I wanted to talk to you about Monroe Capital (NASDAQ: MRCC) and the interesting financial developments it’s been going through lately.

First off, let’s dive into the numbers. Monroe Capital has been making its common shareholders quite happy with a hefty 13.5% dividend yield. They’ve been consistently dishing out $0.25 per share in quarterly distributions for the past three years. That’s something to smile about.

But, and there’s always a but in finance, right? Their net asset value took a bit of a hit during the second quarter, dropping by $0.45. As of now, Monroe Capital is trading at a 25% discount to its net asset value, which is currently sitting at $9.84 per share at the end of its fiscal 2023 second quarter.

Now, let’s talk strategy. The potential here lies in closing that discount to the net asset value, along with that double-digit yield. Monroe Capital primarily deals with first-lien loans, making up 83.3% of their portfolio. They also have investments in 99 portfolio companies, totaling a fair value of $515.4 million as of the end of the second quarter. It’s worth noting that this was a slight dip from the first quarter.

Here’s an interesting tidbit – the BDC’s weighted average contractual and effective yield on its debt investments was 12.2% as of the end of the second quarter. That’s a 70 basis point expansion from the first quarter, thanks to the Federal Reserve’s continued interest rate hikes.

Now, let’s talk about the not-so-great news. Monroe Capital’s net asset value (NAV), which essentially determines price returns, has been on a downward trend since 2017. It’s been a bit of a bumpy ride, and it’s reflected in the stock’s performance. NAV stood at $213.2 million in the second quarter, an 8.15% drop from the year before. Ouch, right?

But there’s a silver lining here. Even though NAV has been a bit of a troublemaker, Monroe Capital is making strides to secure its dividend. They’ve managed to cover their dividend payout pretty well, with a 92.6% payout ratio for the second quarter. That’s a significant improvement from the previous year when they were paying out a whopping 108.7% of their net investment income as dividends.

Now, I know there’s always a lot of talk about economic ups and downs, but here’s the scoop – the risk of a US recession in 2023 seems to have decreased. Goldman Sachs has even dialed down their probability of a recession next year. Plus, the “higher for longer” interest rate trend is set to stick around, which bodes well for Monroe’s first lien credit-heavy portfolio.

So, here’s the deal: Monroe Capital might not be a screaming buy right now because of its NAV challenges, but things are looking up. Higher net investment income is leading to better dividend coverage, making it a solid hold in my book.

Keep an eye on this one, folks. It’s a bit of a rollercoaster, but it might just be worth the ride.