MidCap Financial Investment Corporation

Good afternoon and welcome to the earnings conference call for the period ended September 30th, 2022 for MidCap Financial Investment Corporation. At this time, all participants have been placed in a listen only mode. The call will be open for a question and answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. I will now turn the call over to Elizabeth Besson, Investor Relations Manager for MidCap Financial Investment Corporation.

Thank you, Operator, and thank you, everyone, for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Greg Hunt, Chief Financial Officer. Howard Widra, Executive Chairman, as well as additional members of the management team are on the call and available for the Q&A portion of today's call. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they have the property of a mid-cap financial investment corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press release. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit our website at www.midcapfinancialic.com. I'd also like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company's financial performance. At this time, I'd like to turn the call over to our Chief Executive Officer, Tanner Powell.

Thank you, Elizabeth. Good afternoon, everyone, and thank you for joining us today. I will begin today's call with some comments about the market environment and why we believe our corporate lending portfolio is well-positioned and well-constructed for a challenging market environment. Next, I will highlight our results for the quarter, provide an update on Merck's, and then I will discuss the increase to our quarterly dividend. Following my remarks, Ted will discuss our investment activity, including the meaningful cash paydowns we received from several investments we are seeking to reduce. Ted will also cover the portfolio's credit quality, including how our portfolio companies are performing in the current environment. Lastly, Greg will review our financial results in detail. We'll then open the call to questions. Throughout today's call, we refer to the company as MFIC or the BDC, and we refer to the Bethesda-based lender, which sources senior secured middle market investment opportunities for Apollo managed capital, including the BDC, as mid-cap financials. Beginning with the current environment, the public credit markets remain volatile as the Fed reiterated its commitment to tighter financial conditions in order to combat inflation. The secondary price rally in the leveraged loan and high-yield markets in the first half of the quarter were all but erased in the second half as investor sentiment was dampened by the elevated interest rate environment and recessionary concerns. During the quarter, credit spreads continued to widen, and U.S. leveraged loan issuance plummeted to the lowest level since the fourth quarter of 2009, driven by a pullback from CLO investors. Banks continued to struggle to offload financing commitments made prior to the current more volatile environment. Although deal activity has slowed, borrowers continue to turn to the private credit market, which offers certainty of execution. In general, periods of economic stress and broader market volatility create better opportunities for direct lending. Amid this broader market volatility, we have seen improved lender terms and spreads for the private direct lending market, which continues to experience strong demand from financial sponsors and companies. We would expect terms to continue to tighten and spreads to widen continue to widen should economic stress continue or worsen. For scaled capital providers like MidCap Financial, we believe that there are opportunities to lend to high-quality companies with attractive pricing and terms. MidCap Financial was relatively active during the September quarter with $3.3 billion of new origination. In the first nine months of 2022, MidCap Financial's new originations totaled $12.5 billion. Additionally, we expect a tougher economic environment should lead to an increase in ABL opportunities in an area where mid-cap financial has a large and successful franchise. In the face of significant market volatility, our corporate lending portfolio continues to perform well, which we believe demonstrates the value of our senior secured investment strategy and the quality of our portfolio companies. Our underlying process contemplates the potential for macroeconomic headwinds. As the macro environment continues to become more challenging, we believe the strength of our underwriting and the quality of our portfolio will become more apparent. We have constructed what we believe to be a well-diversified portfolio of true first-line floating rate corporate loans invested in less cyclical industries with granular position sizes. At the end of September, our corporate lending loans were 94% first lien with a weighted average attachment point of 0.2 times. A metric that demonstrates that we are invested in the most senior part of the capital structure. Moving to our financial results, net investment income was $0.35 per share for the quarter, which reflects an increase in interest income due to higher base rates, as well as strong fee and prepayment income, partially offset by a slight decline in income from Merckx as we continue to reduce the size of this investment. Amid the challenging market conditions, we were able to generate considerable cash paydowns from several investments, which we are seeking to exit, which Ted will discuss later during the call. Overall, given the volatile market environment, we recorded a net loss of $6.6 million on our portfolio. Given the total return feature in our incentive fee structure, incentive fees accrued during the quarter were below the full rate. We ended the period with net asset value per share of $15.45. Moving on, as discussed previously, we are focusing on reducing our investment in Merck's, our aircraft leasing portfolio company, by selling aircraft and de-emphasizing its servicing business. During the September quarter, Merck continued to make progress by selling two aircraft, reducing the number of planes in its own fleet from 62 to 60, which allowed Merck to prepay $14 million to MFIC. In conjunction with the pay down to MFIC and the aircraft sales, we converted $111 million of Merck's revolver into equity. Accordingly, at the end of September, our investment in Merck's totaled $266 million, representing 11% of the total portfolio, consisting of $150 million revolver with a 10% interest rate and $116 million of equity. The paydown and conversion of debt to equity will reduce the amount of interest that Merck pays to MFIC from approximately $6 million in the September quarter to approximately $3.8 million per quarter going forward. Despite the broader uncertain macroeconomic environment, there are no signs of slowdown in daily global flight activity, and we continue to focus on reducing our exposure. Now, let me switch to our dividend policy. Given the impact of higher rates on our net interest income, the strong performance of our corporate lending portfolio, and considering the upcoming reduction in our fee structure, we are pleased to announce that we are raising our regular quarterly base dividend by 15.6% from $0.32 per share to $0.37 per share, payable to shareholders of record as of December 19, 2022. As a reminder, on our last conference call, we made several important announcements, including the establishment of what we consider to be the industry-leading fee structure among listed BDCs. Recall the BDC's base management fee was permanently reduced to 1.75% on equity. Among listed BDCs, MFIC's management fee is the lowest and is the only one to charge management fees on equity. on income was permanently reduced from 20% to 17.5%. The changes to the fee structure will be effective for the period beginning January 1st, 2023. We are raising the dividend to a level which we believe reflects the current earnings power of our portfolio, including some of the permanent benefit of our reduced fee structure, which is not yet reflected in our financial results. When the new fee structure becomes effective, we expect to significantly out-earn this $0.37 base dividend, and we will reevaluate our dividend at that time. With that, I will turn the call over to Ted to discuss our investment activity.