Welcome to Monroe Capital Corporation's second quarter 2022 earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call 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, August 3rd, 2022, 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, uncertainty, or other factors, including, but not limited to, 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.
Good morning, and thank you to everyone who has joined us on our call today. Welcome to our second quarter 2022 earnings conference call. I am joined by Mick Solimene, our CFO and Chief Investment Officer. Last evening, we issued our second quarter 2022 earnings press release and filed our 10-Q with the SEC. The negative economic backdrop and the more aggressive Fed action during the second quarter increased both risk premiums and volatility across asset classes, especially in the more liquid public markets. Negative sentiment was also felt in the private markets, but with lower levels of volatility.
Credit spreads widened in the various loan markets, with the Leveraged L oan 100 Index falling 534 basis points from 97.35% of par at March 31st to 92.01% of par at June 30th, and the LCD Middle M arket Loan Index declining 348 basis points from 97.06% of par at March 31st to 93.50% of par at June 30th. The M&A and related financing markets had a more cautious tone in the first half of the year. According to Refinitiv, U.S. middle market loan volume totaled approximately $133 billion for the first half of the year, approximately 58% lower than 2021's full year.
Activity levels, though, were up during the second quarter in the face of widening credit spreads and an increase in 30-day LIBOR rates from 45 basis points at March 31st to 179 basis points at June 30th. Monroe's pipeline of quality, actionable financing opportunities at the platform level remains strong in the face of today's economic headwinds. The Monroe platform's ability to offer underwritten solutions is a real advantage for our clients during periods of market uncertainty. Turning now to the second quarter results, we are pleased to report adjusted net investment income of $5.4 million or $0.25 per share. This is consistent with adjusted net income of $5.4 million or $0.25 per share for the first quarter.
We also reported NAV of $232.1 million or $10.71 per share as of June 30th, 2022, a decrease of 59 cents per share from NAV of $244.9 million or $11.30 per share as of March 31st, 2022. The decline in NAV was substantially the result of net unrealized losses on the portfolio, primarily due to market volatility and spread widening throughout the quarter. During the quarter, MRCC's debt-to-equity leverage increased from 1.30x debt to equity to 1.38x debt to equity. New origination activity at Monroe remains strong, and we expect to maintain leverage within our targeted leverage range of 1.3x-1.4x debt to equity.
The portfolio is well positioned to benefit from an increase in the short-term interest rates, as substantially all of our borrowers were above their interest rate floors going into the third quarter. Therefore, any additional increases in interest rates should proportionally benefit our investment portfolio. We believe that our existing portfolio companies will be able to navigate a higher interest rate environment, and they are generally well-positioned to manage the inflationary supply chain and geopolitical headwinds they are facing. Our loan portfolio and underwriting focus continues to be on those companies with defendable market positions, resilient business models, exceptional management teams, and strong sponsors or owners.
MRCC enjoys a strong strategic advantage in being affiliated with a best-in-class middle market private credit asset management firm with approximately $14 billion in assets under management and over 175 employees as of June 30th, 2022. We will continue to focus on generating adjusted net investment income that meets or exceeds our dividends and positive long-term NAV performance. I am now going to turn the call over to Mick, who is going to walk you through our financial results.
Thank you, Ted. As of June 30th, two thousand and twenty-two, our investment portfolio totaled $536 million, down $10 million from $546 million as of March 31st, 2022 . Our investment portfolio consisted of debt and equity investments in 98 portfolio companies at June 30th , 2022 as compared to debt and equity investments in 97 portfolio companies at March 31st, 2022 . During the quarter, we made investments in four new portfolio companies with fundings totaling $11.6 million. We also made a $500,000 capital contribution to SLF. In addition, we had revolver add on or delayed draw fundings to existing portfolio companies totaling $9.2 million.
During the quarter, we received two full payoffs totaling $9.6 million and had loan sales and other ordinary course loan repayments aggregating $9.9 million. Subsequent to the end of the second quarter and the filing of the 10-Q, we had repayments of approximately $27.9 million, net of investment activity. We are well-positioned to redeploy this capital carefully into attractive assets that will benefit from increases in interest rates through participating in the substantial pipeline of opportunities generated at Monroe. At June 30th, we had total borrowings of $320 million, including $190 million outstanding under our revolving credit facility and $130 million of our 2026 Notes. Total borrowings increased slightly by $1.7 million during the quarter.
The revolving credit facility had $65 million of availability as of June 30th, subject to borrowing base capacity. Turning to our results. For the quarter ended June 30th, 2022, adjusted net income, net investment income, a Non-GAAP measure, was $5.4 million or $0.25 per share, compared to $5.4 million or $0.25 per share in the prior quarter. When considering our targeted leverage and the current credit performance at MRCC, we believe that on a run rate basis, our adjusted NII will cover the 25 cent per share quarterly dividend, all other things being equal. As of June 30th, our net asset value was $232.1 million, which decreased from $244.9 million in net asset value as of March 31st.
Our NAV per share decreased from $11.30 per share at March 31st to $10.71 per share as of June 30th. The $0.59 per share NAV decrease was substantially the result of market volatility and spread widening, which increased net unrealized losses. We experienced the same effects approximately two years ago at the outset of COVID-19. Looking to our statement of operations, total investment income was $13 million during the second quarter, up from $12.5 million in the first quarter due to higher fee income, partially offset primarily by lower interest income. During the second quarter, we placed no additional borrowers on nonaccrual status. Total nonaccruals approximate 2% of the portfolio at fair value at June 30th, down from 2.2% of the portfolio at fair value at March 31st.
At June 30th, the effective yield on our debt and preferred equity portfolio was 8.5%, up from 8% at March 31st. LIBOR rates, which had been at historically low levels, rose during the quarter with one-month LIBOR at approximately 179 basis points as of June 30th versus approximately 45 basis points as of March 31st. We maintain interest rate floors in nearly all our deals with the majority of floors at a level of at least 1%. As interest rates did not exceed the majority of our floors until the rate reset date at the end of June, the second quarter did not include a significant benefit in interest income from this rising rate environment, and we expect to see a more sizable impact during the third quarter.
All other things being equal, a rising interest rate environment will improve the yield on our investment portfolio and increase net investment income as reference rate levels exceed interest rate floor levels. On most amendments and on virtually all of our newly originated deals, we are focused on pricing our deals as a spread to the secured overnight financing rate, or SOFR, in advance of LIBOR going away, which is expected to occur in 2023. Moving over to the expense side, total expenses for the quarter increased from $7.1 million in the first quarter to $8 million in the second quarter. Primarily driven by higher incentive fees, net of associated fee waivers and income taxes, including excise taxes, partially offset by lower interest and debt financing expense as a result of the repayment of our SBA debentures during the first quarter.
Net loss for the second quarter totaled $12.44 million compared to a net loss of $4.6 million in the first quarter. Net unrealized losses on investments were $13.4 million for the second quarter, primarily driven by the market volatility and spread widening, partially offset by unrealized gains approximating $1 million on foreign currency forward contracts. As of June 30th, the SLF had investments in 62 different borrowers aggregating $195.2 million at fair value, with a weighted average interest rate of 7.1%. The SLF's underlying investments are loans to middle-market borrowers that are generally larger and more sensitive to market spread movements than the rest of MRC's portfolio, which is focused on lower middle-market companies.
The SLF's portfolio decreased in value by 3.1% during the quarter from 97.9% of amortized cost as of March 31st to 94.8% of amortized cost as of June 30th. During the second quarter, MRCC received income distributions from SLF of $900,000 consistent with the first quarter. As of June 30th, 2022, the SLF had borrowings under its non-recourse credit facility of $129.6 million and had $45.4 million of available capacity under its credit facility, subject to borrowing base availability. I will now turn the call back to Ted for some closing remarks before we open up the line for questions.
Thanks, Mick. We feel that MRCC is well positioned to deliver differentiated risk-adjusted returns for our shareholders, especially where our earnings and dividend will benefit from increases in market interest rates. Our overall Monroe Capital platform continues to maintain a very strong pipeline of high-quality investment opportunities for all funds at Monroe, including MRCC. As a firm, we funded over $2.5 billion of new investments in the first half of 2022. We see significant opportunities to deploy capital in sectors with resiliency and growth, including technology, business services, healthcare, and opportunistic. We remain highly focused on the primary risks in the economy today and remain selective in our underwriting, where we generally fund less than 5% of all the deals we review on an annual basis.
We have constructed a purposefully defensive portfolio under the watch of tenured senior leadership team, and we benefit from a large portfolio management organization that has managed credit through multiple economic cycles. We have made substantial progress on portfolio matters in the last two years. We are excited about our investment portfolio and our prospects, and continue to believe that Monroe Capital Corporation, which is affiliated with an award-winning, best-in-class external manager, provides a very attractive investment opportunity to our shareholders and other investors in the current market. Thank you all for your time today, and that concludes our prepared remarks. I'm going to ask the operator to open the call now for questions. Thank you.
Thank you. If you would like to ask a question over the telephone, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Kevin Fultz from JMP Securities. Please go ahead. Your line is open.
Hi, good morning, and thank you for taking my questions. You know, given the evolution of market conditions over the past two quarters, I'm curious if you've seen that translate to improved pricing on new deals that you're reviewing. I guess more broadly, if you can discuss the attractiveness of deals you're currently seeing from a risk-reward perspective.
Mick, you want to start, and then I'll come in on that one?
Sure. From a deal flow perspective, we still are seeing tremendous actionable opportunities. As Ted said earlier, we've got a pretty significant pipeline. We closed over $2.5 billion of deals in the first half of the year. Pipeline remains strong. In terms of what we're seeing in terms of opportunities, we have seen you know, better opportunities in terms of you know, greater spread. That's coincident, as you can imagine, with you know, some of the spread widening that we've seen kind of in all markets. Spread's better. Terms and conditions better. By terms and conditions, I mean you know, tighter documentation as well as covenants.
We have covenants in all of our direct deals that are generally tighter relative to forecast or budget. This is an advantageous market for us. It's advantageous in the sense that, you know, we can be selective around the kinds of opportunities that we're looking at. In that regard, they're just really good opportunities for us to put capital to work.
Yeah, I'll echo what Mick said, Kevin. I think higher spread, lower leverage, better documents are the three things that we're seeing. I will tell you, though, it took a little bit of time. The market was still competitive at the beginning of the quarter. We're just starting to see trends now for increased spread. You know, the first quarter was pretty much business as usual from 2021. We had a lot of fall off into Q1, and there's a lot of liquidity in the market. Deals are getting done. High-quality companies are still commanding, you know, premium terms. What we've seen is the market start to adjust here towards the back half of Q2, and we've been purposefully, I'll call it cautious.
I think that spreads are gonna continue to get better in Q3 and Q4 as the year goes on. What we're doing as a firm is we're positioning ourselves to, you know, get the benefit of that, increased risk-adjusted return and, as well as be thoughtful in how we approach the market, with our existing clients. That's, you know, that's a quick answer. Higher spread, lower leverage, better documents.
Okay. That's all really helpful. Just looking at non-accruals. Non-accruals at fair value came down quarter-over-quarter to 2%. Was there any change to non-accruals at cost, or was that stable quarter-over-quarter?
From a cost perspective, quarter-over-quarter, it was basically flat.
Okay. Got it. That's it for me. Thank you for taking my questions.
As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please go ahead. Your line is open.
Hi. Thanks for taking my questions. Congratulations, Mick, on your step. What was the EBITDA coverage for your portfolio companies in the main portfolio to your debt positions in the second quarter? How do you expect that to change with rising rates through the second half of the year?
In terms of interest coverage, if I look at our portfolio businesses, general interest coverages are gonna be, you know, between two point five and three point seventy-five times. That's the way the portfolio is constructed. We think there's adequate cushion in, you know, in our coverage ratios to support, you know, you know, you know, good portfolio in the context of, you know, foreseeable rate increases for sure.
Great. I guess on asset quality. The SLF had an additional non-accrual, Port Townsend Holdings.
Correct.
You know, any color you can provide on the SLF credit quality since it's a middle-market portfolio, and it's supposed to be, you know, a little bit more conservative than the normal, you know, scheduled investments for MRCC?
Yeah. The SLF, as we talked about in the opening remarks, has a little bigger borrower than the MRCC portfolio. There is one non-accrual in that portfolio, Port Townsend Paper Company, which is a corrugated box business. You know, it was placed on non-accrual this year. You know, otherwise, you know, the portfolio, if I look at that portfolio, the average mark in that portfolio is down around 310 basis points, quarter-over-quarter. We feel good about the quality of that portfolio.
We obviously have one non-accrual position that we're working with, but feel good about the credit quality of that portfolio, which again is generally larger loans.
Is CBC Restaurant in that portfolio is marked as non-accrual in the
That is correct. You are correct.
Okay. Thank you.
It's a small position, but yes, that's also a non-accrual.
Thank you.
Our next question comes from Robert Dodd from Raymond James. Please go ahead. Your line is open.
Hi, guys. Just a more general question, Ted, based on one of your comments. You said you expect spreads to continue to get better in Q3, Q4. I just wonder how confident are you in that? I mean, back in COVID, obviously, you know, in March, we all expected spreads to widen fairly materially throughout the year, and that obviously not ended up not happening. There was a lot of stimulus. There were a lot of other things going on at the same time. What gives you some confidence that they're gonna widen, you know, that this time it'll be different?
Yeah
If you've got any thoughts there. Yeah. I don't expect, you know, things to change, Robert, drastically. I think the economy is basically, you know, in decent shape. You know, we got a lot of talk about recession. We've got talks, you know, about supply chain issues. I think the good companies that we're seeing in our portfolio are performing well. There's a lot of competition for higher quality companies that are able to project out with certainty, you know, what their cash flows are. What's happening is, you know, I talk to lots of the CEOs of other middle market private credit firms. There's been a fair amount of price discovery going on over the last 45 days.
You know, it used to be that, you know, the market was relatively efficient, but I've seen much more price discovery happen in the last 45 days. A lot of discussions where, you know, deals are getting done 50, 75 basis points wide of, you know, where they would have gotten done in late 2021 or even Q1 2022. I anticipate the remainder of the year to follow the trend lines of what we've been seeing in the second half of Q2. What that means is probably 50-75 basis points of spread widening. You know, we're experiencing that across our portfolio.
You know, all I can tell you, when we look at these things is we look at our own portfolio, and we look at our own kitchen to find out, you know, what the market's doing. That's been our experience. You know, I want to always, you know, we try and take a global view of the business here, and not try and time markets. That's why from a Q2 standpoint, as a firm, you know, we're trying to be thoughtful in deploying capital. You know, being good partners, being reliable partners, but also being thoughtful on, you know, how we deploy capital.
I really appreciate that colour. Thanks a lot. Appreciate it.
We have no further questions in queue. I'd like to turn the call back over to Ted Koenig for closing remarks.
Thank you very much for your questions today. I appreciate it. We look forward to, you know, obviously answering any other questions on a one-off basis if you have them. You know, I think that just like after the COVID period, the rest of this year is going to be good for private credit, and we're excited just to speak to you all next quarter. Thank you for your time today. Bye-bye.
This concludes today's conference call. Thank you for your participation. You may now disconnect.