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.