MidCap Financial Investment Corp Q1 FY2025 earnings call

• MFIC reported solid first-quarter results with a net investment income per share of $0.37 and a GAAP net income per share of $0.32. The NAV per share stood at $14.93 at the end of March.
• MFIC maintains a well-diversified portfolio of true first-lien floating-rate direct corporate loans in less cyclical industries. As of the end of March, 99% of the direct origination portfolio was first-lien, and the average direct lending position was approximately $13.1 million, accounting for 0.5% of the total.
• MFIC made $376 million in new commitments during the March quarter. Although there was a slight compression in spreads compared to the previous quarter, the net leverage of new commitments decreased slightly, resulting in an attractive spread per unit of leverage. Assets not in line with the strategy were sold, and the proceeds were deployed into first-lien floating-rate middle-market loans originated by MidCap Financial.
• Regarding Merx investment: Total proceeds from insurance claims to date amount to $16.5 million, with remaining claims awaiting final judgment. Substantial progress has been made in the sales campaign for the remaining aircraft. The blended yield across MFIC's investment in Merx was approximately 3.2% at fair value.
• Market conditions in the first quarter started strong but deteriorated due to federal government layoffs and tariff concerns. While trade tariffs could pose challenges, they are expected to be relatively limited. New issue activity was sluggish, the syndicated loan market faced a lack of investor demand, and secondary markets were volatile. Direct lenders are well-positioned to benefit as borrowers seek solutions in the private market.
• Dividend: The board declared a quarterly dividend of $0.38 per share, payable on June 26, 2025.

In the March quarter, total investment income was approximately $78.7 million, a decrease of $3.5 million or 4.2% compared to the prior quarter. The direct origination and other segments made up 92% of the total portfolio at fair value at the end of March, up from 90% in the previous quarter. Non-directly originated loans from closed-end funds totaled $73 million, representing 2% of the portfolio. Merx accounted for 5.8% of the total portfolio. The weighted average yield at cost of the direct origination portfolio averaged 10.7% in the March quarter, down from 11% in the December quarter. Net investment income per share was $0.37, and GAAP earnings per share was $0.32. The NAV per share was $14.93 at the end of March, a decrease of $0.05 or approximately 30 basis points, but was boosted by about $0.01 from stock repurchases below NAV during the quarter.

• Given the commitments closed so far and the robust pipeline for MidCap Financial, MFIC expects strong fundings in the June quarter.
• With the understanding that prepayment fees may fluctuate, MFIC is confident in its earnings power and capital plan. Earnings from the Merx investment provide confidence in the ability to increase earnings.
• It is anticipated that due to the lack of M&A activity, prepayment income and accelerated original issue discount (OID) are likely to remain at lower levels in the near term.

• The current uncertain and evolving market environment, including trade tariffs, presents challenges. While potential challenges from tariffs are expected to be relatively limited, there are other headwinds to US economic growth.
• Uncertainty in the public debt market may impact borrowers seeking solutions in the private market. Trade war-induced uncertainty could further delay M&A activity, which would negatively affect sponsor activity.

Q: About fundings in the second quarter and spread trajectory, Greg Hunt stated that the activity in the quarter was weighted towards the back half and operating below the leverage level, prepayment income fluctuated, and the combination of earnings from the Merx investment provides confidence in the ability to increase earnings, with the caveat that prepayment fees may fluctuate.

A: Greg Hunt explained that the activity in the quarter was weighted towards the back half, operating below the leverage level, prepayment income fluctuated, and the combination of earnings from the Merx investment provides confidence in the ability to increase earnings, with the caveat that prepayment fees may fluctuate.

Q: Concerning originations and MFIC's dependence on M&A activity, Howard Widra said that MidCap is not entirely reliant on M&A activity, has growth opportunities in the existing portfolio, continuation funds replace some reduced M&A activity, and there was $6.5 million in originations at MidCap in the first quarter that flowed through to MFIC.

A: Howard Widra mentioned that MidCap is not entirely reliant on M&A activity, has growth opportunities in the existing portfolio, continuation funds replace some reduced M&A activity, and there was $6.5 million in originations at MidCap in the first quarter that flowed through to MFIC.

Q: Regarding the M&A recovery timeline and the breakout of new investments, Tanner Powell said that it is path-dependent and difficult to predict a specific timeline, but there is significant private equity dry powder and pressure to return capital to limited partners, and in the first quarter, there were 33 new deals, 19 to new companies, and 14 to existing companies.

A: Tanner Powell stated that the M&A recovery is path-dependent and difficult to predict a specific timeline, but there is significant private equity dry powder and pressure to return capital to limited partners, and in the first quarter, there were 33 new deals, 19 to new companies, and 14 to existing companies.

Q: About prepayment income and exposure to government contracts, Tanner Powell said that fewer prepayments and lower fees are expected due to the lack of M&A, and MFIC has limited exposure to government contracts generally, with healthcare names not directly reimbursed by the government and no direct government contractors.

A: Tanner Powell said that fewer prepayments and lower fees are expected due to the lack of M&A, and MFIC has limited exposure to government contracts generally, with healthcare names not directly reimbursed by the government and no direct government contractors.

Q: Regarding repurchases going forward, Tanner Powell said that the use of capital is assessed based on the discount compared to other options, the window for buying back shares is limited by trading days and the amount that can be bought each day, and buying back shares is part of what they do when it makes sense.