William Blair & Company initiated research coverage of Monroe Capital Corporation (MRCC $15.02), an affiliate of private investment firm Monroe Capital LLC, with an Outperform rating and Core Growth company profile. MRCC is an externally managed business development company (BDC) that provides customized financing solutions primarily to lower-middle-market companies in the United States and Canada. MRCC has declared a $0.34 dividend payable on December 28, which equates to an 8.9% yield.
"Although MRCC had no operating history before its October 25 initial public offering, the enterprise that originated MRCC's initial portfolio of 16 investments, Monroe Capital, has had an impressive track record since its founding in 2004," said analyst Robert Napoli. "Since its inception, Monroe Capital has deployed more than $1.5 billion in principal in more than 390 investments, generating an average annual cash-on-cash return of about 23%. Monroe Capital's historical net loss rate is less than 1%, which compares favorably with the 2% to 3% loss rate of a typical bank. We find these metrics impressive considering the troubled U.S. economy over the past five years and given that commercial and industrial loan loss rates rose to more than 2.5%."
Napoli continued, "We believe MRCC's fee structure and culture are shareholder friendly—evidenced by Monroe Capital incurring the majority of the IPO expenses and underwriting fees.
MRCC's external manager, MC Advisors, which is also a Monroe Capital affiliate, has access to its affiliates' deep and experienced management team, many of whom have worked together for more than 10 years. There is potential for conflicts of interest related to MC Advisors and its affiliates, which could hinder financial performance. Yet Monroe Capital uses a large referral network to source investments that allow it to selectively generate non-private-equity–sponsored investments, which we believe is a competitive advantage."
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