MidCap Financial Investment Corp Q2 FY2024 earnings call

• Mergers with AFT and AIF closed on July 22, expected to be ROE and NII per share accretive, enhance portfolio diversification, realize operational synergies, and broaden investor base.
• Second quarter results: Net investment income per share $0.45, GAAP EPS $0.35, NAV per share $15.38. Net assets increased by $450 million from the mergers.
• Investment activity: Q2 new commitments totaled $285 million across 28 borrowers, weighted average spread on new commitments 559 basis points, net fundings for the quarter totaled $90 million.
• Portfolio: Well-diversified senior corporate lending book with 165 companies across 23 industries, 97% first lien, 88% backed by financial sponsors. Credit quality remains stable with low PIK income and strong fundamentals.
• Mergers assets: Onboarded ~$596 million, selling non-directly originated assets and redeploying proceeds into higher-yielding loans. Sold ~$125 million of non-directly originated assets since merger closing.
• Dividends: One-time special cash distribution of $0.20 per share on August 15, 2024, and quarterly dividend of $0.38 per share on September 26, 2024.

Prior to the mergers with AFT and AIF, MFIC's portfolio had a fair value of $2.4 billion at the end of June 2024, with corporate lending and other representing over 92% of the total portfolio and Merx accounting for less than 8% on a fair value basis. The weighted average yield at cost of the corporate lending portfolio was 12% in the June quarter. After the mergers, MFIC onboarded approximately $596 million of investments from the closed-end funds, increasing the portfolio size to ~$3.1 billion. Of the onboarded assets, ~$207 million (35%) were directly originated loans with a weighted average spread of 564 basis points, and the remaining ~$389 million consisted of broadly syndicated loans, high-yield bonds, and structured credit positions. Net investment income per share for the June quarter was $0.45, and NAV per share was $15.38.

• Mergers expected to be ROE and NII per share accretive.
• Focus on deploying capital into higher-yielding directly originated loans, rotating assets from the mergers.
• Target to reach leverage in the next 2-3 quarters, with confidence in deploying the ~$775 million of capital available.

• Liquidity challenges with non-directly originated assets from the mergers, potential discounts on selling.
• Impact of lower base rates on ROE.
• Credit quality risks if borrowers face challenges, although portfolio fundamentals remain strong.

Q: On portfolio rotation pace, especially with non-directly originated assets from the mergers A: Progress made with ~$125 million sold since merger closing. Not contingent on selling all non-directly originated assets; consider reinvestment yield and potential discounts on illiquid securities.

Q: Update on ROE outlook A: Not updating guidance, but see potential for ROE accretion from lower base rates as outlined in prior materials.

Q: Rotation strategy and leverage build-up A: Leverage target 1.4x, deploying capital from the ~$386 million investment capacity from deleveraging and proceeds from selling non-directly originated assets.

Q: Direct lending setup and deal flow A: Combined Apollo-MidCap effort, core middle market focus, access to significant deal flow from MidCap's ~500 borrowers and Apollo platform.

Q: Path forward for the BDC A: Focus on generating risk-adjusted returns, considering accretive capital access opportunities while prioritizing shareholder value.

Q: Commitment activity and portfolio focus A: Focus on middle market loans, top of the capital structure, floating rate, and diversification across sectors and sponsors.

Q: Expense synergies from mergers A: Expenses eliminated from the closed-end funds, MFIC's SG&A relatively stable with no significant increase in expenses offset by other factors.