Guilty Pleas & PIK Interest: Is MRCC Ignoring Reality at Shareholders’ Expense?
Phantom income, ‘empty shell’ entities, and a dividend feedback loop: How a zombie asset is haunting MRCC’s balance sheet.
First Strike has continued its investigation into Monroe Capital Corporation MRCC 0.00%↑ and we’ve found MRCC and it’s shareholders are significantly exposed to HFZ Capital Group and its affiliated entities. For context, the MRCC portfolio company: HFZ Capital Group has a checkered history of botched real estate projects which include criminal indictments in the New York City Metro.
You can read the first article here.
We believe our findings continue to raise significant concerns regarding Monroe’s valuation ability, the veracity of reported income, and their disclosures to shareholders.
Based on our investigation into MRCC’s SEC filings, public court records, and public reporting we have ascertained the following:
MRCC has approximately $30.3 million in cost basis exposure to HFZ, which they currently mark at $35.5 million fair value which relates to a 17% premium to cost.
In turn, we believe HFZ to be functionally insolvent given that HFZ has forfeited all major assets in foreclosure action all while facing $420+ million in outstanding legal judgements. Moreover, Anthony Marrone of HFZ pled guilty to grand larceny.
MRCC has received next to nothing from HFZ. All reported income has been “Payment-In-Kind” which are paper gains we believe to be worthless obligations.
MRCC’s HFZ exposure is approximately 16% of their NAV.
A proper mark-down would reduce MRCC’s NAV by approximately $1.50-$1.64 per share.
First Strike investigators reviewed MRCC’s Schedule of Investments (as filed with the SEC via Forms 10-Q and 10-K)
We’ve identified five distinct line items attributable to HFZ Capital Group and its restructured affiliates.
For background, MRCC originated a loan to HFZ, then restructured the deal so that part of the loan sits in a new structure within MC Asset entities.
Notwithstanding, MRCC still maintains an effective 18 million dollars of exposure to HFZ, however, it was split into two pieces.
Much of the interest on these loans is Payment-In-Kind (PIK.) We believe this is a clear indicator of financial distress in the underlying asset (HFZ.) When a company (in this case HFZ) pivots to PIK it is a clear sign of a cash vacuum. Instead of repayment in cash, the PIK merely delays default by compounding interest into the existing loans.
We believe the PIK terms of the HFZ loan(s) allows MRCC to synthetically attribute tangible payment performance by the debtor (HFZ.)
Phantom Income and Dividend Risk
MRCC is a Business Development Company— as such they are legally required to pay out 90% of their income to maintain their tax status. Since PIK technically counts as taxable income.
MRCC is forced to pay cash dividends to shareholders based on income it hasn’t actually received in real cash.
The Feedback Loop
We believe there is tangible risk that MRCC may enter a PIK/Dividend feedback loop—based primarily on the underlying solvency issues with one of their largest portfolio companies on their books (HFZ.)
MRCC books PIK interest as income, consequently reported and taxable income rise with no support inflows of actual cash.
In turn—MRCC must distribute at least 90% of this phantom income.
Given there is no actual cash to back the PIK income, MRCC may have to fund these distributions by borrowing, selling other assets, or issuing new equity.
This then creates a feedback loop of significant balance sheet strain.
If investors notice dividends are being funded by leverage and asset sales the stock price could start to fall. When PIK is deemed terminally uncollectible income will subsequently drop and the loop will be further reinforced, if not completed.
We believe this event may already be materializing on the balance sheet based on management’s recent slashing of the dividend down to 0.18 from 0.25. Even if management attempts to mitigate these concerns by pointing to yield compression, credit issues, and merger strategy.
2020 RESTRUCTURING
MRCC’s SEC filings include a footnote explaining a 2020 restructuring of its HFZ position. We offer this quote directly from the Company’s Schedule of Investments:
“The Company also participated $4,758 of the principal amount of its investment in the loan to HFZ as an equity contribution to Industrial. The participation did not meet the definition of a ‘participating interest’ under ASC Topic 860, Transfers and Servicing. As a result, the participation did not qualify for sale accounting and the Company continues to reflect the full amount of its investment in the HFZ loan.”
In simple terms—MRCC restructured a deteriorating HFZ loan into a complex multi-entity structure. Despite multiple line items appearing on the Schedule of Investments, the economic reality is unchanged: this is a single concentrated exposure to HFZ’s real estate portfolio, now filtered through holding company shells.
The failed sale accounting under ASC 860 is particularly notable. MRCC attempted to recharacterize a portion of its loan as an “equity contribution” but was unable to achieve derecognition under GAAP. The Company nonetheless presents the participated portion as a separate investment—a presentation that, in our view, obscures the concentrated nature of this exposure.
Downstream Analysis of HFZ
In reality, MRCC is a junior creditor sitting very low in the recovery bracket. Through the course of our investigation we’ve estimated the overall chances of MRCC accomplishing any degree of asset recovery from HFZ:
We believe the chances of MRCC recovering any tangible assets from HFZ to be in the low single digits.
On August 5th, 2024 HFZ Capital Group pled guilty to three counts of grand larceny in the first degree and criminal tax fraud. In consequence the company received an unconditional discharge and attributed all criminal wrongdoing to Nir Meir.
Subsequently, Mr. Meir filed personal bankruptcy to the sum of $30 Million in liability and listed a total of $50 in assets. Mr Meir was arrested and spent over thirteen months at Rikers Island before materializing $1 Million dollars in a secured cash bail.
His criminal trial remains pending.
HFZ Foreclosure History
Further complicating MRCC’s odds of asset recovery is HFZ has lost total control of all of their major development projects. Granted, one was foreclosed on by Monroe themselves.
Court Judgements
First Strike has gone on to find the following material judgements against HFZ Capital Group and associated companies—
We believe the most concerning of these judgements is the CCO Condo Portfolio case—this involved the foreclosure on four Manhattan condo projects. This judgement remains unsatisfied and is senior to any claim MRCC may present.
Waterfall Analysis
We conducted a simple recovery waterfall to calculate the chance of any value from HFZ reaching MRCC’s structural position.
Senior Secured Mortgages (~$2.0B+ across projects) — Substantially satisfied via foreclosure
Senior Mezzanine Debt (~$500M+) — Foreclosed or converted to equity
Junior Mezzanine Debt (~$350M+) — Foreclosed; deficiency judgments remain
Trade Creditors & Liens (~$100M+) — Omnibuild $100M+ lien; many unpaid
Judgment Creditors (~$128M+) — Active collection efforts ongoing
Unsecured Claims (various)
HFZ Equity / MRCC’s Position — Structurally last
Every major HFZ asset has been liquidated through foreclosure. In each case, sale proceeds were insufficient to satisfy senior claims, resulting in deficiency judgments rather than distributions.
There is no remaining asset base from which MRCC could recover.
The MC Asset Management entities (which MRCC holds via its restructured exposure) are, in our analysis, empty shells. The only potential avenue where value can be exfiltrated is via HFZ’s real estate portfolio which in its current state is non-existent.
NAV Impact
First Strike estimates that MRCC’s HFZ‑related exposure totals $30.3 million at cost and $35.5 million at reported fair value, based on the consolidated Schedule of Investments and related footnote describing the HFZ/MC Asset restructuring.
We calculate the NAV impact of a full write-down of this exposure as follows:
As of September 30, 2025, MRCC reported net assets of approximately $173.0 million (about $7.98 per share), and disclosed HFZ/MC Asset exposure of roughly $30.3 million at cost and $35.5 million at reported fair value in the consolidated Schedule of Investments and related HFZ restructuring footnote. A full write-down of this complex to zero would reduce total NAV by $35.5 million, to roughly $137.5 million, implying a pro forma NAV of about $6.35 per share, or a decline of approximately $1.63 per share
Bear in mind the numbers presented above represent a zero recovery scenario (which we consider most likely)
It does not calculate or account for the following:
Reversal of previously recognized PIK income.
Potential dividend reduction if NII coverage erodes.
Disclosure Concerns
MRCC marks HFZ as one of their top portfolio investments—we believe investors relying solely on these filings and absent this investigative report would be unaware of the significant red flags we’ve obtained here-in and here-to.
Opaque SEC Disclosures
First Strike conducted an investigation into MRCC’s SEC filings over the past several years and uncovered a consistent pattern: HFZ Capital Group is provided to investors as a large portfolio position, not as a borrower embroiled in civil and criminal turmoil.
In annual reports, and quarterly reports HFZ Capital Group, LLC (and related entities) are repeatedly listed as MRCC’s largest positions with fair value listed in the tens of millions of dollars.
First Strike considers what the filings DO NOT contain as considerably important to MRCC investors.
In sum, our research indicates that MRCC’s SEC filings omitted the following material events:
HFZ Capital Group, its executives, or affiliates being criminally charged, arrested, and/or indicted.
HFZ or its affiliates pleading guilty in New York court.
Any fraud prosecution, criminal case, or investigation involving HFZ.
Continuously MRCC presents HFZ merely as investment - a line item in the portfolio - even after a public report of HFZ’s guilty pleas.1
Conclusion
First Strike Investigators has determined that MRCC’s $35.5 million fair value exposure to HFZ Capital Group represents a material overstatement of Net Asset Value. Based on the evidence assembled herein—including HFZ’s guilty plea to criminal fraud, loss of substantially all assets through foreclosure, outstanding judgments exceeding $128 million, and zero history of cash payments to MRCC—we conclude that realistic recovery on this exposure is negligible.
We estimate MRCC’s NAV is overstated by approximately $1.50–$1.64 per share, or 17–19% of reported book value, solely as a result of the HFZ exposure.
Management’s failure to disclose HFZ’s criminal conviction, explain the status of matured obligations, or justify fair value marks on a functionally insolvent counterparty raises questions regarding the adequacy of MRCC’s financial reporting and the rigor of its investment valuation process.
We again maintain our previous analysis that MRCC management continues to have a questionable track record of pre-deal diligence and investment discipline as it relates to debt-adjacent portfolio companies.
IMPORTANT DISCLOSURES & DISCLAIMER (READ CAREFULLY)
This publication is provided for general informational and educational purposes only and reflects the author’s opinions as of the date of publication, which are subject to change without notice. Nothing herein is, or should be construed as, investment advice, legal advice, accounting advice, tax advice, or a recommendation or solicitation to buy, sell, or hold any security or other financial instrument; readers should consult their own licensed professionals and conduct independent due diligence.
All statements of fact are intended to be drawn from publicly available materials believed to be reliable at the time of writing (including, where cited, SEC filings, court pleadings, motions, bankruptcy dockets, press releases, news reporting, and municipal/public records). To the extent this publication quotes, summarizes, or characterizes allegations from lawsuits, administrative proceedings, regulatory actions, or other disputes, such allegations are unproven unless and until established by a final adjudication, and the defendants deny wrongdoing as reflected in the cited record.
Any references to “fraud,” “scheme,” “predatory,” “coercive,” “usurious,” “improper,” “misconduct,” “incompetence,” or similar terms are used, if at all, only as shorthand for allegations described in cited proceedings or as non-literal rhetorical or analytical commentary, and not as a statement of proven criminal or civil liability. Readers should not interpret any discussion of incentives, motive, intent, knowledge, control, or causation as a factual assertion of any person’s state of mind; such discussion reflects the author’s opinion and inference based on the public record cited.
Estimates, projections, scenarios, and forward-looking statements (including those regarding valuation, rent/lease economics, NAV implications, merger outcomes, portfolio performance, credit metrics, or “risk”) are inherently uncertain and may differ materially from actual results; such statements are provided for illustrative purposes only. Numerical figures may be rounded, derived, or modeled and could contain errors; readers are encouraged to verify all figures independently.
The author and publisher disclaim any duty to update this publication. By reading this publication, you agree that the author and publisher shall not be liable for any losses, damages, or claims arising from the use of, reliance on, or inability to use the information hereto.
Positions / conflicts: The author’s positions (if any) may change at any time, including before or after publication, without notice. Unless expressly stated otherwise in this publication, the author does not hold any fiduciary relationship with readers.
As part of routine investigative due diligence, First Strike Investigators may contact companies and other market participants to evaluate publicly observable business practices, customer-facing representations, and operational risk indicators. Any such outreach is intended solely to understand general processes, stated underwriting criteria, and downstream risk profiles, and is not intended to obtain non-public information, to interfere with any business relationship, or to induce reliance by the contacted party.
Contact: outreach@firststrike.trading
For each filing, HFZ‑related terms (“HFZ Capital Group,” “HFZ,” “MC Asset Management”) were cross‑checked against legal‑trouble keywords including “indictment,” “indicted,” “guilty,” “plea,” “fraud,” “criminal,” “District Attorney,” and “Bragg.” In the documents where HFZ appears, it is mentioned only in portfolio and investment schedules and in generic restructuring footnotes; there are no instances where HFZ is discussed in connection with criminal charges, guilty pleas, or fraud proceedings.