MidCap Financial Investment Corporation

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Good morning. And welcome to the earnings conference call for the period ended September 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 and answer session following the speaker's prepared remarks. If you wish 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. 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, Chief Financial Officer. Howard Ridger, Executive Chairman, and Greg Hunt, our former CFO, who currently serves as a Senior Advisor, 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 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 third quarter earnings conference call. To begin today's call, I'll provide an overview of MFIC's third quarter results and the significant repayment from our investment in Merck, our aircraft lending portfolio company, aircraft leasing portfolio company that we highlighted on our call last quarter. I'll also share some thoughts on the outlook for our dividend. Following that, I'll hand the call over to Ted, who will share our perspective on the current market environment, walk through our investment activity for the quarter, and provide a portfolio update. Kenny will then review our financial results in detail and recent financing-related activities. Yesterday, after market closed, we reported results for the third quarter. Net investment income, or NIA per share, was $0.38 for the September quarter, which corresponds to an annualized return on equity, or ROE, of 10.3%. gap net income per share was 29 cents for the quarter which corresponds to an annualized roe of eight percent as discussed last quarter's call we're pleased to report that mercs our aircraft leasing portfolio company repaid approximately 97 million to mfic during the quarter nap per share was 14.66 at the end of this at the end of september down 0.6% compared to the prior quarter. The decline in NAV was primarily due to a handful of positions that were added to non-accrual status, partially offset by a gain on our investment in Merckx. The increase in non-accruals reflects company-specific issues and we believe is not representative of a broader deterioration in credit quality. During the September quarter, MFIC made $138 million of new commitments across 21 transactions. We believe MidCap Financial's strong incumbent position continues to be a significant competitive advantage, as evidenced by the fact that slightly more than half of our new commitments, by number, were made to existing portfolio companies. In a muted M&A environment, incremental commitments are an important source of deal flow. While sourcing assets is generally considered to be among the biggest challenges for many market participants in the market environment, MFIC benefits from access to assets sourced by MidCap Financial, one of the largest and most experienced lenders in the middle market, which is consistently ranked nearer at the top of the league tables. Our affiliation with MidCap Financial provides a significant deal sourcing advantage for MFIC. We are fortunate to have the access to significant volume of commitments originated by MidCap Financial, which allows MFIC to select assets which we believe to have the most attractive risk-reward characteristics. During the September quarter, MidCap Financial closed approximately $5.8 billion of commitments. MidCap Financial has what we believe one of the largest direct lending teams in the U.S. with over 200 investment professionals. Midcap Financial was founded in 2009, has a long track record, includes closing on approximately $150 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, and we believe that this makes Midcap Financial one of the most informed and experienced middle market lenders in the market. Key members of MidCap's financial management team have been working together for more than 25 years, resulting in strong collaboration and enhanced ability to navigate challenging market conditions, leading to improved credit quality and risk management. We believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high-yield market. MFIC's affiliation with MidCap Financial has enabled us to successfully build a portfolio of predominantly first lien loans to sponsor-backed companies. Moving on to Merckx, our aircraft leasing company, As discussed on last quarter's call, during the September quarter, Merck completed a sale transaction covering the majority of its owned aircraft. In addition, Merck received additional payments from insurers related to three aircraft detained in Russia. Both the sale transaction and the insurance proceeds exceeded the assumptions in Merck's June valuation, resulting in a $16.6 million gain recorded during the September quarter. Merck repaid approximately $97 million to MFIC on a net basis during the September quarter. Approximately $72 million of the paydown was applied to equity, and the remaining $25 million was applied to the revolver. At the end of September, MFIC's investment in Merck's totaled $105 million at fair value, representing 3.3% of the portfolio, down from 5.6% at the end of June, which reflects the $97 million paydown and the net gain recorded during the quarter. As part of the sale transaction, MIRCS expects to receive approximately $25 million of additional consideration by the end of 2025 or in early 2026, which will be paid to MFIC and further reduce our exposure. Let me remind you about what remains at MIRCS. MFIC's remaining investment in MIRCS consists of four aircraft, plus the value associated with Merck's servicing platform. Merck earns income through its servicing activities from Navigator, Apollo's dedicated aircraft leasing fund, which currently owns 39 aircraft. Having fully deployed its equity commitments, Navigator is in the harvest period, and as such, the fund is opportunistically monetizing assets to optimize fund level returns. Merck receives a remarketing fee on each aircraft sale. At the end of September, the servicing business represented approximately 25% of the total value of Merck's. The servicing component of Merck's will naturally decline as servicing income is received. Turning to our dividend, on November 4, 2025, our Board of Directors declared a quarterly dividend of $0.38 per share for stockholders in record as of December 9th. 2025 payable on december 23rd 2025. before i turn the call over to ted i would like to take a moment and make a few comments about our dividend giving increasing investor focus in light of the recent fed cuts and market expectation for additional cuts and the resultant decline in the sofa forward curve Due to the asset-sensitive nature of our balance sheet, all else equal, declines in base rates will put pressure on net investment income. For context, the current SOFR forward curve is projected to trough around mid to late 2026 at around 3%, which is roughly 80 to 90 basis points below current levels. As shown on page 16 in the earnings supplement, 100 basis point reduction in base rates would reduce MFIC's annual net investment income by approximately $9.4 million or $0.10 per share, which includes the impact of incentives. We are actively working on a couple of initiatives to help offset the impact of some to offset some of the impact from declining base rates these initiatives including pursuing additional pay downs from mercs and resolving certain non-accrual and under earning assets post quarter end we made a couple of enhancements to our capital structure which will also improve mfic's earnings power which kenny will discuss with that i will now turn the call over to ted thank you tanner good morning everyone

Starting with the market backdrop, the U.S. economy has remained resilient, which has helped ease concerns about a recession. Inflation remains elevated. Consumer spending and business spending have been strong, although consumer sentiment is worsening. In response to rising unemployment risks, the Federal Reserve cut interest rates by 25 basis points in September. The Fed cut another 25 basis points in October. Torsten Slocke, Apollo's chief economist, says private labor data suggests that the labor market is doing okay. He also sees growing upside risk to inflation driven by tariffs, a weakening U.S. dollar, a strong economy, and wage pressures in certain sectors. As the significant tariff-driven volatility is eased and there's more clarity with respect to the trajectory of rates, we're seeing an increase in sponsor M&A activity. That said, given the significant capital raise for direct lending, we continue to see pressure on both spreads and OIDs. 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. Regardless of recent M&A activity levels, we see that many of our borrowers continue to have add-on financing needs, which is an important source of deal flow. Next, I'm going to spend a few minutes reviewing our third quarter investment activity and then provide some detail on our investment portfolio. In the September quarter, we continued to deploy capital into assets with what we believe to be strong credit attributes. As mentioned, MFIC's new commitments in the September quarter totaled $138 million, with a weighted average spread of 521 basis points across 21 different companies. Despite the competitive environment, MidCap Financial has remained disciplined in its underwriting. The weighted average net leverage on new commitments was 3.8 times in the September quarter, down from 4 times in the prior quarter. Our fee structure, which is one of the lowest among listed BDCs, allows us to generate what we believe to be attractive ROEs, even at current spreads. Gross fundings, excluding revolvers and MERCs, totaled $142 million. Sales and repayments, excluding revolvers and MERCs, totaled $197 million. Net revolver fundings were approximately $3 million. And as previously mentioned, we received a $97 million net pay down for MERCs. In aggregate, net repayments for the September quarter were $148 million. Excluding the $97 million net repayment for Merck's, net repayments for the quarter totaled $51 million. Shifting now to our investment portfolio, at the end of September, our portfolio had a fair value of $3.18 billion and was invested across 246 companies across 48 different industries. Direct origination and other represented 95% of the total portfolio, up from 92% at the end of June, primarily driven by the Merck's paydown. Merck's accounted for 3.3% of the total portfolio at the end of September, down from 5.8% at the end of June. At the end of September, the non-directly originated loans acquired from the closed-end funds represented approximately 2% of the portfolio. All of these figures are on a fair value basis. With respect to recent headlines, we have no exposure to either first brands or tricolor. Specific to the direct origination portfolio, at the end of September, 98% was first lien and 91% was backed by financial sponsors, both on a fair value basis. The average funded position was 12.9 million. The median EBITDA was approximately 51 million. Approximately 95% had one or more financial covenants on a cost basis. Covenant quality is a key point of differentiation for the core middle market as substantially all of our deals have at least one covenant. The weighted average yield at cost of our direct origination portfolio was 10.3% on average for the September quarter, down from 10.5% for the June quarter. At the end of September, the weighted average spread on the directly originated corporate lending portfolio was 559 basis points, down 9 basis points compared to the end of June. Underlying portfolio company credit metrics showed a slight improvement quarter over quarter, although we saw an uptick in investments on non-accrual status. We observed a modest decrease in borrower net leverage, or debt to EBITDA, with the weighted average leverage decreasing to 5.29 times at the end of September, down from 5.32 times at the end of June. This trend reflects the lower leverage on new commitments, which helped offset increases in certain existing investments. Additionally, the weighted average interest coverage ratio improved slightly to 2.2 times, up from 2.1 times last quarter. Looking ahead, all else equal, if base rates decline as currently expected, we anticipate a positive impact on portfolio company credit quality through even higher interest coverage ratios. These metrics are generally based on financial information as of the end of June 2025. We believe the steady revolver utilization rate we see from our borrowers is an indicator of greater financial stability and provides us with incremental and more frequent financial information. Revolving facilities provide insight into a company's liquidity position through draw behavior. At the end of September, the percentage of our leveraged lending revolver commitments that were drawn was essentially flat compared to the prior quarter. During the quarter, we reinstated a portion of our investment in New Era to accrual status following a restructuring, which converted our first lien debt position into a combination of first lien debt and preferred equity. Conversely, we placed five investments on non-accrual status due to company-specific challenges, noting that one of these investments was acquired in last year's mergers. A portion of our investment in LendingPoint was moved to non-accrual status in anticipation of a forthcoming restructuring. In total, investments on non-accrual status represented 3.1% of the portfolio at fair value, up from 2% at the end of the prior quarter. Subsequent to quarter end, we were repaid on our position in Global Eagle, a position acquired in the mergers, which was on non-accrual. Toward the end of October, we became aware that one of our portfolio companies, Renovo, would be filing for bankruptcy. The company filed in early November. As of September 30th, MFIC had a $7.9 million exposure to the company. Pick income declined to 5.1% of total investment income for the September quarter and 5.8% over the LTM period. Our pick income remains relatively low compared to other BDCs, which we view as a positive indicator of portfolio health and reflects our focus on cash pay investments. With that, I will now turn the call over to Kenny to discuss our financial results in detail.

Thank you, Ted, and good morning, everyone. Total investment income for the September quarter was approximately $82.6 million, up $1.3 million, or 1.6% compared to the prior quarter. The increase was primarily driven by higher prepayment and fee income, partially offset by a decline in recurring interest income, which is due to a tightening of base rates, a modest uptick in non-accruals, and a slightly lower average portfolio size. Prepayment income was approximately $3.2 million, up from $1.2 million last quarter. Our fee income was $458,000, up from $220,000 last quarter. Dividend income was $200,000 flat quarter over quarter. The weighted average yield at cost of our directly originated lead lending portfolio was 10.3% on average for the September quarter. This is down from 10.5% last quarter due to the aforementioned tightening in rates. Net expenses for the quarter were $47.3 million, up from $44.9 million in the prior quarter. This increase was primarily driven by higher incentive fees. MIFIC's stated incentive fee rate is 17.5% and is subject to a total return hurdle with a rolling 12-quarter lookback. Given the total return hurdle feature and the net loss incurred during the lookback period, MIFIC's incentive fee for the September quarter was $5.8 million, were 14.1 percent of pre-incentive fee net investment income. Other G&A expenses totaled $1.6 million for the quarter, and administrative service expenses totaled $1 million. Both figures are essentially unchanged from the prior quarter and in line with our previously communicated expectations of $1.6 million and $1 million, respectively. For the September quarter, net investment income per share was 38 cents, and GAAP earnings per share or net income per share was 29 cents. These results correspond to an annualized ROE-based net investment income of 10.3 percent and an annualized return on equity based on net income of 8 percent. Results for the quarter including net loss of approximately $7.9 million, excuse me, or 8 cents per share primarily due to losses on a handful of investments as previously mentioned. Turning to the balance sheet, at the end of September, the portfolio had $8 billion. Total principal debt outstanding of $1.92 billion, and total net assets stood at $1.37 billion, or 14.66 cents per share. Company ended the quarter at net leverage of 1.35x, with average net leverage, excluding the impact of MERS, waiting to 1.37x. This was up slightly from the prior quarter's average of 1.35x. Gross fundings for the quarter, including revolvers, totaled $142 million. Net repayments for the quarter were $148 million. Excluding the $97 million repayment from Merck's, net repayments for the quarter would have been $51 million. Turning to the liability side of the balance sheet, we have been focused extending our debt maturities and reducing our financing costs. On October 1st, we amended our revolving credit facility and extended the final maturity to October 2030. Part of this amendment, the funded spread on the facility was reduced by 10 basis points, from 197.5 basis points to 187.5 basis points. Just a reminder, this includes the 10 basis points of credit spread adjustment. The unused fee was reduced from 37.5 basis points to 32.5 basis points. The size of the facility was reduced by $50 million to $1.61 billion. The remaining material terms of the facility were unchanged. As a result of this amendment, we expect to recognize a one-time expense of approximately $1.5 million in the December quarter due to the acceleration of unamortized debt excellence costs associated with one lender whose commitment was reduced. In addition, in October, we upsize and reprice MFIC Bethesda 1 CLO, which originally priced in September 2023. We increased the size of the CLO collateral from $400 million to $600 million. As part of this reset, we sold through the single ATRONs, generating approximately $456 million of relatively low-cost secured debt, which equates to a blended advance rate of 76%. The blended cost of the nodes sold was 161 basis points. Spreads on middle market CLO debt tranches have tightened considerably since this CLO originally priced. Spread on the senior AAA tranche on the CLO reset was 149 basis points, compared to 240 basis points when this CLO originally priced, tightening of 91 basis points. CLO has a reinvestment period of four years, and the net proceeds from the CLO transaction were used to repay borrowings under our revolving credit facility. As discussed on prior calls, we continue to view CLOs as an attractive source of term financing. We will recognize a one-time expense of approximately $1.8 million in the December quarter related to the reset, which reflects the acceleration of unamortized debt issuance costs for the original CLO. As always, MFIC benefited from MCAT Financial and Apollo's experience and expertise in CLO management and structuring this transaction. While these financing transactions will result in approximately $3.3 million of one-time expenses in the December quarter, the expected reduction in financing costs is expected to lead to a rapid payback period. Weighted average cost of debt for the September quarter was 6.37%. Weighted average spread on our floating rate liabilities will decline from 195 basis points as of September 30th to 176 basis points, a 19 basis point reduction. This decrease is driven by both the amendment of the revolving credit facility and the CLO reset. This concludes our prepared marks. Operator, please open the call to questions.

Thank you. If you'd like to ask a question, press star 1 on your keypad. To leave the queue at any time, press star 2. Once again, that is star 1 to ask a question. And we'll pause for just a moment to allow everyone a chance to join the queue. And we will take our first question from Aaron Siganovich with True Securities. Please go ahead. Please go ahead, Aaron. Your line is open.

Apologies. I had it muted. I'd just like to discuss the increase But there were several companies. Maybe you could just talk a little bit about what is driving this. Is there any kind of theme between them? Are they tariff-related? Maybe just a little bit more detail around the issues that were affecting those companies.

Yeah, sure, Aaron. This is Ted. Thanks for the question. If you look at the companies that went on non-accrual, there's not really a theme that ties them all together. You know, we have, you know, one that was impacted by tariffs. You know, we have one that does have some pressure from, you know, weakened consumer sentiment. But overall, you know, not a real theme, very idiosyncratic across each one.

Okay. In terms of the, you know, the increase in M&A activity that you're seeing in the marketplace, Is this something that you feel like will be, you know, sustainable through 2026? Maybe just a little more of your thoughts on the outlook for investing environment.

Yeah, I mean, I think... Yeah, sure. Go for it. Go ahead, Tanner.

No, go ahead.

Okay, sure. Yeah, I mean, Aaron, I think, you know, there's a couple factors at play. You know, one, you have some private equity companies or held companies that have been in the portfolio for a long time You also have dry powder. And so you need a combination of putting money to work as well as returning capital back to the LPs. So from that perspective, there should be ongoing demand. You also have with tariffs not going away, but at least some of that volatility being muted as we talked about, a little more certainty, which could narrow the bid-ask spread between buyer and seller. And then with rates starting to come down and you've got some consensus around where the curve is going to shake out, I think Tanner mentioned troughing mid-next year around 3%, you start to see the financing costs come down and the certainty of that financing and the cost start to stabilize. So all those factors should lead to ongoing activity. Great. Thank you. Appreciate it.

Thank you. And we'll take our next question from Melissa Waddell with JP Morgan. Please go ahead.

Good morning. Thanks for taking my questions. I wanted to revisit the comment you made about some of the mitigating actions that you're taking to help offset the impact of lower base rates. I realize that those things can take a while to ramp up and it can take some time to rotate assets. I'm curious how your team is evaluating the timing difference there and how that could impact dividend decisions. Essentially, how long might you wait to give those efforts time to kick in?

Yeah, sure. Thanks, Melissa. When we look at deployment, as we've alluded to quite a bit, we're very lucky to be roughly $3 billion of a sourcing engine for $50 billion, and so have a lot of opportunities for deployment in an improving M&A market. And importantly, when we look at deployment, and I think this rhymes with our approach with respect to the proceeds we generated from the sales of the broadly syndicated and high-yield loans, We want to do it in a deliberate manner, and importantly, instead of just getting right back to target leverage from the Merck's proceeds immediately, we want to continue to, one, not over-index in any one market, and then also take the opportunity which we're afforded by virtue of that really wide origination funnel to be very granular in what we're doing. And so, importantly, all things being equal, you'd love to get right back up to target leverage. And in the case of Merckx, we've gotten $97 million back, and we anticipate another $25 million, which was otherwise only earning 2.5% on our balance sheet, so clearly a nice accretion opportunity. But when we go to deploy, it's got to be balanced by, and even if it does... take a little bit of time. We want to err on the side of creating a really, really granular portfolio. And importantly, the other aspect of that is, of course, now, as Kenny alluded to, having reset our first CLO down 90 basis points and upsized, our all-in secured cost of capital, which is our financing strategy to become more secured heavy in our liability side, is roughly 175 and putting us in a good position to be able to still generate nice NIM in what is very clearly a tightening spread environment or a tight spread environment. So the conclusion is, We can do it quickly. We want to be measured, and we want to do it consistent with how we've deployed across a really diverse pool of 244 obligors in our portfolio.

I appreciate that detail. You mentioned portfolio leverage as part of your answer. Can you give us an update on how you're thinking about portfolio leverage in the context of this environment, given where spreads are right now? Thanks.

Yeah, our target for leverage is unchanged, and we would endeavor over the next period of time to get back to the 1.4 level. We do think, as we've said in the past, that the execution through very, very attractive levels of investment grade within the CLO is indicative of our confidence in being able to run at a little bit higher leverage level. And so we would endeavor to get back to that 1.4 level, again, drawing on the comment to your previous question, again, but doing it in a measured way.

Thank you. Thank you. And once again, if you would like to ask a question, please press the star and 1 on your telephone keypad now. And we'll pause for just one more moment to allow any further questions to queue. And we will take our next question from Paul Johnson with KPW. Please go ahead.

Yeah. Good morning. Thanks for taking my question. I only have, um, just one, I mean, what the, the recent, uh, liability amendments and, um, I guess, um, you know, addressing kind of, uh, it looks like you're making room to kind of address the upcoming bond maturity. Um, but kind of getting your ducks in a row, I guess, on the liability side, does that, does that, um, change anything around, you know, your interest in potentially repurchasing shares?

um yeah thanks paul i think um you know when we look at uh share repurchases which are are obviously um you know very topical now in light of uh where bdc's have um uh have have traded as a as of recently um you know we have been you know an active repurchaser historically uh it is a very compelling um tool for driving uh shareholder value which of course needs to be weighed against liquidity and where we stand in terms of leverage and outlook, importantly, of course, weighed against the opportunity to deploy and to new loans. But that said, you know, we do believe, you know, as we have in the past, that it is a compelling tool. And I would note also on share repurchases, Paul, Um, historically, uh, you, it has been our view that instead of, uh, implementing a 10 B five, you know, we would prefer to, to, to, uh, to utilize a share repurchases when, when the windows open and thus we can have the latest, uh, and greatest information, uh, which obviously limits the amount of time you can be repurchasing, but, but not withstanding, you know, we do, we do believe it's compelling and, and we have, um, uh, a nitro room under our current authorization. Thank you. Very helpful.

That's all for me.

Thank you. And once again, if you would like to ask a question, please press the star and 1 on your telephone keypad now. And we will take our next question from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hey, good morning. Thanks for taking my question. This may have been already covered. Unfortunately, I'm just juggling a few calls. What's the latest and any update thoughts around dividend coverage, just given the current rate outlook there? Thanks.

Yeah, sure. You know, when we look at the dividend, Ken, we were able to meet 38 cents, you know, benefiting from a slightly lower incentive fee in the current quarter. And then, as we mentioned in the prepared remarks, we do have considerable proceeds from Merck's that were yielding on our books a significantly lower yield. So that's a nice accretion opportunity for us. And then we've also undertaken an opportunity in the current market environment, which is as Those spreads on our assets have come down. We've been able to remark our liabilities. And as that plays through our numbers between those dynamics and then in addition to the fact that there is an opportunity to work through our non-accrual positions, those three drivers give us an opportunity to mitigate the effects of lower base rates. And so the board has made a decision at the current moment to leave the dividend intact. And then as we see those three levers that we have playing through and we assess, importantly, The actual trajectory of rates versus what's anticipated, you know, we will continue to reevaluate. We also did call out, you know, 100 basis decline in rates would be about 10 cents of annual NII. And thus, you know, taking into account, you know, what the actual directory of rates is against those three levers will enable us to make kind of a more informed decision as we move forward over the coming quarters.

Gotcha. Super helpful there. That's all I had. Thanks. Thanks, Ken.

Thank you. And that is star and one to ask a question. We will pause for just another moment to allow any further questions to queue. And at this time, there are no further questions in queue. I will now turn the meeting back to Tanner Powell for any closing remarks.

Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the entire team, we thank you for your time today. Please feel free to reach out to us with any other questions and have a good day.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation.