Will Monroe Capital Issue More Equity ?
A NEW EQUITY RAISE COMING SOON ?
After reviewing Monroe Capital’s IVQ 2016 and full year earnings press release, and reading the 10-K, the BDC Reporter gets the impression another secondary offering of common shares might be in the offing in the months ahead. The last offering was made on July 25, 2016 at a price of $15.50 and raised $55mn for the mid-sized BDC. Before that, MRCC had an issue in April 2015. Here are the reasons why:
- Portfolio growth has continued at a rapid pace, from $343mn at cost in June 2016 to $413mn at 2016 year-end.
- To take advantage of a new SBIC authorization to issue $63.5mn in 10 year debentures at favorable rates, the BDC needs to contribute $16.5mn in new equity capital to its subsidiary. MRCC does not yet have the cash to fund the capital.
- MRCC’s Revolver appears to be reaching fully drawn status, when adjusted for unused capacity that any reasonable BDC maintains against unexpected needs in the absence of other sources of ready liquidity. MRCC does not provide unused borrowing capacity data, but we calculate that total portfolio assets at FMV, net of SBIC assets that are not available as collateral for the lenders, is just under 250% (assets divided by outstanding debt).
- In Subsequent Events in its 10-K, MRCC reported a ” $40mn upsize to its revolving credit facility…from $160mn to $200mn in revolving commitments”.
- The BDC has been increasingly retaining Net Investment Income on its balance sheet-at a not inconsiderable cost to shareholders ($639,000 in 2016 of Excise Taxes paid to the Federal Government for deferring distributions by a year). As of the end of the year on a GAAP basis, MRCC had accumulated $7mn in “Undistributed Net Investment Income”. That’s 4x the level of the year before, and up from a negative balance in 2014. The amount of Taxable Income hoarded (as opposed to the GAAP calculations you see on the balance sheet) may be even higher. BDCs tend to hoard/defer distributions of income in this way sometimes when projecting that new common share issuances will not be covered by current Net Investment Income.
- Market conditions for a new round of equity issuance remains highly favorable, with MRCC trading around $15.70 and the latest NAV at $14.52 (closer to $14 if all the Net Investment Income had been distributed !).
- From a market standpoint, the metrics and outlook for MRCC remain positive and should result in an amiable reception from prospective investors. The BDC has maintained an unchanged distribution of $1.40 annually for years; the likely yield going forward assuming a $15.50 price for the new shares would be 9.0%; NAV (albeit boosted by retained Net Investment Income-which investors rarely notice or worry about) is only $0.48 down from MRCC’s IPO 5 years ago and credit quality appears to be in decent shape by the standards of the day. Lastly, the new SBIC debt and increased Revolver capacity should allow MRCC to boost its portfolio size (depending on how much equity is raised, of course) well north of half a billion dollars from $413mn at FMV today.
The BDC Reporter believes that it’s Likely MRCC will issue a new round of common stock at a premium to NAV (possibly through its ATM program but more likely in a traditional secondary offering) within the next 6 months.
We’ll undertake our first update at the end of June 2017.