MidCap Financial Investment Corporation

Good afternoon and welcome to the earnings conference call for the period ended December 31st, 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 speakers' 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, 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 Rudra, 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 are the property of MidCap 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. Throughout today's call, we will refer to MidCap Financial Investment Corporation as either MFIC or the BDC, and we'll use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. 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'd like to begin today's call by highlighting our results for the quarter, followed by a review of our investment strategy, including some performance data, which we believe shows why we're so confident in our strategies. I will then provide an update on the good progress we have made reducing our investment in Merck's and will conclude with the increase to our quarterly dividend. Following my remarks, Ted will review our investment activity and provide an update on portfolio credit quality. Lastly, Greg will review our financial results in detail and provide some additional comments on Merck's. We will then open the call to questions. Beginning with our financial results, after market closed today, we reported net investment income per share of $0.43, which benefited from the positive impact of higher base rates. As a reminder, there's generally some lag before we see the full impact of higher base rates due to the timing of loan resets. At the end of December, net asset value per share was $15.10, a decline of 2.3% quarter over quarter, mostly due to losses outside of our first lien corporate lending strategy. Regarding investment activity, new commitments continue to focus on first lien corporate loans sourced by MidCap Financial. We have also made significant progress reducing our exposures outside of our core strategy. Sales and repayments during the quarter included nearly all of our remaining oil and gas exposure, which is now less than $1 million at fair value. In addition, post-quarter end, we received a significant pay down from Merckx, reducing our position by roughly 24%. Pro forma for this pay down, Merckx represents approximately 8.3% of the portfolio at fair value. Shifting to a review of our investment strategy, as you may recall, in August, we made several key announcements which underscored Apollo Global Management's commitment to being at the forefront of the democratization of finance. These announcements included the establishment of a new and industry-leading fee structure for MFIC, an equity investment into the BDC by MidCap Financial, and a change in the company's name. These announcements reinforce MFIC's position as a pure-play, senior-secured, middle-market BDC, providing public shareholder access to institutional quality private credit at a best-in-class fee structure among listed BDCs. As you have heard us discuss on our previous calls, over the last several years, we have shifted the BDC's portfolio into first lien corporate loans, primarily sourced by MidCap Financial, one of the world's leading middle market lenders with a proven track record. MidCap Financial has one of the largest direct lending teams in the United States with close to 200 investment professionals. We believe the scale of MidCap Financial combined with other Apollo managed capital makes MFIC part of one of the largest market participants in middle market lending. For reference, in 2022, MidCap Financial closed approximately $16.4 billion in new commitments, including $4 billion in the December quarter. The BDC is fortunate to be in a unique position to have access to loans sourced by MidCap Financial, given the strategic relationship between MidCap Financial and Apollo Global. In mid-16, concurrent with the receipt of our co-investment order, MFIC shifted its strategic focus to leverage Apollo Global's relationship with MidCap Financial. I wanted to take a moment to provide some historical performance data, which we think shows how well this strategy has performed. As of June 2016, which is approximately the date upon which we began utilizing our co-investment order, our first lien corporate lending portfolio totaled approximately $300 million. At the end of December 2022, Our first lien corporate lending portfolio had grown to nearly $2 billion at fair value. Over that six and a half year period, we funded approximately $5.7 billion of new first lien corporate loans sourced by MidCap Financial. Total losses on those first lien corporate loans during that period have been approximately $7 million, or 12 basis points on a cumulative basis, or two basis points annually. We have We are highlighting this track record because we do not believe the market has fully appreciated how these assets have performed over an extended period of time, and because we believe it may help to inform how our first lien corporate lending portfolio should perform going forward. It is also worth noting that today's first lien corporate lending portfolio is not only well diversified by borrower and industry, but also across five distinct product groups, leverage lending, asset-based lending, lender finance, life science lending, and franchise finance. Moving to Merck's, consistent with our strategic focus on being a pure-play, senior-secured, middle-market BDC, we remain focused on accelerating the reduction of our investment in Merck's. We are pleased to report that we have made significant progress in this regard. At the end of December, MFIC's investment in Merck's had a fair value of $261 million, representing 10.9% of the total portfolio at fair value. Post-quarter-end, Merck's executed a significant transaction by selling its interest in a joint venture and repaid roughly $62 million to MFIC, which was applied to the revolver, reducing the size of MFIC's investment in Merck's to approximately $199 million, or 8.3 percent of the portfolio at fair value. We remain focused on continuing to reduce our investment in Merck's, and while we don't expect paydowns to occur evenly, we do expect to see additional paydowns in 2023 subject to market conditions. Greg will provide some additional color on the reduction in MERCs later during the call. Moving to our quarterly dividend, given the benefit we are seeing from higher base rates, the exit of lower yielding and non-earning legacy assets, and the expected benefit from our new fee structure, which became effective on January 1st, 2023, our board has increased MFIC's regular quarterly dividend by one cent from 37 cents to 38 cents, which equates to a 10% dividend yield based on December NAV. This dividend increase marks the third consecutive increase in our quarterly base dividend. At current base rates, we are well positioned to generate net investment income in excess of this new dividend level. The forward curve indicates that there will be additional rate increases, and rates will remain elevated for some time. As the operating environment continues to evolve, our board will continue to evaluate whether to retain additional earnings, increase the base dividend, or declare supplemental dividends. With that, I will turn the call over to Ted.