Q3 2024 MidCap Financial Investment Corp Earnings Call
At this time, all participants have been placed in a listen only mode and the call will be open for your questions and answer session. Following the Speakers' prepared remarks, if you would like to ask a question at that time simply press star one on your telephone keypad. If you would like to withdraw your question Press Star two.
Speaker Change: I'd like to turn the call over to Elisabeth <unk> Investor Relations manager for <unk> and Midcap Financial Investment Corporation. Please go ahead.
Elisabeth: 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, Our Executive Chairman Howard Winter is available for the Q&A portion of today's call.
[music]
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 <unk>.
Elisabeth: 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.
For more information, visit www.FEMA.gov
Speaker Change: Please stand by. Your program is about to begin. If you need audio assistance during your call, please press star zero.
Elisabeth: Please 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.
Directions, unless required by law to obtain copies of our SEC filings. Please visit either the SEC website at www dot SEC backup or our web site.
Speaker Change: Good morning and welcome to the earnings conference call for the period ending September 30th 2024 for MidCap Financial Investment Corporation. At this time all participants have been placed in a listen-only mode and the call will be open for your questions and answers session following the speakers prepared remarks.
Elisabeth: <unk> Dot com.
Elisabeth: I'd like to remind everyone that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company.
Speaker Change: 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 would now like to turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Please go ahead.
Throughout today's call, we will refer to mid cap financial investment Corporation as either MF IC or the BDC, we will use midcap financial to refer to the lender headquartered.
Speaker Change: At this time I would like to turn our call over to <unk> Chief Executive Officer.
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. Our Executive Chairman, Howard Widra, is available for the Q&A portion of today's call.
Speaker Change: Thank you Lindsay and good morning, everyone and thank you for joining.
Speaker Change: Please call I'll start today's call by discussing the successful completion of our mergers with Apollo senior floating rate fund or <unk>, and Apollo Tactical income fund or <unk>.
Listed closed end funds previously managed by Apollo.
Speaker Change: I'd like to advise everyone that today's call and webcast are being recorded.
Elizabeth Besen: 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: I will then provide an overview of <unk> third quarter results and share our perspective on the current market environment.
Speaker Change: Ted who will discuss our investment activity and provide an update on the investment portfolio, including the progress we've made rotating certain of the assets acquired in the mergers.
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.
Elizabeth Besen: Today's conference call webcast may include forward-looking statements. You should refer to our most recent
Ted McNulty: And capital position in more detail.
Speaker Change: Let me start with a brief update on the closing of our mergers, which we view as a significant and transformational events.
Elizabeth Besen: filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit either the SEC's website at www.sec.gov or our website at midcapfinancialic.com.
Speaker Change: As I mentioned and if successfully closed its mergers with <unk> T. In Aif during the quarter as we said before we believe these mergers offered.
Speaker Change: Again financial benefits, we're excited about the long term benefits that we believe this transaction will create more importantly, we expect these mergers will be <unk>.
Elizabeth Besen: I'd also like to remind everyone that we've posted a supplemental financial information package on our website which contains information about the portfolio as well as the company's financial performance.
We're all shareholders.
As a result of the mergers mfc's net assets increased by over 40% generating significant investment capacity.
Elizabeth Besen: 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 our call over to Tanner Powell, MFIC's Chief Executive Officer.
Speaker Change: Last quarter, we on boarded approximately $600 million of investments from the CES with approximately one third in directly originated loans, which are.
Tanner Powell: Thank you Elizabeth. Good morning everyone and thank you for joining MFIC's third quarter earnings conference call. I'll start today's call by discussing the successful completion of our mergers with Apollo Senior Floating Rate Fund, or AFT, and Apollo Tactical Income Fund, or AIF, two listed closed-end funds previously managed by Apollo.
Speaker Change: We're going to be core and intend to retain that.
Speaker Change: The remaining two thirds were non directly originated loans consisting of broadly syndicated loans.
Speaker Change: High yield bonds.
Speaker Change: Physicians.
Speaker Change: We started rotating.
Speaker Change: The non directly originated assets when the merger's close prioritizing the lower yielding assets as tenants.
Tanner Powell: I will then provide an overview of MFIC's third quarter results and share our perspective on the current market environment. I will then turn the call over to Ted, who will discuss our investment activity and provide an update on the investment portfolio, including the progress we've made, rotating certain of the assets acquired in the mergers.
Speaker Change: So the non directly originated assets are progressing well and we are on track to complete these sales over the next few quarters.
Speaker Change: We are focused on prudently deploying.
Speaker Change: Generated from these sales and additional investment capacity created from the mergers based on our target leverage ratio of one four times and the remaining non drug.
Tanner Powell: Greg will then review our financial results and capital position in more detail.
Tanner Powell: Let me start with a brief update on the closing of our mergers, which we view as a significant and transformational event for MFIC.
Speaker Change: Tend to reposition we have approximately $600 million of capital to deploy into directly originated middle market loans. We are fortunate to have access to all the necessary origination to deploy this capital given the significant volume of commitments originated by mid cap financial over.
Tanner Powell: As I mentioned, MFIC successfully closed its mergers with AFT and AIF during the quarter. As we've said before, we believe these mergers offer numerous strategic and financial benefits.
Speaker Change: Over the past four quarters mid cap is closed $18 seven.
Tanner Powell: We are excited about the long-term benefits that we believe this transaction will create. More importantly, we expect these mergers will be ROE-creative for all shareholders.
Speaker Change: 7 billion of commitments, including $5 1 billion in the third quarter.
Speaker Change: That said, we are committed to deploying this capital in a steady and measured manner, while maintaining discipline in terms of obligor and vintage exposure.
Tanner Powell: As a result of the mergers, MFIC's net assets increased by over 40%, generating significant investment capacity.
We have a clear and straightforward plan to gradually increase leverage over the coming quarters, and we believe <unk> future results are well positioned to benefit as we re lever back to our target level, we expect to be able to reach our target leverage in the next couple of quarters.
Tanner Powell: As discussed last quarter, we onboarded approximately $600 million of investments from the CEFs, with approximately one-third in directly originated loans, which are performing well and which we consider to be core and intend to retain.
Tanner Powell: The remaining two-thirds were non-directly originated loans consisting of broadly syndicated loans.
Speaker Change: Turning to our results for the September quarter. Please note that the mergers closed on July 22nd Consequently results for the quarter include approximately 10 weeks of combined company revenue and income.
high-yield bonds and structured credit positions.
We started rotating.
Tanner Powell: The non-directly originated assets when the mergers closed, prioritizing the lower yielding assets. As Ted will discuss later in the call, our efforts to sell the non-directly originated assets are progressing well and we are on track to complete these sales over the next few quarters.
Speaker Change: <unk> net investment income per share for the September quarter was 44.
Speaker Change: Which corresponds to an annualized return on equity or ROE of 11, 5% and reflects a partial incentive fee.
Tanner Powell: We are focused on prudently deploying the investment capacity generated from these sales and additional investment capacity created from the mergers.
So for the quarter reflect strong recurring interest income from our predominantly floating rate portfolio.
based on our target leverage ratio of 1.4 times.
Recorded a modest net loss on our portfolio GAAP EPS for the quarter was 31.
Tanner Powell: and the remaining non-directly originated, which we intend to reposition, we have approximately $600 million of capital to deploy into directly originated middle market loans. We are fortunate to have access to all the necessary origination to deploy this capital, given the significant volume of commitments originated by MidCap Financial.
Speaker Change: NAV per share was $15 10 at the end of September down <unk> are approximately <unk>, 5% from the end of June excluding the impact of the onetime 20 per share special cash distributions paid during the quarter in connection with the mergers.
Tanner Powell: Over the past four quarters, MidCap has closed $18.7 billion of commitments, including $5.1 billion in the third quarter.
Speaker Change: These mergers where a deleveraging event for MFC.
Tanner Powell: That said, we are committed to deploying this capital in a steady and measured manner, while maintaining discipline in terms of Avogor and vintage exposure.
Speaker Change: And at the end of September <unk> net leverage was $1 16 compared to $1 45 at the end of June.
Tanner Powell: We have a clear and straightforward plan to gradually increase leverage over the coming quarters and we believe MFIC's future results are well positioned to benefit as we relever back to our target level.
Speaker Change: The current market environment continues to benefit from a solid economic backdrop economic growth continues at a healthy rate and we witness continued strength in the consumer a strong wage growth higher stock prices of strong credit markets in terms of the credit markets. We have seen an increase in activity levels. The volume in the year to date period has been more concentrated and opportunistic refinancings and reprice.
Tanner Powell: We expect to be able to reach our target leverage in the next couple of quarters.
Tanner Powell: Turning to our results for the September quarter, please note that the mergers closed on July 22nd. Consequently, results for the quarter include approximately 10 weeks of combined company revenue and income.
Speaker Change: <unk> lowering spreads pushing out maturities and improving capital structures more recently, we have seen some pickup in new money transactions and in particular sponsor M&A. Following the September rate cuts and are cautiously cautiously optimistic that activity levels will increase in the back half of Q4 and into 2025. In addition to rate cuts and as we have mentioned.
Tanner Powell: MFIC's net investment income per share for the September quarter was 44 cents, which corresponds to an annualized return on equity, or ROE, of 11.5%, and reflects a partial incentive fee.
Tanner Powell: Results for the quarter reflect strong recurring interest income from our predominantly floating rate portfolio.
In the past we note the dynamics with financial sponsors seeking liquidity events for fundraising and the pressure to return capital is hold periods have continued to stretch. In addition to significant dry powder may also serve to increase M&A volumes into 2025.
We're
Tanner Powell: recorded a modest net loss on our portfolio. GAAP EPS for the quarter was 31 cents.
Tanner Powell: NAV per share was $15.10 at the end of September, down $0.08 or approximately 0.5% from the end of June, excluding the impact of the one-time $0.20 per share special cash distribution paid during the quarter in connection with the mergers.
Speaker Change: As you know NFC 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.
These mergers were a deleveraging event for MFIC.
Speaker Change: Financial was founded in 2009 has a long track record, which includes closing on approximately 124 billion of lending commitments since 2013.
Tanner Powell: And at the end of September, MFIC's net leverage was $116 compared to $145 at the end of June.
Speaker Change: This originally origination track record provides us with a very large data set data set.
Tanner Powell: The current market environment continues to benefit from a solid economic backdrop. Economic growth continues at a healthy rate and we've witnessed continued strength in the consumer, strong wage growth, high stock prices, and strong credit markets.
Middle Middle market company financial information across all industries, and we believe makes mid cap financial one of the most informed an experienced middle market lenders in the market.
Tanner Powell: In terms of credit markets, we've seen an increase in activity levels, though volume in the year-to-date period has been more concentrated in opportunistic refinancings and repricings, lowering spreads, pushing out maturities, and improving capital structures.
Speaker Change: Apollo Global's affiliation with mid cap financial provides MFC 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.
Tanner Powell: More recently, we have seen some pick up in new money transactions, and in particular sponsor M&A following the September rate cuts, and are cautiously optimistic that activity levels will increase in the back half of Q4 and into 2025.
Speaker Change: Turning to our dividend as a reminder, during the September quarter. In addition to our regular quarterly dividend 38, we paid a special 21 time special dividend to shareholders in connection with the mergers.
Tanner Powell: In addition to rate cuts, and as we have mentioned in the past, we note the dynamics with financial sponsors seeking liquidity events for fundraising and the pressure to return capital as hold periods have continued to stretch, in addition to significant dry powder, may also serve to increase emitting volumes into 2025.
Speaker Change: On November 4th.
2024, our board declared a quarterly dividend of <unk> 38 per share for shareholders of record as of December 10th 2024 payable on December 26, 2024 with that I will now turn the call over to Ted.
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 professionals.
Ted McNulty: Thank you Tanner good morning, everyone I will spend a few minutes reviewing our third quarter investment activity and then provide details on our portfolio in the September quarter. We started actively deploying the capital from the mergers <unk> new commitments in the September quarter totaled 371 million up 30% from the prior quarter and were across 27 different borrowers.
Tanner Powell: MidCap Financial was founded in 2009, has a long track record, which includes closing on approximately $124 billion of lending commitments since 2013.
Speaker Change: For an average new commitment of $13 7 million all new commitments were first lien the weighted average spread on our new commitments in the September quarter was 533 basis points net leverage on new commitments to four seven times for the quarter gross fundings totaled $288 million, excluding revolvers in assets from the mergers that ruble.
Tanner Powell: 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.
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: Refundings were $13 million and we received a $7 $5 million Paydown for Merck's and total net fundings were $222 million excluding assets from the mergers as mentioned on last quarter's call. We on boarded $596 million in assets from the closed end funds of which $207 million were $4 35%.
Tanner Powell: According to our dividend, as a reminder, during the September quarter, in addition to our regular quarterly dividend of $0.38, we paid a special $0.20 one-time special dividend to shareholders in connection with the mergers.
Speaker Change: Were directly originated loans and $389 million or 65% were non directly originated loans.
Tanner Powell: On November 4th, 2024, our board declared a quarterly dividend of $0.38 per share for shareholders of record as of December 10th, 2024, payable on December 26th.
Speaker Change: We sold or were repaid on $234 million of these assets, including two positions that were on nonaccrual status and aggregate net fundings for the quarter totaled $585 million, including assets from the mergers with respect to the non directly originated loans acquired in the mergers. These assets are held throughout the Apollo platform, which is for.
2024.
Speaker Change: With that, I will now turn the call over to Ted.
Ted McNulty: Thank you, Tanner. Good morning, everyone. I'll spend a few minutes reviewing our third quarter investment activity and then provide details in our portfolio.
Speaker Change: <unk>, both the credit monitoring and the sales process.
Speaker Change: In the September quarter, we started actively deploying the capital from the mergers. MFIC's new commitments in the September quarter totaled $371 million, up 30% from the prior quarter, and we're across 27 different borrowers for an average new commitment of $13.7 million.
Speaker Change: Turning to our investment portfolio.
Speaker Change: At the end of September our portfolio had a fair value of 3.03 billion and was invested in 250 companies across 26 industries direct origination and other including the directly originated loans acquired from the closed end funds represents 88% of the total portfolio. The non directly originated loans acquired from the closed end funds.
Speaker Change: All new commitments were first leaned. The weighted average spread on our new commitments in the September quarter was 533 basis points.
Speaker Change: Represented 6% of Merck's also accounted for approximately 6% of the total portfolio on a fair value basis.
Speaker Change: As you can see on page six in the earnings supplement we've added a row to break out the non directly originated assets that we acquired from the mergers taking into account the remaining non directly originated loans that we intend to sell plus the additional investment capacity.
Speaker Change: Based on the target leverage of one four times, we have approximately $600 million of capital to deploy and directly originated middle market loans.
Speaker Change: We continue to monetize the non directly originated assets, although the pace may vary as we remain committed to deploying the capital in a steady and measured manner.
Speaker Change: At the end of September 98% of our directly originated portfolio was first lien at fair value approximately 99% of our direct origination portfolio on a cost basis had one or more financial covenants and 91% of our direct origination portfolio is backed by financial sponsors, who we know well and with whom midcap has long standing relationship.
Speaker Change: The average funded direct originations deposition was $13 million.
Speaker Change: The weighted average yield at cost of our directly originated lending portfolio was 11, 6% on average for the September quarter down from 12% last quarter. The decline in the weighted average yield was mostly due to the decline in base rates and to a lesser extent the decline.
Speaker Change: And the spread on assets.
Speaker Change: At the end of September the weighted average spread on directly originated corporate lending portfolio was 577 basis points down 24 basis points compared to the end of June the decline in the yield on the direct origination portfolio was not materially impacted by the closed end fund assets.
Speaker Change: In terms of credit quality, we believe the overall credit quality of the MF Ics direct origination portfolio remains healthy the financial sponsors and management teams of our borrowers have been effectively managing their liquidity.
Speaker Change: And the handful of more challenged situations, we're seeing good financial sponsor support we have not seen a significant increase in amendment requests related to covenants or liquidity and their request. We have seen are generally accompanied with equity infusions.
Speaker Change: At the end of September the weighted average net leverage of our direct origination portfolio increased slightly to four three times.
Speaker Change: Up from $4 three.
Speaker Change: Three eight times last quarter at the end of September at the weighted average interest coverage ratio was one nine times flat compared to last quarter.
Speaker Change: Median EBITDA of MF Ice's origination portfolio companies was approximately $52 million.
Speaker Change: We believe the stable level of revolver utilization, we are seeing from our portfolio of companies is also an indicator of portfolio health.
Speaker Change: At the end of September approximately 31% of our leveraged lending revolver commitments were drawn which is consistent quarter over quarter. We believe our steady revolver utilization rate can indicate greater financial stability.
Speaker Change: Our underwriting on Midcap source loans has proven to be sound based on data since mid 2016, which was the approximate date upon which we began utilizing our co investment order our annualized net realized and unrealized loss rate is around four basis points on loan sourced by Midcap financial we think this performance data shows how.
Speaker Change: Well the strategy has performed.
Speaker Change: No investments were added to non accrual status during the quarter. We exited two investments from the acquired closed end fund portfolios that were on non accrual status.
Speaker Change: At the end of September investments on non accrual were one 8% of the total portfolio at fair value or two 3% of cost.
Speaker Change: When assessing our Bdc's credit quality, we think it is important to look at investments on non accrual status in combination with the bdc's level of Pik income, we believe allowing borrowers to pick can make non accrual levels of your artificially low as the financial stress of borrowers is not fully reflected in the non accrual statistics and potentially masking.
Speaker Change: Underlying issues.
Speaker Change: We do recognize that it makes sense to allow borrowers to opt to pick in certain circumstances.
Speaker Change: Fics Pik income remains low representing approximately three 6% of total investment income from the quarter well below the BDC average.
Speaker Change: Moving to Merck's 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 payout pay downs to occur evenly we believe aircraft sales and servicing income should allow for the pay down of third party debt and <unk> investment in merck's overtime.
Speaker Change: During the September quarter, Merck's paid $9 1 million, including $1 6 million of interest and a $7 $5 million return of capital, which we highlighted on our last earnings call.
Speaker Change: At the end of September <unk> investment in Merck's totaled $183 million, representing 6% of the total portfolio at fair value the blended yield across our total investment in Merck's was approximately three 3% of fair value and the continued rotation of capital for merck's into directly originated corporate loans.
Speaker Change: Have a beneficial impact on <unk> income.
Speaker Change: We expect MSI ice's exposure to merck's to decline in the coming quarters, driven by additional paydowns in the continued growth in the investment portfolio as we deploy the capital required in the mergers.
Speaker Change: We believe the current environment for selling aircraft is very attractive due to limited availability and strong demand and we expect to make meaningful progress, reducing our exposure in the near future with that.
Speaker Change: I will now turn the call over to Greg to discuss our financial results in detail.
Greg Hunt: Thank you Ted and good morning, everyone.
Greg Hunt: Getting with our results as previously mentioned the Merger's closed on July 20 <unk>.
Greg Hunt: Consequently results for the September quarter include approximately 10 weeks of combined company revenue and income.
Greg Hunt: Net investment income per share for the September quarter was 44%.
Speaker Change: GAAP EPS was <unk> 31.
Speaker Change: Reflects a <unk> 13 per share.
Speaker Change: <unk>.
Speaker Change: For the quarter correspond to an annualized return on equity or ROE based on net debt and you come out of 11.5%.
Speaker Change: The annualized ROE based on net income of eight 1%.
Speaker Change: I will now discuss several factors that impacted <unk> results for the September quarter.
Speaker Change: First as previously noted the mergers where a deleveraging event for MFC Accordingly results for the September quarter reflect below target leverage as we sold certain assets acquired in the mergers and deployed capital into directly originated loans. We ended the September quarter with a net leverage.
Speaker Change: 116 times below our target as Tanner mentioned, we intend to prudently increase leverage over the coming quarters, and we see no impediment to doing so.
Speaker Change: Prepayment and fee income were below normal levels for the September quarter prepayment income was approximately $900000 down from $3 2 million in the prior quarter.
Speaker Change: Fee income was approximately $1 million up slightly from last quarter.
Speaker Change: Third <unk> base management fee.
Speaker Change: $4 4 million unchanged from the previous quarter, our base fee is calculated as 175 on net assets as of the beginning of the quarter. Consequently, the increase in net assets from the merger did not impact the management fee in the second half.
Speaker Change: The December quarter base management fee will be approximately six points.
Speaker Change: Whereas the results for the quarter include a net loss of $11 4 billion or 13 cents per share.
Speaker Change: <unk> incentive fees for the quarter was approximately $4 six.
Speaker Change: We are focused on deploying the capital from the mergers and repositioning the remaining non directly originated loans and increasing fsic's earnings power.
Speaker Change: Taking all this into account at the end of September <unk> NAV per share was $15 10 down 8% quarter over quarter.
Speaker Change: <unk>.
Speaker Change: 5%.
Speaker Change: Leading the onetime <unk> <unk> per.
Speaker Change: Per share special dividend paid in connection with the mergers.
Speaker Change: <unk> decline was driven by <unk> 13 per share net loss, partially offset by net income in excess of our regular dividend.
Speaker Change: Moving to capital MSI see issued $28 5 million shares at NAV during the quarter as part of the consideration for the merger.
Speaker Change: As a result.
Speaker Change: I see now has approximately $93 8 million shares outstanding.
Speaker Change: With Ias 33, MSE, Ice's, NII and EPS denominator, where based on the weighted average shares outstanding during the quarter.
Speaker Change: It's 28.
Speaker Change: 5 million shares issued approximately three weeks into the quarter. The EPS denominator for the September quarter was approximately $87 3 million.
Speaker Change: Terms of recent capital activity.
Speaker Change: As we disclosed in October.
Speaker Change: To extend the maturity of our senior secured revolving credit facility.
Speaker Change: Hi, approximately 18 months pushing the maturity to October 2029.
Speaker Change: We maintained existing pricing and terms total lender commitments under the facility were increased by $110 million.
Speaker Change: One 6 billion with the <unk>.
Speaker Change: Number of lenders increasing to 18.
Speaker Change: We announced <unk> merger with the closed end funds.
Speaker Change: We highlighted improved access to capital is a key potential benefit and we're pleased to see this benefit materialize.
Speaker Change: <unk> successfully added a new lender to the facility was previously a credit provider to the closed end funds. We greatly appreciate the support.
Speaker Change: Our lending partners.
Speaker Change: I'd like to review the accounting aspects of the project.
Speaker Change: Mercury are being accounted for in accordance with the asset acquisition method of accounting under ASC 805.
Speaker Change: As a reminder.
Speaker Change: Ft in Aif merged with and into <unk>.
Speaker Change: Two stock for stock transaction the shares being exchanged on a NAV for NAV basis.
Speaker Change: Change ratios for the mergers where based on each fund's NAV per share as of July 19, 2024.
Speaker Change: Clearly <unk> issue.
Speaker Change: $95 four seven shares of its common stock for each <unk>.
Speaker Change: Each year and <unk> 94.
Speaker Change: One shares of its common stock.
Speaker Change: Sure.
Speaker Change: H a F share.
Speaker Change: In total IC issued 28 5 million shares.
Speaker Change: I see to the closed end funds, helping and $93 8 million.
Speaker Change: <unk>.
Speaker Change: Outstanding shares following the merger.
Speaker Change: I'm at the merger closing.
Speaker Change: <unk> is trading at a slight discount to its current now.
Speaker Change: <unk>, an affiliate of Apollo paid 25 per share.
Speaker Change: Special cash payment to.
Speaker Change: The closed end fund shareholders for a total payment of $7 5 million.
Speaker Change: Orders for the accounting guidance a portion of this cash payment.
Speaker Change: With the merger consideration.
Speaker Change: Resulted in the fair value of the consideration paid to both.
Speaker Change: Closed end funds in equal to the fair value of the acquired assets, resulting in no purchase discount or premium.
Speaker Change: As a result.
Speaker Change: No impact on the cost basis of the acquired assets and therefore, no impact on our financial statement.
Speaker Change: Fair value of the closed end assets at close became Mic's cost basis.
Speaker Change: Now any adjustments.
Speaker Change: This concludes our prepared remarks.
Speaker Change: Please open the call to questions.
Speaker Change: Certainly at this time I would like to ask a question. Please press star one on your telephone keypad you may withdraw your question at any time by pressing star to you. Once again that is star one for any questions. We will take our first question from Kenneth Lee with RBC capital partner markets. Please go ahead.
Kenneth Lee: Hey, good morning, and thanks for taking my question just one on the fee income there could.
Speaker Change: Could you just remind us again, if <unk> is more levered to prepayments for fee income and therefore as prepayments pick up you should see a little bit more of.
Speaker Change: Pick up there.
Speaker Change: So I think.
Speaker Change: Thanks, Ken and good morning so.
Speaker Change: The loan asset class doesn't typically have a ton of call protection and in particular in markets like des <unk>.
Speaker Change: Closed end funds being equal to the fair value of the acquired assets, resulting in no purchase discount or premium.
Speaker Change: You start to see.
Speaker Change: That become less less robust in any event and Israeli ever more than 100 to 101, our practice is to take OID and amortize it over time and so prepayments will create.
Speaker Change: As a result.
Speaker Change: 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 and assets at close became M fic's cost basis.
Speaker Change: Without any adjustments.
Speaker Change: A pull forward of that that OID. If you will if the loan is redeemed prior to maturity.
Speaker Change: This concludes our prepared remarks.
Speaker Change: Please open the call to questions.
Speaker Change: Certainly at this time, if you would like to ask a question. Please press star one on your telephone keypad you may withdraw your question at any time by pressing star to you. Once again that is star one for any questions. We will take our first question from Kenneth Lee with RBC capital partner markets. Please go ahead.
Speaker Change: But it often times outside of.
Speaker Change: The one exception within our portfolio.
Speaker Change: In our life Sciences.
Speaker Change: Vertical where we typically will have call protection. So notwithstanding you've got a dynamic where yes. There is a pick up when you do see prepayments, but outside of life Sciences, it's not too too dramatic on any given.
Speaker Change: Hey, good morning, and thanks for taking my question just one on the fee income there could.
Kenneth Lee: Could you just remind us again, if M F. I see it's more levered to prepayments for fee income and therefore as prepayments pick up but you should see a little bit more of a pick up there. Thanks.
Speaker Change: Alone.
Speaker Change: Got you very helpful. There and then just one follow up if I may in terms of the ongoing rotation for the non directly originated assets.
Kenneth Lee: So I think thanks, Ken and good morning so.
Speaker Change: And you mentioned during the prepared remarks that the pace could vary over the next few quarters.
Speaker Change: You know the loan asset class doesn't typically have a ton of call protection and in particular in markets. Like this you start to see that.
Any updated.
Speaker Change: Outlook in terms of what factors could drive.
Speaker Change: The pace there is it based on macro or pricing or rates, just any kind of color on that thanks.
Speaker Change: That become less less robust in any event and Israeli ever more than one O Q1 O. One you know our practice is to take OID and amortize it over time and so prepayments will create.
Speaker Change: Yeah sure Ken it's a little bit of all of those things.
We want to manage our deployment.
Speaker Change: Appropriately and we don't want to over index to one particular quarter in terms of vintage.
Speaker Change: A pull forward of that debt OID. If you will if the loan is redeemed prior to maturity.
Speaker Change: As we noted the mergers where a deleveraging event.
Speaker Change: But it oftentimes outside of and then the one exception within our portfolio.
Speaker Change: So as we look to redeploy capital build back to art.
Speaker Change: <unk> is in our life Sciences vertical where we typically will have a call protection. So notwithstanding you've got a dynamic where yes. There is a pick up when you do see prepayments, but outside of life Sciences, It's it's not too too dramatic on any given a lot.
Speaker Change: Target leverage enough full earnings capacity, we want to balance the risk of the market risk of the closed end funds.
Speaker Change: To also.
Speaker Change: Redeployment.
Speaker Change: Capacity as well as just exposure and.
Speaker Change: So I think that's kind of generally the overall sentiment we did we did.
Speaker Change: Yeah.
Speaker Change: Got you very helpful. There and then just one follow up if I may in terms of the ongoing rotation for the non directly originated assets.
Speaker Change: When we started to sell these assets. We initially focused on the lowest yielding assets. So we were able to move those quickly and very efficiently.
Speaker Change: And you mentioned during the prepared remarks that that the pace could vary over the next few quarters.
Speaker Change: And so what we have in the book now.
Speaker Change: Has a better earnings capacity than than the overall portfolio and we will continue to manage risk and earnings as we move forward over the next few quarters.
Speaker Change: Any updated our outlook in terms of what factors could drive the pace. There is it based on on macro or pricing or where rates just any kind of color on that thanks.
Speaker Change: I'll make one quick addition to that Ken and at the risk of stating the obvious is within.
Speaker Change: The pool of loans that came over.
Kenneth Lee: Yeah sure Ken it's a little bit of all of those things we want to manage our deployment.
Speaker Change: Surprisingly certain of those loans that were loans or high yield bonds.
Speaker Change: Had varying degrees of liquidity and obviously.
Speaker Change: You know appropriately and we don't want to over index to one particular quarter in terms of vintage.
Speaker Change: As we're evaluating the framework that Ted just alluded to.
Speaker Change: As we noted the mergers where a deleveraging of that and so as we look to redeploy capital build back to you you know our target leverage and thus full earnings capacity, we want to balance the risk of the market risk of the closed end funds.
Speaker Change: A lot of emphasis is obviously get into.
Speaker Change: The level of liquidity in the underlying loan and making sure that the selling of that loan or bond.
Speaker Change: I would not would not catalyze a loss in which we're trying to be very deliberate in that regard as well.
Speaker Change: Got you very helpful. Thanks again.
Speaker Change: Two also.
Speaker Change: Redeployment of capacity as well as just exposure and so I think that's kind of generally the overall sentiment.
Speaker Change: Thank you we will take our next question from Mark Hughes with Trust. Please go ahead.
Speaker Change: Yes. Thank you good morning, just looking at the.
Speaker Change: We we did when we started to sell these assets. We initially focused on the lowest yielding assets. So we were able to move those quickly and very efficiently.
Speaker Change: Direct origination commitment.
Speaker Change: Eight on the presentation. The average commitment size has been moving up the last few quarters and I think you pointed out the net leverage.
Speaker Change: And so what we have in the book now.
Speaker Change: For the loans this quarter was a little bit higher anything.
Speaker Change: As you know a better earnings capacity than than the overall portfolio and we'll continue to manage risk and earnings as we move forward over the next few quarters.
Speaker Change: To see there I know you are trying to.
Speaker Change: Kind of meet that shift in asset.
Speaker Change: Expeditiously is that contributing to that evolution.
Speaker Change: I'd make one quick addition to that Ken and at the risk of stating the obvious is within.
Speaker Change: Yes, I would say really quickly is we did have knowledge of the merger closing and knowing that it was going to be.
Speaker Change: The pool of loans that came over not surprisingly certain of those loans that were loans or high yield bonds.
Speaker Change: Direct origination sorry, a deleveraging event.
Speaker Change: <unk> had varying degrees of liquidity and and obviously as we're evaluating the framework that Ted just alluded to.
Speaker Change: We obviously tried to over index into the origination and as you as you know or as we alluded to on the call I'm sorry in the prepared remarks, we were at 145 leverage.
Speaker Change: Lot of emphasis is obviously get into the.
Speaker Change: The level of liquidity in the underlying loan and making sure that the selling of that loan or bond.
Going into this quarter.
Speaker Change: Furthermore.
Speaker Change: We saw was in certainly in the first part.
Speaker Change: Would not would not catalyze a loss and what we're trying to be very deliberate in that regard as well.
Speaker Change: In Q2 and into the first part.
Speaker Change: This quarter was very healthy in terms of M&A are relatively healthy from the beginning of the year and so there were also additional opportunities there.
Speaker Change: Gotcha very helpful. There. Thanks again.
Speaker Change: Thank you we will take our next question from Mark Hughes with Trust. Please go ahead.
Mark Hughes: Yes. Thank you good morning, just looking at the direct origination of that commitment.
Speaker Change: Just to take that one step further we have seen as somewhat of a reduced level of activity perhaps.
Speaker Change: This is eight on the presentation. The average commitment size has been moving up the last few quarters and I think he pointed out the net leverage.
Speaker Change: In anticipation of the election.
Speaker Change: And anecdotally, we have heard that.
And do expect auction activity to pick up.
Speaker Change: For the loans this quarter was a little bit higher anything to see there I know you're trying to.
Speaker Change: Kind of post election, and as evidenced by the number of NDA that we're signing obviously add aided also by the rate cut that we saw in September.
Speaker Change: Kind of make that shift in asset.
Speaker Change: Expeditiously.
Speaker Change: Contributing to that evolution.
Speaker Change: And while auction activity is expected to increase.
Speaker Change: Yeah, I'd say really quickly is we did have a knowledge of the merger closing and knowing that it was going to be a direct origination sorry, a deleveraging event.
Speaker Change: Obviously that is a gestation period, so could could could drive.
Speaker Change: Deployment in the latter part of this quarter or kind of into 2025. So overall strong origination had to do with that kind of a good market healthy M&A volumes.
Speaker Change: We obviously tried to over index in Ted the origination and as you as you know or as we alluded to on the call I'm sorry in the prepared remarks that we were at 145 leverage.
Speaker Change: <unk>.
Speaker Change: Q2, and early Q3 period and are optimistic.
Speaker Change: Going into this quarter.
Speaker Change: As we look at the growing pipeline into the back half of this quarter end and into 2025.
Speaker Change: Furthermore, what we saw was in certainly in the first part.
Speaker Change: Hi, Yeah in Q2 and into the first part of this quarter was very healthy in terms of M&A or relatively healthy from the beginning of the year and so there were also additional opportunities there.
Speaker Change: And how about the.
Speaker Change: Spreads on the deal this quarter relative to last quarter, how do you see competitive environment.
Yes, I think overall the market has become more borrower friendly.
Speaker Change: Just to take that one step further we have seen a somewhat of a reduced level of activity, perhaps in anticipation of the election.
Speaker Change: You look at where CLO or pricing. These days you look at all the money that private capital is raising.
Speaker Change: And anecdotally, we have heard that and do expect auction activity to pick up are you kind of post election, and you know as evidenced by the number of NDA said, we're signing obviously at aided also by the rate cut that we saw in September.
And on one on one hand, and then on the other hand, you see a slowdown in M&A activity as Tanner mentioned ahead of the election.
Speaker Change: Anticipating rate cuts you see so you see the supply demand imbalance kind of tilt in the borrower's favor and so we've certainly seen really starting in last December spread compression.
Speaker Change: And while auction activity is expected to increase obviously that is a gestation period, so could could could drive and deployment in.
The spreads were I think admittedly than we and our peers I think all see this.
Speaker Change: The latter part of this quarter or kind of into 2025. So overall strong origination had to do with that kind of a good market healthy M&A volumes and in the Q.
Speaker Change: Fred's, we're really high relative to historical norms in 2023, and so they've been coming back in.
Speaker Change: Similarly leverage in 2023, and the first part of 'twenty four.
Speaker Change: Q2, and early Q3 period and are optimistic.
Speaker Change: Well below where the historical norms are and so.
Speaker Change: What we're seeing now is more.
Speaker Change: Certainly borrower friendly.
Speaker Change: Fair amount of competition out there.
So loans are as attractive as 2023 for sure.
Speaker Change: But still remain attractive on a historical basis and frankly, when we think about where we sit competitively with the large universal borrowers we have in the power of our competencies, we feel like we're in a good spot.
Speaker Change: Appreciate that thank you.
Speaker Change: Thank you we will take our next question from Matthew Hewitt with Jefferies. Please go ahead.
Speaker Change: Hi, guys congrats on the quarter and the close of the merger can you.
Speaker Change: I mean, it would be an expert on politics or policy, but can you just talk about maybe your high level thoughts about what the election.
Speaker Change: It could mean for your business sort of portfolio of companies at this point.
Speaker Change: Yeah. This is Howard.
Speaker Change: No.
Speaker Change: I think.
Speaker Change: You've seen the forward curves move up so that's that that is probably the most sort of.
Obvious indication of where the market thinks it's going which is like a you know of.
Speaker Change: A more benign regulatory environment.
Speaker Change: Also.
Speaker Change: And potentially more inflationary environment, which is why they think interest rates are going up.
Speaker Change: That generally you know it can cut both ways, but obviously.
Speaker Change: More growth.
Speaker Change: No.
Speaker Change: Backdrop.
Speaker Change: Four out for companies.
Speaker Change: You know and then the other part of it is just sort of like regulatory.
Speaker Change: Oversight and obviously that could change at the FTC I think changes People's view.
Speaker Change: Of mergers.
Speaker Change: Probably.
Speaker Change: I didn't even fewer major practice.
Speaker Change: Practical implications of emerging will change so you would expect field point to go up.
Speaker Change: So those are probably the first order effects second third fourth order effects or a hard hard to know and obviously specific companies have specific issues.
Speaker Change: That come up as policies change.
Speaker Change: And then just to add on to that obviously and much has been made it is.
Speaker Change: Highly likely that the tariffs go up.
Speaker Change: So when we think about our borrowers and by statute, we have to be a U S based.
Speaker Change: So it's less of an effect of the markets that they are selling into but looking very critically at the supply chain of our underlying borrowers and making sure we integrate that into our underwriting framework is going to be of utmost importance as we evaluate the risk on our books and we evaluate new investment opportunities.
Speaker Change: Okay. Thanks, that's great context, and then can I just ask.
Speaker Change: The 10% unrealized and realized loss.
Speaker Change: For sure for the quarter can you maybe give some color on.
Speaker Change: Which portfolio companies drove that.
Speaker Change: Sure.
Speaker Change: So the losses were and we have.
Speaker Change: We think about the portfolio and a couple of different ways one is.
Speaker Change: What did we what did we acquire from the closed end funds.
Speaker Change: We're largely flat we did take a small loss.
Speaker Change: Which.
Speaker Change: On exiting some of the non.
Speaker Change: The non accrual status names that was offset by.
Speaker Change: Gains and other sales, we had a restructuring name where probably our one of our biggest losses with a.
Speaker Change: Something called <unk>, which we.
Speaker Change: Restructured we went from preferred equity into second lien.
Speaker Change: So we think overall.
Speaker Change: Going from non current income to current income or moving up the cap stack is very beneficial from an overall perspective.
Speaker Change: However in terms of getting out of the preferred equity security, we did have to realize the loss on that.
Then.
Speaker Change: Lot of the other loans were.
Speaker Change: A lot of the other bigger move movement names were names that are on our watch list or are going through a sales process and.
Speaker Change: We wanted to do.
Speaker Change: Highlight the uncertainty of the outcome, there and mark them down slightly.
Speaker Change: Thanks very much.
Speaker Change: Thank you Andy reminder, to ask a question that is.
Speaker Change: And we'll take our next question from Paul Johnson with <unk>.
Speaker Change: Yes. Good morning, Thanks for taking my questions.
Speaker Change: My only question is just.
Speaker Change: Kind of given the weakness in the stock during the quarter post closing the merger.
Speaker Change: A market that's been pretty competitive weighted average spread on investments 570 basis points.
Speaker Change: So.
Speaker Change: And your leverage is about as low as it's been in a while obviously due to the closing of the merger so.
Speaker Change: Can you just.
Speaker Change: Kind of expand on maybe your thoughts around the buyback when you would look to potentially repurchase.
Shares if thats an option why not.
Speaker Change: Consider that here in this scenario with with leverage Youre looking to increase here in the pretty pretty tight.
Speaker Change: Pretty tight market.
Speaker Change: So.
Speaker Change: I think that's what's ironic because the questions prior to the merger why is your numbers are so high.
Speaker Change: So.
Speaker Change: But I would say like we've always said like well, we'll buy back stock when its accretive versus other uses of the capital.
Speaker Change: The guideline we had given previously was around eight looks like.
Speaker Change: Thanks, Matt.
Speaker Change: And even we think you know the stock.
Stock price has traded down versus peers since the merger as people, who can hold the stock and fill it out so.
Speaker Change: Okay.
Speaker Change: I think that's an ongoing thing and then the last thing I'll say is.
Speaker Change: Whenever you saw in the last quarter is not necessarily like indicative of whatever our strategy might be going forward.
Speaker Change: We're not overly conservative.
Speaker Change: And that has always been the case like the window is not open.
Speaker Change: Huge amount of training days during the quarter so.
Speaker Change: So the answer is the same as it was before I don't think it changes based on sort of where our leverage is when we have available capital we weigh the options.
But we also think having available capital.
Speaker Change: Brett.
Speaker Change: It is one that plays.
Speaker Change: You know always pointed out to us having spent that we could do that so now we have it.
Got it I mean does that mean does does the relationship change to wear.
Speaker Change: You would potentially look to buyback I mean kind of that breakeven.
Speaker Change: Price I mean, how does that change in relation to just overall market returns putting that into context of the 108 150 basis points or so of spread compression we've seen.
Speaker Change: This year.
Speaker Change: Yes look I mean.
Speaker Change: I mean, obviously, there's lots of inputs cost of debt.
Speaker Change: Going down too.
Speaker Change: No.
Speaker Change: Lots of lots of things play into it obviously, if long term, we probably all senior loans, we're going to be at 400 over.
Speaker Change: That would be a different calculus, there would also be a different expectation for Roe across the whole market from people. So you know that.
Speaker Change: That balance with.
Speaker Change: But but remember like like Theres been a 150 basis point decline in spreads, but but that followed a 150 basis point increase in spreads.
Speaker Change: Prior to that.
Speaker Change: So like if you don't want to react to where are you where you think spreads are on that day, it's where you think the spreads are over the cycle.
Speaker Change: And I appreciate that.
Speaker Change: All the questions for me congrats on the good quarter guys. Thanks.
Speaker Change: Thank you and there are no further questions at this time I will turn the call to management for any closing remarks.
Speaker Change: Thank you operator, and thank you everyone for listening to today's call on behalf of the entire team. We thank you for your time today. Please feel free to reach out to us. If you have any other questions and have a good day.
Speaker Change: Thank you. This does conclude today's program. Thank you for your participation you may disconnect at any.