Lower middle market focused BDC Monroe Capital Corporation (MRCC) ended the IIIQ 2016 with 6 of its 66 portfolio companies under-performing to varying degrees. In aggregate, Watch List asset are valued just over $20mn, and are equally divided between the three tiers the BDC Credit Reporter uses to assess risk. Only 1 Watch List company (TPP Acquisition) is on non-accrual, and tagged as Non-Performing, and accounts for a third of the total in dollar terms. That’s a Great Experiment for MRCC, which intends to bring the company out of bankruptcy, with a new capital structure and potentially, even more capital. Some portion of the debt currently on non-accrual for 3 quarters may return to paying status. Watch this space.
There is one more Category 5 company in the portfolio. The internet publisher Answers Corporation (now known as Multiply) is already not paying its second lien lenders but MRCC’s share of a syndicated First Lien loan is still current, but probably for not much longer. Thankfully for MRCC, the Answers exposure is not a Material Position by our reckoning (i.e. under 1% of Net Asset Value).
There are two Category 4 companies in the portfolio. The other two are both long-standing “troubled credits: Fabco Automotive has been valued below par since 2013 and has just seen its Unitranche loan (which itself was just restructured and re-priced) written down by a record 51%. The investment size is equal to 1.7% of NAV. Shoe company Rocket Dog Brands, in which MRCC has invested senior and subordinated debt and Preferred and common stock, has been on Watch List Status since 2012. Still, remaining exposure is only just over $1mn (from $4.5mn at cost) and 0.5% of NAV. For both Fabco and Rocket Brands the credit trend is still down in the IIIQ of 2016. The Category 4 names, though, contribute only a modest amount to MRCC’s overall income. (Nonetheless, we wonder how MRCC can justify booking about $0.5mn of annual income on $3.5mn of Rocket Dog investments at cost-all in PIK form- so we’ll be asking Investor Relations). Fabco pays a mixture of cash and PIK.
Finally, there are two Category 3 credits: on the Watch List but more likely than not to still meet all obligations in full: BluestemBrands, Inc. and Playtime, LLC. Both have been written down modestly and are very much paying their bills. Nonetheless, we will remain vigilant.
Overall, MRCC’s credit quality appears to be in good shape by most any standard at the moment, with Watch List assets accounting for just 8% of September 30, 2016 Net Asset Value. The BDC Credit Reporter, though, worries both about the strategy of doubling down on bankrupt companies by investing even more time and capital therein; and by the possibility that one or two companies are being “kept alive’ for long periods by PIK-ing or reducing debt obligations, but do not have business models with a reasonable hope for success, which we shall call “Zombie Companies”. Other than those concerns, MRCC’s relatively short history as a public company has resulted in a remarkably clean sheet where net investment losses are concerned, with Realized and Unrealized Losses less than 1% of equity capital at par.