Executive Summary / Key Takeaways

• Strategic Transformation: Monroe Capital Corporation is undergoing a pivotal transformation, having announced a definitive merger agreement with Horizon Technology Finance Corporation (HRZN) and an asset sale to Monroe Capital Income Plus Corporation (MCIP), expected to close in Q4 2025. This marks a strategic exit from its standalone BDC operations.
• Lower Middle-Market Niche & Operational Edge: Historically, MRCC carved a niche in lower middle-market direct lending, leveraging a proprietary origination platform, rigorous underwriting, and a hands-on portfolio management playbook to deliver customized senior secured debt solutions and minority equity co-investments.
• Recent Financial Headwinds & Dividend Support: In Q2 2025, total investment income decreased by $5.8 million year-over-year, driven by lower average invested assets, reduced effective rates, and increased non-accrual positions. The $0.25 per share quarterly dividend is currently supported by accumulated spillover income, totaling $0.53 per share ($11.5 million) as of March 31, 2025.
• Portfolio Contraction & Quality Focus: The portfolio has seen contraction, with management actively working to resolve non-accrual assets (totaling $13.4 million at fair value, 3.6% of investments as of June 30, 2025) and deleverage the upper middle-market focused SLF joint venture.
• Investment Implications: The investment thesis for MRCC is now fundamentally tied to the successful execution and valuation of the HRZN merger. Investors should focus on the terms of the exchange ratio, HRZN's future performance, and the potential for a smooth transition, rather than MRCC's standalone operational metrics.

A Legacy of Direct Lending: Monroe Capital's Journey to a Strategic Pivot

Monroe Capital Corporation, established in 2012, has long operated as an externally managed Business Development Company (BDC), dedicated to maximizing total return for its stockholders through current income and capital appreciation. Its core strategy centered on providing customized financing solutions, predominantly senior secured, unitranche secured, and junior secured debt, complemented by minority equity co-investments, to lower middle-market companies across the United States and Canada. This specialized focus on companies with EBITDA typically ranging from $3 million to $35 million allowed MRCC to carve out a distinct niche in the competitive direct lending landscape.

Throughout its history, MRCC built a robust operational framework. It adopted a dividend reinvestment plan (DRIP) in 2012 and secured shareholder approval in 2015 to issue warrants and options, further enhancing its capital-raising flexibility. An at-the-market (ATM) equity distribution program, initiated in 2017 and extended in 2020, provided additional avenues for capital. The company also expanded its investment capacity through a strategic joint venture, MRCC Senior Loan Fund I, LLC (SLF), co-investing in senior secured loans with Life Insurance Company of the Southwest (LSW). This venture, while providing diversification, also exposed MRCC to the dynamics of the upper middle-market, a segment management has recently become less "constructive" on.

The Operational Moat: Beyond Traditional Technology

MRCC's competitive differentiation has historically stemmed not from a singular, proprietary technology product, but from its deeply ingrained operational platforms and methodologies. The company leverages a "leading in-house originations platform" that enables efficient sourcing of deals within the often-fragmented lower middle-market. This platform, supported by what can be described as advanced analytical frameworks and robust internal systems, allows for a systematic and repeatable approach to identifying promising investment opportunities.

Complementing this is a "rigorous underwriting standards" and a "time-tested portfolio management playbook." These are critical operational technologies that ensure disciplined credit assessment, conservative structuring, and proactive risk management. The emphasis on "senior secured positioning with lower leverage attachment points" and "covenant perfection detections" provides tangible benefits, including enhanced downside protection and the ability to actively manage outcomes, even in challenging economic environments. Furthermore, MRCC's strategy of "incumbency lending"—providing incremental and follow-on investments to existing, well-known portfolio companies—reduces underwriting risk and has historically generated some of its most attractive risk-adjusted returns. This operational agility and deep expertise, rather than a specific software, form MRCC's core competitive moat, allowing it to navigate market complexities and maintain a disciplined approach to capital deployment.

Competitive Landscape: Niche Strength in a Crowded Market

MRCC operates within a highly competitive BDC market, facing both direct and indirect rivals. Direct competitors include larger, more diversified BDCs like Ares Capital Corporation (ARCC) and Main Street Capital Corporation (MAIN), as well as specialized lenders such as Hercules Capital (HTGC) and Prospect Capital Corporation (PSEC).

MRCC's niche in the lower middle-market, focusing on customized financing and minority equity co-investments, differentiates it from ARCC, which typically targets larger middle-market deals and benefits from significantly greater scale. While ARCC demonstrates consistently stronger revenue growth and return on equity (ROE), MRCC's tailored approach fosters deeper client relationships and potentially higher efficiency in its specific segment. Against HTGC, a venture debt specialist in technology and life sciences, MRCC's focus on traditional leveraged buyouts offers greater stability, though it may lag HTGC in capturing high-growth tech sector opportunities and the associated dynamic profitability.

Compared to PSEC, which has a broader, more opportunistic investment mandate, MRCC's disciplined underwriting and focus on senior secured positions offer a more conservative risk profile. While PSEC might achieve more robust revenue expansion in certain volatile markets, MRCC's reliability in its niche is a key advantage. Main Street Capital (MAIN) is perhaps MRCC's closest peer, also targeting the lower middle-market. Both exhibit similar stability and growth patterns, with MAIN often showing consistently strong operating margins and cash flow generation. MRCC's competitive edge against MAIN lies in its slightly more customized solutions and flexibility in equity co-investments, though MAIN's operational execution often appears more efficient.

Indirect competitors, including traditional banks and fintech platforms, pose additional challenges. Banks offer conventional loans, while fintech innovators can provide cheaper, more streamlined digital lending options. However, MRCC's deep relationships and customized solutions for complex middle-market needs often provide a buffer against these more commoditized offerings. The broader Monroe Capital platform, with over $20 billion in assets under management and a team of 115 investment professionals, provides MRCC with a strategic advantage in terms of deal sourcing, underwriting expertise, and overall market presence, allowing it to compete effectively despite its smaller standalone scale.

Recent Financial Performance and Portfolio Dynamics

The financial performance for MRCC in the first half of 2025 reflects a period of contraction and strategic adjustments. For the three months ended June 30, 2025, total investment income was $9.87 million, a notable decrease from $15.63 million in the same period of 2024. This $5.8 million decline was primarily attributed to a reduction in average invested assets, lower effective interest rates, and the placement of additional portfolio companies on non-accrual status. Similarly, for the six months ended June 30, 2025, total investment income fell to $21.51 million from $30.81 million year-over-year.

Operating expenses also saw a reduction, decreasing by $2.3 million to $6.62 million for the three months ended June 30, 2025, and by $4.6 million to $14.05 million for the six-month period. This was largely due to lower interest and other debt financing expenses, benefiting from a reduced interest rate environment and a decrease in average debt outstanding. Additionally, lower incentive fees and base management fees contributed to the expense reduction. Despite these efforts, adjusted net investment income for Q1 2025 was $4.2 million ($0.19 per share), down from $6.2 million ($0.29 per share) in Q4 2024, reflecting a lower average effective yield of 9.2% at March 31, 2025, compared to 10.2% at December 31, 2024.

The portfolio's fair value stood at $367.7 million as of June 30, 2025, a decrease from $457.05 million at December 31, 2024. This contraction was driven by sales, principal repayments, and payoffs, with the company rotating out of seven legacy assets totaling $37.6 million in payoffs during Q1 2025. Portfolio composition remained largely consistent, with senior secured loans accounting for 73.5% of total investments, unitranche secured loans at 0.6%, junior secured loans at 8.6%, and equity investments (including the SLF interest) at 17.3%. However, the effective yield on the portfolio decreased due to lower spreads and the exit of some higher-yielding assets.

Credit quality, while generally stable, saw some challenges. As of June 30, 2025, ten borrowers had debt or preferred equity investments on non-accrual status, totaling $13.4 million at fair value, representing 3.6% of total investments. This figure is slightly lower than the $15.7 million (3.4% of total investments) on non-accrual at December 31, 2024. Management attributes these non-accruals primarily to "idiosyncratic factors of specific borrowers" rather than a broader systemic issue. The company's investment in MRCC Senior Loan Fund I, LLC (SLF) also experienced net unrealized losses, contributing to a slight decline in NAV per share from $8.85 to $8.63 in Q1 2025. Management has expressed a cautious stance on the upper middle-market focus of SLF, indicating a comfort with its "rapid deleveraging" and evaluating its future role.

Liquidity, Capital Structure, and the Path Ahead

As of June 30, 2025, MRCC maintained a cash and cash equivalents balance of $2.4 million. The company's debt structure included $80.3 million outstanding on its revolving credit facility and $130 million on its 4.75% fixed-rate 2026 Notes. With $174.7 million available for additional borrowings on its revolving credit facility (subject to borrowing base availability) and an asset coverage ratio of 185% (up from 165% at December 31, 2024), MRCC's liquidity position appears robust enough to cover its outstanding commitments. These commitments include $31.6 million for undrawn revolvers, delayed draw commitments, and subscription agreements, plus an additional $7.3 million in unfunded commitments to SLF.

The company's strategic capital allocation has historically prioritized supporting portfolio companies and maintaining consistent dividends over stock buybacks. This commitment to dividends is evident in management's plan to support the $0.25 per share quarterly dividend with accumulated spillover income, which stood at approximately $0.53 per share ($11.5 million) as of March 31, 2025. Management has also indicated a willingness to waive incentive fees if necessary to support the dividend, underscoring a shareholder-friendly approach.

A significant strategic shift for MRCC was initiated on August 7, 2025, with the announcement of a definitive merger agreement with Horizon Technology Finance Corporation (HRZN). This transaction involves an asset purchase agreement where Monroe Capital Income Plus Corporation (MCIP) will acquire MRCC's investment assets at fair value for cash, immediately preceding the merger. Following this asset sale, MRCC will merge with HRZN, with HRZN continuing as the surviving entity. This series of transactions, anticipated to close in the fourth quarter of 2025, fundamentally redefines MRCC's future.

This strategic pivot follows the March 31, 2025, completion of Monroe Capital LLC's partnership with the Wendel Group, a French investment company. While Monroe's investment process and operations remain autonomous, this partnership is expected to provide additional capital and scale to the broader Monroe platform, potentially benefiting MRCC through new, higher interest-earning, and diversifying strategies. However, the subsequent merger with HRZN now supersedes much of the standalone growth narrative.

Risks and Challenges in a Transformative Period

The current investment thesis for MRCC is heavily influenced by the impending merger and asset sale, introducing a new set of risks. The market value of the HRZN common stock that MRCC stockholders will receive is subject to fluctuations, creating uncertainty regarding the final value of the merger consideration. Should the transactions fail to close, MRCC would have incurred substantial expenses without realizing the anticipated benefits, potentially leading to a decline in its stock price and an inability to find an equivalent or more attractive offer. Furthermore, the merger agreements contain provisions that limit MRCC's ability to pursue alternative transactions and may expose it to indemnification obligations. The successful consummation of these transactions is contingent on various closing conditions, including stockholder and regulatory approvals, which may not be satisfied.

Beyond the merger, MRCC faces ongoing macroeconomic risks. Elevated U.S. inflation rates continue to pressure labor, energy, and raw material costs, potentially impacting portfolio companies' profit margins and their ability to service debt, especially if interest rates rise further. While MRCC's portfolio is largely comprised of floating-rate loans with interest rate floors, a prolonged "higher for longer" interest rate environment or a softening macroeconomic backdrop could lead to increased default rates and decreased net investment income. The subjective nature of valuing private investments also introduces valuation risk, as fair values may differ significantly from actual liquidation values. The equity interest in SLF, being a subordinate position in a levered vehicle, also carries inherent risks related to the performance of its underlying, larger middle-market loans.

Conclusion

Monroe Capital Corporation stands at a pivotal juncture, transitioning from an independent BDC focused on lower middle-market direct lending to an integrated component of Horizon Technology Finance Corporation. This strategic pivot, culminating in a merger and asset sale expected in Q4 2025, fundamentally reshapes the investment narrative. While MRCC has historically demonstrated a robust operational model, characterized by a proprietary origination platform, rigorous underwriting, and a disciplined portfolio management playbook, its future is now inextricably linked to the successful execution of this transformative transaction.

For investors, the focus shifts from MRCC's standalone financial performance and growth strategies to the implications of the HRZN merger. Key considerations include the final exchange ratio, the future performance and strategic direction of the combined HRZN entity, and the potential for a seamless integration. While MRCC's recent financial performance has shown some headwinds, with declining investment income and reliance on spillover income to maintain its dividend, the strategic exit aims to unlock value for shareholders. The company's historical strengths in risk management and its niche market expertise, while valuable, now serve as a foundation for this new chapter, with the ultimate investment thesis resting on the successful realization of the merger's intended benefits.