Q3 2024 MidCap Financial Investment Corp Earnings Call

Operator: I would now like to turn the call over to Elizabeth Besen, investor relations manager for MidCap Financial Investment Corporation. Please go ahead.

I'd like to turn the call over to Elizabeth Besen Investor Relations manager for <unk> and Midcap Financial Investment Corporation. Please go ahead.

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.

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 wage rates 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.

Elizabeth Besen: 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.

Elizabeth Besen: Mid cap financial investment Corporation, and that any unauthorized broadcast in any form is strictly prohibited information about the audio replay of this call is available in our press release I'd also like to call your attention to the customary safe Harbor disclosure in our press release regarding forward looking information today's conference call and webcast may include forward looking statements you should refer to our most recent filing.

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.

Elizabeth Besen: As 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 Dot FCC duck app or our website at Midcap financial I see dotcom I'd also like to remind.

Elizabeth Besen: To obtain copies of our SEC filings, please visit either the SEC's website at www.sec.gov or our website at MidCapFinancialIC.com.

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. Throughout today's call, we will refer to MidCap Financial Investment Corporation as either MFIC or the BDC. We will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland.

Elizabeth Besen: One that we've posted a supplemental financial information package on our website, which contains information about the portfolio as well as the company's financial performance throughout today's call. We will refer to in Midcap financial investment Corporation as either MF I C or the BDC.

Elizabeth Besen: 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 and if Icf's Chief Executive Officer.

Elizabeth Besen: At this time, I'd like to turn our call over to Tanner Powell, MFIC's Chief Executive Officer.

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. 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.

Tanner Powell: Thank you Elizabeth good morning, everyone and thank you for joining <unk> 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 AFG and Apollo Tactical income fund or Aif. Two listed closed end funds previously managed by Apollo.

Elizabeth Besen: I will then provide an overview of <unk> third quarter results and share our perspective on the current market environment. I'll, 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 Greg.

Tanner Powell: Greg will then review our financial results and capital position in more detail.

Elizabeth Besen: 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. 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. 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. As a result of the mergers, MFIC's net assets increased by over 40%, generating significant investment capacity. As discussed last quarter, we onboarded approximately $600 million of investments from the CES with approximately one-third in directly-originated loans, which are performing well and which we consider to be core and intend to retain.

Elizabeth Besen: Let me start with a brief update on the closing of our mergers, which we view as a significant and transformational event for him if I see.

Elizabeth Besen: As I mentioned, even if I see successfully closed its mergers with F G and H O. Yes during the quarter as we said before we believe these mergers offered numerous strategic and financial benefits.

Elizabeth Besen: Cited about the long term benefits that we believe this transaction will create more importantly, we expect these mergers will be are we freed up for all shareholders.

Elizabeth Besen: As a result of the mergers MFA seats net assets increased by over 40% generating significant investment capacity.

Elizabeth Besen: As discussed last quarter, we on boarded approximately $600 million of investments from the CES with approximately one third in directly originated loans, which are performing well in 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 High Yield Bonds and Structured Credit Positions.

Elizabeth Besen: The remaining two thirds were non directly originated loans consisting of broadly syndicated loans high.

Elizabeth Besen: High yield bonds and structured credit positions.

Tanner Powell: We started rotating. 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 weeks. We are focused on prudently deploying the investment capacity generated from these sales and additional investment capacity created from the mergers. Based on our target leverage ratio of 1.4 times 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.

Elizabeth Besen: We started rotating.

Speaker Change: The non directly originated assets when the merger's close 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.

Tanner Powell: 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 debt. Over the past four quarters, MidCap has closed $18.7 billion of commitments, including $5.1 billion in the third quarter. That said, we are committed to deploying this capital in a steady and measured manner, while maintaining discipline in terms of Oligore and vintage exposure. 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.

Tanner Powell: We expect to be able to reach our target leverage in the next.

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. MFIC's net investment income per share for the September quarter was $0.44, which corresponds to an annualized return on equity, or ROE, of 11.5%, and reflects a partial incentive. Results for the quarter reflect strong recurring interest income from our predominantly floating rate portfolio. recorded a modest net loss on our portfolio. Gap EPS for the quarter was $3,100. NAB 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 merger.

Tanner Powell: These mergers were a deleveraging event for MFIC. And at the end of September, MFIC's net leverage was $116 compared to $145 at the end of June.

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. In terms of the credit markets, we've seen an increase in activity levels. The volume in the year-to-date period has been more concentrated in opportunistic refinancings and repricings, lowering spreads, pushing out maturities, and improving capital strength. 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 optimistic that activity levels will increase in the back half of Q4 and into 2025.

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 M&A volumes into 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, has a long track record, which includes closing on approximately $124 billion of lending commitments since 2009.

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. 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.

Tanner Powell: Turning 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. 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, 2020.

Tanner Powell: With that, I will now turn the call over to Ted.

Ted McNulty: Thank you, Tanner.

Ted McNulty: Good morning, everyone. I'll 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. 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. All new commitments were first lien. The weighted average spread on our new commitments in the September quarter was 533 basis Net leverage on new commitments 4.7 times. For the quarter, gross funding totaled $288 million, excluding revolvers and assets from the merger.

Ted McNulty: Net Revolver fundings were $13 million, and we received a $7.5 million paydown from Merck's. In total, net fundings were $222 million, excluding assets from the mergers. As mentioned on last quarter's call, we onboarded $596 million in assets from the closed-in funds, of which $207 million, or 35%, were directly-originated loans, and $389 million, or 65%, were non-directly-originated loans. We sold or were repaid on $234 million of these assets, including two positions that were on non-accrual status. In aggregate, net fundings for the quarter totaled $585 million, including assets. With respect to the non-directly originated loans acquired in the mergers, these assets are held throughout the Apollo platform, which is facilitating both the credit monitoring and the sales process.

Ted McNulty: Turning to our investment portfolio, 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 represented 6%, and Merck's also accounted for approximately 6% of the total portfolio on a fair value-based As you can see on page 6 in the earnings supplement, we've added a row to break out the non-directly originated assets that we acquired from the merger.

Ted McNulty: Taking into account the remaining non-directly originated loans that we intend to sell, plus the additional investment capacity, based on a target leverage of 1.4 times, we have approximately $600 million of capital to deploy in directly originated middle market loans. 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. 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.

Ted McNulty: And 91% of our direct-origination portfolio is backed by financial sponsors who we know well and with whom MidCap has a long-standing relationship. The average funded direct origination debt position was $13 million. 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 The decline in the weighted average yield was mostly due to the decline in base rates and to a lesser extent the decline in the spread on assets. 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.

Ted McNulty: The decline in the yield on the Direct Origination Portfolio was not materially impacted by the closed-end fund assets. In terms of credit quality, we believe the overall credit quality of the MFIC's direct origination portfolio remains healthy. The financial sponsors and management teams of our borrowers have been effectively managing their liquidity. In a 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 the requests we have seen are generally accompanied with equity investments. At the end of September, the weighted average net leverage of our direct origination portfolio increased slightly to 4.3 times.

Ted McNulty: At the end of September, the weighted average interest coverage ratio was 1.9 times flat compared to last quarter. The median EBITDA of MFIC's origination portfolio companies was approximately $52 million. We believe the stable level of revolver utilization we are seeing from our portfolio companies is also an indicator of portfolio health. At the end of September, approximately 31% of our leveraged lending revolver commitments were drawn, which is consistent quarter over quarter. We believe a steady revolver utilization rate can indicate greater financial stability. Our underwriting on MidCap sourced loans has proven to be sound. Based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment order, our annualized, net realized, and unrealized loss rate is around 4 basis points on loans sourced by MidCap Financial.

Ted McNulty: We think this performance data shows how well the strategy is performing. 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. At the end of September, investments on non-accrual were 1.8 percent of the total portfolio at fair value, or 2.3 percent at cost. When assessing a BDC's credit quality, we think it is important to look at investments on non-accrual status in combination with a BDC's level of PIC income. We believe allowing borrowers to PIC can make non-accrual levels appear artificially low as the financial stress of borrowers is not fully reflected in the non-accrual statistics and potentially masking underlying issues.

Ted McNulty: We do recognize that it makes sense to allow borrowers to opt to PIC in certain circumstances. MFIC's peak income remains low, representing approximately 3.6% of total investment income from the quarter, well below the BDC average.

Ted McNulty: Moving to Merck's, 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 MFIC's investment in MERCs over time. During the September quarter, MERCs 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. At the end of September, MFIC's 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 3.3% at fair value, and the continued rotation of capital from Merck's into directly-originated corporate loans should have a beneficial impact on MFIC's income.

Ted McNulty: We expect MFIC's exposure to Merck's to decline in the coming quarters, driven by additional pay-downs and the continued growth in the investment portfolio as we deploy the capital acquired in the merger. 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.

Greg Hunt: With that, 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. Beginning with our results, as previously mentioned, the mergers closed on July 22nd. Consequently, results for the September quarter include approximately 10 weeks of combined company revenue. Net Investment Income Per Share for the September quarter. Gap EPS was $0.31, which reflects https://www.youtube.com The Annualized ROE based on net income. I will now discuss several factors that impacted MFIC's results for this.

Greg Hunt: First, as previously noted, the mergers were a deleveraging event for MFIC. Accordingly, results for the September quarter reflect below target leverage as we sold certain assets acquired in the mergers and deployed capital. We ended the September quarter with a net leverage of $1 billion. below are.

Greg Hunt: Tanner Mench, and Tanner Pruden. increase leverage over the coming quarters and we see no second. The income is below normal levels. September ¼, prepayment income was approximately $900,000, down from $3.2 million in the prior The income was approximately a million dollars. Third, MFIC's base... 4.4 million. as 1.75 on net assets as of the beginning of the quarter. Increase in net assets from the merger.

Greg Hunt: Results for the quarter include a net loss of $11.4 million. MFIC's Incentives. We are focused on deploying the CAP. non-direct. taking all this. MFIC's NAV per share was $15.10, down $0.08, quarter for Broadcasting Station. including the one time. 1st shearer. The $0.08 decline was driven by the... loss partially offset by net income. Moving to Capital, MFI. 5 million shares at NAB during the quarter as part of the As a result, MFIC now has approximately 93% of the population. IAS. MFICs, NIRs, and NIAIDs. based on the weighted average shares outstanding during the quarter. 5 million shares.

Greg Hunt: three weeks into the quarter. approximately in terms of recent debt capital. to extend the maturity of our senior secure revolving. by approximately 18 months, pushing the maturity to October 2017. number of lenders.

Greg Hunt: We announced MFIC's merger with the Closed We highlighted improved access to CAP. http://TheBusinessProfessor.com Successfully added a new lender. previously at Credit We greatly appreciate the support from our...

Greg Hunt: I'd like to review the accounting. Mergers are being accounted for in accordance. The Asset Acquisition Method of Accounting under ASC. As a reminder, AFT and AIF merged with and into MFIC. to stock-for-stock transactions. Shares being exchanged on a NAV4NAV. The exchange ratios for the mergers were based on each fund's NAV, per share, as of July 19. And more importantly, MFIC. .9547 shares of its common stock. aftshare, and point nine. one shares of its common stock. AIF In total, MFIC issued 28.5 million shares of MFIC to the Closed End Funds, resulting in $93.8 million. At the time of the merger, closing, MFIC.

Greg Hunt: Trading in a slight Connection with the Mergers, an affiliate of Apollo. $0.25 per share. Special Cash Payment 2. Closed End Fund Shareholders for a total of $1.5 million. http://TheBusinessProfessor.com portion of resulted in a fair value of the consideration paid to both. Closed in 5. As a result, https://www.larryweaver.com and therefore no impact on our air value of the closed end. FICs. Cross.

Operator: Certainly, at this time, if you would like to ask a question, please press star 1 on your telephone keypad. You may withdraw your question at any time by pressing star 2. Once again, that is star 1 for any questions.

Speaker Change: 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: We will take our first question from Kenneth Lee with RBC Capital Partners. Markets, please go ahead.

Kenneth Lee: Hey, good morning. Thanks for taking my question. Just one on the fee income there. Could you just remind us again if MFIC is more levered to prepayments for fee income and therefore as prepayments pick up, you should see a little bit more of a pickup there. Thanks.

Kenneth Lee: Hey, good morning, and thanks for taking my question just one on the fee income there could.

Kenneth Lee: So I think, thanks, Ken, and good morning. So the, 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 become less robust in any event, and it's rarely ever more than 102, 101.

Ted McNulty: Our practice is to take OID and amortize it over time, and so prepayments will create a pull forward of that OID, if you will, if the loan is redeemed prior to maturity, but it oftentimes, outside of, and the one exception within our portfolio 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 pickup when you do see prepayments, but outside of life sciences, it's not too dramatic on any given loan.

Speaker Change: Our practice is to take OID and amortize it over time, and so prepayments will create

Speaker Change: a pull forward of that OID, if you will, if the loan is redeemed prior to maturity. But it oftentimes, outside of and the one exception within our portfolio,

Speaker Change: is in our life sciences vertical, where we typically will have a call protection.

Speaker Change: So, notwithstanding, you've got a dynamic where, yes, there is a pickup when you do CPRE payments, but outside of life sciences, it's not too dramatic on any given loan.

Kenneth Lee: Gotcha. Very helpful there.

Kenneth Lee: And just one follow-up, if I may, in terms of the ongoing rotation for the non-directly originated assets, and you mentioned during the prepared remarks that the pace could vary over the next few quarters. Any updated outlook in terms of what factors could drive the pace there? Is it based on macro or pricing or rates? Just any kind of color around that.

Speaker Change: Gotcha. Very helpful there. And just one follow-up, if I may, in terms of the ongoing rotation for the non-directly originated assets.

Speaker Change: in terms of what factors could drive the pace there? Is it based on macro or pricing or rates? Just any kind of color around that. Thanks.

Ted McNulty: Yeah, sure, Ken. It's a little bit of all of those things. We want to manage our deployment, you know, appropriately, and we don't want to over index to one particular quarter in terms of vintage. As we noted, the mergers were a deleveraging event. And so as we look to redeploy capital, build back to, you know, our target leverage and the full earnings capacity, we want to balance, you know, the risk of the market risk of the closed end funds to also, you know, redeployment capacity, as well as just exposure. And so I think that's kind of generally the overall sentiment.

Speaker Change: Yeah, sure, Ken. It's a little bit of all of those things.

Speaker Change: We want to manage our deployment appropriately, and we don't want to over-index to one particular quarter in terms of vintage.

Speaker Change: Appropriately and we don't want to over index to one particular quarter in terms of vintage.

Speaker Change: As we noted the mergers where a deleveraging event.

As we noted, the mergers were a deleveraging event.

Speaker Change: And so as we look to redeploy capital build back to 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: And so as we look to redeploy capital, build back to, you know, our target leverage and the full earnings capacity, we want to balance, you know, the risk of the market risk of the closed-end funds.

Speaker Change: Two also redeployment of capacity as well as just exposure and so I think that's kind of generally the overall sentiment. We did we did when we started to sell these assets. We initially focused on the lowest yielding assets. So we.

Speaker Change: to also, you know, redeployment capacity as well as just exposure and so I think that's kind of generally the overall sentiment.

Ted McNulty: We did, 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. And so what we have in the book now has, you know, a better earnings capacity than the overall portfolio. And we'll continue to manage, you know, risk and earnings as we move forward over the next few quarters.

Speaker Change: We did, when we started to sell these assets, we initially focused on the lowest yielding assets.

Speaker Change: We were able to move those quickly and very efficiently.

Speaker Change: So, we were able to move those quickly and very efficiently, and so what we have in the book now has a better earnings capacity than the overall portfolio, and we'll continue to manage risk and earnings as we move forward over the next few quarters.

Speaker Change: And so what we have in the book now has 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 and then I'd make one quick addition to that Ken and at the risk of stating the obvious is within.

Ted McNulty: And I'd make one quick addition to that, Ken, and at the risk of stating the obvious, is within the pool of loans that came over, not surprisingly, certain of those loans that were loans or high yield bonds had varying degrees of liquidity. And obviously, as we're evaluating the framework that Ted just alluded to, a lot of emphasis is obviously given to, you know, the level of liquidity in the underlying loan and making sure that the selling of that loan or bond would not would not catalyze a loss. And we're trying to be very deliberate in that regard as well.

Speaker Change: I'd make one quick addition to that, Ken, and at the risk of stating the obvious, is within the pool of loans that came over, not surprisingly certain of those loans that were loans or high-yield bonds.

Speaker Change: The pool of loans that came over not surprisingly certain of those loans that were loans or high yield bonds.

Speaker Change: <unk> had varying degrees of liquidity and obviously as we're.

had varying degrees of liquidity.

and obviously...

Speaker Change: We're evaluating the framework that Ted just alluded to.

Speaker Change: As we're evaluating the framework that Ted just alluded to, a lot of emphasis is obviously given to the level of liquidity in the underlying loan and making sure that the selling of that loan or bond would not catalyze a loss. And we're trying to be very deliberate in that regard as well.

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 would.

Speaker Change: Would not would not catalyze a loss and what we're trying to be very deliberate in that regard as well.

Kenneth Lee: Gotcha. Very helpful there.

Speaker Change: Gotcha very helpful. There. Thanks again.

Kenneth Lee: Thanks again. Thank you.

Gotcha. Very helpful there. Thanks again.

Mark Hughes: We will take our next question from Mark Hughes with Truist. Please go ahead.

Speaker Change: Thank you we will take our next question from Mark Hughes with Trust. Please go ahead.

Speaker Change: Thank you. We will take our next question from Mark Hughes with Truist. Please go ahead.

Mark Hughes: Yeah, thank you.

Speaker Change: Yes. Thank you good morning, just looking at the <unk>.

Mark Hughes: Good morning. Just looking at the direct origination commitments, I guess this is 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 for the loans this quarter is a little bit higher. Anything to see there? I know you're trying to Kind of make that shift in assets expeditiously, is that contributing to that evolution?

Speaker Change: Yeah, thank you. Good morning. Just looking at the direct origination commitments, I guess this is 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 for the loans this quarter is a little bit higher. Anything to see there? I know you're trying to...

Speaker Change: Direct origination and commitment.

Speaker Change: This is kate on the presentation.

Speaker Change: Average commitment size has been moving up the last few quarters and I think you pointed out the net leverage.

Speaker Change: For the loans this quarter was a little bit higher.

Speaker Change: Anything to see there I know you are trying to.

Speaker Change: Kind of make that shift in asset.

Speaker Change: kind of make that shift in assets expeditiously, is that contributing to that evolution?

Speaker Change: Expeditiously is that contributing to that evolution.

Ted McNulty: Yeah, I'd say really quickly is we did have knowledge of the merger closing, and knowing that it was going to be a direct origination, sorry, a deleveraging event, we obviously tried to over-index into the origination. And as you know, or as we alluded to on the call, sorry, in the prepared remarks, we were at 145 leverage going into this quarter. Furthermore, you know, what we saw was in, certainly in the first part. 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: 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: I'd say really quickly is we did have knowledge of the merger closing and knowing that it was going to be a direct origination, sorry, a deleveraging event.

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: we obviously tried to over-index into the origination. And as you know, or as we alluded to on the call, I'm sorry, in the prepared remarks, we were at 145 leverage going into this quarter.

Speaker Change: Going into this quarter.

Speaker Change: Furthermore, what we saw was in certainly in the first part.

Furthermore, what we saw was, 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, we're relatively healthy from the beginning of the year and so there were also additional opportunities there.

in Q2 and into the first part.

of this quarter.

Speaker Change: 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.

Ted McNulty: You know, just to take that one step further, we've seen somewhat of a reduced level of activity, perhaps, you know, in anticipation of the election. And anecdotally, we have heard that and do expect auction activity to pick up, you know, kind of post-election, and, you know, as evidenced by the number of NDAs that we're signing, obviously aided also by the rate cut that we saw in September. And while, you know, auction activity is expected to increase, obviously that has a gestation period, so could drive deployment in the latter part of this quarter or, you know, kind of into 2025.

Speaker Change: Just to take that one step further we have seen somewhat of a.

Speaker Change: Just to take that one step further, we've seen somewhat of a reduced level of activity, perhaps in anticipation of the election.

Speaker Change: A reduced level of activity, perhaps in anticipation of the election.

Speaker Change: And anecdotally, we have heard that.

Speaker Change: And do expect auction activity to pick up a kind of post election, and as evidenced by the number of NDA said, we're signing obviously at aided also by the rate cut that we saw in September.

Speaker Change: And while auction activity is expected to increase obviously that is a gestation period, so could could could drive.

Speaker Change: <unk> deployment in.

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 in the.

Ted McNulty: So overall, strong origination had to do with, you know, kind of the good market, you know, healthy M&A volumes in the Q2 and early Q3 period, and are optimistic as we look at the growing pipeline into the back half of this quarter and into 2025.

Speaker Change: Q2, and early Q3 period and are optimistic.

Speaker Change: As we look at the growing pipeline into the back half of this quarter end and into 2025.

Ted McNulty: And how about the spreads on the deal this quarter, relative to last quarter? How do you see the competitive environment? Yeah, I think overall, the market has become more borrower friendly. If you look at, you know, where CLOs are pricing these days, you look at all the money that private capital is raising. And on one hand, and then on the other hand, you see a slowdown in M&A activity, as Tanner mentioned, ahead of the election and anticipating rate cuts. You know, you see some, you see the supply demand imbalance kind of tilt in the borrower's favor.

Speaker Change: And how about the spreads on the deal this quarter relative to last quarter, how do you see the competitive environment.

Speaker Change: Yes, I think overall the market has become more borrower friendly.

Speaker Change: If you look at you know where CLO or pricing. These days you look at all the money that private capital is raising.

Speaker Change: 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 and anticipating.

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 our spread compression.

Ted McNulty: And so we've certainly seen really starting in last December, spread compression. You know, the spreads were, you know, I think, admittedly, and, you know, we, we and our peers, I think all see this spreads were really high relative to historical norms in 2023. And so they've been coming back in, you know, similarly, leverage in 2023, in the first part of 24, you know, was well below where the historical norms are. And so, you know, what we're seeing now is, you know, more, certainly borrower friendly, fair amount of competition out there. So, you know, loans, you know, aren't as attractive as 2023, for sure, but still remain attractive on a historical basis.

Speaker Change: The spreads where you know I think admittedly than we and our peers I think all see this spreads were really high relative to historical norms in 2023, and so they've been coming back in similarly leverage in 2023, and the first part of 'twenty four.

Speaker Change: Well below where the historical norms are and so.

Speaker Change: What we're seeing now is more certainly borrower friendly.

Speaker Change: A fair amount of competition out there so.

Speaker Change: Loans are as attractive as 2023 for sure, 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 incumbency, we feel like we're in a good spot.

Ted McNulty: And frankly, when we think about where we sit competitively with the large universe of borrowers we have and the power of incumbency, we feel like we're in a good spot.

Mark Hughes: Appreciate that. Thank you.

Speaker Change: I appreciate that thank you.

Elizabeth Besen: Yeah.

Matthew Hurwit: We will take our next question from Matthew Hurwit with Jeffries.

Speaker Change: Thank you we will take our next question from Matthew Hewitt with Jefferies. Please go ahead.

Matthew Hurwit: Please go ahead.

Matthew Hurwit: Hi, guys, congrats on the quarter and the close of the mergers.

Speaker Change: Hey, guys congrats on the quarter and the close of the mergers can you.

Howard Widra: Can you not ask me to be an expert on politics or policy, but can you just talk about maybe your high level thoughts about what the election could mean for your business or portfolio companies at this point?

Speaker Change: Not asking you to 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 companies at this point.

Howard Widra: Uh, yeah, this is Howard. Uh, you know, I think You know, you've seen the forward curve move up. So that's that, that is probably the most sort of obvious indication of where you know, the market thinks it's going, which is like a, you know, a more benign regulatory also a and, you know, potentially more inflationary environment. You know, that generally, you know, it can cut both ways, but obviously, like, that's a, that's a more growth. you know, uh, uh, back. for companies.

Howard Wage: Yeah. This is Howard.

Howard Wage: I think.

Speaker Change: You've seen the forward curve move up so that's that that is probably the most sort of.

Speaker Change: Obvious indication of where the market thinks it's going which is like a you know a.

Speaker Change: More benign regulatory environment and also a.

Elizabeth Besen:

Elizabeth Besen: And potentially more inflationary environment, which is why they think interest rates are going up.

Speaker Change: That generally it.

Elizabeth Besen: It can cut both ways, but obviously that's a that's.

Elizabeth Besen: That's a more growth.

Speaker Change: Uh huh.

Elizabeth Besen: Drop for four out for companies.

Howard Widra: You know, and then the other part of it is, you know, just sort of like regulatory, you know, oversight and obviously like a change at the FTC, I think change. That would be the view of merchers probably. Or I don't mean the view of mergers. The practical implications of merging will change so you already expect the overflow to go up. So, like, those are probably the first order effects. Second, third, fourth order former effects are hard to know. And obviously specific companies have to play a particularity in different ways. that come up as policy.

Elizabeth Besen: You know and then the other part of it is just sort of like regulatory.

Elizabeth Besen: Oversight and obviously like a change at the FTC I think changes sort of People's view.

Elizabeth Besen: Of mergers.

Elizabeth Besen: Probably for I don't even view of measures that the practice.

Elizabeth Besen: Practical implications of emerging will change so you would expect deal for it to go up.

Elizabeth Besen: So those are probably the first order effects second third and fourth order effects. Our hearts are hard to know and obviously specific companies have specific issues.

Elizabeth Besen: That come off as policies change.

Howard Widra: And then just to add on to that, you know, obviously, and much has been made of this is like highly likely that the tariffs go up. And so when we think about our borrowers and and and by statute, we have to be US based. So it's less an effect of the markets that they're selling into. But you know, looking very critically at at the supply chains 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: And then just to add on to that obviously and much has been made at this is.

Speaker Change: Highly likely that the tariffs go up and 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 at the supply chains of our underlying borrowers and making sure we integrate that into our underwriting framework is gonna be of utmost importance as we evaluate the risk on our books and we evaluate new investment opportunities.

Matthew Hurwit: Okay, thanks, that's great context.

Speaker Change: Okay. Thanks, that's great context, and then can I just ask.

Matthew Hurwit: And then, can I just ask, The $0.10 unrealized and realized loss per share for the quarter, can you maybe give some color on which portfolio companies drove that?

Speaker Change: The Tencent unrealized and realized loss.

Speaker Change: Per share for the quarter can you maybe give some color on.

Speaker Change: Which portfolio companies drove that.

Elizabeth Besen: Okay.

Matthew Hurwit: Sure. So the losses were, and you know, we have... We think about the portfolio in a couple of different ways, you know, one is what did we, what did we acquire from the closed-end funds. Those were largely flat. We did take small loss, which, you know, on exiting some of the non- The non-accrual status names, that was offset by gains and other sales.

Elizabeth Besen: Sure.

Elizabeth Besen: So the losses were and we have.

Elizabeth Besen: We think about the portfolio and a couple of different ways one is.

Elizabeth Besen: What did we what did we acquire from the closed end funds.

Elizabeth Besen: Those were largely flat, we did take a small loss.

Elizabeth Besen: Which you know is.

Elizabeth Besen: On on exiting some of the dawn.

Elizabeth Besen: The non accrual status names that was offset by a.

Elizabeth Besen: Gains and other sales, we had a restructuring name where probably our one of our biggest losses are it was a company called <unk>, which we.

Matthew Hurwit: We had a restructuring name where probably one of our biggest losses was a company called Aved, which we restructured. We went from preferred equity into a second lien. So we think overall, going from non-current income to current income and moving up the cap stack is very beneficial from an overall perspective. However, in terms of getting out of the preferred equity security, we did have to realize a loss on that.

Elizabeth Besen: Restructured we went from preferred equity into second lien.

Elizabeth Besen: So we think overall.

Elizabeth Besen: Going from you know non current income to current income or moving up the cap stack is very beneficial from an overall perspective. However in in terms of getting out of the preferred equity security. We did have to realize a loss on that.

Matthew Hurwit: And then a lot of the other loans were, a lot of the other bigger movement names were names that are on our watch list or are going through a sales process. And, you know, we wanted to, you know, highlight the uncertainty of the outcome there and mark them down slightly.

Elizabeth Besen: And then you know.

Elizabeth Besen: A lot of the other loans were.

Matthew Hurwit: Thanks very much. Thank you.

Operator: And a reminder to ask a question that is one.

Paul Johnson: And we will take our next question from Paul Johnson with KBW. Yeah, good morning. Thanks for taking my questions. My only question is just kind of, you know, given the weakness in the stock during the quarter, you know, post-closing the merger, you know, a market that's been pretty competitive, you know, weighted average spread on investments, 570 basis points. or so, and your leverage is about as low as it's been in a while, obviously due to the closing of the merger.

Paul Johnson: So can you just kind of expand on maybe your thoughts around the buyback, when you would look to potentially repurchase shares if that's an option, and why not consider that here in this scenario with leverage you're looking to increase here in a pretty tight market?

Howard Widra: So. First of all, it's ironic, because the questions were prior to the merger, why... So, but I would say, like, we have always said, like, well, you know, we'll buy back stock when it's an accretive versus other uses of the capital, you know, the guideline we had given previously was around 0.8%.

Howard Widra: The stock price has traded down versus peers since the merger as people who can't hold the stock have cleared out. I think that's an ongoing thing.

Howard Widra: And then the last thing I'll say is... Whatever you saw in the last quarter, it's not necessarily indicative of whatever our strategy might be going forward because we're not... You know, trade and that has always been the case, like the window is not open, you know. 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 odds. But we also think having available capital is a strength. you know always pointed out.

Paul Johnson: Got it.

Paul Johnson: I mean, does the relationship change to where you would potentially look to buy back? I mean, kind of that break-even. price I mean how does that change in relation Overall, market returns, you know, putting that into context of the 100, 150 basis points or so spread compression. this year. Well, yeah, look, I mean, I mean, obviously, like, there's lots of inputs, cost of debt is going to, is going down to, you know, so, like, lots of, lots of things play into it. Obviously, if long term, we thought all senior loans were going to be at 400 over, you know, there would be a different calculus.

Howard Widra: There'd also be a different expectation for ROE across the whole market for, from people. So, you know, that balance. You know, but, but, you know, remember, like, like, there's been 150 basis point decline in spreads, but, but that followed 150 basis point increase. you know, just prior to that, you know, so like, it's, you know, you don't want to react to where you, where you think, you know, spreads are on that day. It's where you think the spreads are over.

Paul Johnson: I appreciate that.

Paul Johnson: That's all the questions for me. Congrats on a good quarter, guys.

Operator: Thank you and there are no further questions at this time.

Tanner Powell: I'll turn the call to management for any closing remarks. Thank you operator. Thank you everyone for listening to today's call.

Tanner Powell: 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 Thank you.

Operator: This does conclude today's program. Thank you for your participation. You may disconnect at any time.