KBRA Assigns Rating to Monroe Capital Income Plus Corporation's $200 million Senior Unsecured Notes due 2028
15 Nov 2023 | New York
KBRA assigns a rating of BBB- to Monroe Capital Income Plus Corporation's (“MCIP” or “the company”) $200 million 9.42% senior unsecured notes due 2028. The notes comprise two $100 million tranches with maturities of November 15, 2028 and December 13, 2028. The rating Outlook is Stable. The proceeds will be used for general corporate purposes, including the repayment of debt.
Key Credit Considerations
The rating and Stable Outlook are supported by MCIP's ties to Monroe Capital LLC's $17.2 billion private credit lending platform, along with SEC exemptive relief to co-invest among affiliated companies, and its diversified $1.8 billion investment portfolio of 171 middle market companies with the majority of investments senior secured first lien loans (86.7%), as of June 30, 2023. The portfolio companies span 27 sectors that are generally less cyclical in nature. MCIP specializes in lower middle market lending, or loans considered traditional financing, with average EBITDA of $30 million. Approximately 23% of investments are in recurring revenue loans and 11% to opportunistic asset-backed financing. MCIP focuses primarily on sponsor-backed companies that provide significant equity cushion with low LTVs, moderate leverage (average 4x), and solid interest coverage. At 2Q23-end, the top four portfolio sectors were Healthcare & Pharmaceuticals (14.5%), Business Services (13.0%), High Tech Industries (11.1%), and Media Advertising, Printing & Publishing (8.1%). The ratings also consider MCIP’s solid management team that has a long track record of working within the private debt markets, with executives each having nearly 40 years of industry experience. MCIP, as a perpetual, private BDC, raises capital each quarter, mostly from high net worth investors, and offers quarterly share repurchases of up to 5% of outstanding shares rather than a planned liquidity event. MCIP maintains appropriate leverage (debt/equity) of 0.94x with a prudent target range of 0.90x to 1.00x, which is comparable to peers. Asset coverage was 207% with a 38% cushion, which KBRA considers solid, allowing MCIP to absorb increased market volatility as well as a potential increase in non-accruals as we enter an anticipated recessionary period with high interest rates and inflation. MCIP had one portfolio company on non-accrual status, as of 2Q23; however, the company’s portfolio is seasoned only four years, with the portfolio doubling in size in 2022. Despite the potential for adverse credit headwinds, KBRA believes the company is well positioned to weather a more difficult credit environment based on management’s long-term experience, solid underwriting with 100% of its directly originated loans with at least one financial covenant, and 75% of investments where MCIP is the sole lender.
The company's $200 million issuance of senior unsecured debt diversifies its funding sources, increases financial flexibility, and unencumbers assets for the benefit of the unsecured noteholders. The issuance will result in pro forma unsecured debt to total debt of 22.6%, calculated as of June 30, 2023. Pro forma liquidity, including cash, available credit lines, and uncommitted lines, is $313.7 million.
The rating strengths are counterbalanced by the potential risks related to the company’s relatively illiquid investments, predominantly secured funding profile, retained earnings constraints as a Regulated Investment Company (RIC), and an uncertain macro-environment.
MCIP is an externally managed, closed-end, non-diversified investment management company that elected to be treated as a Business Development Company (BDC) under the 1940 Act and as an RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company was formed as a Maryland corporation in January 2019 when it commenced operations. The company is managed by Monroe Capital BDC Advisors, LLC, an affiliate of Monroe Capital LLC, which had $17.2 billion of assets under management, as of June 30, 2023. Monroe Capital LLC focuses almost exclusively on private credit.
Given the Stable Outlook, an upgrade is not expected in the next one or two years. The Outlook could be revised to Negative, or the rating could be downgraded, if a prolonged downturn in the U.S. economy has a material impact on performance, including increased nonaccruals and a significant rise in leverage. An increased focus on riskier investments or a change in the current management structure and/or a change in strategy and risk management that negatively impact credit metrics could also pressure ratings.
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