MidCap Financial Investment Corporation

Good morning and welcome to the earnings conference call for the period ending June 30th, 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-answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star and then 1 on your telephone keypad. If you would like to withdraw your question, press star, then 2. I will now turn the call over to Elizabeth Besson, Investor Relations Manager for MidCap Financial Investment Corp.

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 Kenny Seifert, our newly appointed Chief Financial Officer. Howard Widra, Executive Chairman, and Greg Hunt, our former CFO, who now serves as an advisor, 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 Midcalf 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 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 MidCap Financial Investment Corporation's second quarter earnings conference call. In case you missed our mid-June filing, we're pleased to share that Kenny Cyphers has been appointed as MFIC's new chief financial officer, which took effect as of the close of business on June 30th. Kenny has been a key leader within Apollo's finance and accounting team since 2015. Kenny previously served as the CFO of both AFT and AIF, the two funds that MFIC merged with last year. Greg Hunt, MFIC's former CFO, will continue to support the company as an advisor through the end of December to ensure a smooth and effective transition. Additionally, Howard Widra, MFIC's executive chairman, informed our board of his intention to retire from Apollo at the end of 2026. We are thankful to both Greg and Howard for their many contributions to MFIC. For today's call, I will begin by providing an overview of MFIC's second quarter results along with an update on the meaningful progress we've made reducing our investment in Merckx. I will then turn the call over to Ted, who will share our views on the current market environment, walk through our investment activity for the period, and provide an update on the portfolio. Kenny will then review our financial results and capital position. Yesterday, after market closed, we reported results for the second quarter. Net investment income, or NII per share, was $0.39 for the June quarter. which corresponds to an annualized return on equity or ROE of 10.5%. Gap net income per share was 19 cents for the quarter, which corresponds to an annualized ROE of 5.2%. NAV per share was $14.75 at the end of June, down 1.2% compared to the prior quarter. The decline in NAV per share was primarily due to a handful of positions that are experiencing company-specific challenges, partially offset by a gain on Merckx, which we will touch on shortly, and NII, slightly exceeding the dividend. During the June quarter, MFIC made $262 million of new commitments across 29 transactions. MidCap's strong incumbent position continues to be a competitive advantage, as evidenced by the fact that slightly more than half of the 29 commitments were made to existing portfolio companies. This underscores the power of incumbency, particularly in a muted M&A environment. We also observed a slight increase in the spread per unit of leverage on new commitments compared to the prior quarter, which Ted will discuss later. Moving on to Merck's, our aircraft leasing portfolio company, which as you know, we have been actively working to reduce. During the June quarter, Merck sold one aircraft, which resulted in $8.5 million pay down to MFIC. We're very pleased to share several recent positive developments related to our investment in Merck's that occurred subsequent to quarter end. As mentioned on last quarter's call, we were working on multiple sales campaigns and anticipated MFIC's exposure to Merck's to decline in the coming quarters. We are happy to report that we've made significant progress toward this objective. Post-quarter end, Merck successfully completed a sales transaction covering the majority of its aircraft. Given the strong market environment, we were able to sell these aircraft above the value vetted in Merck's valuation, which resulted in a modest write-up on our investment during the June quarter. In addition, in July, Merck's received payments from insurers related to the three aircraft detained in Russia – in the amount of $30.9 million, which brings Merck's total recoveries to date to approximately $47.4 million on those three aircraft. Similar to the sales transaction, the insurance proceeds were slightly above the amounts assumed in Merck's valuation. Following the sales transaction and the insurance recoveries, Merck's will be repaying approximately $90 million to MFIC on a net basis in the September quarter, reducing MFIC's investment by nearly half. As part of the sales transaction, Merck's is also expected to receive additional consideration of approximately $30 million anticipated by year-end 2025 or early 2026. Both the insurance recoveries and the sales transaction combined are expected to result in a positive impact to NAV in the high single digit per share range relative to its June 30th, 2025 carrying value. To facilitate the Merck's sales transaction, MFIC temporarily provided additional capital to Merck's. As a result, MFIC has incurred incremental interest expense associated with this temporary capital infusion in the September quarter of approximately $1 million, or one cent per share. On a pro forma basis, adjusting Merck's $185 million fair value as of the end of June for this $90 million net pay down, MFIC's investment in Merck's will total approximately $95 million, representing approximately 2.8% of the total portfolio, down from 5.6% at the end of June. Of the $90 million net repayment, approximately $25 million will be used to reduce the Merck's Revolver and the remaining $65 million applied to our equity investment in Merck's. As mentioned, MFIC will be receiving additional consideration totaling approximately $30 million by the end of 2025 or in early 2026, which will further reduce MFIC's exposure to Merck's. Let me now walk you through what remains in Merck's. MFIC's remaining investment in Merck's consists of four aircraft plus the value associated with Merck's servicing platform. As a reminder, Merck's earns income through its servicing activities for Navigator, Apollo's dedicated aircraft leasing fund. Navigator is actively pursuing the sale of its fleet. Merck's received a servicing fee. Merck's receives a servicing fee on each aircraft sale. Pro forma for the sale transaction, the servicing business represents approximately 40% of the total value. Taking a step back, this reduction in our exposure to Merck's lowers MFIC's exposure to an under-yielding asset and provides us with capital to deploy into first lien middle market loans sourced by MidCap Financial, which we believe will deliver a higher and more attractive risk-adjusted return. At the current base rates, we estimate that reinvesting $90 million, comprising of $25 million from Merck's Revolver and $65 million from equity, is expected to generate approximately $0.06 per share in additional annual net investment income, enhancing long-term value for our shareholders. The remaining value of Merck's, once realized and reinvested, will generate another approximate $0.06 per share in additional net investment income at current base rates. Turning to our dividend, on August 5th, 2025, our Board of Directors declared a quarterly dividend of 38 cents per share for shareholders of record as of September 9th, 2025, payable on September 25th, 2025. As mentioned, we intend to redeploy the capital repaid from Merck's, which should be accretive to MFIC's earnings power and strengthen our dividend coverage going forward. With that, I will now turn the call over to Ted.