MONROE CAPITAL Corp Q1 FY2020 Earnings Call

Hello and welcome to Monroe Capital Corporation’s First Quarter 2020 Earnings Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call today may contain certain forward-looking statements, including statements regarding our goals, strategies, beliefs, future potential, operating results or cash flows particularly in light of COVID-19 pandemic. Although we believe these statements are reasonable based on management’s estimates, assumptions and projections as of today, May 11, 2020, these statements are not guarantees of future performance. Further, time-sensitive information may no longer be accurate as of the time of any replay or listening. Actual results may differ materially as a result of risks, uncertainties or other factors, including, but not limited to the risk factors described from time-to-time in the company’s filings with the SEC. Monroe Capital takes no obligation to update or revise these forward-looking statements. I will now turn the conference over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation. Sir, you may begin.

Good morning and thank you to everyone who has joined us on our call today. Welcome to our first quarter 2020 earnings conference call. I’m joined by Aaron Peck, our CFO and Chief Investment Officer. Friday evening, we issued our first quarter 2020 earnings press release and filed our 10-Q with the SEC. First and foremost, I hope you and your families are healthy and safe. This is a very difficult time for our country and the world, and we at Monroe Capital Corporation, BDC and the broader Monroe Capital organization, have those that have been most affected by the COVID-19 pandemic in our thoughts and best wishes. We also want to thank the brave men and women, the essential workers who put themselves at personal risk every day to help the rest of us get through this pandemic. Our employees remain safe as a firm. We have seamlessly navigated the transition to a remote working environment. Technology has allowed us to maintain close contact with all of our teams, and we have been able to maintain a highly collaborative approach, which we believe is very important to navigating the challenging economic environment we are facing as a result of the pandemic. We do not know for sure when we will be able to return to our offices, but we look forward to the day that we can return to a more normal working environment. As you all know, the uncertainty associated with the COVID-19 pandemic has created concerns related to the economy, as well as specific unanticipated challenges for many companies due to business interruptions and the slowdown in business activity. This uncertainty has caused negative implications across the financial markets, with the S&P 500 down almost 20% in the first quarter of 2020. Significant price declines were also seen in traded credit investments, as the S&P/LSTA Leveraged Loan Index was down over 20% at times, and finished the first quarter down 14% in market value. Uncertainty has also caused many of our portfolio companies across our platform to be focused on their own liquidity as evidenced by the wave of revolver draw requests that we saw during March as a direct response to concerns over the COVID-19 pandemic. The Monroe Funds, including MRCC, have met all borrower revolver draw requests, and we believe that we have appropriate liquidity to meet any future requests across all of our funds. While we certainly couldn't have predicted the COVID-19 pandemic due to overall concerns about an overheated economy, we have been shifting our portfolios over the past several quarters in all of our Monroe funds away from higher risk cyclical industries. As a result, MRCC has limited to no direct portfolio exposure in industries most affected by the pandemic, such as airlines, automotive, travel, leisure, oil and gas, minerals and mining, and energy. However, the best thing about our portfolio is that we are typically a control lender. We are the agents on approximately 88% of our loan investments. We have tight baskets regarding indebtedness and restricted payments. We get at least two and often several more financial covenants on most all of our deals, including maintenance and incurrence tests and debt leverage. This allows us to be proactively engaged with our borrowers and their financial sponsors in terms of liquidity. It also allows us to opportunistically amend and reprice our loans to constantly de-risk and re-risk our portfolio. In past calls, we have discussed the importance of tighter loan documentation in the lower middle market that we play in. In the larger broad middle market, almost 80% of all loans are covenant-light. In our markets, we are dialoguing with our companies weekly, and sometimes on a daily basis to the points where in most cases they have to come to us to incur a PPP loan, because they don't have the debt incurrence basket availability in their financial covenants. This allows us to manage risk to enhance our risk and return positions. Our risk is also mitigated by the fact that we maintain conservative starting leverage and loan to values when we underwrite our loans. An average mineral agented loan is between 4 and 4.5 times leverage and below 50% loan to value at the time the investment is underwritten and closed. And while for the benefit of hindsight, I am sure there are some things we would have done differently in managing our business, we believe that MRCC and the rest of the Monroe Capital Funds are in a strong position to navigate the current crisis vis-à-vis the markets and our competitors. And we expect to emerge in a strong position to take advantage of the enhanced returns that will be available as a result of the market dislocation that has occurred. Also, as we discussed in the prior calls, our arbitration proceeding in the Rockdale Blackhawk matter is now completed. The award has been issued in final form and will cover more than 100% of our par amounts on this loan and is consistent with the current fair value on our balance sheet. We anticipate payments in the coming quarter, which will be a materially positive result for our company. Turning now to the first quarter results. We are pleased to report that in this challenging environment, we generated adjusted net investment income of $0.33 per share, down from the adjusted net investment income of $0.37 per share in the fourth quarter. Declines in our net investment income are primarily as a result of us proactively placing three additional assets on non-accrual, in part due to challenges faced by these borrowers related to COVID-19, as well as a decline in fee income during the period. Aaron will go into some more detail regarding the components of our net investment income and the non-accrual assets later in the call. We also reported a net decrease in assets resulting from operations of $36.9 million, or $1.81 per share during the quarter, which was primarily as a result of a decline in the fair value of our investment portfolio during the quarter. As a result, our NAV on a per share basis fell from $12.20 per share at December 31st to $10.04 per share at the end of the first quarter, or 18%. As we have discussed on past calls, we maintain very disciplined valuation procedures at Monroe, which rely heavily on independent third-party valuations or observable market prices for 100% of our portfolio each quarter. The process employed by our third-party valuation firms is not just based on individual credit performance from a bottom-up basis, but also includes a top-down analysis and heavily incorporates the impact of general market spreads on our assets. As a result of this process, our average portfolio mark across the entire portfolio fell by approximately 6.8% during the quarter. The decline in our marks resulted in approximately $2.21 per share in net unrealized mark-to-market valuation losses during the quarter. We estimate that approximately $1.25 per share of these unrealized losses, or 57%, was attributable solely to the widening of credit spreads during the period, unrelated to individual credit performance. Since quarter end, LCD first-lien loan spreads have tightened by 108 basis points already retracing around 28% of the Q1 spread widening. Of that $1.25 per share of NAV decline attributable to spread widening, approximately $0.71 per share, or 57% of that was attributable to assets held directly by us, while $0.54 per share, or 43% of that number was a result of markdowns on assets held in the MRCC Senior Loan Fund joint venture. The loans in the joint venture tend to be larger upper middle market companies and those loans experienced higher price volatility in times of market correction. Assuming credit spreads continue to tighten as we have seen post quarter end and absent future permanent credit losses associated with these loans, we would expect a significant portion of these unrealized mark-to-market losses in both our lower middle market portfolio and in the MRCC Senior Loan Fund joint venture to reverse resulting in positive NAV adjustments and positive earnings performance in future periods. Approximately $0.96 per share of the $2.21 per share unrealized mark-to-market losses or 43% was attributable to specific credit deterioration in certain portfolio companies, a significant portion of which is as a result of the impact of the COVID-19 pandemic on these borrowers. A recovery of these unrealized losses is dependent on both continued spread tightening as well as improved company performance for these specific borrowers. Regarding these unrealized losses associated with specific credit performance, while we believe that this quarter’s increase in unrealized mark-to-market declines associated with these select borrowers were exacerbated by the COVID-19 pandemic, our senior management team is continuing to spend a significant amount of time analyzing these credits and focusing on our workouts and collection strategies. We are very focused on realizing the highest possible recoveries on the assets that we have marked down, and we are engaged in several processes to execute on that strategy. One such process was undertaken with respect to Rockdale Blackhawk in 2019, and we are seeing the positive results of that process today. Please be aware that the Monroe Capital organization has 135 employees, with many devoted to underwriting risk management and workout strategies. During periods like this, it allows us to bring the very resources to bear on the portfolio that are necessary. As many of you know, we have a long track record of significant success in managing through difficult economic environments, notably the great financial crisis in 2008 and 2009 including select workout situations with borrowers. If need be, we can come in and take over and own a business. While that is not our preferred option or outcome, we know how to do it, and have done it successfully in the past. If necessary, we will roll up our sleeves with our 135 employees and get our companies through this period to achieve a good recovery. The important thing is that we have the ability and experience to do that if needed to achieve the best recovery possible for our investors. We also announced in our earnings release last Friday that the Monroe management team made a recommendation to our Board of Directors, and the Board authorized a reduction in our dividends to $0.25 per share for the second quarter of 2020, payable in cash on June 30, 2020. The decision to make a reduction in our dividend was very difficult, and is the direct result of the uncertainty due to the COVID-19 pandemic. It reflects our desire to maintain a conservative approach regarding distributions and liquidity. While we do not have any specific information regarding additional assets moving to non-accrual in the future, given the uncertainties in the economy, we believe it is prudent to plan for various stress test scenarios that have made the difficult decision to reduce our dividend rate for the first time in our company's history. We will continue to closely monitor the performance of all of our borrowers as well as overall economic trends, activity and future prospects. If appropriate, we will adjust the dividend amount in the future if we see evidence of a sustained recovery, which causes a positive impact on our net investment income. We believe that by making these dividend adjustments, we are acting decisively and responsibly in light of the uncertainties and challenges we are facing as a result of the current crisis. As always, we are focused on the long-term interest of our shareholders, and we'll continue to operate with caution. As we look ahead, while there is a high bar today for investing in new capital during these uncertain times, and our focus in the near term will be on reducing our debt leverage, as Aaron will discuss, we have seen many attractive opportunities to invest. Our focus will be to continue to make new investments in portfolio companies and very compelling risk-return investments in these situations on an opportunistic basis just as we have done as a firm in 2010 and 2011, following the great financial crisis. MRCC enjoys a very strong strategic advantage in being affiliated with a best-in-class middle market private credit asset management firm with over $9 billion in assets under management and over 135 employees as of April 1, 2020. Monroe Capital will continue to devote whatever resources are necessary to generate acceptable levels of adjusted net investment income and improve NAV performance of MRCC going forward. I am now going to turn the call over to Aaron, who's going to walk me through our financial results.

Thank you, Ted. During the quarter, we funded a total of $71 million in investments consisting of $41 million in loans to new borrowers and $30 million in new fundings to existing borrowers, including $21 million in revolver draws and $9 million in add-ons and delayed draw fundings. As we discussed earlier in the call, many of our borrowers drew on their revolvers to increase liquidity on their balance sheets due to the uncertainty related to COVID-19. This portfolio growth was partially offset by sales and repayments on portfolio assets, which aggregated $53 million during the quarter including four full payoffs, one asset sale and partial sales and paydowns. All investments in new borrowers were made earlier in the quarter prior to the market dislocation and spread widening that occurred late in the quarter related to the pandemic. At March 31st, we had total borrowings of $416 million, including $192 million outstanding under our revolving credit facility, $109 million of our 2023 notes and $115 million in SBA debentures payable. We are currently mostly focused on our portfolio and we are not expecting material new investment growth in the immediate term. Any future portfolio growth, revolver draws, or advances through existing borrowers will predominantly be funded by the availability remaining under our revolving credit facility, subject to borrowing based capacity and the uninvested cash held in our SBIC subsidiary. Turning to our results. For the quarter ended March 31st, adjusted net investment income, a non-GAAP measure, was $6.8 million or $0.33 per share, a decrease from the prior quarter’s adjusted NII of $7.7 million or $0.37 per share. The decrease was primarily as a result of declines in interest income as a result of overall declines in LIBOR, placing additional assets on non-accrual status and a reduction in fee income earned on our assets during the quarter. These declines were partially offset by a reduction in incentive fees as these fees were fully limited during the quarter as a result of the total return limitation in our shareholder-friendly advisory agreement. LIBOR rates were volatile during the period. The three-month LIBOR as an example fell from approximately 1.9% at the beginning of the year to 1.45% at March 31st. During March, however, the three-month LIBOR rate fell to a level as low as 75 basis points or 0.75%, and is even lower than that today. We maintain LIBOR floors in nearly all of our deals, which tend to be at least 1%, which insulates our portfolio from narrowing spreads in periods where LIBOR falls below our floors. As of March 31st, our net asset value was $205.4 million, which was down approximately 18% from the $249.4 million in net asset value as of December 31st. Our NAV per share decreased from $12.20 per share at December 31st to $10.4 per share as of March 31st. As Ted already discussed in his earlier remarks, this decrease was primarily as a result of unrealized mark-to-market valuation adjustments in the portfolio. Approximately 57% of which was solely related to the general widening of credit spreads during the quarter due to concerns over the COVID-19 pandemic. We believe all things being equal that a significant portion of these valuation adjustments could reverse over the next several quarters if the general level of market spreads continues to tighten. Looking to our statements of operations, total investment income decreased during the quarter primarily as a result of a decrease in interest income due to additional non-accruals as well as the decrease in fee income as the last period included a success fee related to our investment in Tap Room Gaming, $854,000 of which was not previously accrued and was realized upon the payoff of our investment during the fourth quarter, and a slight reduction in dividend income from the SLF during the period. During the quarter, we placed three additional positions on non-accrual status including the last out tranche of Incipio, our investments in SHI and Bluestem. While total non-accruals are now approximately 7% of the portfolio at fair value, once the expected proceeds are received on Rockdale Blackhawk, assuming all things remain the same and no additional non-accruals are added, our non-accruals would fall to approximately 4.3% based on fair value. Moving over to the expense side, total expenses for the quarter decreased primarily driven by the elimination of incentive fees in the quarter. Base management fees also declined slightly primarily due to the lower level of assets at fair market value as a result of fair value adjustments to the portfolio during the quarter, and interest and other debt financing expenses also declined during the quarter primarily as a result of lower average debt outstanding and reductions in LIBOR during the quarter. At the end of the quarter, our regulatory leverage was approximately 1.47 debt-to-equity, an increase from the regulatory leverage of nearly 1.2 at the end of the prior quarter. While this is higher than we would prefer, it is not unanticipated as a result of COVID-19 related issues. The increase in regulatory leverage is as a result of fair market value adjustments in our portfolio as well as the significant amount of unanticipated revolver draws during the period. The current level of regulatory leverage is higher than the targeted leverage range we have guided you to on prior calls. As such, our near-term focus will be on reducing leverage rather than portfolio growth. As we discussed earlier in the call, market loan prices have begun to recover, which should reverse some of the fair value marks on our assets. This coupled with normal course principal amortization and possible repayments on recent revolver draws could contribute to future de-leveraging of the portfolio. We are currently comfortably in compliance with the SEC asset coverage ratio limitation and do not currently need to take advantage of the relief the SEC recently provided due to the extreme volatility of asset prices during the first quarter. As of March 31st, the SLF had investments in 63 different borrowers aggregating $217.2 million at fair value with a weighted average interest rate of approximately 6.5%. The SLF had borrowing under its non-recourse credit facility of $150.7 million and $19.3 million of available capacity under this current facility subject to borrowing base availability. We do not expect to significantly grow the assets held in the SLF at this time and the SLF continues to be in compliance with all covenants in its credit facility. As discussed earlier, the loans held in the SLF saw significant unrealized mark-to-market write-downs during the period as a result of market spread widening due to the pandemic. Regarding Rockdale Blackhawk, as we have discussed on prior calls, there was pending private arbitration of an accounts receivable claim with a national insurance carrier with a material amount in dispute. That claim serves as collateral from the MRCC loan to Rockdale Blackhawk. The underlying arbitration proceedings were completed in mid-August and final trial briefs were due and submitted to the arbitrator in late September. An interim award was issued in January 2020. Just recently, the arbitrator issued a final award which updated the interim award to include certain attorney's fees, interest, and other amounts. The final award was very positive and should result in a substantial recovery from MRCC and the other lenders to Rockdale far in excess of the cost basis of our outstanding loan balances due to the lenders’ right to receive excess proceeds pursuant to the terms of a sharing agreement between the lenders and the estate. If there are any updates that could have a material effect on the value of the position, either positive or negative, we will update the shareholders at the appropriate time. Another portfolio company, TooJay's, has been in the news recently as it recently filed for bankruptcy protection in Florida. TooJay's is a chain of fast-casual gourmet deli restaurants down in Florida. As a result of the COVID-19 pandemic, their restaurants have been closed for dine-in service and their revenues have been severely impacted as a result. In the bankruptcy filings which are public, the company has indicated that they believe our loan is within the enterprise value of the company, and we anticipate receiving adequate protection payments on our TooJay's loan given our overcollateralization position in the bankruptcy proceedings. I will now turn the call back to Ted for some closing remarks before we open the line for questions.

Thanks, Aaron. In closing, we find ourselves in an unprecedented economic environment, which is likely to cause rising default rates and the potential for an extended recession. Despite these challenges, we remain optimistic that we can weather the storm and emerge strong as we did as a firm after the great recession of 2008 and 2009. The key to our optimism is our conservative underwriting and purposeful defensive portfolio and our access to a large and very experienced portfolio management team with experience managing through multiple economic cycles and workouts. We have a defensively positioned portfolio with solid loan documentation and a lot of control over our own destiny in terms of risk management. As such, we continue to believe that Monroe Capital Corporation provides a very attractive investment opportunity to our shareholders, as evidenced by the substantial amounts of recent insider buying in March by members of our Board, our extensive management team and the senior management team at Monroe Capital. We are committed to navigating successfully through this economic crisis and are confident that we have the skills and experience necessary to manage through on behalf of all of our lending partners, bondholders, JV partners, and shareholders. We believe that MRCC is affiliated with a best-in-class external manager, which has decades of experience, 135 highly skilled employees, and approximately $9.3 billion in assets under management, which provides us the stability to steer the ship towards calmer waters. We would like to thank our shareholders for their loyalty and confidence in us through these difficult times. I would also like to thank the entire team at the Monroe Capital organization for their hard work and dedication. Thank you for all of your time today. And this concludes our prepared remarks. I'm going to ask the operator to open the call now for questions. Thank you.

Thank you. Our first question comes from Bob Napoli with William Blair. Your line is open.

Good morning Ted and Aaron. Good to hear your voice and you're doing well. Appreciate the moves you’ve announced here this morning, and I think they're appropriate. I guess the biggest question, the hardest question to the call is the marks that you've taken on the portfolio and the economic trends. I mean how confident are you? And I know it's impossible to forecast the next several quarters. But how confident are you in the current markets that you have excluding the spreads, changes in spreads, and credit quality of the portfolio? How many of those companies are on a watch list and were maybe not there three months ago because of COVID? So just some commentary around your comfort there would be helpful?

Thank you for the question, Bob. It's a great question. Like all Business Development Companies, we conduct a thorough internal analysis and review each of our marks every quarter. We examine our entire portfolio. We also engage outside third parties to review our marks comprehensively, ensuring that every aspect of the portfolio is assessed, rather than only a portion of it or management's estimates. Credibility is a core principle for us at Monroe, both for our publicly traded BDCs and our privately managed funds. We strive to provide the most accurate information available, and we bring in external parties to enhance that accuracy. This quarter, we made some significant marks. We hope that over time, some of these marks will improve. Notably, 57% of these marks were influenced by spread widening and factors outside of our control. From our management perspective, we are optimistic that these issues will settle down in the next quarter or two, allowing us to return to normal operations. We believe we have handled the situation as well as possible given the current circumstances and the information at hand. Aaron, do you have anything to add?

Yes, just quickly. To the other part of your question, Bob, we've been pretty aggressive in rerating our credits based on their impact of COVID and how that implies on a credit rating basis, movements that need to make. So we've definitely seen an increase in 3-rated credits as a result of the pandemic because some of our borrowers are more directly affected than others. And so you'll see when you look at the aggregation in the 10-Q that there's more 3-rated credits than there were last period. And that's what you would expect. And we're very carefully looking at all of the deals in the portfolio across the entire Monroe platform. Our credit teams are meeting multiple times a day on every deal, particularly the ones that are impacted by it. And the one of the real benefits of having real scale in our investment teams is that when the new deal activity is lighter, which it is now due to low M&A activity, we have so many people available to make sure we're as on top of this portfolio as any firm could be. So we feel really good about where we stand with regards to being able to manage through the crisis.

Congratulations on the achievement with Rockdale; that's impressive. This seems like a favorable environment for making quality loans with appealing terms. I understand you've mentioned not planning to expand the portfolio and are hoping to see recovery from Rockdale. Considering your current leverage, how do you view the opportunities to issue new loans in this setting?

You know me Bob, as well as others, we're going to play offense here. We did it after the crisis and we're going to do it now. We see some great opportunities across the firm. We have funds that we've raised for this very purpose. We've got plenty of room across the firm and we're going to do everything we can to create some availability at MRCC. And as Aaron mentioned, some of this is going to turnaround. We're going to get our leverage where we want it to be. Again, for the COVID pandemic with the spread widening and everything else, we’d be in much better shape. But again, post quarter that's already started to reverse. So we will be playing offense in this environment and we will be taking the best opportunities we can in the market and generating returns for our shareholders.

Thank you. Our next question comes from the line of Tim Hayes with B. Riley. Your line is open.

Hey, good morning everyone. Thanks for taking my questions. Hope you're doing well. My first one here, just to follow up on Bob's. In the pipeline what you're seeing today, what the leverage multiple and spreads look like? And are there any other characteristics that are a little bit different than what kind of your normal pipeline looks like based on the circumstances?

Yes, that's a great question. Looking at the current environment and the publicly reported LSG data, we've seen a couple of hundred basis points of spread widening across broader, syndicated, and traded names. In our market deals, we're now seeing rates at L800, L850, and L900, which were previously at overhead values. Today, we're quoting term sheets at rates ranging from L800 to L1000. The leverage we’re observing has shifted from the 5s to the low 4s and sometimes even mid-3s. In terms of our pipeline, leverage is now around 3.5 to 4 turns, compared to 5 to 6 turns previously. A unique opportunity for the Monroe platform lies in our substantial opportunistic financial business, which differs from traditional lending to private equity firms and leveraged buyouts. Our opportunistic business involves acquiring high-performing loans at significantly discounted rates, as well as offering asset-based financing against pools of performing assets. We also engage in bridge lending for various cases, including real estate, and we purchase portfolio NAV-type loans and acquisitions. We have substantial capital allocated for these strategies, which currently represent the most lucrative opportunities for generating double-digit yields for investors. This strategy has been in place for the last decade, and we anticipated a period of economic cooling to deploy alternative strategies for generating returns. While I was hoping for a more gradual cooling, I believe Monroe will emerge from this situation stronger, similar to how we did after the financial crisis in 2008 and 2009, both with our private funds and MRCC, as well as our high net worth retail funds.

Thanks, Ted. That's a good point and good color. And then if you can give us an update on credit trends so far in the second quarter. I know you said that in 1Q about over 97% of the portfolio was current, but how has that trended with scheduled payments in the second quarter? How many companies would you say in your portfolio have requested some type of forbearance and how have you satisfied those requests?

Good question. I will tell you that I think we've done a really good job in Q1, over our companies. And because of that, we've got an exceptionally high rate of performance. I think it's too early to tell you in Q2 what happens because we are way early in the quarter and the effects of this COVID-19 I think are really going to play out in Q2 for many companies. As I mentioned in our prepared remarks, we've been extraordinarily lucky. And I think some of that luck was just based on good historical practice. We've pulled out our playbook that we ran in the great financial crisis in ‘08 and ‘09. We've avoided industries in a significant manner that are going to get decimated in the next quarter or two. Those are autos, airlines, cruise, leisure, health club type things, oil and gas, and minerals and mining, energy. If you look across the spectrum of private credit and other BDCs, you're going to see a drastically different type of portfolio in MRCC, and in the Monroe organization in general. Because historically, we haven't had the expertise to lend into some of these specialized energy industries. We’ve stayed away from aviation, we’ve stayed away from autos, because we didn't like what happened the last time when the economy got overheated. So, all things being equal, we should come out of this in much better shape than our peers. As I mentioned in my prepared remarks, we're not afraid to own companies. I mean, we've got a number of companies that we've taken over historically. We've generated some pretty darn good results by replacing management teams, bringing in some of our resources to bear, and some of our professional staff, and combining businesses. We can do a fair amount. We got 508 companies in our portfolio across the firm. So that's 508 CEOs, CFOs, Boards of Directors, professional contacts. We take over a company or we put the Monroe brand to bear in a situation just like we did with Rockdale Blackhawk. That was a hospital, if you recall that was closed. We brought the resources to bear necessary to file a bankruptcy and purchased claims in that bankruptcy to require the entire rights to manage the credit out of that bankruptcy. Then we proceeded against what we felt was a party that owed the company, one of the insurance carriers. We received a substantial recovery on that way in excess of our loan. We have a number of other situations in the portfolio that we're proceeding now with similar type strategies. I would expect once this crisis passes to get into a much better position vis-à-vis the market and the portfolio versus other private credit managers.

That's helpful, Ted. And yes, congrats again on a successful outcome there with Rockdale. Definitely very positive and demonstrates the resources you guys have there. But just poking on the kind of the part B of that questionnaire a little bit more was, I'm just curious if you’ve done anything like reducing covenants or deferring principal or interest payments or anything to satisfy forbearance requests at this point. I am just trying to size the magnitude of that versus the companies that haven't made any requests at this point?

Yes, we're actively engaging in discussions with all our companies. So far, we've been fortunate. Since we're not heavily involved in high-risk industries, this hasn't been a major challenge across our portfolio like it might be for others. Our focus is primarily on business services, software, and IT. We see ourselves as solution providers whose main objective is to support and protect our companies, management teams, and private equity sponsors. As Aaron mentioned, we've successfully funded revolvers for our companies. I've advised several of them that it's unnecessary to draw on revolvers if they aren't in need, as they were worried about future capital requirements. We have seen a positive trend recently; the usage of revolvers has started to decrease again, which I believe will continue going forward. This will positively impact us, especially as we aim to achieve our target leverage. In response to your question, we are confident in our ongoing communication with our clients and in providing support for revolvers. However, we are not observing a widespread need for drastic changes across the portfolio, which reflects the stability of our current assets.

That's good color. Thanks, Ted. Appreciate it. And then is one more since you brought up the revolvers there, just a little bit more maybe context around unfunded commitments right now. How much of unfunded commitment is approved and kind of readily available for borrowers to draw down on versus if any of that is achievement or milestone-based or needs approval?

I want to make a comment before turning it over to Aaron. We have set aside 100% of our revolver capacity for clients, and we operate on a much more conservative basis compared to others. We ensure that we have revolver commitments in place. That said, we will likely always use about 50% to 60% of our revolvers. Currently, companies are aware that they can reach out to us at Monroe for funding, so there’s less reason for them to draw on their revolvers and keep cash in bank accounts that we control, especially when they incur unnecessary interest payments. Many of our clients have recognized this, and it doesn't make sense for them to borrow and pay us interest when they don't need to. We have $9.3 billion at Monroe, and we are stable and strong in terms of liquidity. Unlike some banks that failed in the last crisis, we are not going anywhere. So, borrowing unnecessarily to take down revolvers and incur interest is not a wise decision. Aaron, do you have anything else to add?

Yes, just to your question around milestones and things like that, for the delayed draws, most of the committed delayed draws are set up for very specific uses. A lot of them are things like acquisitions. And so as you might imagine, M&A activity is pretty light right now because most companies are moving to buy someone in this market would need to put up substantial equity, and it's a hard thing for sponsors to want to do right now until they sort of see things normalize. So, I think, our total unfunded amount is something like $22 million is delayed draw, a lot of that we would not expect to fund at least in the near term. And then the remaining, I think it's around $18 million is remaining unfunded revolver availability, which is subject to covenant compliance and things like that.

Thank you. Our next question comes from the line of Chris York with JMP Securities. Your line is now open.

A couple of questions to begin on senior loan funds. Aaron, in your prepared comments you said you are in compliance with SLF credit facility, but can you just update on those financial covenants with cap one?

Yes, Chris, there are standard considerations. The primary concern regarding a credit facility is its mark-to-market aspect. In a market like this, mark-to-market calls on a highly leveraged facility could be a significant issue. However, the credit facility isn't strictly a mark-to-market fund. Certain conditions must be met by the underlying borrowers for the lender to consider a reevaluation. These conditions are known as reevaluation events for the SLF credit facility, and they could pose potential issues if they arise. So far, we’re in a good position, and we've analyzed all the relevant names and scenarios. We believe we should be able to manage the situation effectively while continuing to keep an eye on it.

Okay. So just to be clear, no minimum equity covenants are in that facility?

There are other covenants, I have to get back to you on the specifics. I don't have them in front of me but that facility just to be clear is non-recourse to the parent. So there's nothing that creates a scenario that would come back to the parent, but they've got significant equity in the SLF that we want to preserve and we expect we'll be able to do that. But I'd have to get back to you on the specific covenants at the SLF credit facility. I don't have them all in front of me.

Okay. And then two follow-ups, how much unfunded commitments exist in SLF? And then secondly, do you expect to fund your remaining equity or do you expect it to be drawn in SLF?

So, we don't have a lot of unfunded commitments in the SLF, I don't have the exact number in front of me, but these are very small. We don't do a lot of revolvers in there. We don't do a lot of delayed draws in there, just a handful. And so, there isn't a lot of unfunded risk in SLF. We do still have the ability to call some capital in order to deal with any issues that might happen in that fund. They're strong funded commitments in terms of equity under the original commitments. But at this point, there's no current expectation at this moment that we would need to fund any of those. And right now, we're not growing the assets in there. So, we are, believe it or not, seeing from time to time natural payouts in that fund even in this environment. So, so far, so good. I think there's definitely less than 1 million in revolvers at the SLF, I think it’s about 800,000 of revolver, maybe something like under 2 million of delayed draws I think. And as I said, those are very similar to the ones that we hold on the balance sheet in terms of some of the specific uses of proceeds for delayed draw, most of which is predominant right now.

Thank you. Our next question comes from the line of Robert Dodd with Raymond James. Your line is open.

First a housekeeping one then a couple of these questions. On Rockdale Blackhawk, I mean Ted, in your prepared remarks you expect that settlement to be paid in I think the coming quarter, does that mean the second quarter or the third quarter just for clarity?

Good question, Robert. First of all, I'm glad you're safe and everything's good. I think it'll get paid in Q2 is our plan right now. We know our lawyers are telling us that this money should be in the Q2. So that's what we've been planning for.

Can you give us any column what percentage of your portfolio is say a cash monthly interest payout versus quarterly? And all of those, how many of them made the payment in April?

Good question. Most of our portfolio has quarterly payments. I don’t have the exact numbers right now, but we can provide that information for you. We designed our system across the firm to primarily accommodate quarterly payments. As Aaron mentioned earlier, we achieved a 97% or higher payment rate for our March payments, so we don’t expect significant declines, although it is still early in May with about six weeks left in the quarter. I can tell you that we are regularly communicating with our companies on a weekly basis. Thanks to the loan documentation we have with these companies in this market segment, we can obtain real-time information, often weekly financial updates. A large percentage of our companies also applied for and received PPP loans. This is something that is sometimes overlooked, but in our market segment, our infrastructure allowed us to actively assist our companies with the PPP program. I believe this will yield benefits for us in terms of stability, liquidity, and the performance of borrowers.

And then one more if I can. On the recovery process, I mean there are going to be recovery processes as we go through this, obviously. I mean, how are you going to allocate or what's the approach to maybe allocating time? It's going to be quite an intensive process and in some cases obviously in lockdown, very good recovery. The Picture People, if we go back, not so good recovery, you spent a lot of time on that one. So how's the allocation of resources done to be decided, if it's only 3% of portfolio it’s not that bad but we don’t know how things are going to turn out. So how is that allocation being of headcount, your time on some percent being allocated across the more stressed portfolio right now?

That's a very good question. Given the size of our platform, we have some inherent advantages and we've learned valuable lessons over the years, often from less than favorable outcomes. The Picture People transaction was not successful for us despite our initial efforts. We realized we didn't have the right people in the right positions and learned from that experience. This time is different. We have eight individuals who joined the firm over the past three to four years, focusing specifically on workouts, restructuring, and equity optimization. We have an equity group led by Brad Bernstein, who has over 30 years of experience. His team consists of eight seasoned professionals with 15 to 20 years of experience in buying, managing, and running companies. We are actively monitoring our high-risk companies in two ways: as a lender and as an equity owner, since these are businesses that we may ultimately own. We approached Rockdale similarly, where we purchased the debt with the intention of either operating it or filing a claim; we chose to file a claim in that case. In other instances, we have taken over companies, such as a maintenance and repair operation for airlines that we acquired years ago under the Monroe Capital platform. We successfully restructured that business, and while it is not currently part of the MRCC portfolio, we brought in the right resources, and that company is set to be sold for a high multiple of earnings. Regarding MRCC specifically, many BDCs focused on lower-middle-market investments lack the resources we have, including eight dedicated workout professionals. The advantage with MRCC is that we're part of the Monroe platform, which provides us with the necessary infrastructure and resources to manage and potentially take over these companies. This allows us to concentrate on our core responsibilities of operating MRCC and acting conservatively for our shareholders.

Thank you. Our next question comes from the line of Troy Ward with Ares Management. Your line is open.

Thank you. Good morning Ted and Aaron and thanks for the call; hope your team is staying safe and healthy. First, we'd just like to commend you on the detail you provided. The breakout of the unrealized marks related to credit versus spread widening is extremely helpful for us to understand the move in NAV and what we might expect in the future and the coming months and quarters. And as you correctly laid out, the spreads tightening and some amortization and some portfolio cash flow, should see natural occurrence. I think Ted, as you used to get back into a lower leverage perspective, but kind of to follow up on. I feel like a lot of the questions I've been revolving around is really kind of the ability to put attractive capital out in the near term without pushing that leverage back up. So Ted, if you could speak to kind of the conversations you're having maybe directly with the companies, but maybe the companies and their ability to access any potential government programs that could help because you're on the lower side, but also the private equity ability or willingness to put in additional capital and also the relaxation of some of the co-investment rules. Is there an opportunity for other capital to come in and protect the investments at MRCC from the broader Monroe platform? So any commentary around that would be really helpful.

Yeah, good choice. I'm glad you asked that question actually since it’s a thoughtful one. The most people don't really understand, in our market and the lower part of the middle market, there's opportunities to play offense while you're playing off offense but there are also opportunities to play offense while you're playing defense. The neat thing about our market is companies don't have the ability to go out and do bond offerings and do unsecured notes. In our part of the market, what we try to look for is ways to assist companies. It can be through a revolver draw. It could be through a relaxation of a covenant. It could be introducing the company to a mezzanine debt provider to put additional capital in and reprice our loan. It can be leading on the private equity sponsor to do something. If we do something, then we ask them to do something. Very often, when we make a covenant waiver or we make an accommodation for our borrower, it's because we're doing that in concert with something else. The private equity sponsor is stepping up additional equity. The sponsor is guaranteeing a part of our loan, the sponsor is committing to put forth capital in the future into the company. As I mentioned earlier in my remarks, we've taken a very active program in assisting our companies with PPP money. We have 53 banks and our credit facilities across the Monroe platform. The first thing that we did as a firm is we've identified the banks that were most likely to assist each one of our portfolio companies. Then we made the appropriate introductions to make sure that that process was set up appropriately. We monitored the effect of this or that and the staging of the applications and the approvals and the funds awarding under the PPP program. There are a couple of other programs now that are online and regulations are being formed, the Main Street Lending Program, other loan programs, and we're equally as active in those programs with our borrowers to make sure that they can access the liquidity. So from a company standpoint, very often the things that happen behind the scenes that don't show up in our earnings calls are the things that are the most effective in creating value and playing offense. As I mentioned earlier, we're taking a hard look at all of our companies. And when we're being asked to make accommodations and to provide assistance, we're asking for the same benefit from our companies in terms of repricing and re-risking our portfolio and very often de-leveraging as well. This is an interesting time and in the space that we play in, we've got a number of different levers to pull that we can pull that in larger companies they can't and very often the middle market companies, we’ve got control over their income statement very often in terms of identifying areas where they can cut expenses and encouraging them to make certain expense cuts reductions and things to preserve and protect cash as well. So, that's a long-winded answer to I think your question, but it shows all the tools that we have available in our arsenal to bring to bear.

Now that's very insightful and very helpful. One last thing. I think you mentioned, the broader Monroe platform as upwards of $9 billion of AUM. Can you speak to the kinds of dry powder, if you're willing, that you have available to step in and put capital to work where needed?

Going into this crisis situation on March 1st, we had approximately $1.4 billion available at Monroe Capital. We also have SEC co-investment capability across our funds. We were optimistic about this. We have been actively raising additional capital at a low level and have several funds in the market, including private credit funds, opportunistic funds, and retail funds catering to high net worth individuals. We see this as an opportunity to continue raising capital from various investors, including institutional investors, sovereign wealth funds, pensions, endowments, and foundations seeking yield. During times when the S&P drops, bonds fluctuate, and U.S. Treasuries are low, investors find refuge in the private credit space. They tend to rely on the most reputable managers with extensive track records. With 20 years in this business and experience in multiple downturns, including the dotcom crash and the financial crisis of 2008, we have a proven strategy to navigate these challenges. We are well-equipped with the necessary infrastructure and capital. Historically, we have performed well during and after crises, and I believe that 2020, 2021, and into 2022 will be strong periods for private credit, especially for firms like ours that have the resources to be active in these times. Conversely, firms that lack diversification or scale may struggle. Quality will prevail, and I am confident that the infrastructure we’ve established at Monroe will continue to generate significant returns during and post-crisis, just as we have in the past.

Thank you. I'm not showing any further questions. I will now turn the call back over to Ted Koenig for closing remarks.

I want to thank everyone today for joining the call. I know it ran a little bit longer than our prior calls. I think there were a lot of good questions. Again, we don't take decisions and actions lightly and we've put forth, I think, a thoughtful and decisive manner in which we're managing MRCC. We've made some hard decisions at MRCC, which are going to be in the long-term best interest of our shareholders. We continue to see value where we are today, as evidenced by a lot of the insider purchases that have been made in our company. I wish everyone health, be safe. We will all talk to you again next quarter sometime in early August. So with that, any follow-up questions that anyone has, as always, we endeavor to be as transparent as we can. Please contact Aaron offline, and I'm sure we can give more information as requested. So thank you and everyone have a good day.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.