 31, 2024, one investment transferred from Level 3 to Level 1 due to a restructuring, resulting in a net transfer out of Level 3 of ($335) thousand[152] Note 5. Transactions with Affiliated Companies This note details the Company's investment income and financial interactions with non-controlled and controlled affiliate companies Non-Controlled Affiliate Company Investments (March 31, 2024, in thousands) | Metric | Fair Value | | :---------------- | :--------- | | Total fair value | $83,633 | | Net PIK interest | $1,307 | | Net unrealized gain (loss) | ($803) | Controlled Affiliate Company Investments (March 31, 2024, in thousands) | Metric | Fair Value | | :-------------------------------- | :--------- | | MRCC Senior Loan Fund I, LLC | $32,990 | | Net unrealized gain (loss) | ($132) | Investment Income from Non-Controlled Affiliates (in thousands) | Income Type | Q1 2024 | Q1 2023 | | :---------------- | :------ | :------ | | Interest Income | $2,495 | $2,804 | | Dividend Income | $53 | $49 | | Fee Income | $0 | $0 | Investment Income from Controlled Affiliates (in thousands) | Income Type | Q1 2024 | Q1 2023 | | :---------------- | :------ | :------ | | Interest Income | $0 | $0 | | Dividend Income | $900 | $900 | | Fee Income | $0 | $0 | Note 6. Transactions with Related Parties This note describes the management and incentive fees paid to MC Advisors and administrative expenses reimbursed to MC Management - The Company pays MC Advisors a base management fee and an incentive fee under the Investment Advisory and Management Agreement[170] Base Management Fees (in thousands) | Period | Amount | | :-------------------------------- | :----- | | Three months ended March 31, 2024 | $2,048 | | Three months ended March 31, 2023 | $2,200 | Part One Incentive Fees (in thousands) | Period | Amount | | :-------------------------------- | :----- | | Three months ended March 31, 2024 | $1,368 | | Three months ended March 31, 2023 | $1,657 | - The Company reimburses MC Management for allocable overhead and administrative expenses under the Administration Agreement. Total administrative expenses were $695 thousand in Q1 2024 ($209 thousand to MC Management) and $538 thousand in Q1 2023 ($255 thousand to MC Management)[175] Note 7. Borrowings This note provides details on the Company's debt structure, including its revolving credit facility and senior unsecured notes, and asset coverage compliance - As of March 31, 2024, the Company's asset coverage ratio was 163%, compared to 167% at December 31, 2023, exceeding the 150% requirement[178] - The Company has a $255.0 million revolving credit facility with an accordion feature up to $400.0 million, maturing December 27, 2027. Outstanding borrowings were $191.7 million at March 31, 2024, and $174.1 million at December 31, 2023, with a weighted average interest rate of 8.1% for both periods[179][182][183] - The Company has $130.0 million in aggregate principal amount of senior unsecured notes (2026 Notes) outstanding, maturing February 15, 2026, bearing interest at an annual rate of 4.75%[184] Interest and Other Debt Financing Expenses (in thousands) | Expense Type | Q1 2024 | Q1 2023 | | :--------------------------------- | :------ | :------ | | Interest expense - revolving credit facility | $3,625 | $3,638 | | Interest expense - 2026 Notes | $1,555 | $1,555 | | Amortization of deferred financing costs | $327 | $321 | | Total interest and other debt financing expenses | $5,507 | $5,514 | | Average debt outstanding | $301,043 | $324,082 | | Average stated interest rate | 6.9% | 6.5% | Note 8. Derivative Instruments This note discusses the Company's use of derivative instruments for risk mitigation and their financial impact - The Company may use foreign currency forward contracts to mitigate exposure to exchange rate fluctuations[186] - As of March 31, 2024, and December 31, 2023, there were no foreign currency forward contracts outstanding[186] - Net change in unrealized gain (loss) on foreign currency forward contracts was $0 in Q1 2024 compared to $180 thousand in Q1 2023. Net realized gain (loss) was $0 in Q1 2024 compared to $37 thousand in Q1 2023[187] Note 9. Distributions This note outlines the Company's dividend policy, distributions declared, and the operation of its dividend reinvestment plan Distributions Declared | Metric | Q1 2024 | Q1 2023 | | :-------------------------------- | :------ | :------ | | Amount Per Share | $0.25 | $0.25 | | Cash Distribution (in thousands) | $5,417 | $5,417 | | DRIP Shares Repurchased (in thousands) | 18,219 | 10,380 | | Cost of DRIP Shares Repurchased (in thousands) | $134 | $81 | - The Company operates an "opt out" dividend reinvestment plan (DRIP) for common stockholders[94] Note 10. Stock Issuances and Repurchases This note details the Company's equity distribution program and any stock issuance or repurchase activities - The Company has an At-The-Market (ATM) equity distribution program allowing sales of up to $50.0 million of common stock[189] - No stock issuances occurred through the ATM Program during the three months ended March 31, 2024, or 2023[189] Note 11. Commitments and Contingencies This note discloses the Company's outstanding investment commitments, unfunded obligations, and potential risks from legal proceedings or market factors - As of March 31, 2024, the Company had $37.35 million in outstanding commitments to fund investments (undrawn revolvers, delayed draw, subscription agreements), excluding SLF[190] - The Company had $7.35 million in unfunded commitments to SLF as of March 31, 2024[190] - Management believes available cash and/or the revolving credit facility provide sufficient funds to cover its unfunded commitments[190] - The Company is subject to credit risk, counterparty risk, and market risk (due to volatility and liquidity)[192][193] - No current legal or regulatory proceedings are expected to have a material adverse effect on the consolidated financial statements[194] Note 12. Financial Highlights This note presents key per-share data, total returns, and financial ratios, offering a concise overview of the Company's performance Per Share Data | Metric | March 31, 2024 | March 31, 2023 | | :------------------------------------------------- | :------------- | :------------- | | Net asset value at beginning of period | $9.40 | $10.39 | | Net investment income | $0.25 | $0.31 | | Net gain (loss) | ($0.10) | ($0.16) | | Net increase (decrease) in net assets resulting from operations | $0.15 | $0.15 | | Stockholder distributions - income | ($0.25) | ($0.25) | | Net asset value at end of period | $9.30 | $10.29 | | Per share market value at end of period | $7.20 | $7.65 | Total Return and Ratios | Metric | March 31, 2024 | March 31, 2023 | | :------------------------------------------ | :------------- | :------------- | | Total return based on market value | 5.30% | (7.55)% | | Total return based on average net asset value | 1.58% | 1.50% | | Ratio of net investment income to average net assets | 12.90% | 14.26% | | Ratio of total expenses to average net assets | 17.24% | 16.17% | | Portfolio turnover | 2.44% | 4.15% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, liquidity, and capital resources for the quarter ended March 31, 2024. It includes an overview of investment activities, detailed analysis of income and expenses, portfolio asset quality, and discussions on market trends and significant accounting policies FORWARD-LOOKING STATEMENTS This section provides important caveats regarding forward-looking statements, highlighting inherent risks and uncertainties that could cause actual results to differ materially - This section contains forward-looking statements based on current expectations, estimates, and projections, which involve risks and uncertainties[198][201] - Actual results could differ materially due to factors like future operating results, business prospects, economic conditions, competition, interest rates, inflation, and regulatory changes[199][201] - The Company does not undertake to update any forward-looking statements[203] Overview This section introduces Monroe Capital Corporation as a BDC and RIC, outlining its investment strategy, objective, and current portfolio composition - Monroe Capital Corporation is an externally managed Business Development Company (BDC) and Regulated Investment Company (RIC), focused on providing financing solutions to lower middle-market companies in the United States and Canada[204][205] - The Company primarily invests in senior secured, junior secured, and unitranche secured debt, with a lesser extent in unsecured subordinated debt and equity co-investments[205] - The investment objective is to maximize total return through current income and capital appreciation[209] - As of March 31, 2024, the portfolio comprised 80.7% senior secured loans, 1.2% unitranche secured loans, 5.5% junior secured loans, and 12.6% equity securities[209] Investment income This section describes the various sources of the Company's investment income, including interest, fees, and dividends, and their recognition policies - Revenue is generated from interest income on debt investments (senior secured, unitranche, junior secured), which typically have 3-7 year terms and bear fixed or floating interest rates[211] - Income also includes deferred interest (PIK), commitment, origination, amendment, structuring, due diligence, and managerial assistance fees[211] - Dividend income from preferred equity is accrued, while common equity dividends are recorded on the record date. Distributions from LLC/LP investments are evaluated as dividend income or return of capital[212] Expenses This section details the Company's primary operating expenses, including management fees, incentive fees, and administrative costs - Primary operating expenses include base management and incentive fees paid to MC Advisors, and allocable overhead and other expenses paid to MC Management under administration agreements[213] - Other operating costs and interest expense on indebtedness are also borne by the Company[213] Net gain (loss) This section explains how the Company recognizes realized and unrealized gains and losses on investments and foreign currency transactions - Realized gains or losses on investments and foreign currency transactions are recognized based on the difference between net proceeds from disposition and cost basis[214] - Current period changes in fair value of investments and foreign currency transactions are recorded as net change in unrealized gain (loss)[214] Portfolio and Investment Activity This section summarizes the Company's investment transactions, including new investments, repayments, and the weighted average effective yield of its portfolio - During Q1 2024, the Company invested $10.2 million in 3 new portfolio companies and $14.0 million in 29 existing portfolio companies, with $12.1 million in sales and principal repayments, resulting in a net increase in investments of $12.1 million[215] - During Q1 2023, the Company invested $9.6 million in 2 new portfolio companies and $12.7 million in 29 existing portfolio companies, with $30.4 million in sales and principal repayments, resulting in a net reduction in investments of $8.1 million[216] Portfolio Yield by Security Type (Weighted Average Annualized Effective Yield) | Security Type | March 31, 2024 | December 31, 2023 | | :------------------------ | :------------- | :---------------- | | Senior secured loans | 12.4% | 12.6% | | Unitranche secured loans | 13.8% | 14.1% | | Junior secured loans | 8.5% | 8.6% | | Preferred equity securities | 2.8% | 2.8% | | Total | 11.9% | 12.1% | - Effective yields decreased from December 31, 2023, primarily due to an increase in the number of portfolio companies on non-accrual status[218] Portfolio Asset Quality This section describes the Company's internal risk rating system for monitoring investment performance and details the status of non-accrual loans - MC Advisors monitors all credits using an internal proprietary risk rating system (Grades 1-5), with increased monitoring for investments rated 3, 4, or 5[220][221] Investment Performance Risk Rating Distribution (March 31, 2024, in thousands) | Risk Rating | Fair Value | Percentage of Total Investments | | :---------- | :--------- | :------------------------------ | | Grade 1 | $0 | 0% | | Grade 2 | $423,325 | 84.5% | | Grade 3 | $64,433 | 12.9% | | Grade 4 | $7,648 | 1.5% | | Grade 5 | $5,483 | 1.1% | | Total | $500,889 | 100.0% | - As of March 31, 2024, seven borrowers had loans or preferred equity securities on non-accrual status, totaling $10.8 million at fair value (2.1% of total investments), up from five borrowers and $7.5 million (1.5%) at December 31, 2023[224] Results of Operations This section provides a comparative analysis of the Company's total investment income, operating expenses, and net investment income for the reporting periods Key Financial Results (in thousands) | Metric | Q1 2024 | Q1 2023 | Change | | :------------------------------------------------- | :------ | :------ | :----- | | Total investment income | $15,182 | $16,804 | ($1,622) | | Total operating expenses | $9,694 | $9,944 | ($250) | | Net investment income | $5,470 | $6,627 | ($1,157) | | Net realized gain (loss) | $4 | $740 | ($736) | | Net change in unrealized gain (loss) | ($2,279) | ($4,008) | $1,729 | | Net increase (decrease) in net assets resulting from operations | $3,195 | $3,359 | ($164) | - Investment income decreased by $1.6 million in Q1 2024 compared to Q1 2023, primarily due to a reduction in the average investment portfolio and lower fee income, partially offset by higher base interest rates[226] - Operating expenses decreased by $0.3 million in Q1 2024 compared to Q1 2023, primarily due to lower incentive fees (resulting from lower net investment income) and base management fees (resulting from lower average invested assets)[228] - The net change in unrealized gain (loss) in Q1 2024 was primarily attributable to unrealized mark-to-market losses on portfolio companies with credit performance concerns (risk rating Grade 3, 4 or 5), partially offset by net unrealized gains on the remainder of the portfolio[235] Liquidity and Capital Resources This section discusses the Company's cash position, debt facilities, asset coverage ratio, and strategies for generating future liquidity - As of March 31, 2024, the Company had $4.9 million in cash, $191.7 million of total debt outstanding on its revolving credit facility, and $130.0 million in 2026 Notes. $63.3 million was available for additional borrowings on the revolving credit facility, subject to borrowing base availability[239] - The asset coverage ratio was 163% as of March 31, 2024, compared to 167% at December 31, 2023, exceeding the 150% requirement[240] - In Q1 2024, operating activities used $12.3 million, primarily for investment purchases, partially offset by principal repayments and net investment income. In Q1 2023, operating activities provided $8.7 million, primarily from principal repayments/sales and net investment income, partially offset by investment purchases[241] - The Company intends to generate additional cash primarily from future offerings of securities, future borrowings, and cash flows from operations[242] - Stockholders approved selling common stock below NAV for one year (June 15, 2023). No stock issuances occurred through the ATM Program in Q1 2024 or Q1 2023[243][245] MRCC Senior Loan Fund I, LLC This section details the Company's co-investment joint venture, SLF, including its capital structure, credit facility, and financial performance - The Company co-invests with Life Insurance Company of the Southwest (LSW) in senior secured loans through SLF, an unconsolidated Delaware LLC[256] - As of March 31, 2024, SLF had $100.0 million in aggregate equity commitments from members, with $85.3 million funded. The Company committed $50.0 million, with $42.7 million called and contributed[257][258] - SLF has a senior secured revolving credit facility with Capital One, N.A., allowing borrowing up to $110.0 million (reduced from $175.0 million on June 9, 2023), bearing interest at SOFR (three-month) plus 2.10%, maturing November 23, 2031[260] SLF Financial Summary (in thousands) | Metric | March 31, 2024 | December 31, 2023 | | :------------------------ | :------------- | :---------------- | | Investments, at fair value | $116,439 | $139,914 | | Total assets | $124,864 | $148,449 | | Revolving credit facility | $58,014 | $82,014 | | Members' capital | $65,981 | $66,242 | SLF Operating Results (in thousands) | Metric | Q1 2024 | Q1 2023 | | :-------------------------------- | :------ | :------ | | Total investment income | $4,038 | $5,143 | | Total expenses | $1,917 | $2,558 | | Net investment income | $2,121 | $2,585 | | Net increase (decrease) in members' capital | $1,539 | $2,309 | Related Party Transactions This section outlines the contractual agreements and financial relationships between the Company, its investment advisor, and administrator - The Company has an Investment Advisory and Management Agreement with MC Advisors, under which it pays base management and incentive fees for investment management[282] - The Company has an Administration Agreement with MC Management for office facilities and administrative services. SLF also has an administration agreement with MC Management for loan servicing and administrative functions[289] - Theodore L. Koenig (CEO & Chairman) and Lewis W. Solimene, Jr. (CFO & CIO) hold leadership positions in both the Company and its affiliates (MC Advisors, MC Management)[289] - The Company has a royalty-free license agreement with Monroe Capital LLC to use the "Monroe Capital" name[289] Commitments and Contingencies and Off-Balance Sheet Arrangements This section discloses the Company's unfunded investment commitments, potential liabilities, and the absence of other off-balance sheet arrangements - As of March 31, 2024, the Company had $37.3 million in outstanding commitments for investments (undrawn revolvers, delayed draw, subscription agreements), excluding SLF[286] - The Company had $7.3 million in unfunded commitments to SLF[286] - The Company enters into contracts with general indemnification provisions, with expected remote risk of future obligations[286] - There are no other off-balance sheet financings or liabilities beyond contractual commitments[287] Market Trends This section analyzes the economic environment, including trends in the middle-market lending landscape, competition, and the impact of inflation and interest rates - Small and middle-market companies (revenues between $10.0 million and $2.5 billion) represent a significant growth segment requiring substantial capital[288] - Lending to middle-market companies is labor-intensive, requires specific due diligence, and ongoing monitoring, making traditional banks less suited[289] - A large pool of uninvested private equity capital for middle-market companies is expected to drive demand for senior secured and mezzanine debt[290] - Traditional banks have de-emphasized middle-market lending, creating opportunities for alternative funding sources, though increased capital in private debt has heightened competition[291] - Volatility and macroeconomic issues have reduced debt capital access for middle-market companies, leading to more favorable capital structures and deal terms, despite increased competition[292] - Middle-market investments are attractive in uncertain environments with elevated inflation and interest rates, offering yield premium and floating rate structures as a natural hedge. However, a softening macroeconomic environment could increase default rates[293] Significant Accounting Estimates and Critical Accounting Policies This section highlights the key accounting judgments and estimates, particularly regarding investment valuation and incentive fee accruals - Interest and fee income are accrued based on expected collectibility. PIK interest is not accrued if not collectible. Loan origination fees, OID, and market discount/premium are amortized as interest income[295] - Investments without readily available market quotations are valued at fair value in good faith by the Valuation Designee, involving subjective judgments and estimates[297][298] - The valuation process involves a multi-step quarterly process including initial evaluation, independent appraisals for selected investments, valuation by the Designee for others, and approval by the valuation committee, with Board oversight[299][301] - The capital gains incentive fee is accrued quarterly, including unrealized gains, though actual payment is based on realized gains net of losses and unrealized depreciation at year-end[305][306] - No further reductions in accrued capital gains incentive fees occurred in Q1 2024 or Q1 2023 due to accumulated realized and unrealized losses on the portfolio[307] New Accounting Pronouncements This section discusses the impact and adoption status of recent accounting standards, specifically ASU 2020-04, on the Company's financial statements - ASU 2020-04 (Reference Rate Reform) provides optional expedients and exceptions for GAAP application to contracts affected by reference rate reform, effective from March 12, 2020, through December 31, 2024. The Company did not utilize these expedients in Q1 2024 or Q1 2023[308] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's exposure to various financial market risks, including valuation risk, interest rate risk, currency risk, and inflation/supply chain risk, and outlines how these risks are managed or could impact financial performance Valuation Risk This section addresses the inherent subjectivity and potential for material differences in fair value determinations for illiquid investments - Many investments lack readily available market quotations and are valued at fair value by the Valuation Designee, involving subjective judgment and estimates[310] - Fair values may differ significantly from market values if a ready market existed, and differences could be material[310] - The Board periodically assesses and manages material risks associated with fair value determination[311] Interest Rate Risk This section describes the Company's exposure to interest rate fluctuations, the characteristics of its floating-rate loans and debt, and potential hedging strategies - The majority of the Company's loans have floating interest rates (typically SOFR-based with monthly/quarterly resets) and often include interest rate floors[312] - The revolving credit facility has a floating interest rate, while the 2026 Notes have fixed interest rates[312] Annualized Impact of Hypothetical Base Rate Changes (March 31, 2024, in thousands) | Change in Interest Rates | Net increase (decrease) in net investment income | | :----------------------- | :----------------------------------------------- | | Down 25 basis points | ($549) | | Up 100 basis points | $2,247 | | Up 200 basis points | $4,466 | | Up 300 basis points | $6,685 | - The Company may use hedging instruments (futures, options, forward contracts) to mitigate interest rate fluctuations, though this may limit participation in benefits of lower rates[314] Currency Risk This section outlines the Company's exposure to foreign exchange rate fluctuations and its strategies for mitigating this risk - Exposure to foreign currencies from investments is translated into U.S. dollars, creating exchange rate risk. To reduce this risk, the Company may borrow in foreign currency or use foreign currency forward contracts[315] - As of March 31, 2024, the Company held no investments in foreign currencies or foreign currency forward contracts[315] Inflation and Supply Chain Risk This section discusses the potential negative impact of accelerating inflation and supply chain disruptions on portfolio company profit margins - Accelerating inflation due to global supply chain issues, geopolitical events, rising energy prices, and strong consumer demand could lead to monetary policy tightening[316] - Persistent inflationary pressures could negatively affect portfolio companies' profit margins[316] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the quarter ended March 31, 2024 Disclosure Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures in ensuring timely and accurate financial reporting - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2024, concluding they were effective and provided reasonable assurance that required information is recorded, processed, summarized, and reported timely[317] Changes in Internal Control Over Financial Reporting This section reports that no material changes occurred in the Company's internal control over financial reporting during the quarter - No change occurred in internal control over financial reporting during the three months ended March 31, 2024, that materially affected or is reasonably likely to materially affect it[318] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and controls Item 1. Legal Proceedings The Company is subject to ordinary course legal and regulatory proceedings, but currently expects no material adverse effect on its financial condition or results of operations from any such future proceedings - The Company is subject to legal and regulatory proceedings in the ordinary course of business[321] - No current proceedings are expected to have a material adverse effect on the Company's financial condition or results of operations[321] Item 1A. Risk Factors No material changes to the previously disclosed risk factors were identified during the quarter ended March 31, 2024. Investors should carefully consider all risk factors, as additional unknown risks could also materially affect the business - No material changes to the risk factors discussed in the annual report on Form 10-K for the year ended December 31, 2023, were known during the quarter ended March 31, 2024[322] - Additional risks not currently known or deemed immaterial could adversely affect the business[322] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds occurred during the reporting period - None[323] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - None[324] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[325] Item 5. Other Information No directors or officers entered into Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the quarter. The Company has insider trading policies in place - No director or officer entered into Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during Q1 2024[326] - The Company has adopted insider trading policies and procedures to promote compliance with insider trading laws, rules, and regulations[326] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including organizational documents, certifications from the CEO and CFO, and XBRL-related documents - Includes Amended and Restated Articles of Incorporation and Bylaws[327] - Certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Rule 13a-14 and 18 U.S.C. Section 1350)[327] - Inline XBRL documents are also filed[327] Signatures The report is duly signed on behalf of Monroe Capital Corporation by Theodore L. Koenig, Chairman, Chief Executive Officer and Director, and Lewis W. Solimene, Jr., Chief Financial Officer and Chief Investment Officer, on May 8, 2024 - Signed by Theodore L. Koenig, Chairman, Chief Executive Officer and Director[331] - Signed by Lewis W. Solimene, Jr., Chief Financial Officer and Chief Investment Officer[331] - Date of signature: May 8, 2024[331]