U.S. tax, healthcare changes won’t distract Monroe Capital

Monroe Capital Corp's office building lobby
Monroe Capital Corp's office building lobby at 311 S Wacker Drive (Jingnan Huo/MEDILL)

By Jingnan Huo

Chicago-based business development company Monroe Capital Corp. (NASDAQ: MRCC) is expected to maintain strong growth in 2017, analysts say. Policy changes in healthcare and tax breaks and intensifying competition in the business development arena will not have a heavy impact on the company’s business, nor will it affect the company’s conservative investment approach, management said.

The company just reported $22.5 million of net investment income for 2016, up 20.1 percent from previous year. Net investment income per share fell 5 cents to $1.55 from $1.60. Net investment income in the fourth quarter rose 7.4 percent to $5.4 million from $5 million in the year-earlier quarter. Net investment income per share was 32 cents, down from 39 cents. In June and July, the company issued a total of 3,565,000 common shares, raising in aggregate $52.5 million.

net investment income chart 2014 - 2016 monroe capital corp
Net investment income of Monroe Capital Corp. 2014-2016 (Data: Monroe Capital Corp Annual report; Chart: Jingnan Huo /MEDILL)

Total investment income of $11.2 million was less than the expected $11.8 million, but this could be timing-related as Monroe Capital continues to deploy its recent offering proceeds, wrote Matt Schmid, analyst of Stephens Inc., in a report.

Nine of 11 analysts covering the company rate the stock a buy. The other two recommend hold.

“It is a well-run company. It has performed well over a number of years, they have had very little loan losses through the years and that’s always the one single biggest thing for a company, not to have loan losses,” said Chris Kotowski, analyst at Oppenheimer & Co. Inc..

Monroe is expected to maintain a conservative investment approach despite anticipated tax reductions that are driving up the market. “We’re not going to allow a heated market to drive our activity from a modeling standpoint or earning standpoint,” said CEO Theodore L. Koenig, in the management’s earnings conference call.

“While we pass on over 90% of the investment opportunities we identify, we still have a considerable number of high quality and attractive opportunities in our pipeline.” Koenig said.

“A conservative and careful approach is what you want,” said Mitchel Penn, analyst at Janney Montgomery Scott LLC. “I think the company is going to do well.”

Monroe is facing a more competitive industry as money is flowing into retail mutual funds, liquid trading strategies, private debt, as well as other traded and proliferating non-traded business development companies, said Koenig.

The combined assets of U.S. mutual funds increased by $237.72 billion, or 1.5 percent, to $16.58 trillion in January, according to the Investment Company Institute’s survey of the mutual fund industry.

With strict leverage limits and the requirement to distribute 90 percent of net investment income, business development companies rely on the capital markets to fund investment growth and are highly subject to market conditions when raising equity capital, noted Bryce Rowe, analyst for Robert W. Baird & Co.. Lack of external capital could limit the company’s growth, his report said.

But Monroe will not be greatly affected by the increase of competitiveness because it has its own origination operation, and its revenue relies less on buying products originated by others as other business development companies often do, said Koenig.

Unique in the BDC space, Monroe has eight regional origination offices and a dozen strategic and limited partnerships with banks throughout the U.S. to complement its referral network that includes more than 10,000 firms and individuals in North America, wrote Rowe.

The potential financial deregulation following the unraveling of Dodd-Frank is not likely to expose Monroe to competition of banks in private lending, said Koenig, because banks traditionally compete in asset-based loan markets, but not in cash-flow-based loans as BDCs do. That said, other BDCs that do have business in asset-based lending will face more competitive pressure.

“Higher interest rates could place stress on MRCC’s portfolio companies and its stock price as the demand for yield-oriented stocks would likely weaken, and in turn, lower the demand for the stock,” Rowe wrote. The report also noted that “MRCC’s balance sheet internally mitigates some interest rate risk as the investment portfolio and credit line carry floating rates tied to LIBOR.”

The management remains optimistic about growth in investments in the healthcare sector, Monroe’s largest portfolio sector with over $4 billion, Koenig said, and healthcare reforms are not likely to curtail deals but to prompt migration from traditional healthcare like hospital services to non-traditional healthcare like behavioral-type health.

Meanwhile, the performance of Rockdale Blackhawk LLC has attracted questioning from analysts. Rockdale, a medical services provider whose equity Monroe owns, did not deliver dividends last quarter and has seen its dividend payment decline in the past year.

“We’re not seeing sort of any material things that would suggest that it was something performance related,” said Managing Director Aaron D. Peck. “I think it’s just a matter of how they’re adjusting estimates and how they’re looking at their tax planning.”

Over the last three years, Rowe wrote, Monroe ranks as one of only a handful of BDCs that has earned its dividend on a cumulative basis and preserved or grown its net asset value per share.

The stock rose 10 cents or 0.64 percent to $15.78 Wednesday.