MidCap Financial Investment Corp Q4 FY2023 earnings call

• Financial results: Net investment income per share for the March quarter was $0.45. NAV per share at the end of March was $15.18, an increase of $0.08 or 0.5% from the end of December, driven by net investment income and net unrealized gains. The yield at cost of the corporate lending portfolio was 11.3% on average for the quarter, up from 10.3% last quarter. - Investment activity: New corporate lending commitments totaled $110 million; Merx repaid $65 million during the quarter. - Current environment: The quarter began with a more constructive tone but shifted in March due to regional banking challenges and recession fears; private debt remains favorable with wider spreads and higher base rates compared to a year ago. - Portfolio quality: Corporate lending portfolio quality improved with lower average position size, decreased net leverage, and lower weighted average attachment point. Borrowers have been resilient with positive operating trends in revenue and EBITDA. Amendment activity is low but picked up slightly.

Corporate lending and other represented 92% of the total portfolio at fair value, while Merx represented 8% of the portfolio at fair value. New corporate lending commitments made during the quarter totaled $110 million, all first lien floating rate across 15 distinct borrowers. At the end of March, the investment in Merx totaled $197 million, representing 8.3% of the total portfolio at fair value. The corporate lending portfolio had a fair value of $2.39 billion invested in 141 companies across 25 different industries. New corporate lending commitments in the March quarter were all first lien floating rate loans with a weighted average spread of 665 basis points or 675 basis points (excluding revolver commitments) and a weighted average net leverage of 4.2x.

• Leverage guidance remains unchanged; operating within the lower end of the target range. - Expect net investment income to continue exceeding the current dividend based on the current forward curve for the foreseeable future. - The new fee structure only charges fees on equity, so increases in leverage do not affect the manager, and the team is comfortable with the leverage range.

• Regional banking challenges and renewed fears of a recession have contributed to uncertain financial markets. - Potential for banks to pull back from lending, accelerating the shift to nonbank lenders and tighter financial conditions. - Increased volatility of outcomes due to regional banking stress, which may impact investment opportunities.

Q: You mentioned revenue and EBITDA growth within the portfolio was sustained through Q1. I wonder if you saw any kind of deceleration there? And if that leads to any conclusions about how the economy is performing here recently?

A: Yes, we did see a slight deceleration relative to the last few quarters. Margin growth is not as fast as revenue growth. From an economic standpoint, there's continued pressure on consumers and small businesses to obtain credit, but private lenders like ourselves can take advantage of opportunities with good pricing and terms.

Q: Regarding your interest coverage, the portfolio average kind of sits at 1.7x right now. Some portion of that had to be significantly lower, but your PIK didn't rise. So have you guys had any discussions with sponsors regarding amendments by them or any incremental support from sponsors?

A: No, our PIK hasn't risen nor do we necessarily expect it to rise. We have very little amendment activity picking up, and borrowers are still resilient with positive operating trends. We don't expect PIK to pick up significantly due to the quality of our portfolio.

Q: Just kind of a follow-up there in terms of the deal environment versus, I think you guys referenced kind of your undervalued stocking how you're thinking about in capital into new deals versus buybacks weighing leverage at the same time?

A: We're balancing the opportunity we see in the marketplace versus keeping our leverage at the lower end of our target range at this point. We'll continue to evaluate it moving forward.

Q: You talked about it, obviously, a little bit on the call here, but just the broader corporate lending world, at this point, I'm just trying to get a sense of, I guess, what the sponsor appetite really is, I guess, for deal activity today?

A: The sponsor community is digesting higher rates affecting valuation. M&A was down in Q1. Private credit is taking share, and sponsors are focused on add-ons and existing borrowers with the power of incumbency.