Q2 2024 MidCap Financial Investment Corp Earnings Call

August 8, 2024

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Operator: Good morning, and welcome to the earnings conference call for the period ended June 30th, 2024 for MidCap Financial Investment Corporation. At this time, all participants have been placed in listen-only mode. The call will be open for a question and answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Speaker Change: Good morning and welcome to the earnings conference call for the period-ended June 30, 2024, for MidCap Financial Investment Corporation. At this time, all participants have been placed in listen-only mode.

Operator: At this time, all participants have been placed in listen-only mode. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Speaker Change: The call will be open for a question and answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press the star 2.

Elizabeth Besen: And lastly, we believe that the larger market capitalization for the combined company may broaden the universe of potential investors, which could result in greater stock liquidity. Moving to our results for the June quarter, as previously announced when the mergers closed, MFIC's net investment income per share for the June quarter was $45,000. Gap EPS for the June quarter was $0.35. NAV per share was $15.38 at the end of June, down $0.04 from the end of March.

Speaker Change: I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Elizabeth Besen: 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 Widra, 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 MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press release.

Speaker Change: thank you operator and thank you everyone for joining us today speaking on today's call our tor pal chief executive officer ted mcalty of president and greg hunt chief financial officer our ward widinter executive chairman as well as additional members of the management teamer on the call and available for the q a portion of today's call

Elizabeth Besen: I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law.

Speaker Change: I'd like to advise everyone that today's call and webcasts are being recorded. Please note that they are the property of MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited.

Speaker Change: information about the audio replay of this call is available in our p release i'd also like to call your attention to the customarysafe harbor disclosure in our press releaseregarding forward-looking information

Speaker Change: Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make.

Speaker Change: we do not undertake to update our forward-looking statements or projections less required by law to obtain copies of our sec filings please visit

Elizabeth Besen: To obtain copies of our SEC filings, please visit either the SEC 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 information package on our website which contains information about the portfolio as well as the company's financial performance. Throughout today's call, we will refer to MidCap Financial Investment Corporation as either MFIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

Speaker Change: either the SEC website at www.sec.gov or our website at www.midcapfinancialic.com.

Speaker Change: I'd also like to remind everyone that we posted a supplemental information package on our website which contains information about the portfolio as well as the company's financial performance.

Speaker Change: Throughout today's call, we will refer to MidCap Financial and 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.

Tanner Powell: Thank you, Elizabeth, and thank you to everyone who has joined today's call, especially those of you who may be newer to MFIC. I will begin today's call with an update on the successful completion of our mergers with our previously affiliated funds, Apollo Senior Floating Rate Fund, Inc., and Apollo Tactical Income Fund, Inc., which we refer to as AFT and AIF or the CEFs throughout today's call. I will then provide an overview of MFIC's second-quarter results, and we'll also provide our perspective on the current environment.

Tanner Powell: Ted will then discuss our investment activity and provide an update on the investment portfolio. He will also review the assets that we acquired in the connection with the merger. Greg will then review our financial results in greater detail, and we'll also discuss some of the accounting aspects.

Tanner Powell: and Apollo Tactical Income Fund, Inc., which we refer to as AFT and AIF or the CEFs throughout today's call. I will then provide an overview of MFIC's second quarter results and will also provide our perspective on the current environment.

Tanner Powell: Ted will then discuss our investment activity and provide an update on the investment portfolio.

Speaker Change: He will also review the assets that we acquired in the connection with the murders.

Tanner Powell: Greg will then review our financial results in greater detail and we'll also review some of the accounting aspects of the mergers.

Tanner Powell: Beginning with the mergers, we are pleased to announce that on July 22nd, MFIC successfully closed its mergers with AFT and AIF, two listed closed-end funds managed by Apollo. We believe these mergers mark an important step in MFIC's evolution to becoming a leading pure-play middle-market BDC. We remain enthusiastic about realizing the potential benefits that we highlighted when we announced the mergers last November. Let me remind you of some of these. First, we expect these mergers will be both ROE and NII per share accretive for all shareholders as we rotate the CEF's lower yielding investments in the ordinary course into higher yielding directly originated loans that align with MFIC's investments. Second, the mergers are expected to enhance MFIC's portfolio diversification and improve certain portfolio metrics. Third, we expect to be able to realize operational synergies from the elimination of certain duplicative expenses from the merger.

Speaker Change: beginning with the gers we arepleased to nce onjuly twenty second mi see successfully closed its mergers with aft and af two listed closed in funds managed by hon

Tanner Powell: And lastly, we believe that the larger market capitalization for the combined company may broaden the universe of potential investors, which could result in greater stock liquidity. As Ted will discuss, we are currently focused on deploying the capital and rotating certain assets acquired in the mergers and have already made good progress on that. As a reminder, Apollo provided significant financial support for these mergers by reimbursing all merger-related expenses for all three funds and by making a one-time special cash payment to the CEF shareholder.

Tanner Powell: As a result of the mergers, MFIC's net assets have increased by approximately 44 percent. With $1.45 billion in net assets, MFIC has a significant investment. As a result of this deleveraging, MFIC is well-positioned to deploy capital into true first-lane, senior-secured loans sourced by MidCap Financial, a leading middle-market lender managed by Apple. Moving to our results for the June quarter, as previously announced when the mergers closed, MFIC's net investment income per share for the June quarter was $45,000, which corresponds to an annualized return on equity or ROE of 11.8%

Tanner Powell: We believe these mergers mark an important step in MFIC's evolution to becoming a leading pure play middle market BDC.

Tanner Powell: Results for the quarter reflect solid recurring interest income from our predominantly floating rate portfolio and strong fee and prepayment. Gap EPS for the June quarter was $0.35. NAF for share was $15.38 at the end of June, down $0.04 from the end of March. Beginning with the macro environment regarding rates, Apollo's chief economist believes that the Fed will cut rates by 25 basis points in September but still expects a soft landing. He notes a continuing strength in a broad set of weekly indicators, such as TSA data for air travel, restaurant bookings, retail sales, and hotel occupancy rates that suggest the economy will be able to avoid recession.

Tanner Powell: we remain enthusiastic about realizing the potential benefits that we highlighted when we announced the mergers last november let me remind you of some of these key benefits

Tanner Powell: First, we expect these mergers will be both ROE and NII per share accretive for all shareholders as we rotate the CEF's lower yielding investments in the ordinary course into higher yielding directly originated loans that align with MFIC's investment strategy.

Tanner Powell: Second, the mergers are expected to enhance MFIC's portfolio diversification and improve certain portfolio metrics.

Tanner Powell: Third, we expect to be able to realize operational synergies from the elimination of certain duplicative expenses from the mergers.

Ted: as ted willll discuss we are currently focused ondeploying the capital and rotating certain assets acquired in the mergers and haveve already made good progress in that regard

Ted: As a reminder, Apollo provided significant financial support for these mergers by reimbursing all merger-related expenses for all three funds and by making a one-time special cash payment to the CEF shareholders.

Speaker Change: As a result of the mergers, MFIC's net assets have increased by approximately 44%. With $1.45 billion in net assets, MFIC has significant investment capacity.

Ted: As a result of this deleveraging, MFIC is well-positioned to deploy capital into true first-lane, senior-secured loans sourced by MidCap Financial, a leading middle-market lender managed by Apollo.

Ted: Moving to our results for the June quarter, as previously announced when the merger is closed, MFIC's net investment income per share for the June quarter was 45 cents, which corresponds to an annualized return on equity, or ROE, of 11.8 percent.

Ted: Results for the quarter reflect solid recurring interest income from our predominantly floating rate portfolio and strong fee and prepayment income.

Ted: Gap EPS for the June quarter was $0.35. NAV for share was $15.38 at the end of June , down $0.04 from the end of March.

Speaker Change: Beginning with the macro environment regarding rates, Apollo's chief economist believes that the Fed will cut rates by 25 basis points in September , but still expects a soft landing. He notes a continuing strength in a broad set of number of weekly indicators such as

Speaker Change: TSA data for air travel, restaurant bookings, retail sales, and hotel occupancy rates that suggest the economy will be able to avoid recession.

Tanner Powell: With regard to markets, the credit market continued to be very strong and well bid throughout Q2 and into the start of Q3. M&A and LBO activity increased in Q2 from very low levels, though it has lagged expectations, and thus issuers and sponsors have taken advantage of limited new supply tapping the market for dividends and repricing. Auction activity has seen a meaningful pickup in the latter part of Q2 and into Q3, and we expect to see an increase in new deployment opportunities for direct lenders in the back half of the year.

Speaker Change: with regard to markets the credit market continue to be very strong and well bid throughout q two and into the start of q three two thousand and twenty four

Speaker Change: M&A and LBO activity increased in Q2 from very low levels, though has lagged expectations, and thus issuers and sponsors have taken advantage of limited new supply tapping the market for dividends and repricings.

Speaker Change: Auction activity has seen a meaningful pickup in the latter part of Q2 and into Q3, and we expect to see an increase in new deployment opportunities for direct lenders in the back half of the year.

Elizabeth Besen: As you know, MFIC is squarely focused on investing in first lien loans to middle market companies sourced by MidCap Financial, a leading middle market lender with one of the largest direct lending teams in the U.S. with close to 200 investment professionals. MidCap Financial was founded in 2009, and has a long track record which includes closing on over $118 billion of lending commitments since 2009. Next, let's turn to dividends. With that, I will now turn the call over to

Tanner Powell: As you know, MFIC is squarely focused on investing in first lien loans to middle market companies sourced by MidCap Financial, a leading middle market lender with one of the largest direct lending teams in the U.S. with close to 200 investment. MidCap Financial was founded in 2009, and has a long track record, which includes closing on over $118 billion of lending commitments since 2009. This origination track record provides us with a very large data set of middle market company financial information across all industries, and we believe this makes MidCap Financial one of the most informed and experienced middle market lenders in the market.

Speaker Change: As you know, MFIC is squarely focused on investing in first lien loans to middle market companies sourced by MidCap Financials.

Elizabeth Besen: During the June quarter, MFIC's new investment commitments totaled $285 million across 28 different borrowers, for an average new commitment of $10.2 million. As we continue to focus on diversification by borrower, 23% of new commitments were made to existing portfolio customers. The average funded corporate lending position was $14.1 million, or approximately 0.6% of the total corporate and other lending portfolio, down 20 basis points compared to the end of March. At the end of June, the weighted average net leverage of our corporate lending portfolio was 5.38 times, up very slightly from 5.36 times last quarter. At the end of June, the weighted average interest coverage ratio remained 1.9 times, unchanged quarter over quarter, with four companies below one time or having strong financial sponsors.

Speaker Change: a leading middle market lender with one of the largest direct lending teams in the U.S. with close to 200 investment professionals.

Speaker Change: MidCap Financial was founded in 2009, has a long track record which includes closing on over $118 billion of lending commitments since 2013.

Speaker Change: this origination track record provides us with a very large data set of middlemarket company financial information across all industries and we believe makes mid-cpt financial one of the most informed and experienced middle market lenders in the market

Tanner Powell: Apollo Global's affiliation with MidCap Financial provides MFIC and the broader Apollo platform with significant deal flow. In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high yield market.

Speaker Change: apollo globals affiliation with mid-p financial provides mf mfic and the broader apolo platform with significant deal flow

Speaker Change: In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high yield market.

Tanner Powell: Despite the heightened level of competition, we are pleased to report that MidCap Financial was active during the June quarter, closing approximately $4.4 billion in new commitments or $9.6 billion in the first half of 2024. Next, let's turn to dividends. First, as previously announced, in connection with the mergers on July 21, our Board of Directors declared a one-time special cash distribution of $0.20 per share to shareholders of record as of August 5th, 2024, payable on August 15th, 2024.

Speaker Change: desite the highight level compeition we are pleasedto report that mid-cpt financial was active during the june quarter closing approximately four point four billion a new commitment or nine point six billion in the first half of two thousand and twenty-four

Speaker Change: Next, let's turn to dividends.

Speaker Change: First, as previously announced, in connection with the mergers, on July 21st, our Board of Directors declared a one-time special cash distribution of 20 cents per share to shareholders of record as of August 5th, 2024, payable on August 15th, 2024.

Tanner Powell: As a reminder, this special 20-cent dividend is being paid to all shareholders as of a record date, including former AFT and AIF shareholders. In addition, on August 6, 2024, our board declared a quarterly dividend of 38 cents per share, consistent with our prior quarterly dividend to shareholders of record as of September 10, 2024, payable on September 26. With that, I will now turn the call over to Mr.

Speaker Change: As a reminder, this special $0.20 dividend is being paid to all shareholders as of a record date including

Speaker Change: former afft and af shareholders in addition on august sets two thousand and twenty four our board declared a quarterly dividend of thirty- eight cents per share consistent with our prior quarterly dividend to shareholders of record as of september tenth

Speaker Change: 2024, payable on September 26, 2024. With that, I will now turn the call over to Ted.

Ted McNulty: Thank you, Tanner. Good morning, everyone.

Ted McNulty: I'll spend a few minutes reviewing our second quarter investment activity and our investment portfolio. I will then discuss the investments we acquired via the mergers with the closed-end funds. During the June quarter, MFIC's new investment commitments totaled $285 million across 28 different borrowers, for an average new commitment of $10.2 million. As we continue to focus on diversification by borrower, 23% of new commitments were made to existing portfolio customers. Despite spread compression, we believe the risk-return profile of these new commitments remains compelling.

Ted: Thank you, Tanner. Good morning, everyone. I'll spend a few minutes reviewing our second quarter investment activity and our investment portfolio. I will then review the investments we acquired via the mergers with the closed-end funds.

Ted: During the June quarter, MFIC's new investment commitments totaled $285 million across 28 different borrowers for an average new commitment of $10.2 million. As we continue to focus on diversification by borrower, 23% of new commitments were made to existing portfolio companies.

Ted: Despite spread compression, we believe the risk return profile on these new commitments remains compelling. The weighted average spread on our new commitments in the June quarter was 559 basis points.

Ted McNulty: The weighted average spread on our new commitments in the June quarter was 559 basis points. Net leverage on new commitments was 3.3 times, down from 3.9 times last quarter. The weighted average OID for new commitments was approximately 157 basis points.

Ted: Net leverage on new commitments was 3.3 times, down from 3.9 times last quarter. The weighted average OID for new commitments was approximately 157 basis points.

Ted McNulty: This spread in OID translates into a very attractive unlevered asset yield of over 11%, assuming a 5% base rate. In terms of funded investment activity for the quarter, gross funding for the Corporate Lending Portfolio, excluding revolvers, totaled $214 million. Sales and repayments totaled $131 million. Net corporate lending revolver fundings were positive $10 million, and we received a $3 million pay-down from Merck. In aggregate, net funding for the quarter totaled $90 million.

Ted: This spread in OID translates into very attractive unlevered asset yield of over 11%, assuming a 5% base rate.

Ted: In terms of funded investment activity for the quarter, gross fundings for the corporate lending portfolio, excluding revolvers, totaled $214 million.

Ted: Sales and repayments totaled $131 million. Net corporate lending revolver fundings were positive $10 million, and we received a $3 million pay-down from Merck's. In aggregate, net fundings for the quarter totaled $90 million.

Ted McNulty: Turning to our investment portfolio, we built what we believe is a well-diversified senior corporate lending book at the end of June prior to the close of the mergers with a closed-end fund. Our portfolio had a fair value of $2.4 billion and was invested in 165 companies across 23 different industries. Corporate lending and other represented over 92% of the total portfolio, and Merck's accounted for less than 8% of the total portfolio on a fair value basis.

Ted: Turning to our investment portfolio, we have built what we believe is a well-diversified senior corporate lending book at the end of June prior to the close of the mergers with the closed-end funds.

Ted: our portfolio had a fair value of two point four billionand was invested in one hundred sixty-five companies across twenty-three different industries corporate lending and other represented over ninety two percent of the total portfolio and marks accounted for less than eight percent of total portfolio on a fair value basis

Ted McNulty: 97% of the corporate lending portfolio was first lien, and over 99% of our corporate lending debt portfolio had 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 has longstanding financial relationships. The average funded corporate lending position was $14.1 million, or approximately 0.6% of the total corporate and other lending portfolio. The weighted average yield at cost of our corporate lending portfolio was 12% on average for the June quarter, down slightly from 12.1% in the March quarter. At the end of June, the weighted average spread on the corporate lending portfolio was 601 basis points, down 20 basis points compared to the end of March.

Ted: 97% of corporate lending portfolio was first lien, and over 99% of our corporate lending debt portfolio had 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 has longstanding financial relationships.

Ted: The average funded corporate lending position was $14.1 million, or approximately 0.6% of the total corporate and other lending portfolio.

Speaker Change: aweighted average yield at cost of our corporate lending portfolio was twelve percent on average for the june quarter down slightly from twelve point one percent in the march quarter atthe endofjune the weightited average spread on the corpor lending portfolio was six hundred one basis points

Speaker Change: down 20 basis points compared to the end of March.

Ted McNulty: 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 stable credit quality. 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 borrowing. We have not seen a significant increase in amendment requests, and the requests we have seen are generally accompanied by good sponsors.

Speaker Change: 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 stable credit quality.

Ted: overall we feel good about the health and quality of our corporate lending portfolio as our underlying borrowers have largely been able to handle a higher borrowing costs

Ted: we have not seen a significant increase in the amendment replquests and the requests we have seen or generally accompanied with good spoontsor support

Ted McNulty: Portfolio companies are generally maintaining, and continuing the trend of solid fundamentals demonstrated in 2023 and into early. On a median basis for the March quarter, portfolio company revenue and EBITDA both increased by mid-single digits year-over-year. This has been achieved despite a downturn in acquisition activity, indicating that much of the growth demonstrated has been organic. At the end of June, the weighted average net leverage of our corporate lending portfolio was 5.38 times, up very slightly from 5.36 times last quarter. Additionally, at the end of June, the weighted average interest coverage ratio remained 1.9 times, unchanged quarter over quarter, with four companies below one time.

Ted: portfolio companies are generally maintaining performance continuing the trend of solid fundamentals demonstrated in two thousand and twenty three and into early two thousand andtwenty four

Speaker Change: On a median basis for the March quarter, portfolio company revenue and EBITDA both increased by mid-single digits year-over-year. This has been achieved despite a downturn in acquisition activity, indicating that much of the growth demonstrated has been organic.

Speaker Change: at the end of june the weighted average net leverage of our corporate lending portfolio was five point three eight times of very slightly from five point three six ton last quarter at the endofjune the weighted average interest coverage ratio remained one point nine times unchanged quarter-over quarter with four companies below one times

Ted McNulty: We are closely monitoring these situations and believe they are manageable as the companies have strong current liquidity, good underlying business, or have strong financial sponsors. The Median EBITDA of the MFIC's Corporate Lending Portfolio was approximately. Our underwriting on MidCap source loans has proven to be sound.

Speaker Change: We are closely monitoring these situations and believe they are manageable as the companies have strong current liquidity, good underlying business performance, or have strong financial sponsor support.

Speaker Change: the median ebitda of the mi'scorporate lend portfolio companies was approximately forty-six million

Ted McNulty: Based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment, our annualized, net realized, and unrealized loss is around 3 basis points on loans sourced by MidCap Financial. We think this performance data shows how well the strategy is performing.

Speaker Change: our underwriting on midcap source loans is proven to be sound based on data since mid two thousand and sixteen which is the approximate date upon which we began utilizing our coinvestment order

Speaker Change: our annualized not realized and unrealized loss is around three basis points on loan sourced by mid-ca financial we think this performance data shows how well the strategy is performed

Ted McNulty: As of the closing of the merger... Investments on non-accrual were 1.8% of the total portfolio at fair value or 2.3% at amortized cost across 11 names, including six companies acquired from the closed-end fund portfolio, two of which we have exited near cost in the secondary market. We wanted to take a few minutes to highlight some metrics that we think can provide insight into how we assess the risk of the portfolios of BDM.

Ted: As of the closing of the mergers.

Ted: Investments on non-accrual were 1.8% of the total portfolio at fair value, or 2.3% at amortized cost across 11 names, including six companies acquired from the closed-end fund portfolio, two of which we have exited near cost in the secondary market.

Elizabeth Besen: We wanted to take a few minutes to highlight some metrics that we think can provide insight into how we assess the risk of the portfolios of BDFs. Lenders have a number of ways they can mask the liquidity challenges of their underlying borrowers. Some lenders provide covenant light loans where even draws on the revolvers do not spring a covenant, effectively making the whole revolver available for payment of interest regardless of the state of the company. However, we generally do not advance credit to borrowers to cover.

Speaker Change: We wanted to take a few minutes to highlight some metrics that we think can provide insight into how we assess the risk of the portfolios of BDCs.

Ted McNulty: Lenders have a number of ways they can mask the liquidity challenges of their underlying borrowers. First, lenders increase the use of pick, whether at origination or as part of the restructuring. Pick Income is a proxy for borrowers who cannot currently service their debt. In this regard, MFIC's pick income remains very low compared to the BDC industry average. Second, lenders allow revolving loans senior to their cash flow term debt while still categorizing their cash flow loan as the first lien.

Speaker Change: Lenders have a number of ways they can mask liquidity challenges of their underlying borrowers. First, lenders increase the use of pick interest.

Speaker Change: Whether at origination or as part of the restructuring, PIC income is a proxy for borrowers who cannot currently service their debt. In this regard, MFIC's PIC income remains very low compared to the BDC industry average.

Speaker Change: Second, lenders allow revolving loans senior to their cash flow term debt while still categorizing their cash flow loan as first lien. We focus on what we often refer to as true first lien or top of the capital structure, meaning there's no debt senior to our position, as evidenced by our attachment point of 0.04 times.

Ted McNulty: We focus on what we often refer to as true first lien or top of the capital structure, meaning there's no debt senior to our position, as evidenced by our attachment point of 0.04 times. Some lenders provide covenant-light loans where even draws on the revolvers do not spring a covenant, effectively making the whole revolver available for payment of interest regardless of the state of the company. As a reminder, over 99% of MFIC's corporate lending portfolio has at least one financial covenant, and any covenant light loans we may hold would have a spring covenant when the revolver is drawn above certain levels.

Speaker Change: third

Speaker Change: Some lenders provide covenant light loans where even draws on the revolvers do not spring a covenant, effectively making the whole revolver available for payment of interest regardless of the state of the company.

Speaker Change: As a reminder, over 99% of the MFIC's corporate lending portfolio has at least one financial covenant. Any covenant light loans we may hold would have a spring covenant when the revolver is drawn above certain levels.

Ted McNulty: Fourth, some lenders have added structures where they increase their debt to pay their own interest, sometimes referred to as synthetic PIC, although hard to account for the myriad structures of lenders of the structures lenders can use to achieve these results. However, we generally do not advance credit to borrowers to cover.

Speaker Change: And fourth, some lenders have added structures where they increase their debt to pay their own interest, sometimes referred to as synthetic PIC, although hard to account for the myriad structures of lenders.

Speaker Change: of structures lenders can use to achieve these results. We generally do not advance credit to borrowers to cover interest.

Elizabeth Besen: And most importantly, MFIC benefits from MidCap Financial's large, dedicated portfolio management. As an agent, we are in active dialogue with the borrower and have enhanced information flow, which allows us to be proactive in resolving problems. We onboarded approximately $596 million of investments from the Closed End Fund. The remaining $389 million of these assets consists of broadly syndicated loans, high-yield bonds, and structured credit plans. The good news is that these non-directly originated assets are held throughout the Apollo platform, which facilitates risk monitoring while on our books, as well as the selling process. Given the significant deal flow generated by MidCap, we are confident that we can deploy this capital in attractive opportunities. As Tanner mentioned earlier, MidCap closed on $9.6 billion of commitments in the first half of 2025.

Ted McNulty: And most importantly, MFIC benefits from MidCap Financial's large dedicated portfolio management, 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 problems.

Speaker Change: importantly in fi see benefits from midca financials's large dedicated portfolio management team

Speaker Change: 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.

Speaker Change: As agent, we are in active dialogue with the borrower and have enhanced information flow, which allows us to be proactive in resolving problem credits.

Ted McNulty: Moving on to Merck. As we've discussed in the past, we're focused on reducing our investment in our aircraft leasing and service. 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 the MFIC's investment in Merck over time. The blended yield across our total investment in Merck is less than 4%, and the continued rotation of capital from Merck has the potential to have a meaningful beneficial impact on income.

Speaker Change: moving on to merch as we've discussed inthe past we're focused on reducing our invment in our aircraft leasing and servicing business

Ted McNulty: As of June 30, 2024, our investment in Merck totaled $187 million, representing 7.7% of the total portfolio at fair value. During the June quarter, Marks paid MFIC $4.7 million, including $1.7 million of interest and a $3 million return of capital. At the end of June, MFIC's investment in Merck's decreased to approximately 5.8% of the total portfolio due to a combination of the growth in the portfolio from the mergers as well as an additional $7.5 million paydown from Merck which occurred in July.

Ted McNulty: Turning to the mergers with AFT and AIF, to echo Tanner's comments, we're excited about the long-term benefits that we believe this transaction will create. I'd like to take a few minutes to discuss the assets we acquired as part of our mergers with AFT and AIF. We onboarded approximately $596 million of investments from the Closed End Fund. Increasing the size of MFIC's portfolio to approximately $3.1 billion as of the closing day. Of the $596 million of onboarded assets, approximately $207 million, or 35% of these assets were directly originated loans across 37 obligors, with a weighted average spread of 564 basis points.

Ted McNulty: The remaining $389 million of these assets consists of broadly syndicated loans, high-yield bonds, and structured credit positions. As Tanner mentioned, we are currently in the process of selling the non-directly originated assets and redeploying those assets, redeploying those proceeds into assets that are more consistent with MFIC's investment strategy. The good news is that these non-directly originated assets are held throughout the Apollo platform, which facilitates risk monitoring while on our books, as well as the selling process.

Speaker Change: We on boarded approximately $596 million of investments from the closed end funds, increasing the size of the MF ice's portfolio to approximately $3 1 billion as of the closing date.

Speaker Change: Of the $596 million of onboard it assets approximately $207 million or <unk> 35 per cent of these assets were directly originated loans across 37, obligor ours with a weighted average spread of 564 basis points. The remaining $389 million of these assets consists of broadly syndicated loans high yield bonds.

Speaker Change: And structured credit positions.

Speaker Change: Standard mentioned, we're currently in the process of selling the non directly originated assets and redeploying those assets redeploying those proceeds into assets that are more consistent with M. F I seize investment strategy.

Speaker Change: The good news is that these non directly originated assets are held throughout the Apollo platform, which facilitates risk monitoring while on our books as well as the selling process.

Ted McNulty: Since the closing of the mergers on June 22nd and through yesterday, we have sold approximately $125 million of these assets near their cost base. We are very much on track with our plan to sell these assets, which we expect to complete over the next few quarters. In addition, the mergers were a significant deleveraging event for MFIC and created investment capacity of approximately $386 million, assuming a net leverage ratio of 1.4 times.

Speaker Change: Since the closing of the mergers on June 22nd and through yesterday, we have sold approximately $125 million of these assets near our cost basis, we're very much on track with our plan to sell these assets, which we expect to complete over the next few quarters. In addition, the mergers where a significant deleveraging event for MFC and created investment capacity.

Speaker Change: <unk> of approximately $386 million, assuming a net leverage ratio of 1.4 times taking into account the 389 million of non directly originated assets that we intend to sell plus the $386 million of additional investment capacity, we have approximately $775 million of capital to deploy.

Ted McNulty: Taking into account the $389 million of non-directly originated assets that we intend to sell, plus the $386 million of additional investment capacity, we have approximately $775 million of capital to deploy. Given the significant deal flow generated by MidCap, we're confident that we can deploy this capital and attractive opportunities. As Tanner mentioned earlier, MidCap closed on $9.6 billion of commitments in the first half of 2024. We expect to reach our target leverage in the next two to three quarters and see no impediment to doing so.

Speaker Change: Given the significant deal flow generated by mid cap, we're confident that we can deploy this capital in attractive opportunities as Sandra mentioned earlier midcap closed on $9 6 billion of commitments in the first half of 2024, we expect to reach our target leverage in the next two to three quarters and see no impediment to doing so we want to emphasize.

Ted McNulty: We want to emphasize that we will remain committed to our disciplined approach to portfolio construction as we deploy this capital. With that said, I will now turn the call over to Greg to discuss our financial results in detail.

Speaker Change: We will remain committed to our disciplined approach to portfolio construction as we deploy this capital.

Speaker Change: That I would now I'll turn the call over to Greg to discuss our financial results in detail.

Ted McNulty: Thank you, Ted, and good morning, everyone. Beginning with our financial results, net investment income per share for the June quarter was $0.45, which reflects solid recurring interest income as well as strong fee and prepayment income. Results for the latest 12-month period correspond to an annualized ROE based on net investment income of 11.6 percent and an annualized ROE based on net income of 11.1 percent from the mergers. Both the NAV per share of $15.38 and the $450 million increase in net assets exclude the impact of the one-time special distribution of $0.20 or $18.8 million made in connection with the merger. We intend to continue to evaluate and monitor capital raising transactions going forward, which we believe provides greater shareholder alignment and focus on net asset value.

Greg Hunt: Thank you, Ted, and good morning, everyone. Beginning with our financial results, net investment income per share for the June quarter was $0.45, which reflects solid recurring interest income as well as strong fee and prepayment income. For the quarter, prepayment income was $3.2 million, and fee income was approximately $900,000. Tick income remains low, representing approximately 3.6% of total investment income for the quarter.

Greg: Thank you Ted and good morning, everyone, beginning with our financial results net investment income per share for the June quarter was 45.

Greg: Which reflects solid recurring interest income as well as strong fee and prepayment income for the quarter prepayment income was $3 2 million in fee income was approximately 900000 Pik income remains low representing approximately three 6% of total investment income for the quarter.

Operator: Please stand by, your program is about to begin. If you need assistance on today's program, please press star zero.

Greg Hunt: Gap net income per share for the quarter was $0.35. Results for the quarter correspond to an annualized return on equity, or ROE, based on net investment income of 11.8% and an annualized ROE based on an income of 9%. Results for the latest 12-month period correspond to an annualized ROE based on net investment income of 11.6 percent and an annualized ROE based on net income of 11.1 percent. MFIC's NAB per share at the end of June was $15.8, down 4 cents quarter over quarter, which reflected net investment income of $0.45, which is $0.07 above the $0.38 distribution, and an $0.11 per share net loss in the portfolio. As Ted mentioned, the vast majority of our corporate lending portfolio continues to have strong fundamental performance.

Greg: GAAP net income per share for the quarter was 35.

Greg: Results for the quarter corresponded to an annualized return on equity or ROE based on net investment income of 11, 8% and an annualized ROE based on net income of 9%.

Elizabeth Besen: Good morning and welcome to the Earnings Conference call for the period ended June 30, 2024 for MidCap Financial Investment Corporation. At this time, all participants have been placed in listen only mode. The call will be open for a question and answer session following the speaker's prepared remarks.

Greg: The results for the latest 12 month period correspond to an annualized ROE based on net investment income of 11, 6%.

Greg: Annualized ROE based on net income of 11, 1%.

Operator: 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 the star two.

Greg: <unk> NAV per share at the end of June was 15.

Greg: Dollars and 38 cents down four cents quarter over quarter.

Elizabeth Besen: I want to now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Thank you, operator, and thank you everyone for joining us today.

Greg: Which reflected net investment income of 45, which is seven cents above the 38 cents distribution and an 11 cents per share net loss in the portfolio.

Elizabeth Besen: 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 for the Q&A portion of today's call. I'd like to advise everyone that today's call and webcast are being recorded, so you know that the property of MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited.

Greg: <unk> mentioned.

Greg: Vast majority of our corporate lending portfolio continues to have strong fundamental performance <unk> net assets increased by $450 million.

Greg Hunt: MFIC's net assets increased by $450 million from the mergers. Both the NAV per share of $15.38 and the $450 million increase in net assets exclude the impact of the one-time special distribution of $0.20 or $18.8 million made in connection with the merger. Net expenses for the quarter were $39.6 million, down slightly compared to the prior quarter, primarily due to lower incentive fees and lower administrative expenses, offset by higher interest expense given the increase in the size of the portfolio. The weighted average interest rate on our debt for the quarter was approximately 7%. We intend to continue to evaluate and monitor capital raising transactions going forward.

Greg: From the mergers both the NAV per share of $15 38, and the $450 million increase in net assets exclude the impact of the one time special distribution of <unk> 20, or $18 8 million made in connection with the merger.

Elizabeth Besen: Information about the audio replay of this call is available in our press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law.

Greg: Net expenses for the quarter were $39 6 million down slightly compared to the prior quarter, primarily due to lower incentive fees and lower administrative expenses.

Greg: Offset by higher interest expense given the increase in the size of the portfolio.

Elizabeth Besen: To obtain copies of our SEC filings, please visit either the SEC website at www.sec.gov or our website at www.midcapfinancialic.com. I'd also like to remind everyone that we posted a supplemental 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 offer 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.

Greg: Our weighted average interest rate on our debt for the quarter was approximately 7% we.

Greg: We intend to continue to evaluate and monitor capital raising transactions going forward.

Greg Hunt: Management fees totaled $4.4 million for the June quarter, essentially flat compared to the prior quarter. As a reminder, MFIC's base management fee was reduced to 1.75% of equity and is one of the only listed BDCs to charge management fees on equity, which we believe provides greater shareholder alignment and focus on net asset value. Incentive fees totaled $5.6 million for the June quarter. As a reminder, our incentive fee on income is 17.5% and includes a total return hurdle with a rolling 12 quarter look back. The effective incentive fee rate for the June quarter was 15.9%, impacted by the net loss recorded during the quarter and the impact of the look back.

Greg: Management fees totaled $4 4 million for the June quarter, essentially flat compared to the prior quarter. As a reminder, <unk> base management fee was reduced to 175% on equity.

Greg: And as one of the only listed Bdcs to charge management fees on equity, which we believe provides greater shareholder alignment and focus on net asset value.

Tanner Powell: At this time, I'd like to turn the call over to Tanner Pal, MFIC's Chief Executive Officer. Thank you, Elizabeth, and thank you to everyone who has joined today's call, especially those of you who may be newer to MFIC. I will begin today's call with an update on the successful completion of our mergers with our previously affiliated funds. Apollo Senior Floating Rate Fund Inc. And Apollo Tactical Income Fund Inc. Which we refer to as AFT and AIF, or the CES, throughout today's call.

Ted McNulty: Incentive fees totaled 5.6 million for the June quarter. As a reminder, our incentive fee on income is 17.5% and includes a total return hurdle with a rolling 12 quarter look back. The effective incentive fee rate for the June quarter was 15.9%, impacted by the net loss recorded during the quarter and the impact of the look back. Moving to our balance sheet, MFIC's net leverage was $1.45. As a reminder, AFT and AIF merge into MFIC in Stock-for-Stock transactions, of $7.5 million was deemed to be merger consideration, which resulted in the fair value of the consideration paid by both AFT and AIF shareholders being equal to the fair value of the assets acquired, resulting in no purchase discount or premium.

Greg: Incentive fees totaled $5 6 million for the June quarter as a reminder, our incentive incentive fee on income is 17, 5% and include the total return hurdle with a rolling 12 quarter look back.

Greg: Active incentive fee rate for the June quarter was 15 nine.

Tanner Powell: I will then provide an overview of MFIC's second quarter 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. He will also review the assets that we acquired in the connection with the mergers. Greg will then review our financial results in greater detail, and we'll also review some of the accounting aspects of the mergers.

Greg: 9% impacted by the net loss recorded during the quarter.

Greg: And the impact of the look back feature.

Greg Hunt: Moving to our balance sheet, MFIC's net leverage was $1.45 times at the end of June, compared to 1.35 times at the end of March, reflecting the $90 million of net funding during the quarter. MFIC's net leverage as of the closing of the mergers was 1.13. I'd like to take a few minutes to cover some of the accounting aspects of the merger. Mergers are being accounted for in accordance with the Asset Acquisition Method of Accounting under ASC 805-50.

Speaker Change: Moving to our balance sheet <unk> net leverage was 145.

Speaker Change: Times at the end of June compared to 1.35 times at the end of March reflecting.

Speaker Change: The $19 million of net fundings during the quarter <unk> net leverage as of closing of the merger was 113 times.

Tanner Powell: Beginning with the mergers, we are pleased to announce that on July 22nd, MFIC successfully closed its mergers with AFT and AIF Two listed closed-in funds managed by Apollo. We believe these mergers mark an important step in MFIC's evolution to becoming a leading pure play middle market. BDC. We remain enthusiastic about realizing the potential benefits that we highlighted when we announced the mergers last November. Let me remind you of some of these key benefits.

Speaker Change: I'd like to take a few minutes to cover some of the accounting aspects of the merger.

Tanner Powell: First, we expect these mergers will be both ROE and NII per share of creative for all shareholders. As we rotate the CEF's lower yielding investments in the ordinary course and to higher yielding directly originated loans that align with MFIC's investment strategy. Second, the mergers are expected to enhance MFIC's portfolio diversification and improve certain portfolio metrics. Third, we expect to be able to realize operational synergies from the elimination of certain duplicative expenses from the mergers.

Speaker Change: Mergers are being are being accounted for in accordance with the asset acquisition method of accounting under a S. C $805 50.

Greg Hunt: As a reminder, AFT and AIF merged into MFIC in stock-for-stock transactions, with shares being exchanged on a NAV for NAV basis. The exchange ratios for the mergers were based on the funds NAV per share as of July 19th, 2024. Accordingly, MFIC issued 0.9547 shares of its common stock for each AFT share and 0.9441 shares of its common stock for each AIF share. In total, MFIC issued approximately 28. $1.5 million in shares of MFIC to the closed-end fund shareholders, resulting in 93.8 million MFIC outstanding shares following the merger.

Speaker Change: As a reminder, a F T and Aif merged into <unk>.

Speaker Change: And stock for stock transactions with shares being exchanged on a NAV for NAV basis, the exchange ratios for the mergers where based on the funds NAV per share as of July 19, 2024, Accordingly, <unk> issued 90 547 shares of its common.

Speaker Change: Stock for each <unk> T share and <unk> 94 for one shares of its common stock for each Aif share in total MFC issued approximately 28.

Tanner Powell: And lastly, we believe that the larger market capitalization for the combined company may broaden the universal potential investors which could result in greater stock liquidity. As Ted will discuss, we are currently focused on deploying the capital and rotating certain assets acquired in the mergers and have already made good progress in that regard. As a reminder, Apollo provided significant financial support for these mergers by reimbursing all merger-related expenses for all three funds and by making a one-time special cash payment to the CEF shareholders.

Speaker Change: <unk> 5 million shares of MFC to the closed end fund shareholders, resulting in $93 8 million <unk> outstanding shares following the merger at.

Greg Hunt: At the time of the merger, MFIC was trading at a slight discount to its current value. In connection with the merger, an affiliate of Apollo made a $0.25 per share special cash payment to each AFT and AIF shareholder for a total payment of $7.5 million. This payment was deemed to be merger consideration, which resulted in the fair value of the consideration paid, with both AFT and AIF shareholders being equal to the fair value of the assets acquired, resulting in no purchase discount or premium.

Speaker Change: At the time of the merger <unk> was trading at a slight discount.

Speaker Change: It's currently.

Speaker Change: In connection with the merger an affiliate of Apollo made a 25 cents per share special cash payment to each ft, and Aif shareholder for a total payment.

Tanner Powell: As a result of the mergers, MFIC's net assets have increased by approximately 44 percent. With 1.45 billion in net assets, MFIC has significant investment capacity. As a result of this deleveraging, MFIC is well-positioned to deploy capital into true, first-lane senior-stured loans sourced by mid-cap financial, a leading middle-market lender managed by Apollo. Moving to our results for the June quarter as previously announced when the mergers closed, MFIC's net investment income per share for the June quarter was 45 cents, which corresponds to an annualized return on equity or ROE of 11.8 percent.

Speaker Change: Of $7 $5 million in accordance with the accounting guidance a portion of this cash payment was.

Speaker Change: Deemed to be merger consideration.

Speaker Change: Resulting in the fair value of the.

Speaker Change: Consideration paid to both AFG and AI Aif shareholders being equal to the fair value of the assets acquired resulting in no purchase discount or premium.

Tanner Powell: Results for the quarter reflect solid recurring interest income from our predominantly floating rate portfolio and strong fee and prepayment income. Gap EPS for the June quarter was 35 cents. MFIC's share was $15.38 at the end of June down 4 cents from the end of March. Beginning with the macro-environment regarding rates, Apollo's chief and economist believe that the Fed will cut rates by 25 basis points in September but still expects a soft landing.

Speaker Change: As a result.

Speaker Change: B no impact on the cost basis of the acquired assets and therefore, no impact on our financial statements.

Speaker Change: Fair value of the closed end fund assets at close.

Speaker Change: <unk> cost basis in these assets without any adjustment.

Greg Hunt: As a result, there will be no impact on the cost basis of the acquired assets and therefore no impact on our financial... Fair value of the closed-end fund assets it closed became MFIC's cost basis in these assets without any adjustment. This concludes our prepared remarks. Operator, please open the call to...

Speaker Change: This concludes our prepared remarks, operator, please open the call to questions.

Operator: At this time, if you would like to ask a question, please press star 1 now on your telephone keypad. To withdraw yourself from the queue, you may press star 2. Again, to ask a question, that is star 1 on your telephone keypad. One moment while we queue. We'll take our first question from Kenneth Lee of RBC Capital Markets.

Speaker Change: At this time, if you would like to ask a question. Please press star one now on your telephone keypad to withdraw yourself from the queue. You May Press Star two again to ask a question that is star one now on your telephone keypad, one moment, while we queue.

Tanner Powell: He notes a continuing strength and a broad set of number of weekly indicators such as PSA data for air travel, restaurant bookings, retail sales and hotel occupancy rates that suggest the economy will be able to avoid recession. With regard to markets, the credit market continue to be very strong and well bid throughout Q2 and into the start of Q3 2024. M&A and LVO activity increased in Q2 from very low levels, though has lagged expectations and thus issuers and sponsors have taken advantage of limited new supply tapping the market for dividends and repricings.

Operator: We'll take our first question from Kenneth Lee of RBC Capital Markets.

Speaker Change: We will take our first question from Kenneth Lee of RBC capital markets.

Kenneth Lee: Hey, good morning. Thanks for taking my question. Just in terms of the portfolio rotation over the next few quarters..., the non-directly originating assets being sold, I assume you're talking about the BSLs, the structured credit, and the high-yield bonds from the closed-end funds. Granted, the BSL market is fairly liquid, but I just want to get a better understanding of any kind of key constraints around the pace of sales, for example, like the structured credit and the high

Kenneth Lee: Hey, good morning, Thanks for taking my question just in terms of the portfolio rotation over the next few quarters.

Speaker Change: Not directly originate assets being sold I assume you're talking about the beer sales are structured and the high yield bonds from closed end funds.

Speaker Change: Granted the BSL market is fairly liquid, but just wanted to get a better understand of any kind of key constraints around the pace of cells. For example, like the structured credit to high yield bonds.

Unnamed: Thanks. Thanks.

Ted McNulty: Yeah, thanks, Ken. And thanks for the question. I think, I think.

Tanner Powell: Auction activity has seen a meaningful pickup in the latter part of Q2 and into Q3 and we expect to see an increase in new deployment opportunities for direct lenders in the back half of the year. As you know, MFIC is squarely focused on investing in first lean loans to middle-market companies sourced by mid-cap financials. A leading middle-market lender with one of the largest direct lending teams in the U.S, with close to $200.

Kenneth Lee: Thanks.

Ted McNulty: So first of all, as we mentioned in the prepared remarks, we've already, even since closing the mergers on July 22, made some good progress and sold, you know, raised roughly 125 million in proceeds. So, some really good progress out of the gate. And I think your question is alluding to a very important piece of how we are going to proceed from here, and that is, if you look across the roughly $400 million that's in those three respective buckets of type of investment, there's going to be a number of securities or loans that are not as liquid.

Ted McNulty: Yeah, thanks, Ken, and thanks for the question.

Kenneth Lee: Yeah, Thanks, Ken and thanks for the question.

Speaker Change: I think I think so first of all as we mentioned in the prepared remarks, we've already I, even since closing the merger on July 20, <unk> made some good progress and sold our raised roughly 125 million of proceeds. So some really good progress out of the gate and I think your question is is a loser.

Speaker Change: Two a very important piece of how we are going to proceed from here and that being if you look across the roughly 400 million that's in those three respective buckets.

Tanner Powell: Investment Professors. MidCap Financial was founded in 2009 as a long track record, which includes closing on over 118 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 MidCap Financial one of the most informed and experienced middle market lenders in the market. The Apollo Global's affiliation with MidCap Financial provides MFC and the broader Apollo platform with significant deal flow.

Speaker Change: Type of investment, there's going to be a number of securities or loans that are not as liquid and so we would look at this program and this rotation strategy is not contingent on selling every last a broadly syndicated loan or.

Ted McNulty: And so, we would look at this program and this rotation strategy as not contingent on selling every last broadly syndicated loan or high-yield bond. And obviously, certain of those securities or loans don't have the same liquidity and would require us to take a discount to fair market value, which we would not want to take. And as a result, you should see us continue to make progress in reducing that, but by no means should you expect us to sell out of all $400 million. And importantly, consider reinvestment yield and the type of discount one might have to take in order to transact on those bonds.

Speaker Change: Or high yield bond and you know.

Tanner Powell: In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high yield market. Despite the high level competition where please report that MidCap Financial was active during the June quarter, closing approximately 4.4 billion in new commitments, or 9.6 billion in the first half of 2024.

Speaker Change: Obviously certain of those securities or loans don't have the same liquidity would we would require us to take a discount to a fair market value, which we would.

Speaker Change: Not not want to take and as a result, you should see us continue to make progress.

Speaker Change: In reducing that but by no means I should expect us to sell out of all 400 million and importantly, consider reinvestment yield and the type of discount one might have to take in order to transact on those bonds and loans.

Tanner Powell: Next, what started dividends? First, as previously announced, in connection with the mergers on July 21, our board of directors declared a one-time special cash distribution of 20 cents per share to shareholders of record as of August 5, 2024, payable on August 15, 2024. As a reminder, this special 20 cent dividend is being paid to all shareholders as of a record date, including former AFT and AIF shareholders. In addition, on August 6, 2024, our board declared a quarterly dividend of 38 cents per share, consistent with our prior quarterly dividend to shareholders of record as of September 10, 2024, payable on September 26, 2024.

Ted McNulty: Great. Very helpful there. And just one follow-up question, if I may, any updated outlook on potential ROE or ROE accretion just going forward? Thanks.

Kenneth Lee: Great, very helpful there. And just one follow-up, if I may, any updated outlook on potential ROE or ROE accretion just going forward? Thanks.

Speaker Change: Great very helpful. There.

Speaker Change: And just one follow up if I may.

Speaker Change: Any updated outlook on potential ROA or ROE accretion just going forward. Thanks.

Ted McNulty: No, we are not going to update that guidance. Obviously, we're looking at the potential for lower base rates, but as we outlined in our prepared remarks, as well as in the materials referenced in our November materials, we see significant synergies to improve both ROE and NII.

Speaker Change: No I, we don't we are not going to update that guidance. Obviously you know we're looking at you know the potential for lower base rates, but as we outlined in our prepared remarks as well as you know in which referenced R. R.

Speaker Change: Our our November materials.

Ted McNulty: With that, I will now turn the call over to Ted. Thank you, Tanner.

Speaker Change: We see significant synergies to to improve.

Ted McNulty: Good morning, everyone. I'll spend a few minutes reviewing our second quarter investment activity and our investment portfolio. I'll then review the investments we acquired via the mergers with the closed end funds. During the June quarter, MFIC's new investment commitments totaled 285 million across 28 different borrowers for an average new commitment of 10.2 million, as we continue to focus on diversification by borrowers. 23% of new commitments were made to existing portfolio companies.

Speaker Change: Both ROI Roe and NII.

Kenneth Lee: Gotcha. Very helpful. Thanks again.

Speaker Change: Got you very helpful. Thanks again.

Melissa Wedel: We'll take our next question from Melissa Wedel of J.P. Morgan.

Operator: We'll take our next question from Melissa Wedel of J.P. Morgan.

Speaker Change: We'll take our next question from Melissa Wedel of J P. Morgan.

Melissa Wedel: Good morning. Thanks for taking my questions. I'm trying to sort of reconcile the math around the rotation strategy that you described and also growing leverage or building leverage in the portfolio back up to target levels. It seems like there's a lot of rotation and just sort of organic churn that we should be expecting in the portfolio. But also, it seems like a pretty short timeframe within two quarters or so to get back to the target. Hoping you can help walk us through that a little bit, but also just confirm the target range that you're thinking about in this environment. Thank you. Yeah, sure.

Melissa Wedel: Good morning, Thanks for taking my question.

Melissa Wedel: Im trying to sort of reconcile the math around the rotation strategy that you described.

Ted McNulty: Despite spread compression, we believe the risk return profile in these new commitments remains compelling. The weighted average spread on our new commitments in the June quarter was 559 basis points. Net leverage on new commitments was 3.3 times, down from 3.9 times last quarter. The weighted average OID for new commitments was approximately 157 basis points. This spread and OID translates into very attractive, unlovered asset yield of over 11%, assuming a 5% base rate.

Speaker Change: And also.

Speaker Change: Growing leverage or building leverage in the portfolio back to target levels.

Speaker Change: Seems like Theres, a lot of rotation and just sort of organic churn that we should be expecting in the portfolio, but also it seems like a pretty short timeframe within two quarters or so to get back to the target, hoping you can help walk us through that a little bit but also just reconfirm that.

Ted McNulty: In terms of funded investment activity for the quarter, gross fundings for the corporate lending portfolio, excluding revolvers, totaled 214 million. Sales and repayments totaled 131 million. Net corporate lending revolver fundings were positive 10 million, and we received a $3 million paydown for Merx. In aggregate, net fundings for the quarter totaled 90 million.

Speaker Change: Target range that Youre thinking about in this environment. Thank.

Speaker Change: Thank you.

Ted McNulty: Yeah, sure. Thanks, Melissa.

Melissa Wedel: Yeah sure. Thanks Melissa.

Ted McNulty: So if we start with the lower end of our guided leverage range of 1.4 and the proforma leverage that we reported or that we disclosed in the prepared remarks of 1.13 times, if you just took up leverage, if you just got to that 1.4, that would be investment capacity of nearly $400 million, $386 million to be more exact. And obviously, that's growth, net of any sell-offs you have there. And then, you know, this will reference my answer to Ken's question, and I did allow for the fact that the goal is not necessarily to sell every last bond and loan and to be discriminating in how we sell and ensure that we're not sacrificing FMV to move that risk.

Speaker Change: If we start with the lower end of our guided leverage range of $1 four and the pro forma leverage that we reported are we.

Speaker Change: Lowes in the prepared remarks of 1.13 times. If you just if you just took up leverage if you just got to that one four that would be investment capacity of nearly 400 million 386.

Ted McNulty: Turning to our investment portfolio, we have built what we believe is a well diversified senior corporate lending book. At the end of June, prior to the close of the mergers with the closed end funds, our portfolio had a fair value of $2.4 billion, and was invested in 165 companies across 23 different- Industries. Corporate lending and other are represented over 92% of the total portfolio, and Mark's accounted for less than 8% of total portfolio, on a fair value basis.

Speaker Change: To be to be more exact and obviously that's growth net of any any any selloffs you have there and then you know this all referenced at my answer to Ken's question is if you look at the broadly syndicated and I and I did allow for the fact that the goal is not necessarily to sell every last bond and loan.

Ted McNulty: 97% of corporate lending portfolio was first lean, and over 99% of our corporate lending debt portfolio had 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 has longstanding financial relationships. The average-funded corporate lending position was 14.1 million, or approximately 0.6% of the total corporate and other lending portfolio. The weighted average yield at cost of our corporate lending portfolio was 12% on average for the June quarter, down slightly from 12.1% in the March quarter. At the end of June, the weighted average spread on the corporate lending portfolio was 601 basis points, down 20 basis points compared to the end of March.

Speaker Change: And to be discriminating in and how we sell them and ensure that we're not sacrificing F N b to move that risk, but just for argument's sake. If you were to go wrong.

Ted McNulty: But just for argument's sake, if you were to, you know, rotate out all that $389 million of non-directly originated assets that came over with the mergers, it brings us to a total investment capacity of roughly $775 million. And so that's, so if you think about this from two perspectives, Melissa, you know, on the one hand, we have the $389 to sell, of which we've sold $125 million, and the caveat that the goal is not necessarily to sell all $389. That's one piece of it.

Speaker Change: Rotate out of all of that 389 million of non directly originated.

Melissa: Assets that came over with the mergers it brings us to a total investment capacity of roughly $775 million and and so that's so if you think about this from two two perspectives Melissa.

Speaker Change: On one hand, we have the 389 to sell of which we've sold $125 million and caveat that the goal is not necessarily to sell all 389, that's one piece of it and that will be market dependent over the next couple of quarters Importantly, and I think this has been a really important piece of our strategy.

Ted McNulty: Turning to credit quality, our focus on true first lean, top of the capital structure, middle-market loans, has resulted in what we consider to be stable credit quality. Overall, we feel good about the health and quality of our corporate lending portfolio, and our underlying borrowers have largely been able to handle higher borrowing costs. We have not seen a significant increase in the amendment requests, and the requests we have seen are generally accompanied with good spots or support.

Ted McNulty: And that will be market-dependent over the next couple of quarters. Importantly, and this has been a really important piece of our strategy, of our story for quite some time, and thus it's worth emphasizing, is on the other side, in terms of deployment, we're extremely lucky to be now just over $3 billion in assets, which itself is roughly only one-tenth of the assets within the mid-cap financial ecosystem. That's, you know, in excess of a $30 billion business.

Speaker Change: Our of our story for quite some time and thus it's worth emphasizing is on the other side in terms of deployment, we're extremely lucky to be now just over 3 billion of assets, which itself is roughly only 110th of the assets within the mid cap financial ecosystem that said you know.

Ted McNulty: Portfolio companies are generally maintaining performance, continuing the trend of solid fundamentals demonstrated in 2023 and into early 2024. On a median basis for the March quarter, Portfolio company revenue and EBITDAB both increased by mid-single digits year over year. This has been achieved despite a downturn in acquisition activity, indicating that much of the growth demonstrated has been organic. At the end of June, the weighted average net leverage of our corporate lending portfolio was 5.38 times, up very slightly from 5.36 times last quarter.

Speaker Change: In excess of 30 billion dollar business and so from a deployment standpoint, we've we have never had an issue with deployment or access to assets and with this incremental capital whether it's playing an increased number of deals are increased and Oh.

Ted McNulty: And so from a deployment standpoint, we have never had an issue with deployment or access to assets. And with this incremental capital, whether it's playing an increased number of deals or increasing a roughly higher average size of deal, that piece of the equation, i.e. the redeployment itself, is very much provided for by the breadth of the mid-capital financial origination platform that we're very lucky to have access to.

Speaker Change: Roughly higher average size of deal that piece of the equation I E. The redeployment itself is a very much provided for by the breadth of the midcap financial origination platform that we're very lucky to have access to.

Ted McNulty: At the end of June, the weighted average interest coverage ratio remained 1.9 times unchanged quarter over quarter, with 4 companies below 1 times. We are closely monitoring these situations, and believe they are manageable as the companies have strong current liquidity, good underlying business performance, or have strong financial sponsor support. The median EBITDAB of the company was approximately 46 million. Our underwriting on mid-cap source loans has proven to be sound. Based on data since mid-2016, which is the approximate data on which we began utilizing our co-investment order, our annualized net realized and unrealized loss is around three basis points on loan source by mid-cap financial. We think this performance data shows how well the strategy is performed.

Melissa Wedel: Thank you.

Operator: We'll take our next question from Finian O'Shea of Wells Fargo Securities.

Speaker Change: We'll take our next question from Finian O'shea of Wells Fargo Securities.

Operator: Yes.

Finian O'shea: Hey, everyone. Good morning.

Finian O'shea: higher level question with Howard moving over to Apollo and taking on what seems to be building out the direct origination effort and marrying that with MidCap.

Howard Widra: Higher-level question with Howard moving over to Apollo and taking on what seems to be building out the direct origination effort and marrying that with MidCap. Can you outline the sort of firm-wide direct lending setup, such as how do you collaborate and maybe compete? Do you split up sponsors? Do you go by deal size?

Finian O'shea: Higher level question with with Howard moving over to Apollo and taking on what seems to be building out the direct origination effort.

Speaker Change: And marrying that with mid caps can you outline the sort of firm wide direct lending setup as.

Speaker Change: As such it is how do you collaborate maybe compete do you split up sponsors can go by deal size on who needs any.

Ted McNulty: As of the closing of the mergers, investments on non-accrual were 1.8% of the total portfolio at fair value, or 2.3% at amortized cost across 11 names, including six companies acquired from the closed-in fund portfolio, two of which we have exited near cost in the secondary market.

Speaker Change: That you think will be important.

Speaker Change: For the mid cap investor. Thank you.

Howard Widra: Yeah, I can take that. That's Howard. So, again, to the market, we have one offering, which is, you know, the combined Apollo MidCap menu of direct lending options. So we, you know, there's a calling effort to sponsors, which combines resources at Apollo and MidCap, which I'm responsible for, which basically goes to market and says, we're available for your capital needs. Those capital needs are these direct lending loans, which you see go into sort of the large market Apollo effort and the MidCap effort.

Speaker Change: Yes, I can I can take that.

Finian O'shea: Howard.

Finian O'shea: So.

Finian O'shea: I guess, Mike you know to the market, we have one offering which as you know the combined Apollo midcap.

Ted McNulty: We wanted to take a few minutes to highlight some metrics that we think can provide insight into how we assess the risk of the portfolios of BDCs. Lenders have a number of ways they can mask liquidity challenges that are underlying borrowers. First, lenders increase the use of pick interest, whether at origination or as part of the restructuring. Pick income is a proxy for borrowers who cannot currently service their debt. In this regard, MFIC's pick income remains very low compared to the BDC industry effort.

Ted McNulty: 2. Lenders allow a revolving loan senior to their cash flow term debt while still categorizing their cash flow loans as first lien. We focus on what we often refer to as true first lien or top of the capital structure, meaning there's no debt senior to our position as evidence by our attachment point of 0.04 times. 3. Some lenders provide covenant light loans, or even draws on the revolvers to not spring covenant, effectively making the whole revolver available for payment of interest regardless of the state of the company.

Speaker Change: Menu of direct lending options. So we.

Speaker Change: There is a calling effort to sponsors which combines resources at Apollo and mid cap.

Speaker Change: Im responsible for which which which basically goes to market and says we are available for your capital needs capital needs are these direct lending loans, which you see go into sort of built the.

Howard Widra: There are also other things we provide, you know, sponsors, which could be NAV loans or, or, or, GP capital generally, or, or, or, you know, re-discount loans when they have finance capacity, equipment loans, whatever, you know, the case may be. So we go to the market, and we say, "Here is our, you know, here is our catalog of capabilities."

Speaker Change: The large market Apollo effort and the big cap effort. There's also other things we provide.

Speaker Change: Sponsors, which could be NAV loans, or GP capital generally or or.

Speaker Change: Rediscount loans, when they have finance capacity.

Speaker Change: Capacity equipment logs whatever the case may be so we are going to the market and we are saying here is ours.

Ted McNulty: As a reminder, over 99% of the MFIC's corporate lending portfolio has at least one fitting in financial covenant. In any covenant light loans we may hold would have a spring covenant when the revolvers drawn above certain levels. 4. Some lenders have added structures where they increase their debt to pay their own interest, sometimes referred to as synthetic pick. Although hard to account for the myriad structures of lenders, of structures lenders can use to achieve these results, which generally do not advance credit to borrowers to cover interest.

Speaker Change: Here's our catalog of capabilities and then when a deal comes in.

Howard Widra: And then when a deal comes in..., you know, there are sort of two strategies which overlap, which I think is the most relevant part of the question. So one is if there is a core middle market deal, say 50 million, $40, $50 million of EBITDA being done at five times, that is being executed by MidCap. And often, you know, portions of the Apollo ecosystem will take some of that loan, especially because, under the 40 Act, you want to be part of transactions as they grow. So they may take a little.

Finian O'shea: No.

Speaker Change: There are sort of two strategies, which overlap, which I think is the most relevant part of the question. So one is if there is a core middle market deal say 50 billion 40 $50 million of EBITDA being kind of a five times that is being executed by mid <unk>.

Finian O'shea: Cap.

Finian O'shea: And.

Ted McNulty: 4. Fortunately, MFIC benefits from mid cap financials large dedicated portfolio management team, which helps identify and address issues early. It's also important to note that mid cap financial leads and serves as administrative agent on the vast majority of our deals, which provides meaningful downside protection. As agent, we are an active dialogue with a borrower and have enhanced information flow, which allows us to be proactive in resolving problem credits.

Speaker Change: Often you know portions of the Apollo ecosystem.

Speaker Change: We'll take some of that will especially be causing a 40 act do you want to be part of transactions as they grow so they may take a little bit high.

Howard Widra: On the other side of the spectrum, $300 million, you know, EBITDA company that's doing, you know, whatever, a billion and five private credit deal, three parties, $500 million. Let's say Apollo's taking down that, and that will be, by and large, done by sort of the ABS, CDC, and other satellite entities. And, you know, we have the option, meaning MFIC has the option to take part in those, but generally won't, might, you know, occasionally and generally won't.

Speaker Change: On the other side of the spectrum 300 million dollar EBITDA.

Speaker Change: EBITDA company that's doing.

Finian O'shea: Whatever.

Finian O'shea: Private credit deal.

Speaker Change: Three parties $500 million, let's say apollo's taking down.

Ted McNulty: Moving on to Merx, as we've discussed in the past, we're focused on reducing our investment in our aircraft leasing and servicing business. While we don't expect paid-outs to occur evenly, we believe the aircraft sales and servicing income should allow for the paid-out of third-party debt and MFIC's investment in Merx over time. The blended yield across our total investment in Merx is less than 4% and the continued rotation of capital from Merx has the potential to have a meaningful beneficial impact on income.

Ted McNulty: Let's say Apollo's taking down that, or that will be done by sort of the ABS, CDC, and other satellite entities. And, you know, we have the option, meaning MFIC has the option to take part in those, but generally won't, might, you know, occasionally and generally won't. And in fact, the closed-end funds were part of that ADS ecosystem and, more recently, had some pieces of some of those loans.

Ted McNulty: That will be by and large that where that will be done by sort of the.

Ted McNulty: At CDC and others.

Ted McNulty: Satellite entities.

Ted McNulty: And.

Ted McNulty: We have the option meeting.

Ted McNulty: <unk> has the option to take part of that in those but generally walk Mike.

Howard Widra: And in fact, the closed-end funds were part of that ADS ecosystem and, more recently, had some pieces of some of those loans. So some of the loans that came over as part of the CEFs are in sort of, are in those loans and are now classified in our corporate portfolio. So things that we're not going to rotate out, with regard to like how, you know, that risk in particular and how MFIC is making choices, you know, because... We're all integrated.

Ted McNulty: Occasionally and generally well and in fact the <unk>.

Ted McNulty: As of June 30, 2024, our investment in Merx totaled 187 million, representing 7.7% of the total portfolio at fair value. During the June quarter, Merx paid MFIC 4.7 million, including 1.7 million of interest and a $3 million return of capital. Since the end of June, MFIC's investment in Merx has decreased to approximately 5.8% of the total portfolio due to a combination of the growth in the portfolio from the mergers, as well as an additional 7.5 million paid-out from Merx, which occurred in July.

Ted McNulty: Closed end funds were part of that Avs.

Ted McNulty:

Ted McNulty: And more recently had some pieces of some of those loans. So some of the loans that came over as part of the C. Yes, we are.

Ted McNulty: Are in sort of are in those loans and are now classified in our corporate portfolio. So things that were not going to rotate out of them.

Ted McNulty: The.

Ted McNulty: With regard to like how that risk in particular, and how MF IC is making choices.

Ted McNulty: Because.

Howard Widra: And because I'm responsible for the sponsor origination, you know, we see and have access to everything. And we know which deals, not only that we bought with CEF loans, but which we have options on. So it actually goes back to what Melissa said: how do we know that we can generate flow?

Speaker Change: We're all integrated and because I'm responsible for the sponsor origination we see and have access to everything and we know which deal not only that we bought we see yeah.

Ted McNulty: Turning to the mergers with AFT and AIF. To echo Tanner's comments, we're excited about the long-term benefits that we believe this transaction will create.

Akshay: But which we have akshay. So it actually goes back to what Melissa said, how do we know that we can generate flow. It's not only all of this mid cap assets, but it's also from time to time picking off certain of the larger assets that we decide that they fit whatever.

Ted McNulty: I'd like to take a few minutes to discuss the assets we acquired as part of our mergers with AFT and AIF. We onboarded approximately 596 million of investments from the closed-end funds, increasing the size of MFIC's portfolio to approximately 3.1 billion as of the closing date. Of the 596 million of onboarded assets, approximately 207 million or 35% of these assets were directly originated loans across 37 Oblacores with a weighted average spread of 564 basis points.

Ted McNulty: Whatever criteria, we may have so.

Howard Widra: It's not only all of these MidCap assets, but we also pick off certain of the larger assets that we decide that they fit whatever, you know, you know, whatever criteria we may have. So you know, I think for the shareholders of MidCap, they should view our strategy, The Core Middle Market, we say, you know, $20 million to $100 million of EBITDA. But, you know, tied into a sort of a global platform that provides a lot to sponsors, so we have a lot of relevance to them, with lots of flow that's available on the periphery of that.

Ted McNulty: You know I think for the for the shareholders of mid cap.

Ted McNulty: Should view our strategy core middle market, we say.

Ted McNulty: $20 million to a $100 million of EBITDA, but.

Ted McNulty: The remaining 389 million of these assets consists of broadly syndicated loans, high-yield bonds, and structure credit- Reposition. As Tanner mentioned, we are currently in the process of selling the non-directly originated assets and redeploying those assets, redeploying those proceeds into assets that are more consistent with MFIC's investment strategy. The good news is that these non-directly originated assets are held throughout the Apollo platform, which facilitates risk monitoring while on our books as well as the selling process.

Ted McNulty: Tied into a sort of a global platform that provides a lot of sponsors. So we have a lot of relevance to them with lots of flow that's available on the periphery.

Howard Widra: And then, sort of most importantly, I think, our strategy being sort of one of the centerpieces that Apollo's taking to market as part of their whole value proposition, as indicated, you know, most, you know, most relevantly in that, you know, you know, you know, me and Claire Baillet, who's responsible for, you know, the MidCap sponsor lead, or sort of leading that effort across Apollo.

Ted McNulty: And then sort of most importantly, I think our strategy being sort of one of the centerpieces that Apollo is taking to market as part of their whole value proposition.

Ted McNulty: So some of the loans that came over as part of the CEFs are in sort of, are in those loans and are now classified in our corporate portfolio. So things that we're not going to rotate out, as indicated, you know, most relevantly in that, you know, you know, you know,

Ted McNulty: As indicated.

Ted McNulty: Most most relevantly.

Ted McNulty: Bob.

Ted McNulty: Since the closing of the mergers on June 22nd and three yesterday, we have sold approximately 100 125 million of these assets near our cost basis. We are very much on track with our plan to sell these assets, which we expect to complete over the next few quarters. In addition, the mergers were a significant de-leveraging event for MFIC, and created investment capacity of approximately 386 million, assuming in that leverage ratio of 1.4 times.

Speaker Change: Uh huh.

Ted McNulty: Yeah.

Speaker Change: <unk> cleared by who is responsible for the mid cap sponsor, we are sort of leading that effort across the power.

Finian O'shea: Awesome. There is a lot of color, and I really appreciate that.

Speaker Change: Awesome color I really appreciate that.

Ted McNulty: Yes.

Howard Widra: I guess just another high-level follow-up, with the murders complete and congratulations on that. What's your name? You know, I assume you probably want to be one of these. $5 billion BDCs, maybe, maybe not. What would the sort of path forward be, you know, some, some, some of your peers do large private to public, there's a lot of those going on. Some are going public, secondary style growth, like how do you look at all that? and I guess..., what is the future for them?

Speaker Change: I guess, just another high level follow up.

Ted McNulty: With the merger is complete and congratulations on that.

Speaker Change: Whats your.

Ted McNulty: Taking into account the 389 million of non-directly originated assets that we intend to sell, plus the 386 million of additional investment capacity. We have approximately 775 million of capital to deploy. Given the significant deal flow generated by MidCap, we are confident that we can deploy this capital and attract of opportunities. As Tanner mentioned earlier, MidCap closed on 9.6 billion of commitments in the first half of 2024. We expect to reach our target leverage in the next two to three quarters and see no impediment to doing so.

Speaker Change: I assume you probably want to be one of these.

Ted McNulty: $5 billion Bdcs, maybe maybe not.

Ted McNulty: What would the sort of path forward would be.

Ted McNulty: We want to emphasize that we will remain committed to our disciplined approach to portfolio construction as we deploy the assets.

Speaker Change: So some of your peers do.

Ted McNulty: Private to public so theres a lot of those going on.

Finian O'shea: Some are going out in public, secondary style growth, like how do you look at all that?

Ted McNulty: Some are going.

Ted McNulty: And.

Finian O'shea: Publix.

Finian O'shea: Secondary style growth like how do you look at all of that.

Speaker Change: And I guess what.

Speaker Change: What is there anything in the immediate future.

Ted McNulty: Well, just to channel Mark Brown for a second, which is he sort of says like, the size of the BDC is not the goal, it's the reward for doing the business the right way. So, we are, you know, we're focused on, and our expectation is that we will continue to generate appealing risk-adjusted returns. So, there will be an ability to grow, you know, in the normal course, meaning, you know, hopefully, trading well, you know, in sort of the, you know, trading well on an absolute basis, in order for people to want to invest more.

Howard Widra: Well, I'm going to channel Mark Brown for a second, which is he sort of says like, the size of the BDC is not the goal, it's the reward for doing the business the right way. So, we are, you know, and our expectation is that we will continue to generate appealing risk-adjusted returns. So, there will be an ability to grow, you know, in the normal course, meaning, you know, hopefully, trading well, you know, in sort of the, you know, trading well on an absolute basis, in order for people to want to invest more.

Finian O'shea: Yes.

Mark: Well just to I'm going to channel Mark.

Greg Hunt: 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 June quarter was 45 cents, which reflects solid recurring interest income, as well as strong C in prepayment income. For the quarter, prepayment income was 3.2 million in C income was approximately 900,000. Pick income remained low, representing approximately 3.6% of total investment income for the quarter.

Ted McNulty: Mark brought in for a second which is he started it sounds like the size of the BDC is not the goal with the reward for doing business the right way.

Ted McNulty: So we we are you know we're focused on and our expectation is we will continue to sort of generate appealing risk adjusted returns so are.

Ted McNulty: There will be an ability to grow.

Ted McNulty: Hi.

Ted McNulty: In the normal course meeting.

Ted McNulty: Hopefully trading well.

Ted McNulty: And sort of.

Ted McNulty: Trading well on an absolute basis in order to sort of people to want to invest more so that's like the core focus continue to execute and we will be rewarded.

Greg Hunt: Gap net income per share for the quarter was 35 cents. Results for the quarter correspond to an annualized return on equity, or ROE based on net investment income of 11.8%, and an annualized ROE based on an income of 9%. Results for the latest 12-month period correspond to an annualized ROE based on net investment income of 11.6%, and an annualized ROE based on net income of 11.1%. MFIC's NAB per share at the end of June was $15.38, down 4 cents, quarter over quarter, which reflected net investment income of 45 cents, which is 7 cents above the 38 cent distribution, and an 11 cent per share net loss on the portfolio.

Ted McNulty: So, that's like the core focus; continue to execute, and we will be rewarded, and we will be able to grow. You know, with regard to sort of other less, you know, less tactical growth. Everything we do, and this almost goes to the other thing, everything we do, we want to be accretive to our shareholders. So, in other words, we don't want to grow at the expense of that. And so, we'll look at everything.

Howard Widra: So, that's like the core focus; continue to execute, and we will be rewarded, and we will be able to grow. You know, with regard to sort of other less, you know, less tactical growth opportunities. I think what, you know, generally our view has been... Everything we do, and this almost goes to the other thing, everything we do, we want to be accretive to our shareholders. So, in other words, we don't want to grow at the expense of that, and so we'll look at everything.

Ted McNulty: Hi.

Ted McNulty: And we will be able to grow.

Ted McNulty: With regard to sort of other sort of lag.

Ted McNulty: Last tactical growth.

Speaker Change: Opportunities I think.

Ted McNulty: Generally our view has been everything we almost got to the only thing everything we do we want to be accretive to our shareholders.

Ted McNulty: Hi.

Ted McNulty: So in other words, we don't want to we don't want to grow at the expense of that.

Ted McNulty: And so you know.

Ted McNulty: We will look at everything that could be.

Howard Widra: That could be... which, as you know, we haven't seen in our industry, like, everybody would love to, you know, merge with another BDC and take in another contract and grow if they think they could deploy the capital well. That stuff hasn't really happened. So it's hard to predict that, but like any, any of the any, any ways to sort of access capital that are accretive to our current shareholder base, we'll, we'll consider. I'll stop there. I don't know, Greg or Tanner, if you have anything to add.

Ted McNulty: Like which as you know we haven't seen in our industry like everybody would love to merge into another BDC and taken another contract and grow if you think you could deploy the capital well that stuff hasn't really happened. So it's hard to predict that but like any any any any ways to sort of access capital that are accretive to our <unk>.

Greg Hunt: As Ted mentioned, the vast majority of our corporate lending portfolio continues to have strong fundamental performance. MFIC's net assets increased by 450 million from the mergers, both the NAB per share of $15.38, and the 450 million increase in net assets that exclude the impact of the one-time special distribution of 20 cents per 18.28 million made... King Connection with Emeritus. Ted expenses for the quarter for 39.6 million down slightly compared to the prior quarter, primarily due to lower incentives and lower administrative expenses, offset by higher interest expense given the increase in the size of the portfolio.

Ted McNulty: Current shareholder base, we'll consider.

Greg: I'll stop there I don't know, Greg or 10, or do you have anything to add.

Ted McNulty: Yes.

Unnamed: Neither do you; you're in.

Operator: Thanks for watching!

Ted McNulty: Hi, there.

Unnamed: So, and I think that's very well said.

Ted McNulty: Thanks.

Speaker Change: No no.

Speaker Change: And I think that's well stated.

Finian O'shea: All right, thanks so much, everybody.

Operator: Alright, thanks, so much everybody.

Operator: Sure.

Operator: And once again, to ask a question, please press star 1 now on your telephone keypad. Please wait a moment while we queue.

Operator: And once again, to ask a question, please press star 1 now on your telephone keypad. One moment while we queue. We'll take our next question from Mark Hughes of Truist.

Speaker Change: And once again to ask a question. Please press star one now on your telephone keypad, one moment, while we queue.

Speaker Change: We'll take our next question from Mark Hughes of Truest.

Mark Hughes: Yeah, thank you. Good morning. What are you seeing in the market? What are you kind of focusing on? I'm just very curious about those movements.

Mark Hughes: Yeah, thank you. Good morning. I wonder if you could talk a little bit about the commitment activity in the quarter. Your average borrower exposure continues to move down a little bit. Leverage of 3.3 versus 3.9 is down sequentially in this quarter's activity, well below the overall portfolio net leverage. What are you seeing in the market? What are you kind of focusing on? I'm just very curious about those movements.

Greg Hunt: The weighted average interest rate on our debt for the quarter was approximately 7%. We intend to continue to evaluate and monitor capital raising transactions from the bottom forward. Antiquence fees totaled 4.4 million for the June quarter, essentially flat compared to the prior quarter. As a reminder, MFIC's base management fee was reduced to 1.75% on equity, and is one of the only listed BDCs to charge management fees on equity, which we believe provides greater shareholder alignment and focus on net asset value.

Speaker Change: Yes, Thank you and good morning.

Speaker Change: I Wonder if you could talk a little bit about the commitment of activity in the quarter.

Speaker Change: Your average borrower exposure.

Speaker Change: To move down a little bit.

Mark Hughes: The.

Speaker Change: Leverage of three three versus $3 nine.

Speaker Change: Down sequentially.

Speaker Change: This quarter's activity well below the overall portfolio net leverage.

Mark Hughes: What are you seeing in the market.

Speaker Change: What are you kind.

Speaker Change: Kind of focusing on just sort of curious with those.

Speaker Change: Those movements.

Greg Hunt: Incentive fees totaled 5.6 million for the June quarter. As a reminder, our incentive fee on income is 17.5%, and include the total return hurdle with a rolling 12 quarter look back. The effective incentive fee rate for the June quarter was 15.9% impacted by the net loss recorded during the quarter and the impact of the look back feature. Moving to our balance sheet, MFIC's net leverage was 1.45 times at the end of June compared to 1.35 times at the end of March, reflecting the 90 million of net fundings during the quarter. MFIC's net leverage as of closing of the mergers was 1.13 times.

Ted McNulty: Yeah, sure, Mark. Hi, it's Ted.

Speaker Change: Yeah sure Mark highest had deep you know in the first half of the year.

Speaker Change: <unk> M&A was down.

Ted McNulty: And but as we kind of move through the second quarter in.

Ted McNulty: In the first half of the year, broadly speaking, M&A was down. But as we kind of moved through the second quarter, in the marketplace, we saw the pipeline building as private equity firms were starting to line up more LBO activity. That may not have shown itself in all of the stats that are more backward looking.

Ted McNulty: In the marketplace. We saw the pipeline building is private equity firms are starting to line up more LBO activity that may not have shown itself in all of the stats that are more backward looking.

Ted McNulty: But I think certainly and you probably heard this from others as we look at our pipeline going.

Ted McNulty: But I think certainly, and you probably heard this from others, as we look at our pipeline, you know, going forward, it's building very nicely. And in terms of deployment, you know, in the second quarter, we did, you know, some of which were, you know, based on incumbency. But then part of that was, as we looked to accelerate ahead of the merger, we knew where that was coming out. So we did accelerate, you know, our deployment.

Ted McNulty: Going forward.

Ted McNulty: Building very nicely and in terms of deployment in the second quarter. We did have we did.

Ted McNulty: Some of which were based on our competency.

Ted McNulty: But then part of that was as we look to accelerate how did the merger.

Greg Hunt: I'd like to take a few minutes to cover some of the accounting aspects of the mergers. Mergers are being accounted for in accordance with the asset acquisition method of accounting under ASC 805-50. As a reminder, AFT and AIF merged into MFIC in stock for stock transactions with shares being exchanged on a nav for nav basis. The exchange ratios for the mergers were based on the fund's nav per share as of July 19, 2024.

Ted McNulty: We knew where that was coming out so we did accelerate.

Ted McNulty: So we finished at 1.45 times, still on the low end of the range, but, you know, certainly in anticipation of the merger closing and then deleveraging down, you know, post that closing. So, you know, in terms of activity, like again, what are we focusing on? You know, we focus on the same thing quarter after quarter, which is, you know, middle market loans, top of the capital structure, cash pay, floating rate, and we continue to try to build and stay diverse across, you know, sectors and sponsors.

Ted McNulty: Our deployment. So we finished at 145 times still on the low end of the range but.

Ted McNulty: So we finished at 1.45 times, still on the low end of the range, but, you know, certainly in anticipation of the merger closing and then deleveraging down, you know, post that closing. So, you know, in terms of activity, like, again, what are we focusing on? You know, we focus on the same thing quarter after quarter, which is, you know, middle market loans, top of the capital structure, cash pay, floating rate, and we continue to try to build and stay diverse across, you know, sectors and sponsors.

Ted McNulty: Certainly.

Ted McNulty: It was in anticipation of the merger closing and then deleveraging down.

Ted McNulty: Post.

Ted McNulty: Closing so.

Ted McNulty: In terms of activity like again, what are we focusing on.

Ted McNulty: We focus on the same thing quarter after quarter, which as you know middle market loans are top of the capital structure.

Ted McNulty: Cash pay floating rate and.

Greg Hunt: Accordingly, MFIC issued 0.9547 shares of its common stock for each AFT share and 0.9441 shares of its common stock for each AIF share. In total, MFIC issued approximately 28.5 million shares of MFIC to the closed end fund shareholders resulting in 93.8 million MFIC outstanding shares following the merger. At the time of the merger, MFIC was trading in a slight discount to its current nav. In connections with the merger in affiliate of Apollo made a 25 cents per share special cash payment to each AFT and AIF shareholder for a total payment of $7.5 million.

Ted McNulty: Continuing to try to build an end state averse across sectors and sponsors.

Ted McNulty: I'd add one thing, your specific question around commitment amounts, and I'll actually allude to a comment that Howard made, is that given the limitations from a 40-act standpoint, it behooves us to participate at the time the deal is originated, Mark, such that we'll have the opportunity to do follow-ons. To the extent that we don't participate, we're necessarily crowded out, so you'll see And then also with regard to commitment size, and Ted alluded to this, but just to maybe dig another level deeper, is that ultimately a lot comes from incumbency, as he said, and ultimately that will have a lot to do with how big of an acquisition that particular company is doing. That would influence our commitment size.

Speaker Change: One thing your specific question around commitment amount and I'll actually alluded to a comment that Howard made is that.

Ted McNulty: Given that the the limitations about 40 act standpoint, it behooves us to participate at the time. The deal is originally originated mark such that we'll have the opportunity to do follow ons to the extent that we don't participate where you're necessarily crowded out so youll see that and then also with regard to the commitment size.

Unnamed: ......

Ted McNulty: And then also with regard to commitment size, and Ted alluded to this, but just to maybe dig another level deeper, ultimately, a lot comes from incumbency, as he said, and ultimately, that will have a lot to do with how big of an acquisition that particular company is doing. And that would... would influence our commitment size. And so I think I wouldn't read too much into it. It's going to ebb and flow based on that.

Ted McNulty: And Ted Ted alluded to this but just to maybe dig another level deeper is ultimately you know a lot of a lot comes from <unk>.

Ted McNulty: Incumbency as he said and ultimately that will have a lot to do with how big of an acquisition that particular company is doing and that would.

Ted McNulty: Would that influence our commitment size and so I think I wouldn't read too much into it it's going to ebb and flow based on that but for emphasis you're one of the real I'll go back to this point about our access to the mid cap origination. If you look at mid cap there is roughly 500 borrowers.

Ted McNulty: And so I think I wouldn't read too much into it. It's going to ebb and flow based on that. But for emphasis, you know, one of the real points, I'll go back to this point about our access to the MidCap origination. If you look at MidCap, there are roughly 500 borrowers. Pro Forma for the merger, we obviously have a significant number of obligors. And over time, you know, we hope to be able to, though, roughly a billion dollars in net assets, be able to run a really, really diversified portfolio and show obligors well in excess of 200 to stress the benefit our platform has of access to very, very diverse deal flow, which will be reflected in the diversification of our platform.

Ted McNulty: But for emphasis, you know, one of the real points, I'll go back to this point about our access to the MidCap origination. If you look at MidCap, there are roughly 500 borrowers. Pro Forma for the merger, we obviously have a significantly number of obligors. And over time, you know, we hope to be able to, though, roughly $1.4 billion in net assets, be able to run a really, really diversified portfolio and show obligors well in excess of 200 to stress the benefit our platform has of access to very, very diverse deal flow, which will be reflected in the diversification of our platform.

Greg Hunt: Guidance, a portion of this cash payment was deemed to be merger consideration, which resulted in the fair value of the consideration paid to both AFT and AIF shareholders being equal to the fair value of the assets acquired, resulting in no purchase, discount, or premium. As a result, there will be no impact on the cost basis of the acquired assets, and therefore no impact on our financial statements. Fair value of the closed and fun assets that close became MFIC's cost basis in these assets without any adjustment.

Ted McNulty: Pro forma for the merger, we obviously have significantly number of obligor ours and over time, we hope to be able to do.

Speaker Change: Roughly one.

Ted McNulty: $1 four in net assets be able to run a really really diversified portfolio and show obligor is well in excess of 200.

Ted McNulty: To stress the benefit of our platform has a lot of access to a very very diverse.

Operator: This concludes our prepared remarks. Operator, please open the call to questions. At this time, if you would like to ask a question, please press star one now on your telephone keypad to withdraw yourself from the queue you may press star two. Again, to ask a question that is star one now on your telephone keypad, one moment while we queue.

Ted McNulty: Our deal flow and be reflected in the diversification of our portfolio.

Mark Hughes: And then the expense synergies associated with the merger. Have you talked about timing on that? It will.

Ted McNulty: Thank you for that. And then the expense synergies associated with the merger. Have you talked about timing on that? A potential impact on returns or NII. It will.

Speaker Change: Okay. Thank you for that and then the.

Speaker Change: Expense synergies associated with the merger have you talked about timing on that.

Speaker Change: A potential impact on returns of NII.

Ted McNulty: Yeah, well, the expenses when you kind of looked at the consolidated group, right, with the closed-end funds and MFIC? And very little increase in expenses at MFIC. You'll have some valuation increases. It has already happened. Okay. So I was really looking at that consolidated expense level. It was about three, a little bit over $3 million of expenses taken out of the closed-end funds. And so the MFIC will stay relatively the same from an SG&AB point of view.

Ted McNulty: Yeah, well, the expenses, when you kind of looked at the consolidated group, right, with the closed-end funds and MFIC? So the expenses are..., you know, essentially eliminated at this closed-end fund, and there is very little increase in expenses at MFIC. You'll have some valuation increases. It has already happened. Okay. So I was really looking at that consolidated expense level. It was about three, a little bit over $3 million of expenses taken out of the closed-end funds. And so the MFIC will stay relatively the same from an SG&A perspective.

Speaker Change: Yeah, well the the.

Ted McNulty: We'll take our first question from Kenneth Lee of RBC Capital Markets. Hey, good morning, thanks for taking my question. Just in terms of the portfolio rotation of the next few quarters, the non-directly-originated assets being sold, I assume you talk about the BSL, the structured credit, and the high yield bonds from the closed end funds. Granted, the BSL Markets are fairly liquid, but just want to get a better understanding of any kind of key constraints around the pace of sales, for example, like the structured credit, the high yield bonds.

Speaker Change: The expense.

Ted McNulty: When you kind of looked at the consolidated group rate with the closed end funds and MFC.

Ted McNulty: So the expenses.

Ted McNulty: Essentially.

Ted McNulty: <unk> eliminated at this closed end funds.

Ted McNulty: And very little increase in expenses at MFC Youll have some valuation.

Ted McNulty: Increases so it's already happened.

Ted McNulty: So it was really looking at that consolidated expense level was about three <unk>.

Ted McNulty: Over $3 million of expenses taken out of the closed end funds.

Ted McNulty: Bye.

Ted McNulty: Thanks. Yeah, thanks, Ken, and thanks for the question. I think, so first of all, as we mentioned in the prepared remarks, we've already even since closing the mergers on July 22nd, made some good progress and sold, you know, erased roughly 125 million of proceeds, so some really good progress out of the gate. And I think your question is alluding to a very important piece of how we are going to proceed from here, and that being, if you look across the roughly 400 million that's in those three respective buckets of type of investment, there's going to be a number of securities or loans that are not as liquid.

Ted McNulty: And so the MFC will stay relatively the same from an SG&A basis.

Speaker Change: Thank you.

Operator: And there are no further questions at this time. I'd be happy to return the call to our hosts for any concluding remarks.

Speaker Change: And there are no further questions at this time I'd be happy to return the call to our hosts for any concluding remarks.

Unnamed: 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.

Speaker Change: 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.

Ted McNulty: And so we would look at this program, and this rotation strategy, as not contingent on selling every last broadly syndicated loan or high yield bond, and, you know, obviously certain of those securities or loans don't have the same liquidity would require us to take a discount to fair market value, which we would, you know, not want to take.

Operator: Yeah.

Unnamed: This does conclude the MidCap Investment Corporation for the period-ended.

Operator: This does conclude the MidCap Investment Corporation earnings call for the period ended June 30th, 2024. You may now disconnect your lines, and everyone have a great day.

Speaker Change: This does conclude the mid cap investment Corporation for the period ended June 30th 2024 earnings call. You May now disconnect your lines and everyone have a great day.

Operator: [music].

Ted McNulty: And as a result, you should see us continue to make progress in reducing that, but by no means should expect us to sell out of all 400 million, and importantly, consider reinvestment yield and the type of discount one might have to take in order to transact on those bonds and loans. Great. Very helpful there.

Ted McNulty: And just want to follow up if I may. Any updated outlook on potential ROE or ROE accretion, just going forward. Thanks. No, we are not going to update that guidance. Obviously, we're looking at the potential for lower base rates, but as we outlined in our prepared remarks as well as in which reference are our November materials, we see significant synergies to improve both ROI, ROE and NII. Gotcha, very helpful. Thanks again.

Operator: Okay.

Operator: Mhm.

Melissa Wedel: We'll take our next question from Melissa Wedel of JP Morgan. Good morning. Thanks for taking my questions.

Ted McNulty: I'm trying to reconcile the math around the rotation strategy that you described, and also building leverage in the portfolio back up to target levels. It seems like there's a lot of rotation and just sort of organic churn that we should be expecting in the portfolio, but also it seems like a pretty short time frame within two quarters or so to get back to the target. Hoping you can help walk us through that a little bit, but also just confirm the target range that you're thinking about in this environment.

Ted McNulty: Thank you. Yes, sure. Thanks, Melissa. So if we start with the lower end of our guided leverage range of 1.4, and the pro forma leverage that we reported, or we disclosed in the prepared remarks of 1.13 times, if you just took up leverage, if you just got to that 1.4, that would be investment capacity of nearly 400 million, 386, to be more exact. And obviously that's growth, net of any sell-offs you have there.

Ted McNulty: And then this will reference my answer to Ken's question is if you look at the broadly syndicated, and I did allow for the fact that the goal is not necessarily to sell every last bond and loan, and to be discriminating in how we sell and ensure that we're not sacrificing FMV to move that risk. But just for arguments sake, if you were to rotate out of all that 389 million of non-directly originated assets that came over with the mergers, it brings us to total investment capacity of roughly 775 million.

Ted McNulty: And so if you think about this from two perspectives, Melissa, on one hand we have the 389 to sell, of which we've sold 125 million and caveat that the goal is not necessarily to sell all 389. That's one piece of it, and that will be market dependent over the next couple quarters. Importantly, and I think this has been a really important piece of our strategy, of our story for quite some time, and thus it's worth emphasizing, is on the other side in terms of deployment, we're extremely lucky to be now just over 3 billion of assets, which itself is roughly only one tenth of the assets within the mid cap financial ecosystem.

Ted McNulty: That's an excess of a $30 billion business. And so from a deployment standpoint, we've never had an issue with deployment or access to assets, and with this incremental capital, whether it's playing an increased number of deals, or increased a roughly higher average size of deal, that piece of the equation, i.e., the redeployment itself, is very much provided for by the breadth of the mid cap financial origination platform that we're very lucky to have access to. Thank you.

Phineon O'Shea: We'll take our next question from Phineon O'Shea of Wells Fargo Securities. Hey everyone, good morning. Higher level question with Howard moving over to Apollo and taking on what seems to be building out the director origination effort and marrying that with MidCap's.

Tanner Powell: Can you outline the sort of firm-wide direct lending setup, such as how do you collaborate and maybe compete, do you split up sponsors, do you go by deal size on who leads anything that you think would be important for the MidCap investor, thank you. Yeah, I can, I can take that and then it's powered. So again, like, you know, to the market, we have one offering, which is, you know, the combined Apollo MidCap, you know, menu of direct lending options, so we, you know, there's a calling effort to sponsors, which combines resources that Apollo and MidCap, which I'm responsible for.

Tanner Powell: Which, which basically goes to market and says we're available for your capital needs, those capital needs are these direct lending loans, which you see go into sort of the large market Apollo effort and the MidCap effort. There's also other things we provide, you know, sponsors, which could be nav loans or GP capital generally or, or, you know, rediscount loans when they have finance capacity equipment loans, whatever, you know, the case may be.

Tanner Powell: So we are going to the market and we are saying here is our, you know, is here is our catalog of capabilities and then when a deal comes in, you know, there, there are sort of two strategies, which overlap, which I think is the most relevant part of the question. So one is, if there is a core middle market deal, say 50 million, 40, 50 million dollars of EBITDA being done at five times, that is being executed by MidCap.

Tanner Powell: And often, you know, portions of the Apollo ecosystem, you know, we'll take some of that loan, especially because in the 40 actually want to be part of transactions that they grow. So they may take a little bit on the other side of the spectrum, 300 million dollar, you know, EBITDA company that's doing, you know, whatever, billion five private credit deal, three parties, 500 million dollars, let's say Apollo is taking down that that will be by and large, that will be done by sort of the, the ADF PDC and other satellite entities.

Tanner Powell: And, you know, we have the option meeting MFIC has the option to take part of the in those, but generally won't might, you know, occasionally generally won't. And in fact, the closed end funds were part of that ADF ecosystem and more recently had some pieces of some of those loans. So some of the loans that came over as part of the CES are in sort of are in those loans and are now classified in our corporate portfolio.

Tanner Powell: So things that we're not going to rotate out of the with regard to like how, you know, that risk in particular and how MFIC is making choices, you know, because we're all integrated and because I'm responsible for the sponsor origination. You know, we see and have access to everything and we know which deal not only that we want to see, yes, loans, but which we have options to so it actually goes back to what Melissa said, how do we know that we can generate flow.

Tanner Powell: It's not only all of this mid cap assets, but it's also from time to time picking off certain of the larger assets that we decide that they they sent whatever, you know, you know, whatever criteria we may have. So, you know, I think for the for the shareholders of mid cap, you know, they should view our strategy, core middle market. And we say, you know, 20,000,000,000,000 of EBITDA, but, but, you know, tied into a sort of a global platform that provides a lot of sponsors, so a lot of relevance to them with lots of flow that's available on the periphery of that.

Tanner Powell: And then sort of most importantly, I think our strategy being sort of one of the centerpieces that Apollo's taking to market as part of their you know, me and Claire Baie, who's responsible for you know, the MidCap sponsor we are sort of leading that effort across Apollo.

Tanner Powell: Awesome, a lot of color and really appreciate that. I guess there's another high level follow-up with the murders complete and congratulations on that. What's your, you know, I assume you probably want to be one of these $5 billion BDCs, maybe, maybe not. What would the sort of path forward be, you know, some of your peers do large private to public, there's a lot of those going on. Some are going in public, secondary style growth, like how do you look at all that?

Tanner Powell: And I guess what is the anything in the immediate future? Well, just to, I'm going to channel Mark, Mark Rowan for a second, which is he sort of says, like the size of the BDC is not the goal, it's the reward for doing the business the right way. So we are, you know, we're focused on and our expectation is we will continue to sort of generate appealing lift adjusted returns. So our, you know, there will be an ability to grow, you know, in a normal course meeting, you know, hopefully trading well, you know, in sort of the, you know, trading well on an absolute basis in order sort of people to want to invest more.

Tanner Powell: So that's like the core focus. Continue to execute and we will be rewarded and we will be able to grow. You know, with regard to sort of other sort of less, you know, less tactical growth opportunities, I think what, you know, generally our view has been everything we, and this almost goes to the other thing, everything we do, we want to be creative to our shareholders. You know, so in other words, like, you know, we don't want to grow at the expense of that.

Tanner Powell: And so, you know, we'll look at everything that could be, you know, like which, as you know, we haven't seen in our industry, like, everybody would love to, you know, merge in another BDC and take in another contract and grow if you think you could deploy the capital well. That stuff hasn't really happened, so it's hard to predict that. But like any, any of the, any, any ways to sort of access capital that are created to our current shareholder base will consider.

Operator: I'll stop there. I don't know, grade or ten, or give anything to ask. All right, thanks so much, everybody. And once again, to ask a question, please press star one now on your telephone keypad. One moment while we queue.

Mark Hughes: We'll take our next question from Mark Hughes of Trilist. Yeah, thank you. Good morning.

Ted McNulty: I wonder if you could talk a little bit about the commitment activity in the quarter. Your average bar exposure continues to move down a little bit. The leverage of 3.3 versus 3.9 is down sequentially in the of this quarter's activity well below the overall portfolio net leverage. What do you see in the market? What are you kind of focusing on to 3.3 curious with those movements? Yeah, sure, Mark. Hi, it's Ted.

Ted McNulty: The, you know, in the first half of the year, you know, broadly speaking, M&A was down. But as we kind of moved through the second quarter, you know, in the marketplace, we saw the pipeline building as private equity firms were starting to line up more LBO activity. That, you know, may not have shown itself in all of the stats that are more backward looking. But I think certainly, and you probably heard this from others, as we look at our pipeline, you know, going forward, you know, it's building very nicely.

Ted McNulty: And in terms of deployment, you know, in the second quarter, we did a, we did, you know, some of which were, you know, based on in common sea. But then part of that was as we look to accelerate ahead of the merger, we knew where that was coming out. So we did accelerate, you know, our deployment. So we finished at 1.45 times still in the low end of the range. But, you know, certainly was and was in anticipation of the merger closing and then, and then de-leveraging down, you know, post that closing.

Ted McNulty: So, you know, in terms of activity, like, again, what are we focusing on? You know, we focus on the same thing quarter after quarter, which is, you know, middle market loans, top of the capital structure, cash pay, floating rate, and continue to try to build and stay diverse across, you know, sectors and sponsors. I add one thing, your specific question around commitment amount, and I'll actually allude to a comment that Howard made is that, you know, given the, the limitations from a 40X standpoint, it behooves us to participate at the time the deal is originally originated mark, such that we'll have the opportunity to do follow on.

Ted McNulty: To the extent that we don't participate, we're, you're, we're necessarily crowded out. So you'll see that. And then also with regard to commitment size and Ted alluded to this, but just to maybe dig another level deeper is ultimately, you know, a lot, a lot comes from, you know, as he said, and ultimately that will have a lot to do with how big of an acquisition that particular company is doing, and that would, um, with Influence Our Commitment Size.

Ted McNulty: And so I think I wouldn't read too much into it. It's going to ebb and flow based on that. But for emphasis, you know, one of the real, you know, I'll go back to this point about our access to the MidCap origination. If you look at at MidCap, there's roughly 500 borrowers, pro forma for the merger. We obviously have a significantly number of obligores. And over time, you know, we hope to be able to though, you know, roughly a billion four in net assets, be able to run a really, really diversified portfolio and show obligores well in excess of 200 to stress. The benefit of our platform has a access to very, very diverse deal flow and be reflected in the diversification of our portfolio. Thank you for that.

Ted McNulty: And then the expense synergies associated with the merger. Have you talked about timing on that and potential impact on returns or NIL? Well, the expense are when you kind of looked at the consolidated group, right, with the closed-end funds and MFIC. So the expenses, you know, essentially are eliminated at this closed-end funds. And very little increase in expenses at MFIC, you'll have some valuation increases. So it's already happened, okay. So it was really looking at that consolidated expense level. It was about $3, a little bit over $3 million of expenses taken out of the closed-end funds. So the MFIC will stay relatively the same from an SGNA basis. Thank you.

Operator: And there are no further questions at this time. I'd be happy to return the call to our hosts for any concluding 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.

Operator: This does conclude the mid-cap investment corporation for the period ended June 30th, 2024 earnings call. You may now disconnect your lines and everyone have a great day. A.C.

Q2 2024 MidCap Financial Investment Corp Earnings Call

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