MidCap Financial Investment Corporation

Good morning and welcome to the earnings conference call for the period ended March 31, 2025 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, press the star 2. I will now turn the call over to Elizabeth Beeson, Investor Relations Manager for MidCap Financial Investment Corporation.

Thank you, Operator, and thank you, everyone, for joining us today. We appreciate your interest in MidCap Financial Investment Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Greg Hunt, Chief Financial Officer. Howard Widra, Executive Chairman, is 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 disclosures 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 either the SEC's website at www.sec.gov or 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 will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MFIC's first quarter earnings conference call. I'll begin today's call by providing an overview of MFIC's first quarter results and sharing our perspective on the current volatile and evolving market environment. I will then turn the call over to Ted, who will discuss our investment activity and provide an update on the investment portfolio, including some comments on the impact of tariffs. Greg will then review our financial results and capital position in more detail. Yesterday, after market close, we reported solid first quarter results, including a healthy level of earnings and strong portfolio growth, with net investment income $0.37 for the March quarter, which corresponds to an annualized return on equity, or ROE, of 9.8%. GAAP net income per share was $0.32 for the quarter, which corresponds to an annualized ROE of 8.7%. NAV per share was $14.93 at the end of March, down $0.05, or approximately 30 basis points. NAV per share benefited by approximately $0.01 from stock repurchases below NAV made during the quarter. We continue to observe stable credit quality trends in our portfolio. During the quarter, we saw sequential improvements in several credit metrics, including a decline in investments on non-accrual status, a decline in PIC income, and a decline in the weighted average leverage of our borrowers. MFIC has built a well-diversified portfolio of true first lien floating rate direct corporate loans invested in less cyclical industries with granular position sizes. At the end of March, 99% of our direct origination portfolio was first lien, and our average direct lending position was approximately $13.1 million, or 0.5% of the total direct lending portfolio. These figures are at fair value. We believe the current uncertain and evolving environment will showcase the advantages of MFIC's portfolio construction and the strength of mid-cap financials underwriting. That said, the current uncertainty stemming from the trade tariffs could pose challenges for some of our portfolio companies, although we expect these potential challenges to be relatively limited, as Ted will discuss later. We continue to be active We continue to be active in our investing and have continued to make progress deploying the capital from the mergers that closed last July. During the March quarter, MFIC made $376 million of new commitments. While we did observe some spread compression relative to last quarter's commitments, we also saw a slight decline in the net leverage of new commitments, resulting in an attractive spread per unit of leverage. We also continued to sell certain assets acquired in connection with the mergers that do not align with our strategy. and prudently deployed the proceeds along with the investment capacity generated from the mergers into first lien floating rate middle market loans originated by MidCap Financial. At the end of March, the non-direct origination assets onboarded from the mergers represented just 2% of the total portfolio fair value. While sourcing assets is generally considered to be among the biggest challenges for many market participants in this market environment, MFIC benefits from access to assets sourced by MidCap Financial. one of the largest and most experienced lenders in the middle market and which is consistently ranked near or at the top of league tables. Our affiliation with MidCap Financial provides a significant deal sourcing advantage for MFIC. We are fortunate to have access to the necessary origination to deploy this capital, given the significant volume of commitments originated by MidCap Financial. During the March quarter, MidCap Financial closed approximately $6.5 billion of commitments, which is particularly noteworthy given the overall muted sponsor M&A activity in the market. Midcap Financial has what we believe to be one of the largest direct lending teams in the U.S. with close to 200 investment professionals. Midcap Financial was founded in 2009 and has a long track record, which includes closing on over $136 billion of lending commitments since 2013. This origination track record provides us with a vast data set of middle market company financial information across all industries that we believe. This makes Midcap Financial one of the most informed and experienced middle market lenders in the market. Key members of MidCap Financial's management team have been working together for more than 25 years, resulting in strong collaboration and an enhanced ability to navigate challenging market conditions, leading to improved credit quality and risk management. We believe the core middle market offers attractive opportunities across cycles and does not compete directly with either the broadly syndicated market or the high-yield market. Moving to Merck's, at the end of March, MFIC's investment in Merck's totaled approximately $185 million, representing 5.8% of the total portfolio at fair value. I'd like to provide an update on Merck's Russia fleet insurance claims. As a reminder, at the time of Russia's invasion of Ukraine in February 2022 and the imposition of sanctions, Merck's own portfolio included four aircraft on lease to two Russian airlines. Those aircraft are held in aircraft securitization known as MAPS 2019. In compliance with EU sanctions imposed on Russia due to the invasion, Merckx terminated the leases of those aircraft, but three were not returned and have remained in Russia since then. Merckx has brought legal action in the English court seeking payment for those aircraft under both the lessee reinsurance policies and its own contingent policies. As mentioned on last quarter's call, we settled a portion of our contingent insurance claims with certain insurers during the first quarter. We recently reached a settlement with another insurer, bringing Merckx's total proceeds to $16.5 million so far. We are currently waiting for final judgment for our remaining claims, which we expect to be made in the very near future. As mentioned on last quarter's call, Merckx has made substantial progress on multiple sales campaigns, covering a majority of the remaining aircraft on its balance sheet. We look forward to providing further updates on the process as purchase agreements are finalized in the very near future. The blended yield across our total investment in Merck's was approximately 3.2% at fair value. And the continued rotation of capital from Merck's into directly originated corporate loans should have a beneficial impact on MFIC's income. Assuming we are successful with our sales campaign, we expect MFIC's exposure to Merck's to decline in the coming quarters. Now let me discuss current market conditions. Market conditions in the first quarter started on a relatively strong note as forward interest rates were expected to be lower but stable, and the economic backdrop was solid. As the quarter progressed, we saw conditions deteriorate amid federal government layoffs, increasing tariff concerns, and their potential negative effects on business fundamentals and economic growth. Although the trade tariffs were largely expected, their size and scope were far greater than anticipated. Following the U.S.-China tariff truce that was announced yesterday, The probability of a U.S. recession in 2025 has decreased. Lower tariffs are positive for the economy and markets, but there are other headwinds to U.S. economic growth. The key issue for markets is to monitor the speed with which confidence is restored among consumers, corporates, and foreigners. While markets may recover quickly from this episode, we believe it will take some time before confidence is restored among consumers and corporates. Amid ongoing volatility and uncertainty driven by the trade war and increasing fears of a recession, newish activity has been fairly light as M&A activity remains slow. Due to the heightened economic uncertainty following the tariff announcements, there has been a lack of investor demand in the syndicated loan market, and banks have become more cautious when launching new syndication transactions. Secondary loan and bond markets have experienced increased volatility and widening spreads. This uncertainty in the public debt markets creates the type of environment that causes borrowers to seek solutions in the private market. On one hand, we believe direct lenders are particularly well poised to benefit in this type of environment as the syndicated loan market has become less certain and accessible for certain borrowers. On the other hand, we believe the trade war-induced uncertainty may further delay the long-awaited anticipated increase in M&A activity. Depending on the timing and outcome of the tariff policies, It may continue to be a slow year for LDOs, M&A, and IPOs, which would negatively impact sponsor activity. That said, the mounting pressure on financial sponsors to return capital to investors could drive some activity. We believe the core middle market, where we are focused, does not compete directly with either the broadly syndicated loan market or the high-yield bond market. Additionally, even with the slowdown in M&A activity, we see that many of our borrowers continue to have add-on financing needs. Now turning to our dividend on May 7, 2025, our board declared a quarterly dividend of $0.38 per share for shareholders of record as of June 10, 2025, payable on June 26, 2025. With that, I will now turn the call over to Ted.

Thank you, Tanner. Good morning, everyone. I'm going to spend a few minutes reviewing our first quarter investment activity and then provide some details on our investment portfolio, including some comments on the analysis we've done with respect to tariff-related risks. In the March quarter, we continued to prudently deploy the capital acquired from the mergers into assets with what we believe to be strong credit attributes. As mentioned, MFIC's new commitments in the March quarter totaled $376 million, with a weighted average spread of 513 basis points across 33 different companies. Although we observed a decline in spreads on new commitments compared to the previous quarter, we also observed a slight decline in the net leverage on new commitments. The weighted average net leverage on new commitments was 4.2 times in the March quarter, down from 4.3 times in the prior quarter. Our fee structure, which is one of the lowest among listed BDCs, allows us to produce attractive ROEs even at current spreads. For the March quarter, gross fundings totaled $357 million, excluding revolvers. Sales and repayments, excluding revolvers, totaled $192 million, including $44 million of liquid assets acquired from the mergers. Net revolver fundings were approximately $3 million. In total, net fundings for the quarter were $170 million. Given commitments closed so far in the June quarter and our robust pipeline for mid-cap financial, we expect fundings for the June quarter to be strong. Turning to our investment portfolio, at the end of March, our portfolio had a fair value of $3.19 billion and was invested in 240 companies across 49 different industries. Please note, we have transitioned our industry classification from the Moody's Industry System the Global Industry Classification System, or GICS, beginning this quarter. Direct origination and other represented 92% of the total portfolio, up from 90% last quarter. This quarterly increase is the result of growth in the portfolio from funding the mid-cap financial source loans and from the sale of non-direct origination positions from the mergers. At the end of March, the non-directly originated loans acquired from the closed-end funds which included high-yield bonds, broadly syndicated loans, and structured credit positions, totaled $73 million, representing just 2% of the portfolio. Lastly, Merck's accounted for 5.8% of the total portfolio. All of these figures are on a fair value basis. Specific to the direct origination portfolio, at the end of March, 99% was first lien and 92% was backed by a financial sponsor, both on a fair value basis. Approximately 97% had one or more financial covenants on a cost basis. Covenant quality is a key point of differentiation for the upper middle market, as substantially all of our deals have at least one covenant compared to larger deals, which are generally without covenants. The average funded position was $13.1 million. The median EBITDA was approximately $46 million. The weighted average yield at cost of our direct origination portfolio was 10.7% on average for the March quarter, down from 11% for the December quarter. The decline in the yield was primarily due to the decline in base rates. At the end of March, the weighted average spread on the directly originated corporate lending portfolio was 569 basis points, down nine basis points compared to the end of December. During periods of elevated volatility and uncertainty, we look at the potential impact on our existing portfolio companies. As it relates to the recently announced U.S. tariffs, we've done a comprehensive review on MFIC's portfolio to evaluate their direct impact on our borrowers. As Tanner mentioned, MFIC has been focused on building a well-diversified portfolio of true first lien floating rate direct corporate loans invested in less cyclical industries. We primarily lend to U.S.-focused service-oriented businesses, and we're underweight businesses that are heavily dependent on imports and exports. At the end of March, MFIC's top three industry exposures, excluding Merck's, were software, healthcare providers and services, and financial services. MidCap Financial leads and serves as administrative agent on the vast majority of the MFIC's direct lending deals, which allows us to be in active dialogue with our borrowers and have enhanced information flow, which is particularly valuable during these uncertain periods. Being agent allows us to detect and address any issues early. At the end of March, MidCap Financial or Apollo is the agent on 72% of the MFIC's direct lending portfolio at cost and at fair value. We believe the first-order impact of the tariffs to our portfolio is limited. We've defined the first-order impact as businesses which have labor or source products from outside the U.S. We've categorized our direct lending portfolio into four categories based on what we believe to be the severity of the tariffs. No impact, minimal impact, medium impact, and meaningful impact. we've enhanced our monitoring of companies, which we have identified as having a meaningful impact. Of course, there could be second-order impact from an economic slowdown or a recession, which is more challenging to quantify. We've supplemented our underwriting process in response to tariffs. Our underwriting process has always included a downside scenario, such as a mild recession. As Tanner mentioned, we continue to observe relatively stable credit quality trends in our portfolio, and we continue to believe that we have constructed a senior portfolio built for today's economic uncertainty. We are not observing any signs of general credit weakness. Our portfolio companies continue to show good financial performance as evidenced by a modest improvement in revenue growth with continued positive EBITDA growth. We saw an improvement in net leverage, or debt to EBITDA, of our borrowers. The weighted average net leverage was 5.25 times at the end of March, down from 5.5 times at the end of December, due to lower leverage on new assets and an improvement on certain existing assets. At the end of March, the weighted average interest coverage was 2.1 times, flat compared to last quarter. This statistic is based on financial information as of the end of December 2024, and therefore does not reflect the benefit of lower base rates that occurred in the March quarter. We believe the stable level of revolver utilization we are seeing from our portfolio companies is an additional sign of portfolio health. At the end of March, the percentage of our leveraged lending revolver commitments that were drawn did not change materially from the prior quarter. We believe a steady revolver utilization rate is an indicator of greater financial stability. The number and dollar amount of investments on non-accrual status decreased on both a cost and fair value basis compared to the previous quarter. No new positions were placed on non-accrual status this quarter. Our position in international cruise and excursion was restored to accrual status following a restructuring that occurred in the December quarter. Additionally, we received a pay down above fair value on a position acquired via the mergers, which exceeded our mark at the end of December. As a result, at the end of March, investments on non-accrual status were 0.9% of the portfolio at fair value, down from 1.3% last quarter. After quarter end, we received information about the ongoing restructuring of the New Era Technologies business, which will be reflected in our June results. MFIC's PIC income declined to 4.5% of total investment income, down from 5.7% last quarter, as a few borrowers switched to cash pay from PIC during the quarter. Our level of PIC remains well below the average of BDC peers. That said, we recognize that it makes sense to allow borrowers to elect PIC in certain circumstances. Our underwriting on mid-cap financial source loans has proven to be sound. Based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment order, our annualized net realized and unrealized loss rate is around five basis points on loans sourced by mid-cap financial. We think this performance data shows how well the strategy has performed. With that, I will now turn the call over to Greg to discuss our financial results in detail.

Thank you, Ted, and good morning, everyone. Starting with our operating results, total investment income for the March quarter was approximately $78.7 million, down $3.5 million, or 4.2%, compared to the prior quarter. This decline was primarily due to lower fee and prepayment income, as well as a decline in asset yield due to the impact of lower base rates on interest income. partially offset by the growth in the size of the portfolio. Fee income and prepayment income for the March quarter totaled $950,000, down from $2.3 million last quarter. Dividend income was approximately $250,000, essentially flat quarter over quarter. As a reminder, there's a lag effect between changes in base rates and their impact to interest income, depending on the frequency of loan resets. During the December and March quarters, three-month SOFR declined by approximately 28 basis points and two basis points, respectively, while one-month SOFR declined by 52 basis points and one basis point, respectively. MFIC's investments are linked to both one-month and three-month SOFR rates, with a great proportion tied to three-month SOFR. In short, the decline in base rates during the December quarter was a contributor to the decline in interest income recorded in the March quarter. The average yield at cost on our direct originated portfolio was 10.7 percent on average for the March quarter, down from 11 percent last quarter, largely due to lower base rates. Net expenses for the quarter were $44.4 million, down from $45.1 million last quarter. This decline was driven by lower management fees interest expenses, and G&A expenses partially offset by a higher incentive fee. Interest expense benefited from the same base rate decline mentioned earlier, partially offset by a higher average debt balance, as well as the impact of the CLO, which closed during the quarter. As mentioned in last quarter's call, in late January, MFIC priced a $529 million CLO which closed on February 24th. We sold through the single-age tranche, adding approximately $399 million of relatively low-cost secured debt at a blended spread of 161 basis points. The proceeds from the CLO were effectively used to repay MFIC's $350 million, 5.25 percent unsecured notes that matured on March 3rd, 2025. At today's base rates, the cost of the CLO is slightly higher than the fixed-rate debt it effectively replaced. Other G&A expenses totaled $1.2 million for the quarter, down from $1.7 million in the previous quarter. During the March quarter, we received a reimbursement from Merck for certain expenses that MFIC previously incurred on Merck's behalf, which was recorded as a contra expense. We expect other G&A to average around $1.6 million per quarter going forward. This is in addition to administrative expenses, which are around $1 million per quarter. MFIC's incentive fee rate is 17.5% and is subject to a total return with a 12-month or a 12-quarter look-back. Given the total return hurdle feature and the net loss incurred during the look-back period, MFIC's incentive fee for the March quarter was $6.4 million for 15.8 percent of pre-intensive fee net investment income. For the March quarter, net investment income per share was 37 cents, and GAAP EPS, or net income per share, was 32 cents. These results correspond to an annualized return on equity-based net investment income of 9.8 percent and an annualized return based on net income of 8.7 percent. Results for the quarter include a net loss of approximately $4 million or $0.05 per share. The net loss was primarily driven by a few concentrated positions that were already on non-accrual status. We ended the quarter with net leverage of 1.31 times up from 1.16 times last quarter. Our funding activity was weighted toward the second half of the quarter. Average leverage for the March quarter was approximately $1. During the March quarter, we continued to make progress deploying the capital acquired from MFIC's merger with the closed-end funds, although we were operating below our target leverage at 1.4 times. Gross and net fundings for the quarter were $357 million and $170 million, respectfully. At the end of March, our portfolio had a fair value of $3.19 billion. We had total principal debt outstanding of $1.9 billion. total net assets of $1.39 billion for a NAV of $14.93 per share. Lastly, during the March quarter, we repurchased approximately 477,000 shares at a weighted average price of $12.75 for a total cost of $6.1 million. These buybacks had an accretive impact on NAV per share of approximately $0.01. This concludes our prepared remarks. Operator, please open the call to questions.

Thank you. At this time, if you would like to ask a question, please press the star 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star 1 to ask a question. We'll take our first question from Mark Hughes with Truist. Please go ahead.

Yeah, thank you very much. Good morning.

Morning.

The funding's in 2Q. I think you said they're strong so far. Kind of interesting to hear, given the kind of cautious commentary from you and others around the overall backdrop. Could you talk a little bit more about that, where you're seeing opportunity, what's driving that, and then any comment on the spread trajectory here in 2Q so far relative to 1Q?

Yes, sure. Thanks, Mark. And what we say oftentimes about many aspects of our business is that there's a lag. And so the activity, and we had a very strong deployment in Q1, the 376 million of new commits we made. And then the strength that we've seen in the quarter to date period reflects that level of activity that frankly was, in many cases, commenced before the end of the year or early in the year, kind of prior to some of the April volatility. And so it really is more just a function of that which was already in the pipeline ultimately being brought to a conclusion. And what you're seeing, and this is how we square the seemingly contradictory results as you alluded to, is that there's less, there's reason to believe that there's less auctions to be launched in the back half of the year or even, you know, in the back half of the second quarter. And so you'll start to see that, you should start to see that show up. But again, the The relatively strong activity that we've seen is really just a holdover from that which was commenced earlier this year. In terms of spreads, our Q1 spreads declined to 513 down from Q4. We've definitely seen some stabilization more recently in where we're indicating and where our peers are indicating. And then from here, it's that tension with the technical mark acknowledging that there's a lot of capital for private transactions out there, as well as also it's likely to be a muted M&A environment, creating fewer credit creation opportunities. And thus, notwithstanding some volatility, it'll be the interplay of those. And we would expect some reprieve from that, which we saw in Q1, or some widening, but not materially, and more just stabilization and less deals getting done in the fores in the broader market.

Very good. And then could you talk about the dividend relative to NII, kind of the sustainability, how you think that will, you know, the underlying trend versus the current dividend as the year progresses, and you're obviously making a lot of progress

lot of updates changes in the portfolio what about sustainability yeah sure so as we alluded to the activity that we had in in the quarter was back half weighted as well as also we were operating below our leverage level and then furthermore you know many of the aspects of our earnings profile are stable but the prepayment income in a given quarter can can ebb and flow and we were relatively light in this quarter. We also mentioned in our prepared remarks about the level of earnings that we're taking from our Merck's investment, which is 5.8% and is only 3.2%. The combination of those gives us a lot of comfort in our ability to increase earnings. And, you know, with the caveat, just particularly as it relates to prepayment, fees that will ebb and flow. And so we still are very comfortable in our earnings power and how we've slated our capital plan.

Very good. Thank you.

Thank you. And as a reminder, ladies and gentlemen, it is star one for a question. We'll take our next question from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hey, good morning. Thanks for taking my question. Just on originations, given the muted outlook for M&A activity there, could you just remind us again the extent of MFIC's dependence on M&A activity for new originations? What's the outlook for potential add-ons and other activity from incumbents? Thanks.

This is Howard. I'll, you know, across MidCap, it is not completely reliant at all on M&A activity. First of all, there is an existing portfolio that continues to grow, and there's opportunities there. And we saw that this quarter, and we'll continue to see it future quarters. And that also, you know, carries on to some of the reduced M&A activity is being replaced by continuation funds. which is also sort of like a captive business, which comes out of a portfolio and enables MFIC to sort of step into transactions they weren't in before. And there's some other products as well. So certainly more M&A activity drives more volume. But, like, even in the first quarter, there was not, you know, huge volume in the market, and there was $6.5 billion of originations at mid-cap, which you saw sort of work its way through to MFIC. And so... So, the answer is, and we said this before, I think, like, if we were a $20 billion BDC, it would be impactful for the amount of assets that MFIT is able to select of what mid-caps originates. It's not that impactful.

Male Speaker 3 Got you. Very helpful there. And one follow-up, if I may, just in terms of the dividend coverage there. Could you remind us again of the latest estimate for spillover income? And then, perhaps, just to remind us again, what's the overall policy and thoughts around usage of that? Thanks.

Michael Heaney Yeah, we, you know, when it comes to spillover income, you know, we, you know, we have minimal spillover income at this point. We, you know, provided, you know, our shareholders with a dividend following the closed-end funds. And, you know, Merck still will create, it does create at some points, know additional spillover income and we'll evaluate that um you know as we continue to reduce that position and move forward gotcha very helpful there thanks again thank you next we'll take our question from healy seth with raymond james please go ahead hi good morning thanks for the question

So in your conversations with private equity sponsors and just looking at the current pipeline, what's your sense for M&A recovery and the timeline there? Do you guys feel like it's more 2025 backend loaded or going into 2026?

Yeah, sure. I think it's going to be path dependent. And, you know, I think it's very easy to look and survey the sponsor community landscape right now. And it's very hard. the calculus is very hard to launch an acquisition right now. And that's what we're seeing. As Howard alluded to, notwithstanding, we take comfort in MFIC's position as a relatively small balance sheet amongst a bigger ecosystem and having opportunities for follow-ons within our existing portfolio companies. When we look out, and it's hard to project specifically whether it's going to be Q4 2025 or 2026, we and our peers often point to, which is objective and demonstrable, this significant level of private equity dry powder, as well as also a real pressure to return capital to LPs. as, you know, again, difficult to predict when it will come, but it needs to come to return that capital and or deploy that capital that's already been raised. And then furthermore, we have a lot of dynamics here in the U.S. that notwithstanding, you know, currently perhaps sidelined or amidst some volatility, but there's a lot to point to significant capital expenditures and infrastructure spending over the next several years that also will give rise to significant credit opportunities for ourselves and other similarly situated private capital lenders in the market.

Got it. That's helpful. And a quick follow-up. With your new investments this quarter, can you provide any sort of breakout for how many were incumbent borrowers versus new borrowers?

Yes, sure. So we did 33 new deals, 19 of which were to new companies and 14 of which were to existing companies.

Perfect. Thank you. We'll take our next question from Melissa Wedel with J.P. Morgan. Please go ahead.

Good morning. Thanks for taking my questions. Following on your comments about the activity levels through today, sort of second quarter, does it stand to reason that prepayment income and accelerated OID might remain on the lower end in the near term? I'm curious if you're seeing slower repayment activity like we've heard from a lot of teams. If I did miss your comments on that, I apologize. Thank you.

Hi, Melissa. Yeah, I think consistent with what you're hearing across the industry from our peers, we do expect that given the lack of M&A, that's going to result in fewer prepayments and that's going to result in lower fees.

Okay, appreciate that clarification. As a follow-up, I appreciate the commentary you've offered about limited direct tariff exposure in the portfolio. On a different but kind of related note, do you – have you assessed the exposure in the portfolio from any government contracts or any sort of – anything susceptible to lower revenues or reimbursements from DOGE cuts or healthcare spending cuts?

It's always part of our underwriting. We have limited, you know, as a general matter for years and years, we've limited our exposure to sort of government payments because of sort of stroke of the pen risk. Obviously, it's even more volatile now, but we just don't have that much of it. Even our health care names are not directly reimbursed by the government and direct government contractors. I don't know if we have any. I don't think we have any. So... Always looking at all of those things, but those are sort of underwriting risks regardless of the administration. It's just this one's more untethered.

Got it. Thank you. We'll take our next question from Paul Johnson with KBW. Please go ahead.

Thanks, Maureen. Thanks for taking my questions. Sorry if I missed it, but I was just wondering, you know, kind of what the sort of underlying meaningful exposure to given call accounts is for, you know, any sort of the tariff countries or anything in all of your higher risk tariff classification, kind of what that is roughly within the portfolio.

So, Paul, single digits. And, you know, I think, like we said in our prepared remarks, you know, we have the benefit of, by statute, we need to focus on U.S. companies in the middle market. It's far less likely to have real diverse supply chains on top of the fact that we're over-indexed to those sectors that are more service-related, less capital-intensive. And, you know, I hope we tried to strike this balance within the portfolio. That number is more important. But as we think about our underwriting, we, and I think the market has as well, notwithstanding we're not looking at those very, very intently and looking at that, you know, single digits part of our portfolio in a very, you know, watching it very closely. But we're really focused on the second-order effect. And we mentioned confidence on the part of both corporates and consumers and really looking at that second-order effect as being the primary driver for credit performance from here and really occupying the lion's share of our time as we assess the effects of the current environment on our current portfolio.

Got it. Appreciate that. And then just on amendment activity, anything to note there in terms of just trends, frequency, how many amendments were addressed during the quarter in the portfolio?

So amendments were relatively flat quarter over quarter. And in particular, you know, some of the more involved amendments, you know, where you're talking about covenant violations or you're dealing with PIC or forbearance or those types of things. that particular segment was flat over quarter over quarter.

Male Speaker 1 Yeah, and I'd make another comment, Paul. This is the second time I'm going to bring up lag on this call. But, you know, recall, you know, so we're reporting March financials and the underlying companies of the amendments that we would otherwise, or the, you know, performance that we would be assessing within this quarter is Q4 by and large, right? You know, we get monthlies on certain of our borrowers, but the lion's share is quarterlies, and certainly the tests are covenant tests, which, you know, is a predictor of amendment activity. is from Q4 performance, and so obviously a different market. So hard to draw too many conclusions from that number, and we weren't surprised to see that that was flat in the quarter.

Thanks again. I appreciate that. And then just on our purchases going forward, you know, congrats on the purchases in the quarter, but with leverage kind of you know, around one, four times. Stocks still trading a little bit low, below the repurchase price during the first quarter. But how are you kind of thinking about that with the deployment of capital and where the stock trades today?

David Morgan Well, we hope that question will be relevant after this call is over. But the chance is not. I mean, we say we always assess the use, you know, the use of our capital based on sort of the discount and that versus like other choices. And obviously, you know, other choices when we're at our full leverage includes effectively paying down debt and redeploying. comes a higher bogey to buy back shares. But it's always, like, part of what we do. The incremental investment would be buying back shares when it makes sense. You know, but it's, you know, and I've said this before in a lot of calls, you know, the window of buying is not, you know, that many trading days during the quarter. And so, you know, sometimes when, like, tracking and people looking at how much we're buying back, we're limited by the amount we can buy each day, you know, when we can buy and we're limited in the amount of days we can buy. So that also impacts whether we buy back shares in that, you know, is the timing at a time when the stock's trading at a level we want and our capital opportunities otherwise fit with it.

Thank you. It's all for me.

Thank you. And as a reminder, ladies and gentlemen, it is star one for a question. We'll pause for a moment. At this time, we have no further questions. I'll return the call over to management for closing remarks.

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