Q4 2023 MidCap Financial Investment Corporation Earnings Call
Speaker 1: For.
Speaker 2: Good morning and welcome to the earnings conference call for the period ended March 31, 2023 for mid-cap financial investment corporation. At this time, all participants have been placed in a list and only mode. Q-
Speaker 2: The call will be open for question and answer session following the speakers prepared remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2. I will now turn the call over to Elizabeth Besson, Investor Relations Manager from Mid-CAP Financial Investment Corporation.
Speaker 2: Thank you, operator, and thank you everyone for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty President, and Greg Hunt, Chief Financial Officer. Howard Ridgyer, Executive Chairman, as well as additional members of the Management Team were on the call and available for the Q&A portion of today's call.
Speaker 2: I'd like to advise everyone that today's calling webcast are being recorded. Please note that they are the property of mid-cap 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.
Speaker 2: the BDC and we will use mid cap financial report to the lender headquarter in Bethesda, Maryland. At this time I'd like to turn the call over to our chief executive officer, Tanner Powell. Thank you, Elizabeth. Good morning, everyone, and thank you for joining us today. I will begin today, it's called by highlighting our results for the quarter and will then provide thoughts on the current environment.
Speaker 3: Following my remarks, Ted will review our investment activity and provide an update on credit quality. Lastly, Greg will review our financial results in detail. We'll then open the call to questions.
Speaker 3: Beginning with our financial results after market closed yesterday, we reported a strong March quarter with net investment income per share of 45 cents, well above the current 38 cents dividend, depending from the positive impact of higher base rates, strong fee and prepayment income, as well as our new fee structure, which became effective during the quarter. As a reminder, fee and...
Speaker 3: excess of the dividend as well as a slight net unrealized gain on the portfolio.
Speaker 3: Regarding investment activity, new corporate lending commitments made during the quarter totaled 110 million all-first-lane floating rate and across 15 distinct borrowers as we continue to emphasize portfolio diversification. As discussed on last quarter's call, Merck's executed a significant transaction during the March quarter by selling its interest.
Speaker 3: in a joint venture which allowed Merx to repay $65 million during the quarter. At the end of March, our investment in Merx totaled $197 million representing 8.3% of the total portfolio fair value. We remain focused on reducing our investment in Merx, and while we don't expect paydowns to occur evenly.
Speaker 3: we do expect to see some additional paydowns in the remainder of 2023 subject to market conditions. Shipping to our perspective on the current environment, the quarter began with a more constructive tone compared to a challenging market in 2022. However, in March, markets sentiment shifted as regional banking challenges and renewed fears of a recession contributed to more uncertain financial markets.
Speaker 3: Even prior to recent issues, we were seeing a more favorable environment for direct lenders with new transactions pricing with wider spreads, lower leverage, and better terms, although M&A activity in the middle market had declined as the landscape at the balls. We believe recent events may cause banks to pull back from lending, which in turn should accelerate the ongoing shift in non-bank lenders' entire financial conditions.
Speaker 3: Let me take a moment to compare today's investment opportunities versus a year ago. A typical investment today prices around so for $650 to $700, basis points with an issue discount of three points.
Speaker 3: A year ago a typical deal would price at SOFR plus 575 to 600 with an issuance discount of 2 points. In addition to an increase in spreads and OID, base rates have increased significantly. Three months SOFR was 4.9 percent at the end of March compared to 0.7 percent a year ago, an increase of over 400 basis points.
Speaker 3: Taken together, this translates into unlevered acid yields of around 12.5% today compared to 7.5% a year ago.
Speaker 3: Moving to the dividend, our Board of Directors declared a dividend of 38 cents per share to shareholders of record as of June 13, 2023, payable on June 29, 2023.
Speaker 4: based on the current forward curve for the foreseeable future. With that, I will turn the call over to Tech. Thank you, Tanner. Good morning, everyone. Beginning with the portfolio, we believe the quality of our corporate lending portfolio continues to improve, which should allow us to mitigate some of the risks that could arise in a slower economy. We saw improvements on several important metrics during the period. Our average position size decreased, enhancing the diversification of the portfolio. The net leverage of our underlying borrowers decreased. And the weighted average attachment point declined. Notably, we realized all of these improvements while also slightly increasing the spread on the portfolio.
Speaker 4: At the end of March, our investment portfolio had a fair value of $2.39 billion invested in 141 companies across 25 different industries.
Speaker 4: down from 5.49 times last quarter. The overall weighted average attachment point declined to 0.1 times, down from 0.2 times last quarter, demonstrating the true firstly nature of our loan book. The weighted average spread across the corporate lending portfolio was 613 basis points, up from 610 basis points last quarter. Despite a slowdown in new issue activity, mid cap financial was active during the March quarter, closing approximately 3.5 billion in new commitments and 15.6 billion over the last 12 months. In the March quarter, MFIC's new corporate lending commitments totaled 110 million.
Speaker 4: had net repayments for the quarter totaling to 20 million. Despite the more challenging macroeconomic environment, our borrowers have proven to be relatively resilient and continue to demonstrate solid fundamental performance. We continue to see positive operating trends among the vast majority of our corporate lending portfolios, which have largely been able to pass along cost increases thereby limiting the impact on margins. Portfolio Company revenue and EBIDAC continue to trend positively, which supports the company's ability to service debt.
Speaker 4: Amendment activity continues to be quite low, although it picked up modestly since the prior quarter. The amendments were normal course in nature.
Speaker 4: As you know, amendments generally provide additional fee income and criminal spread, tighter terms, and sponsor equity infusions.
Speaker 4: Importantly, MFIC benefits from MidCap Financial's large, dedicated portfolio management team of nearly 60 investment professionals, which helps identify and address issues early to maximize value.
Speaker 4: Moving to interest coverage, the weighted average interest coverage ratio is 2.3 times, down from 2.5 times last quarter. These weighted average interest coverage ratios are based on company data for the last 12 months through December . If we utilize December 31st base rates and LTM earnings, you would see interest coverage declined 1.7 times.
Speaker 4: Given the significant increase in base rates, we're focused on current and future interest coverage and fixed charge coverage ratios across the portfolio as a component of an active risk management process.
Speaker 4: No investments were placed on non-accrual status during the quarter. At the end of March, investments on non-accrual status totaled 8.7 million, or 0.4 percent, of the total portfolio at fair value.
Speaker 4: As we discussed many times in the past, starting in 2016, we have shifted the BDC's portfolio into first-line corporate loans, primarily sourced by MidCat Financial, one of the world's leading middle-market lenders with a proven track record. MidCat Financial is one of the largest direct lending teams in the United States, with close to 200 investment professionals. In mid-2016, concurrent with the receipt of our Co-investment Order,
Speaker 4: MFIC shifted its strategic focus to leverage Apollo Global's relationship with Mid-Cat Financial. 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 remains around two basis points on loan sourced by Mid-Cat Financial.
Speaker 4: We think this performance data shows how well the strategy is performed.
Speaker 3: With that, I will now turn the call over to Greg to discuss our financial results in detail. Thank you, Ted, and good morning. I'll be getting with our financial results, Net Investment Income Per Share, for the March quarter with 45 cents. Net Investment Income then has hit it from higher base rates on our floating rate assets, strong C, and prepayment income.
Speaker 3: and our new fee structure. Prepayment income was 2.6 million, essentially flat quarter over quarter. See income was approximately 2.2 million compared to $700,000 last quarter. Dreaming by a slight pickup in a amendment activity. There was a nominal amount of dividend income earned during the quarter. Payment in kind or pick income remains very low.
Speaker 3: representing less than 1.2% of our total income for the quarter. All else equal, the new fee structure increased NII per share by approximately 6.5 cents for the quarter.
Speaker 3: The yield at cost of our corporate lending portfolio was 11.3% on average for the quarter, compared to 10.3% last quarter driven by higher base rates. This yield figure is an average at the beginning and end of the quarter. As at the end of March, the yield on the corporate lending portfolio at cost.
was 11.5%, up from 11% at the end of December .
Nav per share at the end of March was $15,18, an increase of 8 cents or a half a percent quarter over quarter. The increase was driven by 7 cents of net investment income of 45 cents relative to the 38 cents distribution recorded during the quarter. There was also a 1 cent.
Per share increased due to net unrealized gains on the portfolio. Additional details on net gains and losses are shown on page 16 in the dirty, earning supplement.
Total expenses for the quarter were $38.3 million, up from $35.3 million last quarter, primarily due to higher interest expense and higher incentive fees, partially offset by lower management fees.
Gross management fees totaled 4.3 million compared to 8.8 million last quarter, a decrease of 4.5 million or approximately 50%.
As a reminder, MFIIC's base management fee was reduced to 1.75 on equity beginning January 1, 2023.
Among listed BDCs, MFIC's management fee is now the lowest.
Gross incentive fees totaled $6.2 million, an increase of approximately $6 million from last quarter. Recall, MFIC's incentive fees on income includes a total return hurdle with a rolling 12-quarter look back. The total return fee, net losses, unrealized or realized against pre-insentive net investment income over a trailing 12-quarter period.?im
For March 2023, the look back period used to calculate the incentive fee was a 12-quarter period between June 2020 and March 2023. The net loss recorded during the March 2020 quarter, which reflected the initial impact of the pandemic fell out of the look back period.
As a result, the incentive fee cap resulted in a full 17.5% incentive fee for the March quarter. While this can create some volatility within our incentive fee, we believe this provides strong alignment of interest with our stakeholders.
Recall, the incentive fee rate on income was permanently reduced from 20% to 17.5% beginning this quarter.
Moving on, from a balance sheet perspective, our net leverage ratio stood at 1.4 times at the end of March. As previously disclosed in April , we were pleased to extend our net leverage ratio to the next level.
the maturity of our senior secured revolving credit facility by over two years to April 2028. It is
We greatly appreciate the support from our lending partners. The primary benchmark rate was changed from LIBOR to SOFR. The spread under the facility was reduced from 2% to 1.975%.
Their main material terms of the facility were unchanged. Our investment portfolio continues to transition from live or to so far, and at the end of March 65% of our corporate lending portfolio utilized so far.
material terms of the facility were unchanged. Our investment portfolio continues to transition from LIBOR to SOFAR and at the end of March 65% of our corporate lending portfolio utilize SOFAR. Shifting gears a bit.
In light of the recent banking crisis, we wanted to make a few comments from MFICs about MFICs exposure or lack thereof to the regional banks that have failed. MFIC did not hold any cash deposits or securities at the failed banks and did not have any creditor or debtor exposure to the failed banks. We also reviewed the exposure at our portfolio companies.
Only a few of our portfolio companies had cash balances at the failed banks, and those were generally held in security accounts in the banks broker dealer.
That said, all depositors at the banks are being made whole. We continue to believe that we have the best future for all of us. Thank you. Thank you very much. Thank you. Thanks, everyone. Thank you. Thank you.
There is a disconnect between how our stock currently trades considering the repositioning of the portfolio into mostly first lean
corporate loans sourced by MidCap Financial, which has a long and outstanding track record. We believe MFIC presents an attractive investment opportunity. This concludes our remarks, and we'd like to open it up to questions. At this time, we will open the floor for questions. If you would like to ask a question, please press the Q&A button.
Yeah, thank you. Good morning. You mentioned how the revenue and EBITDA growth within the portfolio was sustained through Q1. I wonder if you saw any kind of deceleration there. And if that leads to any conclusions about how the economy is performing here recently, particularly around the bank crisis.
Any thoughts on that topic would be great.
that topic would be right. Yeah, sure.
You know, we did see a slight deceleration, you know, relative to the last few quarters. Revenue growth was in the double digits, although just barely. And EBITDA growth was in the single digits, high single digits. You know, what we do continue to see is that, you know, there are...
margins are not growing as fast as revenue. And as we look out across the spectrum and we think about the impact of what the banking crisis would be, I think it's kind of a double ed sword you've got on one hand from an economic standpoint, you're going to have continued pressure on consumers on small businesses.
and their ability to obtain credit and continue to spend. And then on the other side of the coin, private lenders like ourselves who will be able to take advantage of opportunities that pop up and continue to drive good pricing and importantly good terms in terms of covenants and low advancements.
then rolled forward since December . That'd be a continuation of the trend of a slight moderation, but still healthy overall fundamentals.
appreciate and then I would say
economy perhaps absorbing the banking crisis are you seeing any kind of early signs of a bit of a recovery you said the first quarter started to show signs of life and then slowed down as the news emerged are you seeing any inflection here recently
I wouldn't say we're seeing any inflection. Obviously, you know, the quarter started off with a kind of more benign, more constructive environment, and then we had the events with the regional banking issues emerge. And I think the way we look at it, Marc, is certainly…
As we look forward, I think the volatility of outcomes has probably been enhanced from here. We are experiencing a market that was arguably very compelling from a private debt standpoint, even prior to the regional banking stress. And we think over the longer term are encouraged by the opportunities that that could help, you know, the next.
You know, we have always done stress underwriting. We run stress cases about how rates or costs or other parts of the economy could adversely impact the companies. So we do not underwrite to up into the right hockey sticks in terms of our approach to credit.
And so while we do hope that there will be some rebound, you know, from an underwriting standpoint, it's kind of hope for the best, but we always plan for the worst and are very diligent in those stressed underwriting approaches.
Appreciate that. Thank you. Our next question comes from Kenneth Lee from RBC Capital Markets.
Hi, good morning. Thanks for taking my question. Just one on Merckx. I think in the prepared remarks you mentioned that you could expect some payments this year. Just want to see if you could just further expand upon that. Some details on that. Thanks.
Thanks, Ken. As we mentioned in the prepared remarks, we were very pleased to report, as we did last quarter, a significant pay down to take us down to roughly 8%. I think the emphasis from here is we have assets that are not only in the market, but
you know, in all stages of the disposition process, that will be, you know, market contingent and obviously also depending on the underlying financing arrangements. And so from here, while, you know, payments and repayments in reducing the exposure of MFIC's investment in Merck's, will continue, it won't be linear and it will be dictated by.
those dynamics. You know from an industry perspective we do remain encouraged by you know the fundamentals within the aviation space and aircraft leasing in particular in terms of a good supply dynamics with all the canceled orders during COVID and demand that's that's approaching 90 percent.
pre-COVID levels and then more recently the opening up of China and better traffic volumes in Asia. And so we believe that those dynamics should help to help us to reduce that exposure to Merckx. And the emphasis though...
as I started with, is it's not going to be linear, but as we've mentioned in recent quarters, it's very focused on doing everything we can to pull the exposure down.
Gotcha, very helpful there. And then one follow it by, if I may, there's any updated thoughts around leverage targets in the near term just given the current macro backdrop. Thanks.
Yeah, we are not amending our leverage guidance. We ended the lower end of it. The our approach in this market is obviously balancing our liquidity with what is...
clearly and likely to continue to be a very good vintage for private credit. So I would expect, you know, we're not amending our leverage target. Again, Ken, I would emphasize that, you know, our new fee structure has changed and we're only charging
fees on equity. So increases in leverage do not affect the manager. And so we're very comfortable with our range. And again, the where we operate in terms of leverage will be a balance of the very attractive environment and operating within that range. Got you. Very helpful there. Thanks again.
Our next question comes from Kyle Joseph from Jeffery.
Yeah, hey, good morning guys. Thanks for taking my questions. It's kind of a follow up there in terms of the deal environment versus I think you guys reference kind of your undervalued stocking and how you're thinking about.
selling capital in the new deals versus buybacks weighing leverage at the same time.
Yeah, thanks, Kyle. I mean, I think we're balancing the opportunity and, you know, that we see in the marketplace, you know, versus, you know, keeping our leverage at the lower end of our, you know, target range at this point. So I think, you know, we'll continue to evaluate it and, you know, as we move forward.
Okay, and then just a quick modeling question for Greg, probably, in terms of interest in other income, is this kind of the run rate we should expect going forward?
Were there any sort of one-time items in terms of dividend and coming low?
Well, no, there aren't any. I mean, I think you can look at our recurring, you know, income, you know, interest income and, you know, pro forma that out. And, you know, obviously the fee income and prepayment income does, you know, bounce around quarter to quarter.
Yeah, I would just, you know, and without going into the specifics, Kyle, broadly speaking, dividends, you know, have historically correlated with non-core, some of our non-core investments and that those have come down, we would expect dividend income to come down. As it relates to our current earnings, and we did call this out in our script, you know, there was, you know, enhanced prepayment income and that's a line item that, as you know, and we tell the world about how much money pure income is coming in and why it boxing is the only thing real product here today. We have a chainhat today, so put in the mail again for closing up that, anyway. You know, in that hag meh? indisila transformed the men. So I think capital is part of thez
Hey guys, regarding your interest coverage, the portfolio average is at 1.7x right now. Some portion of that had to be significantly lower, but your pick didn't rise. So have you guys had any discussions with sponsors regarding amendments by them or any...
any commercial support from sponsors? Yeah, I mean this is Howard. So no, our pick has it risen nor do we necessarily expect it to rise. It's generally not part of our, part of the normal course of things that we...
you know provide obviously the low if alone is on not a cruel it may not be paying it may be paying but we generally like if something is picking and it's a first lean loan it generally will be on not a cruel right so and so there hasn't been enough taking that obviously as interest coverage gets tighter
you know, there are more companies that potentially get tighter. But as Ted said, there hasn't really been a kick up in amendment activities, and there is still EBITDA growth, and there is still sort of coverage. That doesn't mean anecdotally there aren't loans that we are always talking to because they are underperforming as there were prior to this environment. So the answer is, you know, we have very little pick. We don't expect it to tick up.
pick to pick up, at least with regard to what is in our NII.
Okay, that's very helpful. Thank you. And as a reminder, if you'd like to ask a question, that is star and one. We'll take our next question from Paul Johnson from KBW.
Yeah, good morning, guys. Thanks for taking my questions. Just tacking on to Kyle's question a little bit, I'm just trying to get a sense of obviously fee income is a little bit higher. It sounds like this quarter, a little bit of prepayment income in there as well. Maybe just balancing that out a little bit with, you know, obviously the expected increase from higher base rates. You know, how do you guys, I guess, really.
So, you know, we have guided before that we expect, you know, prepayment and fee income to be around on average 3 million a quarter. It can be more or less based on what Tanner said is timing, but it isn't a hugely volatile part of our earnings or a high percentage part, as opposed to sort of, you know,
Like, you know, some DDCs take transaction fees on closed deals, you know, as they originate things. We do not do that. So we are not, you know, our fee income isn't driven by origination. It's only driven by sort of either, you know, amendments or one-time events or exit fees or things like that. And it has been pretty consistent if you look over the last three or four years.
around $12 to $14 million a year. So, you know, putting that aside, you know, you then would expect our, if you pull that number out.
With full fees being paid, which they were this quarter, you would expect our net income to go up marginally because interest rates are going up and because we are incrementally redeploying capital that's under earning.
So the answer is, in this interest rate of environment and even a slightly more benign when we expect to sort of have to, you know, continue coverage and, you know, those fees are...
I don't know, they can fluctuate from, you know, I don't know, one to five cents a share during a given quarter. Got it. Thanks. That's very helpful. Last question, just to kind of figure a picture, but, you know, you talked about it obviously a little bit on the call here, but just the broader corporate lending world, you know, at this point, I'm just trying to get a sense of, you know, how you're going to be able
I guess what the sponsor appetite really is, I guess, for deal activity today. We're talking about even the growth that's still in place for a lot of these portfolio companies, but obviously the cost of financing is going up as the...
tight waiting to see what happens with the economy, or is there just a very wide disparity between valuations, or between buyers and sellers, kind of getting a sense of what the appetite is, I guess, for corporate activity.
I will make two comments there. First, as it relates to the environment, I think the sponsor community is certainly trying to digest higher rates and what the impacts are on valuation. We have seen, I think, the numbers for Q1 were M&A down 10% and if you compare it to peak down as much as 30% and I think that bears out.
to that point about digesting a different cost of capital. Within that environment, private credit is certainly taking share and you've seen what is relatively muted leverage loan market and the size of the quality of the deal is required to access that market, which has increased opportunity for...
undertaking a new LBO is difficult. You are seeing a lot of activity or sponsor focus on add-ons and whether we have delayed draws to these existing companies and or they're looking for incremental commitments. That's one aspect of the, you know, over 500 borrowers that we have within thezer control driven times sending them away. So as much as we know, we are dealing care OF,000 collaboration
is digesting different evaluation expectations.
Got it. Appreciate that. That's all the questions for me. Thanks.
Our next question comes from Melissa Waddell from JP Morgan.
Good morning. Thanks for taking my questions today. I wanted to go back to your declared dividend, which you maintained at $38 cents a share, but also keeping in mind your earlier comment about expecting to over earn that amount for the foreseeable future just sort of based on the forward rate curve, I believe, and sort of going back to the next slide. Thank you.
going forward.
Well, you know, we do not expect to be, you know, pay a tax. So we will distribute, you know, special dividends, you know, at least consistent with that, whether that's 90 percent or 98 percent remain to be seen. So I think it's a little bit of both. We have this level about earning.
consistently, which we, as we said, we sort of expect, we would expect that there will be special dividends, but we don't necessarily expect there'll be quarterly. And so we will use some to support that, but at this level, we would expect to be paying some special dividends as well. Okay, thanks for that. In terms of timing, I...
Thank you.
Our next question comes from Jordan Reffin from Wells Fargo.
Hi guys, so in recent quarters you've had kind of more of a tilt towards life sciences. This quarter we don't really see much in new origination. Should we be reading anything into that? No, no, I think we're very lucky to have the various origination channels and what
present itself can can can modulate obviously in life sciences mid cap has a tremendous franchise there and you quite a bit of opportunity we expect over the next several years but I wouldn't I wouldn't take from that anything somatic or you know indicative of the trend.
Okay, thank you. We show no further comments at this time. I will now turn back to management for 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 if you have any other questions and have a good day.
Thank you ladies and gentlemen. This concludes today's conference. You may now disconnect. With the sound of the calling the flag that optical
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