Earnings Call Transcript - MRCC Q4 2020

Operator, Operator

Welcome to Monroe Capital Corporation’s Fourth Quarter and Full Year 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 the COVID-19 pandemic. Although we believe these statements are reasonable, based on management’s estimates, assumptions and projections as of today, March 3, 2021, these things 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 risk factors described from time to time, and 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 call over to Ted Koenig, Chief Executive Officer of Monroe Capital Corporation.

Ted Koenig, CEO

Good morning and thanks to everyone who has joined us on our call today. Welcome to our fourth quarter and full year 2020 earnings conference call. I’m joined by Aaron Peck, our CFO and Chief Investment Officer. Last evening, we issued our fourth quarter and full year 2020 earnings press release and filed our 10-K with the SEC. First and foremost, we hope you and your families remain healthy and safe. We are pleased to report another strong quarter of solid net investment income and increased NAV performance again during the fourth quarter of 2020. We are also pleased to announce a quarterly dividend of $0.25 per share for the first quarter of 2021. During the fourth quarter, the financial markets remained strong as loan markets demonstrated continued resiliency. This can be seen in the performance of a couple of key markets. After being down as much as 30% for the year in late March, the S&P index shook off all effects of the COVID pandemic and ended up the year, up over 15%. Price increases were also seen in traded credits investments, as the S&P/LSTA Leveraged Loan Index, which was down as much as 22% in March, has fully rebounded and was up almost 2% for the year. Our continued reduction in credit spreads has benefited our portfolio marks, which has contributed to significant improvements in our per share NAV over this period, including another increase in the fourth quarter. This normalization of the financial markets contributed to a resurgence of activity in the direct lending markets and for Monroe Capital specifically. In fact, Monroe experienced a record quarter of originations, closing 20 new loan transactions and several add-ons to existing loans, which aggregated approximately $1.1 billion of total commitments in the fourth quarter of 2020. Monroe benefited from this significant origination volume, as evidenced by a strong portfolio growth in the fourth quarter, which was approximately 5% net of pay-offs and ordinary course pay-downs. Turning now to fourth quarter results. We are pleased to report adjusted net investment income of $0.25 per share, slightly lower than the adjusted net investment income of $0.27 per share in the prior quarter. Aaron will go into more detail regarding the components of our net investment income later in the call. We also reported a net increase in assets, resulting from operations of $9.1 million or $0.42 per share during the quarter, which was driven primarily by the increase in fair value of our investment portfolio. As a result, our NAV on a per share basis grew from $10.83 per share at September 30th to $11 per share at the end of the year, a 1.6% increase. This represents the third consecutive quarter of growth in NAV per share, which has increased nearly 10% since the end of the first quarter. During the quarter, we increased MRCC’s regulatory debt-to-equity leverage from 0.9 times debt to equity to 1.0 times. This increase in leverage was primarily driven by strong asset growth at the end of the quarter, partially offset by normal repayments activity, as well as the increase in the fair value of our investments during the quarter. As much of the asset growth occurred near the end of the quarter, the resulting positive impact to NII has not yet fully materialized into our results for the fourth quarter. We continue to focus on managing our investment portfolio at the appropriate risk-adjusted leverage level going forward and are continuing to target regulatory leverage and the ratio of 1.1 to 1.2 times debt to equity in the near term. We have maintained an investment grade corporate rating and recently announced a refinancing of our unsecured bonds with new bonds that carry a coupon, which is a 4 percentage-point, 100 basis points below bonds we recently redeemed, which should have a significant impact on our earnings going forward. Given the substantial pipeline of new deals at Monroe, we would expect to increase the leverage of MRCC carefully over the next few quarters in order to reach our near-term leverage target, which should benefit adjusted net investment income for future periods. Our focus for the next several quarters will be to make new investments in portfolio companies with compelling risk-return dynamics just as we have done at Monroe in the years following the last economic downturn in 2010 and 2011. We are very well-positioned to do this. We will also remain dedicated to generating the best possible recovery on underperforming assets in our portfolio. We still have a couple of COVID-related credits that we are in the process of working out. We have a strong track record of generating solid recoveries, and we expect that to continue going forward. Recent examples of our portfolio management successes include the recovery we have generated on Rockdale Blackhawk and the significantly improved valuation of American Community Homes, just as examples. We remain heavily focused on generating similar recoveries from most of the other lower-rated credits and are optimistic that we can achieve this type of recovery for Monroe. Besides strong portfolio management experience, our success in generating recoveries comes from the fact that we are typically a control lender and our agents are more than 80% of our loans and are investments. We have good loan documentation with tight baskets regarding indebtedness and restricted payments with no collateral leakage potential. We have at least two and often more financial covenants on most of all of our deals, including maintenance and incurrence tests and leverage. This allows us to be proactively engaged with our borrowers and their financial sponsors, which can result in early intervention when performance begins to lag. Our recovery prospects are also enhanced by the fact that we maintain conservative, starting leverage and loan to values when we underwrite our loans often in the neighborhood of 50% loan to value. This morning, an affiliate of our external manager Monroe Capital issued a press release announcing that it has sold passive, non-voting minority interest to Bonaccord Capital Partners. Bonaccord is the private capital markets group of Aberdeen Standard Investments, which is the largest asset management firm in the UK with approximately $600 billion in assets. While we certainly expect this transaction to be beneficial to continued growth, a massive management platform at Monroe Capital, we also expect it to have benefits available to the MRCC shareholders and MRCC as it will open a window into the European market and shareholders to purchase MRCC and enjoy the consistent and stable dividends that we’ve been paying. MRCC enjoys a strong strategic advantage in being affiliated with the best-in-class, middle market private credit asset management firm with almost $10 billion in assets under management and over 130 employees as of January 1, 2021. We will continue to focus on generating adjusted net investment income and positive NAV performance just as we have shown in the last three consecutive quarters. I am now going to turn the call over to Aaron, who’s going to walk you through our financial results in more detail.

Aaron Peck, CFO

Thank you, Ted. During the quarter, we funded a total of approximately $46.9 million in investments, which consisted of $32.3 million in funding to 13 new portfolio companies and $14.6 million of revolver and delayed draw fundings to existing portfolio companies. This solid portfolio growth was offset by sales and repayments on portfolio assets, which aggregated $31.2 million during the quarter. At December 31st, we had total borrowings of $350.6 million, including a $126.6 million outstanding under our revolving credit facility, $109 million of our 2023 notes, and SBA debentures payable of $115 million. Our outstandings under our revolver increased by approximately $27.2 million during the quarter, as we increased our leverage during the period. We are well situated to continue to carefully grow our portfolio through participating in the substantial pipeline of opportunities generated at Monroe. The ING-led revolving credit facility had $128.4 million of availability as of December 31st, subject to borrowing base capacity. Additionally, in January 2021, we issued $130 million in senior unsecured notes at an interest rate of 4.75%. These proceeds were used to redeem all of the $109 million in outstanding 5.75% 2023 notes and repaid a portion of the outstandings on our revolving credit facility. Any future portfolio growth, revolver draws or advances to existing borrowers will predominantly be funded by the availability remaining under our revolving credit facility. Turning to our results. For the quarter ended December 31st, adjusted net investment income, a non-GAAP measure, was $5.4 million or $0.25 per share, a decrease from the prior quarter’s adjusted net investment income or $5.8 million or $0.27 per share. The reduction in per share adjusted NII was predominantly as a result of a decrease in our average investment portfolio size during the quarter, as a majority of the new fundings occurred late in the fourth quarter. While total assets were higher at the end of the quarter, the weighted average level of total assets declined from the previous quarter. External manager voluntarily waived approximately $430,000 in base management fees and $712,000 in incentive fees to generate net investment income in line with our dividend. When considering our targeted leverage, the refinance of our bonds and the current credit performance at MRCC, we continue to believe that on a run rate basis, our adjusted net investment income can cover the $0.25 per share quarterly dividend without significant fee waivers in the future, all other things being equal. LIBOR rates remained basically flat during the period and three-month LIBOR as an example was approximately 24 basis points as of December 31st. We maintained LIBOR floors in nearly all of our deals, with a majority of floors at a level of at least 1%. As of December 31st, our net asset value was $234.4 million, which was up approximately 1.6% from the $230.7 million in net asset value as of September 30th. Our NAV per share increased from $10.83 per share at September 30th to $11 per share as of December 31st. We estimate that of the $0.17 per share in net gains during the quarter, approximately $0.29 per share was attributable to increases in the portfolio valuation, primarily as a result of the tightening of credit spreads during the period, unrelated to individual credit performance. During the quarter, according to Refinitiv LPC, all-in yields for first lien and institutional middle market loans tightened by over 100 basis points to 6.57% in the fourth quarter, compared to 7.62% in the third quarter of 2020. Of that $0.29 per share of NAV increase primarily attributable to spread tightening, approximately $0.21 per share or around 70% was attributable to assets held directly by us, while $0.08 per share, or 30% was as a result of net markups on assets held in the MRCC senior loan fund joint venture. During the quarter, we also experienced a decrease in book value of approximately $0.05 per share attributable to net reductions in the valuation of our portfolio companies that have a risk rating of grade 3, 4 or 5 on our internal risk rating system, a significant portion of which was as a result of the residual impact of the COVID-19 pandemic on these borrowers. Finally, approximately $0.07 per share of the decrease in book value is associated with other losses, primarily associated with unrealized foreign currency fluctuations on our borrowings denominated in British pounds. These borrowings were used to finance investments denominated in pounds. And as such, we have corresponding gains in the fair value of these assets, which is part of the positive marks described earlier. Looking to our statement of operations, total investment income decreased during the quarter, primarily due to a decrease in interest income due to the smaller average portfolio size during the quarter. This decrease was partially offset by an increase in dividend income from the SLF during the period. During the quarter, we placed no additional positions on non-accrual status. Total non-accruals now approximate 4.1% of the portfolio at fair value, which compares to 5.2% as of September 30th. The decrease in non-accruals at fair market value is primarily because of the increase in the size of the investment portfolio during the period, as well as the reduction in the fair value of the non-accrual assets, as of December 31st. Moving over to the expense side. Total expenses for the quarter decreased, primarily driven by the partial waiver of base management fees in the quarter and the lower average debt outstanding, which reduced interest and other debt financing expenses. At the end of the quarter, our regulatory leverage was approximately 1.0 debt-to-equity, a small increase from the regulatory leverage of nearly 0.9 at the end of the prior quarter. The increase in regulatory leverage is primarily due to the portfolio growth at the end of the quarter. The current level of regulatory leverage is below the targeted leverage range we have guided you to on prior calls. We are currently comfortably in compliance with the SEC asset coverage ratio limitations, and slightly below our previously discussed near-term target leverage regulatory leverage level of 1.1 to 1.2 times debt-to-equity. As Ted discussed in his prior remarks, we would expect to grow our portfolio in a measured pace and slightly increase our regulatory leverage over the next few quarters. We also announced that on March 1st, we prepaid $28.1 million in SBIC debentures with excess available cash at the SBIC subsidiary. This should have the effect of removing the cash drag we’ve experienced due to prepayments and income generated at our SBIC subsidiary. We have made no decision regarding any additional near-term debenture repayments at this time. The result of this repayment will not impact regulatory leverage, but will slightly reduce our total leverage calculation on a pro forma basis. As of December 31st, the SLF had investments in 57 different borrowers, aggregating $205.7 million at fair value with a weighted average interest rate of approximately 5.8%. The SLF had borrowings under its nonrecourse credit facility of $131.5 million and $38.5 million of available capacity under this credit 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 increases during the period as a result of continued market spread tightening. I will now turn the call back to Ted for some closing remarks before we open the line for questions.

Ted Koenig, CEO

Thank you, Aaron. In closing, we continue to benefit from the resiliency of the financial markets and the strong proprietary origination network at Monroe, to create differentiated risk-adjusted returns for our shareholders. Our overall Monroe Capital platform closed a record amount of new loan origination in the fourth quarter and continues to maintain a very strong pipeline of high-quality investment opportunities for all funds on Monroe, including MRCC. As a result, we are excited about our investment portfolio and our prospects. The key is our conservative underwriting, a purposefully defensive portfolio, and our access to a large and experienced portfolio management team with experience managing through multiple economic cycles. 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. Our dividend remains fully covered by net investment income and we have sufficient liquidity to continue to play offense in this market. We believe that MRCC is affiliated with an award-winning best-in-class external manager, which has decades of experience, over 130 highly skilled employees and almost $10 billion of assets under management. We would like to thank our shareholders for their loyalty and confidence. I would also like to thank the entire team at Monroe Capital organization for their hard work and dedication through 2020, which was a tough COVID year, as well as a work remote year. Thank you for all your time today. And that concludes our prepared remarks. I’m going to ask the operator to open the call now for questions.

Operator, Operator

Thank you. Our first question comes from the line of Devin Ryan with JMP Securities.

Kevin Fultz, Analyst

Good morning. This is Kevin Fultz on for Devin. My first question, the current deal environment has been described as frothy on a number of earnings calls this quarter. Can you discuss the attractiveness of deals you’re seeing in the lower middle market from a risk-reward perspective?

Ted Koenig, CEO

Sure. Thanks for the question, Kevin. The market is generally very active. A lot of loan demand that was expected in the second and third quarters of 2020 was delayed as private equity firms postponed acquisitions and platform investments until they could better assess the impact of COVID. By the fourth quarter, especially in the latter half, we began to see a resurgence in activity, which continued into early December and has persisted into the first quarter. There's significant pent-up demand from 2020 that's carrying over into 2021. We are witnessing a considerable number of new sponsor platform acquisitions and many add-on transactions. We have taken a disciplined approach to the market, with COVID behind us, allowing us to analyze its effects. More importantly, we can maintain discipline in our underwriting regarding covenants, leverage, debt service coverage, interest, EBITDA covenants, and collateral packages in the lower middle market where we operate. We are not constrained by the high-yield market or larger firms doing deals without covenants. This is how we distinguish our activities at Monroe and manage our investment portfolio.

Kevin Fultz, Analyst

Okay. That’s helpful, Ted. And then, just a follow-on there, are there any pockets that you find particularly attractive right now?

Ted Koenig, CEO

We have been concentrating on business service opportunities, software, data storage, and cloud computing, which do not require in-person interactions. We are avoiding sectors like health clubs, proprietary leisure activities, and restaurants. Given the ongoing uncertainty with COVID and the vaccine rollout, we are focusing on areas that have demonstrated resilience and performed well over the past nine months.

Kevin Fultz, Analyst

Okay. That’s helpful. I appreciate that. And then, pivoting to PIK income, as a percent of total investment income, it rose sharply quarter-over-quarter about 29%. Can you discuss what caused the increase? I don’t know if that was amendment driven or possibly new investments that were structured with a PIK component? And then, your overall level of concern with elevated PIK income?

Ted Koenig, CEO

Yes. I’ll let Aaron address that.

Aaron Peck, CFO

In the quarter, PIK interest increased by $7 million compared to about $6 million in the previous period. This increase comes from three portfolio companies, specifically Familia Dental and a couple of HFZ capital entities. I would consider approximately $1 million of this increase to be non-recurring, representing one-time PIK interest related to some restructuring activities. For example, we executed a favorable restructuring with Familia, refinancing a significant portion of our debt and receiving some PIK interest as a result, along with a considerable amount of upside equity from that deal. Therefore, this income is unlikely to happen again. We also did a favorable restructuring for HFZ and HFZ Member RB, where we received some one-time PIK interest associated with it. While some of that interest will recur, some will not, totaling approximately another $500,000 in non-recurring interest. This is the reason for the increase. We do not expect it to continue at this level in the future, but we are not overly concerned as we understand the origins and reasons behind these amounts and feel confident in the outcomes of those restructurings.

Operator, Operator

Our next question comes from the line of Robert Dodd with Raymond James.

Robert Dodd, Analyst

Hi everyone. Congratulations on navigating through 2020. First, I have a couple of housekeeping items. Ted, you mentioned that much of the asset growth happened at the end of the quarter. Can you provide some insight on where the prepayments took place? The portfolio has grown, nonaccruals have decreased, and the portfolio appears to be in better condition, but income has fallen. Can you give us an idea of how much lower the weighted average portfolio size was this quarter compared to Q3? Anything on that?

Aaron Peck, CFO

Yes, it's Aaron. I'll address this, Ted. You're correct; that's exactly what happened. We experienced a significant amount of pickup toward the end of the quarter, while the repayment activity was more evenly distributed throughout the quarter. I don't have the exact weighted average portfolio balance at hand right now. I understand it can be difficult to see that. However, since the effective yield in the portfolio is essentially flat, slightly up from the last period, and given the portfolio balance at the end of the year, that should provide a decent idea of the portfolio's ability to generate yield going forward. Unfortunately, I can't provide you with the specific weighted average change on this call. If I had to estimate, I'd say the weighted average portfolio size for this quarter was probably $30 million or $40 million less than the average size in the prior quarter. A reasonable estimate for the weighted average portfolio balance for the quarter would be around $530 million.

Robert Dodd, Analyst

Got it. Perfect. This is really helpful. I appreciate that. Just to go back to the PIK income for a second, the press release indicates some of it was reclassification rather than mentioning any one-time items. Can you clarify if $1.5 million of that was a one-time item, or was it reclassified? How exactly did that $1.5 million change or move around? Sorry. Go ahead.

Aaron Peck, CFO

Yes. No, no, no. Good question. And it’s not $1.5 million but I would categorize as reoccurring, just to be clear, it would be about $1 million that I would consider to be nonrecurring. And so, the answer is that basically, it’s stuff that we previously recorded as cash that we ultimately ended up capitalizing into the position for those particular restructurings. So, that’s why we said reclassify. So, it’s things that we had already taken in as expected cash income we accrued as cash, and then we ended up with capitalizing into the position related to the restructuring.

Robert Dodd, Analyst

I understand your point. Ted, regarding your earlier comments about the goal being the best possible recovery, that isn't always a full 100%. Right now, there's some unrealized depreciation in the portfolio, a bit over $2 million. How much of that do you believe can be recovered over time? Not necessarily in the next quarter, but ultimately, what do you estimate is truly recoverable? Would you say a full recovery is the best case scenario, or is it less than that? Could you provide any insight on the time frame for this?

Ted Koenig, CEO

Yes. So, as you know, we take current valuations from independent third parties who do not consider the future or some of our strategies. We have a strong history of recovering nearly 100% on many of our assets. For instance, we experienced significant depreciation on companies like Rockdale and American Community Homes. We maintain confidence in our underwriting assessments and have multiple strategies for recovery. Unfortunately, COVID impacted a few of our companies, and we are currently implementing COVID-related strategies for them. Overall, I am optimistic about our recoveries. We have a few consumer-facing portfolio companies that we are focusing on, not just for immediate business operations, but also on potential transformations, including acquisitions, joint ventures, and European partnerships. We have ample resources at our firm to identify ways to maximize value that may not be visible in a typical quarterly valuation based on historical EBITDA and revenues. Ensuring that we turn unrealized depreciation into recovery dollars for MRCC is my top priority, as it’s the best way to create value for our shareholders.

Aaron Peck, CFO

If I could just Ted, Bob, is it the case that every single asset that has been marked down has a high probability of getting back to par? No. But, I think, what I would say is, if you look at our history and Rockdale is a great example of it, there are assets in this group that are marked below par today that we believe with the kind of work that we do have the opportunity to recover for us greater than par. And so, it’s a difficult question to answer as to what is the potential recovery amount that we could get from those unrealized losses because some of them may be at a premium. And so, on an aggregate basis, we still feel really good about our ability to recover considerable amount of the unrealized losses, but that doesn’t mean that’s true for every single name. It just means as a portfolio of 3, 4 and 5 rated credits, we’re confident that we can recover a significant portion of potentially all of that unrealized loss by good portfolio management skills and by not looking at or setting a goal line at just a recovery of our principal, but looking at what is the most recovery we can generate. And we did that on Rockdale, and we’ll do it on other assets.

Ted Koenig, CEO

We’ve got a couple of assets that we believe will lead to a substantial recovery from RCC beyond par based on our progress so far.

Robert Dodd, Analyst

I appreciate the response. I realize it's a complex question, but I’d like to delve deeper. Currently, it’s clear that the third-party analysts do not take it into account. Additionally, congratulations on your partnership with Aberdeen; they are a significant player on the global stage. Should we anticipate that this could lead to an increase in international deals? We already have a few in the UK. Will we see more international deals in the portfolio, possibly in the joint venture? Given that they don’t qualify as assets, can you provide any insights?

Ted Koenig, CEO

I would say, that’s not our goal for the partnership today is to create more international exposure. I think we’ve got plenty. I mean, as a firm, we did over $2 billion of investments last year. We never had an issue with generating flow for the firm in North America, U.S. So, I think we’re going to be okay there. The real benefit of this Aberdeen Standard relationship from my view, which I think is going to be very, very powerful, is that we have the largest asset management firm in all of the UK now as our joint venture partner with distribution throughout the UK, Europe and Asia. And they need the Monroe Capital investment current income products. They don’t have anything like the products we have in terms of the quality and the consistency of the current income. So, we expect this relationship to open up a whole another group of potential investors to various Monroe Capital products, including MRCC, for investors throughout the world.

Operator, Operator

Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan, Analyst

On the follow-up to Robert’s question. Any particular nonaccrual assets, which we should keep an eye on for a possible earlier resolution?

Aaron Peck, CFO

Good question, Chris. I would say we haven’t disclosed anything specific regarding individual assets and near-term recoveries. It can be risky to play that game because negotiations can be quite lengthy, and you don’t want to reveal your strategies. However, there are assets I can mention that are expected to generate income again. I would highlight ACH, which is a significant holding. MRCC has been on nonaccrual but has seen a substantial recovery; I apologize for the confusion, it is actually on accrual status. Aside from that, I can't point to anything specific that we expect to come back, but there are many possibilities in the portfolio that we believe will recover, allowing us to reinvest those funds into accruing assets in the near term. I would be hesitant to discuss specific individual credits.

Christopher Nolan, Analyst

Great. And as a follow-up, Aaron, on the comments that there’s no need for the waiver in coming quarters to cover the dividend, will that be from higher leverage in the portfolio, lower expenses? Could you give a little color on that?

Aaron Peck, CFO

Certainly. I believe that given our portfolio's current status and our expectations for future performance, we think we can generate enough net investment income to cover the $0.25 per share dividend. While various factors could influence this positively or negatively, that's our current assessment. This outlook is based on slightly increasing our leverage to our target level, the results from the end of the quarter contributing to our net investment income, and benefiting from lower borrowing costs on our debt facility. Together, these elements lead me to believe we can meet the dividend requirement without needing waivers on a run rate basis.

Operator, Operator

Our next question comes from Sarkis Sherbetchyan with B. Riley Securities.

Sarkis Sherbetchyan, Analyst

You talked about gradual growth in the portfolio in the prepared remarks. I just wanted to see if you can speak to the cadence of origination activity or repayments and prepayments as fiscal ‘21 progresses?

Aaron Peck, CFO

So, the portfolio grew a lot in the fourth quarter on a gross basis. We did have some money come back to us but we saw significant new origination and was back end loaded as we mentioned. The pipeline at Monroe remains incredibly strong. And when I look out for the first quarter for example, we are seeing a little bit of a similar dynamic in the first quarter where a lot of our expected closings do seem to be pushing to the end of the quarter. So, that could occur again this quarter, but there is a significant amount earmarked to go into MRCC, which would go a long way to continue to increase the leverage to the targeted level. So, I think, look, I think we’re looking to get that leverage up to the range that we discussed, as reasonably quickly, as it makes sense from the deal flow. And right now, the deal flow is really strong, and we expect to chip away at that leverage increase relatively quickly. What we can never predict, as you know, is what goes out the back door, right? There’s always opportunities for us to be refinanced those deals. We certainly have seen some of that in the quarter. I wouldn’t say, it’s a materially large number for MRCC, but we see it. And so, that’s what we can’t control, and we don’t always get a lot of advanced notice. So, I think the takeaway is, there is no lack of great deal flow from the Monroe Capital origination engine to feed MRCC to get us to our leverage target relatively quickly, and the one thing that toggles that down is, whatever might go out in terms of refinance activity, which we really can’t control.

Ted Koenig, CEO

Yes. What I’ll add, Sarkis, on that is that, 2020 was an aberrational year. In Q2 and Q3 and that early part of Q4 that market was really on edge, and we were very careful in terms of underwriting, because we wanted to see effects of COVID run through portfolio companies. I think, you’re going to see 2021 with MRCC come back to more of a normalized year, like an ‘18 or ‘19 where we’ve got significant pipeline demand. We generate on an average year, we’ll probably put $3 billion in the ground as a firm, and we will have plenty of capacity to allocate to MRCC, leans on a more ratable basis. Now, as Aaron mentioned, deals may close early in the quarter, mid-quarter, late quarter, those are quarter-to-quarter dynamics. But if you smooth it out over the year, I anticipate that 2021 is going to be a very good year for us.

Sarkis Sherbetchyan, Analyst

Great. Thank you for the extra color there. I really appreciate that. I guess, as you kind of look towards the pipeline as it sits today, maybe if you can talk about some of the underwritten yields or potential underwritten yield on the various security types. I think, as you kind of see spreads tying, are you sacrificing some on the yield side to get better quality assets in the book, just trying to get your sense of what you’re seeing real time in the market environment?

Ted Koenig, CEO

I’ll make a comment and then I’ll let Aaron give you some specifics. What we’re trying to do is, we’re trying to take the best quality assets we can and put them into our various funds, put them into our various funds. Now, the key to that is having a very light funnel. Remember, we do both sponsored transactions and non-sponsored transactions. During a COVID year, there is going to be a very little in the way of non-sponsored transactions. So, in 2020, we saw very little non-sponsored transactions, deals that we did were primarily sponsored. What we’re seeing now in ‘21, we’re seeing much more non-sponsored transactions come into play. Those non-sponsored transactions tend to be 300 to 400 basis points of overall return higher than the sponsor transactions. So, while on the sponsor side, we’re looking for quality, we’re looking for some type of excess spread, sometimes it’s in industries, sometimes it’s in companies, sometimes, it’s because of a proprietary relationship, but we’re also looking to sprinkle in a little more non-sponsored into the overall portfolio to drive some additional yield.

Aaron Peck, CFO

Yes. I want to emphasize that we always consider risk as our top priority before finalizing any deals across our portfolio. We don't set a strict threshold for yields. Our aim is to act as diligent portfolio managers, focusing on a balanced yield and risk. Over the past few years, we've seen our yield decrease, influenced both by the market environment and by a shift in our portfolio away from higher-risk structures, such as last out transactions, which we still engage in. However, our portfolio now leans more towards first lien senior secured loans. Currently, in our new origination efforts, we're typically securing loans at around 50% loan-to-value ratios and employing relatively conservative leverage levels compared to the broader market, which averages around 4 to 4.25 times EBITDA. We plan to continue leveraging the strong origination network at Monroe, which has been focusing on lower-risk structures and first lien loans. I don't expect this shift to significantly lower our effective yield. Instead, we have maintained a consistent approach in what we’ve added to our portfolio recently, and we aim to keep it that way moving forward.

Operator, Operator

Thank you. There are no further questions. I will now turn the call back to Ted Koenig for any further remarks.

Ted Koenig, CEO

I just want to say thank you to everyone on the call today. And we really appreciate your time, your questions. It’s important to us to make sure we answer your questions. As you can tell, the market is back, deals are back. There’s lots of activity. We’re very busy across the firm. And I’m very excited about 2021. I think, the year is going to be a really good vintage in credit. And we’ve got a significant market share, and we expect to take a fair amount from the market this year. So, we will talk to you next quarter. And as always, to the extent you have any individual questions, please don’t hesitate to reach out to us in the interim. Thank you. We wish you all a safe and happy and healthy 2021.

Operator, Operator

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