Q4 2023 MidCap Financial Investment Corporation Earnings Call
[music].
Operator: Good morning and welcome to the earnings conference call for the period ended December 31, 2023, for MidCap Financial Investment Corporation. At this time, all participants have been placed in listen-only mode.
Good morning, and welcome to the earnings Conference call for the period ended December 31, 2023 for mid cap financial investment Corporation.
At this time, all participants have been placed in listen only mode.
Operator: 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 star 2. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Please go ahead.
Call will be opened for a question and answer session. Following the Speakers' prepared remarks if.
If you would like to ask a question at that time simply press star one on your telephone keypad.
If you would like to withdraw your question Press Star two.
I will now turn the call over to Elizabeth Besen.
Investor Relations manager for mid cap Financial Investment Corporation. Please go ahead.
Elizabeth Besen: Thank you, operator, and thank you, everyone, for joining us. Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Greg Hunt, Chief Financial Officer. Howard Widra, Executive Chairman, as well as additional members of the management team, are on the call and available. 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 any unauthorized broadcast in any form.
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 would drive executive Chairman as well as additional members of the management team 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 mid cap financial investment Corporation.
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.
Elizabeth Besen: The 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... 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 do not undertake to update our forward-looking statements or projections unless required by law.
Today's conference call and webcast May include forward looking statements you should refer to our most recent filings with the SEC for risk set of playwear business and 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 the U S.
Elizabeth Besen: To obtain copies of our SEC filings, please visit 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. Information about the portfolio as well as the company's financial... 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, and thank you, everyone, for joining today's call.
He sees website at www dot SEC Gov, or our website at www Dot Midcap financial IC Dot com.
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 mid cap financial investment Corporation is either M. S. I C 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.
I'll turn the call over to Tanner Powell, and if Icf's Chief Executive Officer.
Thank you Liz and thank you everyone for joining today's call.
Tanner Powell: I'll begin today's call with a summary of our results, and we'll also provide our perspective on the current environment. Ted will then discuss our investment activity and provide an update on the investment portfolio credit quality. Lastly, Greg will review our financial results in greater detail, and we'll also discuss our recent financing. We will then open the call to questions. Yesterday, after the market closed, we reported strong results for the December quarter to cap off a strong year, highlighted by an increase in net investment income, an increase in net asset value, stable credit performance, and continued de-risking of the portfolio. Net investment income per share for the December quarter was $0.467, up from 43 cents last quarter, which corresponds to an annualized return on equity or ROE of 11.9%.
In today's call with a summary of our results and will also provide our perspective on the current environment.
Ted will then cover our investment activity and provide an update on the investment portfolio of credit quality.
Lastly, Greg will review our financial results in greater detail and will also discuss our recent financing transaction. We will then open the call to questions yesterday after market close we reported strong results for the December quarter to cap off a strong year highlighted by an increase in net investment income an increase in net asset value stable credit.
Performance and continued derisking of the portfolio.
Net investment income per share for the December quarter was 46 cents up from 43 cents last quarter, which corresponds to an annualized return on equity or ROE of 11, 9%.
Tanner Powell: Results for the quarter reflect an increase in recurring interest income from our predominantly floating rate portfolio as well as strong prepayment. Gap EPS for the December quarter was $0.51, up from $0.46 last quarter, which includes a net gain on the portfolio of $0.05 per share, reflecting the stable credit quality of our portfolio. Our gap earnings for the quarter corresponds to an annualized ROE of $13.3 billion.
Results for the quarter reflect an increase in recurring interest income from our predominantly floating rate portfolio as well as strong prepayment income.
GAAP EPS for the December quarter was 51 cents up from 46 cents last quarter, which includes a net gain on the portfolio five cents per share, reflecting the stable credit quality of our portfolio. Our GAAP earnings for the quarter of corresponds to an annualized Roe.
13, 3%.
Tanner Powell: We believe these results demonstrate the merits of our investment strategy and our fee structure, which aligns the incentives of our managers with the interests of our shareholders. We also continue to improve the risk profile of our portfolio by reducing our exposure to Merck, our aircraft leasing portfolio, as well as our second... At the end of December, corporate lending and other represented 92% of the total portfolio, of which 96% was first lien on a fair basis. We believe MFIC has one of the most senior corporate lending portfolios among BDCs, as evidenced by our low attachment point of 0.1.
We believe these results demonstrate the merits of our investment strategy and our fee structure, which aligns the incentives of our manager with the interests of our shareholders.
We also continued to improve the risk profile of our portfolio by reducing our exposure in merck's, our aircraft leasing portfolio company as well as our second lien exposure at the end of December corporate lending and other represented 92% of the total portfolio.
Of which 96% was firstly not a fair value basis.
We believe M. F. C has one of the most senior corporate lending portfolios among bdcs as evidenced by our low attachment point of 0.1 times, 98% of our corporate lending portfolio has one or more financial covenants and 88% of our corporate lending portfolio is backed by financial sponsors, who we know well and with whom mid cap financial has.
Tanner Powell: 98% of our corporate lending portfolio has one or more financial covenants, and 88% of our corporate lending portfolio is backed by financial sponsors who we know well and with whom MidCap Financial has had a longstanding relationship... We believe we have constructed a corporate lending portfolio that will perform well even during a potential economic slowdown. Overall, we feel good about the health and quality of our corporate lending portfolio as our underlying borrowers have largely been able to handle higher lending. All key credit metrics either improved or were unchanged during the quarter. No investments were placed on non-equivalent credit.
Long standing relationships, we believe we have constructed our corporate lending portfolio that will perform well even during a potential economic slowdown.
Overall, we feel good about the health and quality of our corporate lending portfolio is our underlying borrowers have largely been able to handle higher borrowing costs.
All key met all key credit metrics have either improved or were unchanged during the quarter no investments were placed on non accrual status we.
We have not seen any significant signs of credit weakness that said, we are closely monitoring our portfolio and mindful of the potential impacts of higher for longer rate environment.
As of December 31st 2023 M. S. Six net at net asset per share NAV per share was $15.41, an increase of 13 cents or 0.9% compared to the prior quarter, which reflects operating earnings above the dividend and a net gain on the portfolio.
Tanner Powell: We have not seen any significant signs of credit weakness. That said, we are closely monitoring our portfolio and mindful of the potential impacts of higher for longer rate environments. As of December 31, 2023, MFIC's net asset per share, NAV per share, was $15.41, an increase of $0.13, or 0.9% compared to the prior quarter, which reflects operating earnings above the dividend and a net gain on the portfolio. We also continue to focus on enhancing the right side of our balance sheet. During the quarter, we closed on MFIC's first CLO transaction, and we also issued some unsecured debt, which Greg will discuss in greater detail. These transactions improve MFIC's debt maturity. I would now like to provide a perspective on the current environment. The credit markets rallied during the December quarter, fueled by diminishing concerns about a recession, a slowdown in inflation, and the Federal Reserve signaling that its rate hiking cycle had come to an end.
We also continued to focus on enhancing the right side of our balance sheet. During the quarter. We closed on M. Fsc's first CLO transaction and we're all and we also issued some unsecured debt, which Greg will discuss in greater detail. These.
These transactions improve M S ICD debt maturity ladder.
I would now like to provide a perspective on the current environment the credit markets rallied during December.
During the December quarter fuelled by diminishing concerns about recession slowdown in inflation and the federal reserve signaling rate hiking cycling had come to an end.
As the quarter progressed, we saw an increase in sponsor activity, which combined with a rebound in the syndicated loan market contributed contributed to a supply demand imbalance for private loans, resulting in spread compression. We saw borrowers taking advantage of this dynamic referred to refinance or reprice existing liabilities that said, we continue to see private lenders.
Tanner Powell: As the quarter progressed, we saw an increase in sponsor activity, which combined with a rebound in the syndicated loan market, contributed to a supply and demand imbalance for private loans, resulting in spread. Additionally, we saw borrowers taking advantage of this dynamic to refinance or reprice existing liabilities. That said, we continue to see private lenders fill the void left by the banks. Looking ahead, we believe we will likely see a pickup in deal activity in 2024, given a more stable backdrop, better visibility into rates, significant private equity drive prowler, which needs to be, and increasing pressure for sponsors to exit assets in order to make distributions and or return of capital. Sponsors focused on the middle market are primarily seeking financing solutions in the private equity, buyers and sellers are becoming more aligned on value. At Apollo, and MidCap, we are seeing a noticeable pick-up in pipeline. As you know, MFIC is squarely focused on the core middle market. MidCap Financial has a long track record. 14 years
Fill the void left by banks.
Looking ahead, we believe we will likely see a pickup in deal activity in 'twenty, 'twenty, four giving them more stable backdrop better visibility into rates significant private equity dry powder, which needs to be deployed and increasing pressure for sponsors to exit assets and in order to make distribution <unk> return of capital to investors.
Sponsors focused on the middle market are primarily seeking financing solutions and the private credit market buyers and sellers are becoming more aligned on valuation at Apollo and mid cap, we are seeing a noticeable pickup in pipeline activity in recent months.
No.
He is squarely focused on the core middle market mid cap financial has a long track record, which spans 14 years of lending to middle market companies and includes.
Closing on approximately 110 billion of lending commitments. Since 2013. This origination track record provides us with a very large data set of middle market company financial information across all industries, and we believe makes them mid cap financial one of the most inform an experienced middle market lenders in the market.
Oppose the affiliation with mid cap financial has a significant competitive advantage in short we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated market or the high yield market.
Next let's turn to the dividend our approach to dividends seeks to provide shareholders with an attractive current yield while also retaining some earnings for NAV stability and growth to that end our board of directors declared a dividend of <unk> 38 per share consistent with our prior quarter dividend to shareholders of record as of March 12, 2024 payable on.
On March 28, 2024, 30, eights and dividend represents an annualized yield of approximately nine 9% based on NAV per share as of December 31.
Tanner Powell: The Middle Market, and include closing on approximately $110 billion. This origination track record provides us with a very large data set of middle market company financial information across all industries, and we believe it makes MidCap Financial one of the most informed and experienced middle market lenders. Apollo's affiliation with MidCap Financial is a significant competitive advantage. In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated market or the high-tech market.
Our dividend continues to be well covered by net investment income for.
For the full year net investment income outpaced dividends by nearly 17% as we chose to retain earnings which contributed to the two 1% increase in NAV per share for the year.
A current base rates, we are well positioned to generate net investment income in excess of this dividend. We will continue to evaluate our dividend policy given the prevailing interest rate environment in.
In summary, we generated solid returns for our shareholders in 2023, and we believe we are well positioned to continue to deliver attractive returns looking ahead as we enter 2024. We are excited about the strategic transaction that we announced last quarter. As a reminder, in November <unk> announced that it entered into merger agreements with Apollo.
Tanner Powell: Next, let's turn to the dividend. Our approach to dividends seeks to provide shareholders with an attractive current yield while also retaining some earnings for NAFSA. To that end, our Board of Directors declared a dividend of $0.38 per share, consistent with our prior quarter dividend, to shareholders of record on April 24, payable on.
Senior floating rate Fund, Inc, or a S T and Apollo Tactical income Fund, Inc, or <unk> pursuant to which a S T and Aif will merge into MFC subject to shareholder approvals and other customary closing conditions.
AFG in Aaas are both listed closed end funds registered under the investment Company Act of 1940 and managed by an affiliate of polymer.
Tanner Powell: The $0.38 dividend represents an annualized yield of approximately 9.9% based on NAB per share. Our dividend continues to be well covered by NetInvest. For the full year, net investment income outpaced dividends by nearly 17% as we chose to retain earnings, which contributed to the 2.1% increase in net earnings per share for the year. At current base rates, we are well positioned to generate net investment income in excess of this dividend. We will continue to evaluate our dividend policy given the prevailing interest rate environment. In summary, we generated stellar returns for our shareholders in 2023, and we believe we are well positioned to continue to deliver attractive returns. As we enter 2024, we are excited about the strategic transaction that we announced last quarter.
We have filed a registration statement and preliminary joint proxy statement in connection with the transaction. During this registration period. We are extremely limited in what we can discuss once declared effective we will commence a proxy solicitation process to seek the requisite shareholder approvals for the mergers and we'll be happy to engage in a more detailed dialogue at that.
Todd.
In the meantime, please understand that we will not be able to answer any questions related to the proposed merger on today's call with that I will turn the call over to Ted.
Good morning, everyone, beginning with investment activity as a reminder, <unk> is focused on investing in loans sourced by Midcap financial which provides <unk> with a large pipeline of investment opportunities midcap financials, a leading middle market lender with one of the largest direct lending teams in the U S with close to 200 investment professionals.
Mid cap financial was active during the December quarter closing approximately $3 $9 billion in new commitments or approximately $15 billion for the full year acquisition activity among existing borrowers was significant.
During the quarter <unk> deployed capital into what we believe is an attractive environment characterized by notably lower leverage M F Ice's new investment.
Tanner Powell: As a reminder, in November, MFIC announced that it entered into merger agreements with Apollo Senior Floating Rate Fund, Inc., or AFT, and Apollo Tactical Income Fund, Inc., or AIF, pursuant to which AFT and AIF will merge into MFIC, subject to shareholder approvals and other customary conditions. AFT and AIF are both listed closed-end funds registered under the Investment Company Act of 1940 and managed by an We have filed a registration statement and preliminary joint proxy statement in connection with the transaction. However, during this registration period, we are extremely limited in what we can do.
Commitments during the quarter totaled $175 million of new first lien commitments across 20 different borrowers for an average new commitment of $8 8 million as we continue to focus on diversification by borrower, 45% of new commitments were made to existing portfolio companies. We continue to observe favorable pricing at lower leverage levels for newly originated.
Loans, the weighted average spread on new commitments was 625 basis points with an average OID of approximately 234 basis points. This translates into a very attractive yield of over 12%.
Weighted average net leverage of new commitments was three six times. We're currently seeing some pricing compression on new commitments as a result of the market dynamics previously discussed we have a strong pipeline of investment opportunities.
Tanner Powell: Once declared effective, we will commence a proxy solicitation process to seek the requisite shareholder approvals for the mergers and will be happy to engage in a more detailed dialogue at that time. In the meantime, please understand that we will not be able to answer any questions related to the proposed merger. With that, I will turn the call over to Tanner. Good morning, everyone.
So far in the March quarter, MFC has closed approximately $100 million of nuc amendments.
In terms of funded investment activity gross fundings, excluding revolvers for the corporate lending portfolio told totaled $114 million sales and repayments totaled $152 million net corporate lending revolver pay downs were $1 million and we received a 7 million pay down from merck's in aggregate net repayments for the quarter totaled 47 million.
Ted McNulty: Beginning with investment activity. As a reminder, MFIC is focused on investing in loans sourced by MidCap Financial, which provides MFIC with a large pipeline of investment opportunities. MidCap Financial is a leading middle market lender with one of the largest direct lending teams in the US, with close to 200 investment professionals.
Our portfolio turnover continues to drive a positive shift in the composition of the portfolio sales and repayments included the repayment of one of the few remaining second lien positions in our portfolio, reducing our second lien exposure to less than 2% of the total corporate lending portfolio. This year.
Ted McNulty: MidCap Financial was active during the December quarter, closing approximately $3.9 billion in new commitments, or approximately $15 billion for the full year. Acquisition activity among existing borrowers was, During the quarter, MFIC deployed capital into what we believe is an attractive environment characterized by notably lower leverage. Doug Bruce with Pittsburgh.
<unk> underscores the ongoing improvement in the risk profile of our portfolio.
Turning to our investment portfolio, we have a well diversified senior corporate lending book at the end of December our portfolio had a fair value of $2 33 billion and was invested in 152 companies across 23 different industries.
Corporate lending and other represented approximately 92% of the portfolio and merck's accounted for 8% of the total portfolio on a fair value basis. The average funded corporate lending position was $14 7 million or approximately 0.7% of the total corporate and other lending portfolio, 96% of our corporate lending portfolio was firstly.
Ted McNulty: Thank you. We continue to observe favorable pricing at lower leverage levels for newly originated loans. The weighted average spread on new commitments was 625 basis points with an average OID of approximately 234, based on... This translates into a very attractive yield of over 12. The Weighted Average Net Leverage of New Commitments was 3.6 times.
And 98% of our corporate lending that portfolio on a cost basis had one or more financial covenants.
The weighted average yield at cost of our corporate lending portfolio was 12, 2% on average for the December quarter up for up from 12% in the September quarter at the end of December the weighted average spread on the corporate lending portfolio was 623 basis points up two basis points compared to the prior quarter.
Ted McNulty: We're currently seeing some pricing compression on new commitments as a result of the market dynamics previously discussed. We have a strong pipeline of investment. So far in the March quarter, MFIC has closed approximately $100 million of new commitments. In terms of funded investment activity, gross fundings excluding revolvers for the corporate lending portfolio totaled $114 million.
Turning to credit quality, our focus on true first lien top of the capital structure Middle market loans has resulted in what we consider to be strong and resilient credit metrics. We believe M. F. IC has one of the most senior corporate lending portfolios in the industry not all debt categorized as first lien has a similar risk profile, we know that some lenders.
Ted McNulty: Sales and repayments totaled $152 million. Net corporate lending revolver paydowns were $1 million, and we received a $7 million paydown from Merck. In aggregate, net repayments for the quarter totaled $47 million.
<unk> loans as first lien, even when Theres levered senior there to their positions, which is why we think it's important to look at both leverage and attachment point at.
At the end of December <unk>, net leverage and attachment points on our corporate loans was five to seven times and 0.1 times respectively.
Ted McNulty: Our portfolio turnover continues to drive a positive shift in the composition of the portfolio. Sales and repayments included the repayment of one of the few remaining second lien positions in our portfolio, reducing our second lien exposure to less than 2% of the total corporate lending portfolio. This shift underscores the ongoing improvement in the risk profile of our portfolio. Turning to our investment portfolio, we have a well-diversified senior corporate lending book. At the end of December, our portfolio had a fair value of $2.33 billion and was invested in 152 companies across 23 different industries. Corporate lending and other represented approximately 92% of the portfolio, and Merck's accounted for 8% of the total portfolio on a fair value basis. The average funded corporate lending position was $14.7 million, or approximately 0.7% of the total corporate and other lending portfolio.
The extremely low attachment demonstrates that we are invested in the most senior part of the capital structure.
Moving to interest coverage the weighted average interest coverage ratio was one nine times unchanged from last quarter with three companies below one times, one less than last quarter. We're closely monitoring the situations and believe they're manageable as these companies have strong current liquidity good underlying business performances or have strong sponsor.
Support.
As of December 31, 2023, the median EBITDA of M. S. M. S. Icd's corporate lending portfolio companies was approximately $47 million.
Our portfolio of companies are generally maintaining solid fundamental performance with revenue and EBITDA continuing to grow we've not seen a meaningful increase in covenant breaches or pickup in amendment activity. We believe our credit quality has benefited from mid cap financial strong sourcing and underwriting capabilities.
Our underwriting on Midcap 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 one basis point alone sourced by Midcap financial we think this performance data shows how well the strategy is perfect.
Ted McNulty: 96% of our corporate lending portfolio was first lien, and 98% of our corporate lending debt portfolio, on a cost basis, had one or more financial covenants. The weighted average yield at cost of our corporate lending portfolio was 12.2% on average for the December quarter, up from 12% in the September. At the end of December, the weighted average spread on the corporate lending portfolio was 623 basis points, up two basis points compared to the prior quarter. Turning to credit quality, our focus on true first lien, top of the capital structure, middle market loans has resulted in what we consider to be strong and resilient credit. We believe MFIC has one of the most senior corporate lending portfolios in the industry. Not all debt categorized as first lien has a similar risk profile. We know that some lenders categorize loans as first lien, even when there's leverage senior to their positions, which is why we think it's important to look at both leverage and attachment.
Our non accrual rate remains very low no investments were placed on non accrual status during the quarter at the end of December investments on non accrual status totaled $5 7 million or 0.2% of the total portfolio at fair value.
We believe these strong credit metrics reflect the way in which we've prudently constructed our portfolio M. F. I see us focused on lending to the core middle market, where mid cap financial has strong long standing relationships with sponsors and borrowers and a proven track record across cycles Importantly M. F. I see benefits from midcap financials large dedicated portfolio management.
As my team well over 60 investment professionals, which helps identify and address issues. Early it's also important to note that midcap financial leads and serves as administrative agent on the vast majority of our deals which provides meaningful downside protection as agent. We are in active dialogue with the borrower and have enhanced information flow, which allows us to be proactive in.
Resolving credit problems.
Moving onto Mark's as discussed previously we are focused on reducing our investment in our aircraft leasing and servicing businesses. While we don't expect paydowns to occur evenly we believe aircraft sales and servicing income still allow for the pay down of third party debt and M. S. Ics investment in Merck's overtime.
Ted McNulty: At the end of December, MFIT's net leverage and attachment points on our corporate loans were 5.27 times and 0.1 times, respectively. This extremely low attachment demonstrates that we are invested in the most senior part of the capital structure. Moving to interest coverage, the weighted average interest coverage ratio is 1.9 times, unchanged from last quarter, with three companies below one times, one less than last quarter. We're closely monitoring these situations and believe they're manageable as these companies have strong current liquidity, good underlying business performance, or have strong sponsor support. As of December 31, 2023, the median EBITDA of MFIC's corporate lending portfolio companies was approximately $47 million. Our portfolio companies are generally maintaining solid fundamental performance, with revenue and EBITDA continuing to grow. We've not seen a meaningful increase in covenant breaches or a pickup in amendment activity.
As a reminder, Merck started the year with 57 planes and at the end of December Merck's own 31, aircrafts, which reflects eight aircraft that were sold during the December quarter to eight aircraft were sold for approximately our September 30th value and the cash proceeds were used to pay down debt, thus, providing additional derisking to the remainder of our investment.
In March.
As of December 31, 2023, our investment in March totaled $191 million, representing approximately 8% of the total portfolio at fair value a decrease of over $70 million or 27% compared to the end of 2022.
For the December quarter, Merck's paid approximately $9 million, including $2 million of interest and a 7 million dollar return on capital for the full year Merck's paid M. F I see approximately $84 million, including $8 million of interest and $76 million return of capital with that I'll now turn the call over to Greg to discuss our financial results in detail.
Ted McNulty: We believe our credit quality has benefited from MidCap Financial's strong sourcing and underwriting capabilities. Our underwriting on MidCap-sourced 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 one basis point on loans sourced by MidCap Financial. We think this performance data shows how well the strategy... Our non-accrual rate remains very low. No investments were placed on non-accrual status during the quarter.
Thank you Ted and good morning, everyone, beginning with our financial results net investment income per share for the December quarter was 46.
Which reflects strong recurring interest income and strong prepayment income for the quarter prepayment income was $3 5 million in dividend and fee income was approximately 1 million combined.
Pick income remains very low representing approximately one 3% of total investment income for the quarter GAAP.
GAAP net income per share for the quarter was 51.
Which includes the net gain in our investment portfolio results for the quarter correspond to an annual return on equity based on net investment income of 11, 9%.
Ted McNulty: At the end of December, investments in non-accrual status totaled $5.7 million, or 0.2% of the total portfolio at fair value. We believe these strong credit metrics reflect the way in which we've prudently constructed our portfolio. MFIC is focused on lending to the core middle market, where MidCap Financial has strong, long-standing relationships with sponsors and borrowers and a proven track record across cycles.
An annualized ROE based on net income of 13, 3%.
MFS MF Ics NAV per share at the end of December was $15.41, an increase of approximately 13, 1%.
From the end of September the 13th increase reflects net investment income of 46.
Which is <unk> <unk> above the 38% distribution and a <unk> <unk> gain on the portfolio additional details on the net gain are shown on slide 17 in the earnings supplement deck net expenses for the quarter were $42 2 million up $1 9 million.
Ted McNulty: Importantly, MFIC benefits from MidCap Financial's large, dedicated portfolio management, with over 60 investment professionals, which helps identify and address issues early. It's also important to note that MidCap Financial leads and serves as an administrative agent on the vast majority of our deals, which provides meaningful downside protection. As an agent, we are in active dialogue with the borrower and have enhanced information flow, which allows us to be proactive in resolving credit problems.
Compared to the prior quarter, primarily due to an increase in interest expense.
As discussed on last quarter's call in early November MF IC closed its first CLO transaction issuing $230 million of notes at a cost.
Oversight, so sofa excuse me.
240 basis points. The CLO has a reinvestment period of four years and in December we priced 80 million a five year non call to unsecured notes in the $25 par market with a fixed coupon of 8% is unsecured issuance effectively pre funded a portion of our.
Ted McNulty: Moving on to Mercs. As discussed previously, we are focused on reducing our investment in our aircraft leasing and service businesses. While we don't expect paydowns to occur evenly, we believe aircraft sales and servicing income should allow for the paydown of third-party debt and MFIC's investment in Merck. As a reminder, Merck started the year with 57 planes, and at the end of December, it owned 31 aircraft, which reflects eight aircraft that were sold during the The eight aircraft were sold for approximately their September 30th value, and the cash proceeds were used to pay down debt, thus providing additional de-risking to the remainder of our investment in Merck. As of December 31, 2023, our investment in Merck totaled $191 million, representing approximately 8% of the total portfolio at fair value, a decrease of over $70 million, or 27%, compared to the end of 2022.
Secured debt maturing in March of 2025.
Proceeds from both transactions were used to pay down borrowings under our revolving credit facility.
At the end of December unsecured debt represented 38% of total principal debt outstanding compared to 33% at the end of September.
As a result of these two transactions the weighted average interest rate on our debt for the quarter was 694%.
6.76%.
In the prior quarter, we believe it was prudent to diversify and extend the maturity of our funding sources, we intend to continue to evaluate and monitor our capital raising transactions going forward.
Management fees totaled $4 1 million for the December quarter, essentially flat to the prior quarter. As a reminder, <unk> base management fee was reduced to 175% on equity beginning January one 2023 and is one of the only listed bdcs to charge Manny.
Agent fees on equity, which we believe provides strong shareholder alignment with a focus on net asset value.
Gross incentive fees totaled $6 3 million for the December quarter. As a reminder, our incentive fee and income is 17, 5% and includes a total return hurdle.
Ted McNulty: For the December quarter, Merck paid approximately $9 million, including $2 million of interest and a $7 million return of capital. For the full year, Merck paid MFIC approximately $84 million, including $8 million of interest and $76 million of return of capital. 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. Beginning with our financial results, net investment income per share for the December quarter reflect strong recurring interest in.
With a rolling 12 quarter look back in 2023 net investment income outpaced dividends as we chose to retain earnings and grown that as a result, we accrued approximately $1 1 million of excise tax during the December quarter, which is included in our general and administrative expenses understatement of.
<unk>.
Our current estimated undistributed taxable.
Taxable income or spillover income at the end of 2023 was approximately 92 cents per share. We will continue to monitor our undistributed earnings as part of our capital management considerations.
Moving to our balance sheet <unk> net leverage with 1.3 or four times as of December 31, 2023, compared to one four times at the end of September 2023, reflecting 47 million of net repayments during the quarter and the increase in net assets from retained earnings.
Gregory W. Hunt: For the quarter, prepayment income was $3.5 million, and Dividend and Fee Income was approximately $1 million combined. Pick Income remains very low, approximately 1.3% of total investment. Corp. Gap net income per share for the quarter was $51.
And the net gain on the portfolio.
This concludes our remarks, operator, and please open the call to questions.
At this time the call is now open for questions. If you would like to ask a question at this time. Please press star one on your telephone keypad.
You may wish to withdraw your question by pressing star two.
Once again Thats star one to ask a question.
Our first question comes from Mark Hughes with Truest. Please go ahead.
Gregory W. Hunt: includes the neck, in our investment portfolio. The results for the quarter correspond to an annual return on equity based on net investment income of $11.99 and an annualized ROE based on net income of $13. MSIC's NAV per share at the end of December was $15.41, an increase of approximately $0.13 or $0.01 from. The $0.13 increase reflects net investment income of $0.46, which is eight cents above. 38, and a $0.05 gain on the portfolio.
Yeah. Thank you good morning.
You would suggested you're positioned to generate NII ahead of the dividend.
Foreseeable future with the forward curve as it is now have you modeled out kind of how durable that should be any time period, you want to share in terms of your thinking about that the ability to pay the dividend.
Yes, I mean, I think we've been on.
Mark we've been very disciplined in keeping our dividend at the 38 cents as we look out.
To the.
The forward curve.
And.
We're confident at this point on.
Given where we are that on.
Gregory W. Hunt: Additional details on the net gain are shown on slide 17 in the Earnings Supplementary. Net expenses for the quarter were $42.7 million, up 1.9 million from the prior quarter, primarily due to an increase in interest rates, as discussed on last quarter's call. In early November, MFIC closed its first CLO transaction issuing $230 million of notes at a cost of, Oversight for SOFR, of $240,000. CLO has a And in December, we priced $80 million of five-year non-callable unsecured notes in the $25 par market with a fixed coupon of $8.
Nir.
Near future, which is let's say the next four to eight quarters.
We have coverage.
On that 38% dividend.
Understood and then from a credit perspective, you all seem to be in very good shape. The interest coverage was steady sequentially. Do you think there will be a more of a buildup of pressure kind of across the sector.
Hum.
Given the higher for longer perhaps.
Is it still choppy economy.
It's going to get worse for the sector or do you think this is the maybe.
Maybe.
Reasonably steady state.
Hi, Mark.
Yeah, I mean, I think we're seeing two things.
One side of the coin, we're still seeing revenue and EBITDA growing in our underlying portfolio of companies, which is helpful and then.
Gregory W. Hunt: This unsecured issuance effectively pre-funds a portion of our unsecured debt maturing in March of 2020. Proceeds from both transactions were used to pay down borrowings under our revolving credit facility. At the end of December, unsecured debt represented 38% of total principal debt outlay, clear to 33%. As a result of these two transactions, the weighted average interest rate on our debt for the quarter was 6.94%, up from 6.99%. Seven Se- We believe it was prudent to diversify and extend the maturity of our... Management fees totaled $4.1 million, essentially flat to the prior year.
If we do have higher for longer that's going to put pressure on the company's ability to continue to invest in the business.
Right now it still feels like.
It still feels like a pretty good place I think if you asked most investment folks a year ago or two years ago, everyone was thinking that there would be a harder landing that we've had and.
So we've all been pleasantly surprised by.
Rather benign credit environment.
And I think as we mentioned on the call. We don't see anything that other than the pressure from high interest rates that would cause any concern.
And then anything in the health care, maybe discussion of pressure on reimbursements fee schedules higher labor costs within your health care exposure. How are you positioned relative to some of these risk factors.
Gregory W. Hunt: As a reminder, MFIC's base manager... 1.75% on equity. January 1st, 2000. MFIC is one of the only listed BDCs to charge managers, which we believe provides strong shareholder alignment with a focus on net assets. Gross Incentive Fees totaled $6.3 million.
Yeah, I think we've you know every quarter, we take a look at the portfolio in different sectors and what the themes are that we need to be concerned about either from a top down perspective or that we see bubbling up from a bottoms up perspective.
Gregory W. Hunt: As a reminder, our incentive fee on income is $17.5. It includes a total return hurdle with a rolling 12 quarter. 2023, NetInvest. Outpaced Dividends as we chose to retain earnings and grow net. As a result, we accrued approximately $1.1 million of excise, join the December, which is included in our general and administrative expenses on our Statement of Operations.
And when we were going through.
The portfolio this past quarter.
<unk>.
The the answer is not zero, but it's very very small in terms of exposure to in particular the labor.
Issue.
And then on reimbursement I mean, this is certainly an item that.
Gregory W. Hunt: Our current estimate of undistributable taxable income or spillover income at the end of 2023 was approximately, and we will continue to monitor undistributed earnings. Part of our Capital Management Consideration. Moving to our balance sheet, MFIC has net leverage with one. For more information, visit www.fema.gov, 31st December 2008, compared to 1.4 times at the end of the year, reflecting $47 million of net repayment during the quarter, and Ed Asprey.
<unk> is at the forefront of mines.
And not surprisingly, we like other lenders do our best to.
Not take outright stroke of pen reimbursement risk and while.
It certainly is there to some extent to date as we look at to Ted's point, when we look very critically at our exposures within health care seems to be managing those challenges that are kind of well publicized across the space for.
Operator: This concludes our remarks, Operator. At this time, the call is now open to questions. If you would like to ask a question at this time, please press star 1 on your telephone keypad. You may withdraw your question by pressing star 2.
I appreciate it thank you.
Thank you. Our next question comes from Casey Alexander with Compass point. Please go ahead.
Yes, good morning.
Operator: Once again, that's star number one to ask a question. Our first question comes from Mark Hughes with Truist. Please go ahead. Yeah, thank you. Good morning.
If I was it better analyst I, probably know the answer to this question but.
With merck's.
Is is the remaining planes are they playing specific some of the planes. If theyre sold has to go to the securitization some of the planes. If theyre sold would result in a pay down of the revolver or is it a pool.
Mark Douglas Hughes: You had suggested your position to generate the NII out of the dividend, sounds like the foreseeable future with the forward curve as it is now. Have you modeled out kind of how durable that should be? Any time period you want to share in terms of your thinking about that ability to pay the dividend? Yeah, I mean, Mark, we've been very disciplined in keeping our dividends at 38 cents as we look out to the curve, you know, the forward curve. And, you know, we're confident at this point, given where we are, that in the near future, which is, let's say, the next four to eight quarters, we have coverage on that 38. And then, from a credit perspective, you all seem to be in very good shape. Interest coverage was steady, sequentially.
And if it's a pool then when does it turn more to the revolver as opposed to paying down and securitization.
Thanks Casey for the question. So we have on to about 20.
Two of the planes remaining sit within two securitizations called.
Called maps 18, and <unk> 19.
And the other planes on the other eight or so our joy.
Joint venture that we have on there were 15% of pre.
Proceeds from the joint venture and.
In selling those assets would go to pay down on the capital.
We pay down our capital that we've invested on.
In the portfolio right away.
The securitization.
That capital on those sale of those planes will go to pay down debt for example, during on 'twenty three we paid down.
Tanner Powell: Do you think there will be more of a buildup of pressure kind of across the sector? You know, given the higher for longer, perhaps still choppy economy, do you think it's going to get worse for the sector, or do you think this is maybe a reasonably steady state? Hi Mark.
$240 million worth of debt inside of those on yes.
Securitization with the sale of over 11 planes.
Okay.
Alright, secondly, Greg with the 8% unsecured note did you consider swapping that into a floater.
Tanner Powell: Yeah, I mean, I think we're seeing two things. You know, on the one side of the coin, we're still seeing revenue and EBITDA growing in our underlying portfolio companies, which is helpful. And then, you know, if we do have to hire for longer, that's going to, you know, put pressure on the company's ability to continue to invest in the business. You know, right now, it still feels like, you know, it still feels like a pretty good place.
Given the fact that the <unk>.
Forward curve suggests that rates can start to get easier over the course of the next couple of years.
We did consider it but we have a two year call provision and kind of looking at the curve. We decided at this point and we can always change our decision we.
We have not swapped the 8% note.
Tanner Powell: You know, I think if you asked most investment, you know, folks a year ago or two years ago, everyone was thinking that there would be a harder landing than what we've had. And so, you know, we've all been pleasantly surprised by the rather benign credit environment. And, you know, I think, as we mentioned on the call, we don't see anything that, you know, other than the pressure from high interest rates that would cause any concern. Then anything in healthcare, maybe some discussion of pressure on reimbursements, fee schedules, higher labor costs within your healthcare exposure. How are you positioned relative to some of these risk factors?
Okay.
Then my last question is and you guys are.
It is.
If everything goes as you expect or suspect that it will in relation to the merger do you have.
Sort of a.
Our guideline for when do you think assuming that the vote goes the right way that that deal could close when should we be thinking about it actually consummated.
Yes, I think as Tanner mentioned in the opening comments.
We're limited to what we can say I can say that we continue to work on this standard reviewing the comments from the SEC and we expect that to be completed.
Completed in the near future and then after that once we are in 2014 is effective we can comment on the timing.
Tanner Powell: Yeah, I think we take a look at the portfolio and different sectors and what the themes are that we need to be concerned about, you know, either from a top down perspective or that we see bubbling up from a bottom up perspective. And, you know, when we went through the portfolio this past quarter, you know, I think the answer is not zero, but it's very, very small in terms of exposure to, you know, in particular, the labor issue. And then on reimbursement, I mean, this is certainly an item that is at the forefront of mind. And not surprisingly, we, like other lenders, do our best to not take outright stroke of the pen reimbursement risks. And while it certainly is there to some extent to date, as we look to Ted's point, when we look very critically at our exposures within healthcare, we seem to be managing those challenges that are kind of well publicized. I appreciate it.
More directly.
Alright, Thank you for taking my questions. Thank.
Thank you.
Thank you. Our next question comes from Kenneth Lee with RBC Capital. Please go ahead.
Hey, good morning, Thanks for taking my question I'm wondering if you could just elaborate on the prepared remarks around pricing compression being seen on recent investments and wondering if you could also talk about what youre seeing in terms of.
Documentation in terms of recent investments thanks.
Yeah sure. Thanks Kenneth.
As we alluded to in the in the prepared remarks, we are seeing spread compression.
When you when you step back there's broadly been a rally in credit markets and you've seen spreads compress.
Kind of across the spectrum of private and public.
And we've seen that within within the middle market as well I think when we as we think about spread compression and we look at where we were able to deploy in 2023, we were very cognizant of the fact that if you look at the last couple of quarters.
Casey Alexander: Our next question comes from Casey Alexander with Compass Point. Please go ahead. Yeah, good morning. If I was a better analyst, I'd probably know the answer to this question. But with Merck, are the remaining planes, are they plane-specific?
<unk>.
Spread had been in the high sixes to seven which we did not believe was sustainable was actually against the backdrop of 10 year low in private equity activity.
As we look forward and what is often the case in the sort of incipient rally of credit markets. The activity itself tends to concentrate in repricing and refinancing and.
Ted McNulty: Some of the planes, if they're sold, have to go into securitization. Some of the planes, if they're sold, would result in a pay-down of the revolver, or is it a pool? And if it's a pool, then, you know, when does it turn more to the revolver as opposed to paying down the securitization? Thanks, Casey, for the question. So we have on to about 20... Two of the planes remaining sit within two securitizations. I'm called MAPS 18 and MAPS.
And that was very true within in Q4, as we look at the market environment now with that decline in spreads as well as broadly speaking a more constructive view on one the economy as well as also that.
Well I guess not completely.
No chance for an increase in rates, but broadly speaking market consensus that <unk>.
Ted McNulty: And the other planes, the other eight or so are in a joint venture that we have that we're 15% of. So the proceeds from the joint venture in selling those assets would go to pay down the capital that we have invested in the portfolio right away. During the securitizations, that capital, the sale of those planes will go to pay down debt. For example, during 23, we paid down, you know, approximately $240 million worth of debt inside of those. You know, securitizations with the sale of over 11. All right. Secondly, Greg, with the 8% unsecured note, did you consider swapping that into a floater, given the fact that, you know, the forward curve suggests that rates could start to get easier over the course of the next couple of years? We did consider it, but we have a two-year call provision, and kind of looking at the curve, we decided, at this point, and we can always change our decision. We have not swapped.
Rates rates will not go up further or are you starting to see the pipeline for M&A and LBO volume.
Build typically if we look back as S. L B O volume.
Uh huh.
Builds that typically helps to provide some stabilization in spreads.
And that's what we would expect as we've started to see some of the pipeline activity.
Your comment about you know.
Lender friendly I think it's it's it's helpful to our call to attention or focus on the middle market and broadly speaking more frothy markets result in more borrower friendly terms, but I think the emphasis for us and what kind of corroborate our focus on the middle market.
It's partly a documentation and in particular.
As we mentioned in our prepared remarks overnight about 98% of our corporate lending portfolio has covenants and that's a dynamic that.
That we see continuing and one kind of ballast against.
Frothy market conditions, and what that has a tendency to do.
Gregory W. Hunt: Okay, and then my last question is, and you guys, is this: If everything goes as you expect or suspect that it will in relation to the merger, do you have, you know, sort of a guideline for when you think, assuming that the vote goes the right way, that that deal could close? When should we be thinking about it, actually contemplating it?
And end markets in terms of reducing those lender friendly provisions that had been.
More attendant over the last couple of years, so our focus on the middle market and continued ability to get covenants is one aspect that we point to.
Tanner Powell: Yeah, I think, you know, as Tanner mentioned in the opening comment, I can say that we continue to work on the standard review and the comments from the SEC, and we expect that to be completed in the near future. And then after that, once our N-14 is effective, we can comment on the timing, um, you know, more directly. All right, thank you for taking my question. Thank you. The next question comes from Kenneth Lee with RBC Capital. Please go ahead. Hey, good morning.
In helping too.
Continue to have a strong.
Lender friendly.
Provisions in our documents.
Got you very helpful. There.
And just one follow up if I may.
The portfolio average of interest coverage ratios.
That's about 1.819 times.
I wanted to get your thoughts around where you think the ICR could trough over the near term. Thanks.
Kenneth S. Lee: Thanks for taking my question. Wondering if you could just elaborate on the prepared remarks around price and compression being seen in recent investments, and wondering if you could also talk about what you... Thanks. Sure, thanks, Kenneth.
I mean, it's an interesting question and then we've done a number of different modeling scenarios, but I think if you expect rates to kind of stay where they are and you look at it.
And you expect revenue and EBITDA to continue to grow which is what we're seeing in our portfolio that would suggest that perhaps.
Ted McNulty: As we alluded to in the prepared remarks, we are seeing spread compression. When you step back, you know, there's broadly been a rally in credit markets, and you've seen spreads compress, kind of across the spectrum, private and public. And, you know, we've seen that within the middle market as well.
We're at a trough, although there could be a bit of a lag.
I think we will continue.
Continue to watch and see where the sofa curve goes.
Underlying portfolio continues to perform.
And.
It just kind of depends on the timing of when the sofa curb curve moves.
Ted McNulty: You know, I think when we think about spread compression and we look at where we were able to deploy in 2023, we were very cognizant of the fact that if you look at the last couple of quarters, the spread had been in the high sixes to seven, which we did not believe was sustainable, and was actually against the backdrop of, you know, a 10-year low in private equity activity. As we look forward, and as is often the case in the, you know, sort of incipient rally of credit markets, the activity itself tends to concentrate on repricing and refinancing, and that was very true in Q4. As we look at the market environment now, with that decline and spread, as well as, you know, broadly speaking, a more constructive view on one, the economy, as well as that, while I guess not completely no chance for an increase in rates, but broadly speaking, market consensus that rates will not go up further.
Yeah, I would add to that Ken.
Dennis.
That.
Certainly theres a theres a lot of assumptions that go into trying to put more.
More specific estimation on where it goes I think when we look at the performance of our underlying borrowers as Ted alluded to and.
And we spoke to more broadly in the prepared remarks, there was resilient.
Our performance economic performance in the portfolio and in particular, which is a continuation of the kind of like last two quarters as we saw EBITDA growing more than revenue after quite a few quarters, where and that was not the case and I think one of the reasons that we saw.
Stability in terms of Ah that interest coverage was that at this juncture you can look at companies and whether through putting through price increases and or just the lapping.
Ted McNulty: You're starting to see the pipeline for M&A and LBO volume build. Typically, if we look back, as LBO volume builds, that typically helps to provide some stabilization in spreads. And that's what we would expect as we've started to see some of the pipeline activity. Your comment about lender-friendly, I think it's helpful to call attention to our focus on the middle market. And broadly speaking, more frothy markets result in more borrower-friendly terms. But I think the emphasis for us and what corroborates our focus on the middle market is partly documentation. And in particular, as we mentioned in our prepared remarks, about 98% of our corporate lending portfolio has covenants.
The most acute effects of inflation.
Again, we saw.
EBITDA growing faster than revenue and I think notwithstanding as Ted alluded to we could have different trajectories in terms of.
Interest rates, which would affect that one dynamic which is helping that.
That ratio in particular and by extension.
The cash flow dynamics and our underlying companies is that at this juncture.
Price increases have been put through and we've lapped some of the worst of the inflation.
And helping to to to provide for some resilient performance in our underlying companies.
Got you very helpful. There. Thanks again.
Thank you again, if you would like to ask a question. Please press star one at this time. Our next question comes from Paul Johnson with <unk>. Please go ahead.
Ted McNulty: And that's a dynamic that we see continuing in one ballast against frothy market conditions and what that has a tendency to do in markets in terms of reducing those lender-friendly provisions that had been more attendant over the last couple of years. So our focus on the middle market and continued ability to get covenants is one aspect that we point to in helping to continue to have strong lender-friendly provisions in our document. Gotcha. Very helpful people there. And just one follow-up, if I may. The portfolio average interest coverage ratios, I think they were close to 1.8 or 1.9 times.
Yeah. Good morning, Thanks for taking my questions.
I'm just curious you know if there's any sort of material update.
In terms of kind of the pro forma leverage for for closing the.
The two mergers.
At the time it was expected to be.
A deleveraging event.
Close to like one two times, so I'm wondering if there's any kind of material.
Material update there as well as kind of your outlook just given the you know the.
Ted McNulty: I wanted to get your thoughts around where you think the ICR could trough. It's an interesting question, and, you know, we've done a number of different modeling scenarios, but I think if you expect rates to kind of stay where they are, and you expect revenue and EBITDA to continue to grow, which is what we're seeing in our portfolio, that would suggest that perhaps, you know, we're at a trough You know, I think we'll continue to watch and see where the SOFR curve goes, and the underlying portfolio continues to perform, and, you know, it just kind of depends on the timing of when the SOFR curve moves. Yeah, I would add to that, Kenneth, that certainly there's a lot of assumptions that go into trying to put more, you know, more specific estimations on where it goes.
Some of the spread compression that we've seen last year and perhaps that could continue to to occur this year as activity comes back into the market.
You have any sort of thoughts around the expected accretion from from the merger.
And whether that's changed at all just simply from kind of a spread compression standpoint. Thanks.
Yes, thanks for the thanks for the question Paul.
I'd make a couple of comments to address your questions there.
First of which we are not changing our leverage guidance.
Think consistent with what we said what we have said as you saw a pick up of activity and notably we saw a number of refinancings in Q4 that serve to take us into that the 103 four range.
Ted McNulty: I think, you know, when we look at the performance of our underlying borrowers, as Ted alluded to, and we spoke about more broadly in the prepared remarks, there was resilient performance, economic performance in the portfolio. And in particular, which is a continuation of the kind of like the last two quarters, we saw EBITDA growing more than revenue after quite a few quarters where that was not the case. And I think one of the reasons that we saw stability in terms of that interest coverage was that at this juncture, you can look at companies and, whether through putting in price increases or just lapping the most acute effects of inflation, we saw EBITDA growing faster than revenue.
Relative to the one four that we had operated at.
Last quarter, so there's no update to our leverage guidance, the second point and consistent with what we said last quarter and you alluded to there Paul is that should that mergers be successful or should we be successful in executing the mergers.
Day, one you would see.
A decrease in leverage and would guide people to the statements that we made in.
In connection with the last earnings release.
An investor presentation, there and.
And you know I think as it relates to I think the heart of your question is has our outlook changed based on the spread environment and I would say no I mean, all things being equal you'd rather the market be giving us. The <unk> 75 to 700 that we saw early in the year, but theres going to be ebbs and flows and spread and I would also.
Ted McNulty: And I think, notwithstanding, as Ted alluded to, we could have different trajectories in terms of interest rates, which would affect that. One dynamic that is helping that ratio in particular and, by extension, the cashflow dynamics in our underlying companies is that, at this juncture, price increases have been put through, and we've lapped some of the worst of the inflation, helping to provide for some resilient performance in our underlying Thank you. Very helpful there. Thank you. Again, if you would like to ask a question, please press star one at this time. Our next question comes from Paul Johnson with KBW. Please go ahead.
Call your attention to the fact that you know.
Part of this spread compression is obviously linked to.
A more healthy outlook for the economy itself.
And so on this account given those ebbs and flows in spreads would not anticipate any any different approach in managing the merger should we should we be successful in consummating those those acquisitions.
Thank you that's that's all from me.
Thank you. Our next question comes from Erin <unk> with Citi. Please go ahead.
Paul Johnson: Yeah, good morning. Thanks for taking my questions. I'm just curious, you know, if there's any sort of material update in terms of kind of the pro-forma leverage for foreclosing the two mergers, I think at the time it was expected to be a deleveraging event, you know, close to like 1.2 times, so I'm wondering if there's any kind of, you know, material update there, as well as kind of your outlook, you know, just given the, you know, some of the spread compression that we've seen last year and perhaps that could continue to occur, you know, this year as activity comes back into the market. If you have any.., sort of thoughts around the expected accretion from the merger and whether that's changed at all, just simply from kind of a spread compression standpoint. Yeah.
Thanks, you mentioned that the amendment fee activity or the amendment activity hasn't really picked up but it was highlighted that somewhat of an increase in your other income this quarter.
Maybe touch on that and then on the prepayment side. It would split I think you said between dividend income in the other income.
The geography change there.
Including dividends and converse in southern cone.
So I'll talk to.
I'll talk to amendment activity and maybe Greg can can jump in is.
I think that.
We have not seen them.
Material uptick and amendment activity.
I think as Ted alluded to all things being equal should this current rate environment continue.
And given you know the.
This coverage ratio as you would expect it to get tighter and would not be surprising to see an uptick.
Tanner Powell: Thanks for the question, Paul. I'd make a couple of comments to address your questions there. You know, first of all, we are not changing our leverage guidance. I think consistent with what we said, which is that you saw a pickup of activity, and notably, we saw a number of refinancings in Q4 that served to take us into the 1.3.4 range relative to the 1.4 that we had operated at last quarter. So there's been no update to our leverage guidance.
And amendment activity, where we are seeing activity, we are utilizing that seat at the table. If you will too.
To de risk the.
The emphasis on the continuum.
Is to try to invite further capital we are less concerned with a.
Our re pricing than we are de risking and then in terms of other income and I'll invite Greg to comment as well that itself.
Tanner Powell: The second point, and consistent with what we said last quarter and you alluded to there, Paul, is that should the mergers be successful, or should we be successful in executing the mergers, day one, you would see a decrease in leverage, and I would point people to the statements that we made in connection with the last earnings release and investor presentation there. And, you know, I think as it relates to, I think the heart of your question is, has our outlook changed based on the changing environment? And I would say no.
Is it linked to prepayments, where we get acceleration of OID as well is also in the instance, wherein we're doing add ons and this is this is another important point that we alluded to in the prepared remarks, it's worth emphasizing is 45.
<unk> of our deployment in the quarter was related to existing commitments some of which is existing delayed draws that are drawn down on but other of which is incremental commitments to existing borrowers and that's important for two reasons, one of which is that can come with with incremental fees.
Tanner Powell: I mean, all things being equal, you'd rather the market be giving us the L675 to 700 that we saw early in the year. But there are going to be ebbs and flows in the spread. And I would also call your attention to the fact that, you know, part of this spread compression is obviously linked to, you know, a more healthy outlook for the economy itself. And so on this account, given those ebbs and flows and spreads, I would not anticipate any different approach in managing the merger should we be successful in consummating those acquisitions.
Which may explain the dynamic youre looking at there too, but also importantly, it's I'll use the word balanced again, it's a ballast within the current market environment.
Because all things being equal.
Those existing commitments and the friction costs that would be suffered.
Paul Johnson: Thank you. That's all for now. Thank you. Our next question comes from Arren Cyganovich with Citi. Please go ahead.
To the extent that our sponsor our borrower may look to refinance the entire company enables us to get better on average pricing and it's one of the dynamics kind of has this benefit of incumbency that we talk a lot about and at our peers talk a lot about as well.
Arren Cyganovich: Thanks. You mentioned that the amendment fee activity or the amendment activity hasn't really picked up, but it was highlighted as somewhat of an increase in your other income this quarter. Maybe you can touch on that. And then on the prepayment side, it was split, I think you said, between the dividend income and the other income. What causes the geography to change there?
Greg I'll just throw out so erin.
Actual number of amendments this quarter was one less than the prior quarter.
And some of those whereas Tanner was alluding to.
Ted McNulty: including dividend income versus other So I'll talk to you about amendment activity, and maybe Greg can jump in. I think that we have not seen a material uptick in amendment activity. I think, as Ted alluded to, all things being equal, should this current rate environment continue, and given those coverage ratios, you would expect it to get tighter, and it would not be surprising to see an uptick in amendment activity. Where we are seeing activity, we are utilizing that seat at the table, if you will, to de-risk, you know, the emphasis kind of on the continuum is to try to invite further capital. We are less concerned with repricing than we are with de-risking.
Two additional acquisitions, refinancings et cetera, and so that's the activity level and some of which generated some fees.
Alright, and I think.
Tanner answered the composition of <unk>.
Our other income.
Based on fee doubled.
Quarter over quarter.
And then our dividend income is primarily related to our investment in U S auto.
And we take part of the proceeds we receive every quarter to principal and then we.
Take some of it to dividend income.
Okay. Thank you and then just lastly real quickly.
As the timing of the merger changed off can you remind me when thats the schools.
Ted McNulty: And then in terms of other income, and I'll invite Greg to comment as well, that itself is linked to prepayments, where we get acceleration of OID, as well as in the instance where we're doing add-ons. And this is another important point that we alluded to in the prepared remarks. It's worth emphasizing that 45% of our deployment in the quarter was related to existing commitments, some of which is existing delay draws that are drawn down on, but other of which is incremental commitments to existing borrowers. And that's important for two reasons, one of which is that it can come with incremental fees, which may explain the dynamic you're looking at there too.
I think I think as we've on.
Previously.
We are in the final stages of our.
Comments with the SEC on our end 2014.
We will be making progress in the near future.
Okay. Thank you.
I show no further questions at this time I will now turn the call back to management for any additional or closing remarks.
Thank you operator, and 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 have a good day.
Yeah.
Okay.
This does conclude today's mid cap financial investment Corporation earnings Conference call.
Ted McNulty: But also importantly, it's, I'll use the word ballast again, it's a ballast within the current market environment because, all things being equal, those existing commitments and the friction costs that would be suffered to the extent that a sponsor or borrower may look to refinance the entire company enable us to get better on average pricing, and is one of the dynamics, kind of this benefit of incumbency that we talk a lot about Before you hand it to Greg, I'll just throw it out. So Aaron, the actual number of amendments this quarter was one less than the prior quarter.
You may disconnect your lines at this time and have a wonderful day.
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Gregory W. Hunt: And some of those were, as Tanner was alluding to, to do additional acquisitions, refinancings, et cetera. And so that's the activity level, and some of which were generated. Right, and I think Tanner answered the composition of our other income, based on fees. We did double, you know, quarter over quarter. And then our dividend income is primarily related to our investment in US Auto. And, you know, we take part of the proceeds we receive every quarter as principal, and then we, you, I'm a bit. Thank you. And then, just lastly, real quickly, has the timing of the merger changed at all?
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Arren Cyganovich: Can you remind me when that's disclosed? I think, as I said previously, we are in the final stages of our... You know, comments with the SEC on our N-14.
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Tanner Powell: Together, we are going to be making progress. Thank you. Thank you. Thank you. Thank you. I will now turn the call back to management for any additional or 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. Have a good day. This does conclude today's MidCap Financial Investment Corporation Earnings Conference call. You may disconnect your line at this time and have a wonderful day. Orlando, Arizona, New York City, Maui, Hawaii, moves, Nevada, Nicaragua, départment of 181, and the.
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Operator: .. Greg Day, Thanks for watching!
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