Q4 2024 MidCap Financial Investment Corp Earnings Call
Speaker Change: Good morning and welcome to the earnings conference call for the period ended December 31st, 2024, for MidCap Financial Investment Corporation.
Speaker Change: At this time, all participants have been placed in a listen-only mode.
Speaker Change: The call will be open for a question and answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star and 1 on your telephone keypad. If you would like to remove your question, you may press star and 2.
Speaker Change: I'll now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.
Elizabeth Besen: Thank you operator and thank you everyone for joining us today. We appreciate your interest in MidCap Financial Investment Corporation
Tanner Powell: Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Greg Hunt, Chief Financial Officer.
Tanner Powell: Howard Widra, Executive Chairman, is on the call and available for the Q&A portion of today's call. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited.
Tanner Powell: 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.
Tanner Powell: 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.
Tanner Powell: 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 www.midcapfinancialic.com.
Tanner Powell: 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.
Speaker Change: Throughout today's call, we will refer to MidCap Financial Investment Corporation as either MFIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.
Speaker Change: Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MFIC's fourth-quarter earnings conference call. I'll begin today's call by providing an overview of MFIC's fourth-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.
Speaker Change: Greg will then review our financial results and capital position in more detail.
Speaker Change: beginning with our results yesterday after market closed we reported net investment income or NII per share of 40 cents for the December quarter and a dollar seventy one cents that is a dollar seventy one
Speaker Change: For the full year, these results correspond to annualized return on equity or ROE of 10.5% for the quarter and 11.2% for the year.
Speaker Change: Gap net income per share was $0.26 for the December quarter and $1.27 for the full year. The vast majority of our portfolio is performing well and we are observing stability in certain credit metrics.
Speaker Change: Now per share was $14.98 at the end of December, down 12 cents, or approximately 0.8%.
Speaker Change: During the December quarter we made 255 million of new commitments and for the full year we made a billion, a billion oh six of new commitments.
Speaker Change: While our market remains competitive, we observed a modest increase in spreads on our new commitments compared to the previous quarter, driven by commitments to existing borrowers at what we believe to be attractive leverage entry points.
Speaker Change: Spread compression in the core middle market has been less intense than what we see in the upper middle market. We have a clear and straightforward plan to gradually grow the portfolio over the coming quarters and we believe MFIC's future results are well positioned to benefit as we re-lever back to our target level.
Speaker Change: We expect to be able to reach our target leverage of approximately 1.4 times in the next couple of quarters.
Speaker Change: Taking a step back, as a reminder, in July, MFIC completed its mergers with Apollo's Senior Floating Rate Fund and Apollo Tactical Income Fund, or the CEFs.
Speaker Change: We took advantage of strength in the liquid credit markets during the quarter and continued to sell certain assets acquired through the mergers that do not align with our strategy, and prudently deployed the proceeds along with the investment capacity generated from the mergers into first-lane floating rate middle market loans originated by MidCap Financial.
Speaker Change: Our affiliation with MidCap, a leading lender in the middle market, provides a significant deal sourcing advantage. We are fortunate to have access to the necessary origination to deploy this capital, given the significant volume of commitments originated by MidCap Financial.
Speaker Change: In 2024, MidCap closed over $21.3 billion of commitments, including $6.6 billion in the fourth quarter. MidCap's origination volumes for the quarter and the full year are particularly notable given the overall muted sponsor M&A activity in the market.
Speaker Change: MidCap has what we believe to be 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 130 billion of lending commitments since 2013.
Speaker Change: This origination track record provides us with a vast 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.
Speaker Change: We believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan or high yield market.
Speaker Change: As Greg will discuss in more detail, we continue to optimize MFIC's capital structure, including the closing of our second CLO post-quarter end, which we believe strengthens our balance sheet and aligns with our investment strategy.
Speaker Change: Moving to Merck's, as discussed previously, we are focused on reducing our investment in our aircraft leasing and servicing business.
Speaker Change: I'd like to provide an update on Merckx's Russia fleet insurance claims. As a reminder, at the time of Russia's invasion of Ukraine in February 2022,
Speaker Change: and the imposition of sanctions, Merck's own portfolio included four aircraft on lease to two Russian airlines.
Those aircraft are held in aircraft securitization known as MAP-19.
Speaker Change: In compliance with the EU sanctions imposed on Russia due to the invasion, Merckx terminated the leases of those aircraft.
Speaker Change: but three were not returned and have remained in Russia since then.
Speaker Change: Merckx has brought legal action in the English courts seeking payment for those aircraft under both the lessee reinsurance policies and its own contingent policy and we are pleased to announce that during the first quarter we settled a portion of our contingent insurance claims with certain insurers.
Speaker Change: As mentioned on last quarter's call, we believe the current environment for selling aircraft is very attractive. Merckx has made substantial progress on multiple sales campaigns covering a majority of the remaining aircraft on its balance sheet.
Speaker Change: We look forward to providing further updates on the process as purchase agreements are finalized in the coming months.
Speaker Change: At the end of December, MFIC's investment in Merck's totaled approximately $183 million, representing 6.1% of the total portfolio at fair value.
Speaker Change: The blended yield across our total investment in Merck's was approximately 3.2% at fair value.
Speaker Change: and the continued rotation of capital from Merck's into directly originated corporate loans should have a beneficial impact on MFIC's income.
Speaker Change: Assuming we are successful with our sales campaign, we expect MFIC's exposure to Merck's to decline in the coming quarters.
Thank you for tuning in.
Speaker Change: Moving to the economic environment, we entered 2025 with a solid economic backdrop underpinned by strong consumer spending, strong capital goods spending on infrastructure and AI, and a significant run-up in stock prices. However, investors are increasingly focused on the near-term impact of tariffs.
Speaker Change: and federal government layoffs. The Fred's decision to increase their long-term DOT implies that they are coming around to the view that interest rates will be permanently higher.
Speaker Change: Credit spreads have remained tight despite economic policy uncertainty rising. The probability of a recession has declined significantly over the past months and remains low for 2025.
Speaker Change: Specific to the direct lending market, we are seeing encouraging signs for an increase in sponsor-related M&A activity, including a strong economy, mounting pressure on financial sponsors to return capital, a potentially more favorable regulatory environment, and the stabilization of interest rates.
Speaker Change: As you know, private debt has become an increasingly important source of financing for sponsor transactions, especially in the middle market where we are focused.
Speaker Change: We are currently observing a notable increase in the number of deal screenings and indicating a pickup in activity. Repricing activity has continued at record levels with refinances and extensions continuing to increase as sponsors seek to address vintage investments and upcoming insurance.
Speaker Change: According to our dividend on February 21st, 2025, our board declared a quarterly dividend of 38 cents per share for shareholders of record as of March 11th, 2025, payable March 27th, 2025.
Ted: With that, I will now turn the call over to Ted.
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Speaker Change: Thank you, Tanner. Good morning, everyone. I'm going to spend a few minutes reviewing our fourth quarter investment activity and then provide some details in our investment portfolio. In the December quarter, we continued to prudently deploy the capital acquired from the mergers.
MFIC's new commitments in the December quarter totaled $255 million.
Speaker Change: As we've emphasized before, we intend to deploy this capital in a steady and measured manner, maintaining discipline in terms of obligor and vintage exposure. We are fortunate to have access to the necessary origination to deploy this capital, given the significant volume of commitments originated by MidCap Financial.
Tanner Powell: As Tanner mentioned, MidCap Financial closed approximately $6.6 billion of new commitments during the December quarter.
Tanner Powell: We believe it is prudent to gradually grow the portfolio in order to maintain our desired level of diversification. Despite significant competition for new deals, we observed a modest increase in spreads on new commitments compared to the previous quarter, driven by commitments to existing borrowers at what we believe to be attractive leverage entry points.
Tanner Powell: The weighted average spread on new commitments in the December quarter was 546 basis points, up 13 basis points compared to commitments made in the December quarter, while the net leverage on new commitments decreased to 4.3 times in the December quarter, down from 4.7 times in the September quarter.
Tanner Powell: We believe this attractive risk-return profile reflects MidCap Financial's strong presence as a lender in the middle market and the power of incumbency.
and Ted McNulty. Thank you. Thank you.
Tanner Powell: For the quarter, gross funding totaled $248 million, excluding revolvers. Sales and repayments excluding revolvers totaled $254 million, including $96 million of assets acquired from the mergers.
Tanner Powell: Net revolver repayments were less than 1 million. In total, net repayments for the quarter were 6 million. In the current quarter, we have continued to make progress selling assets acquired from the mergers.
Tanner Powell: Turning to our investment portfolio, at the end of December, our portfolio had a fair value of $3.01 billion and was invested in 233 companies across 25 different industries.
Tanner Powell: Direct Origination and Other, including the Directly Originated Loans Acquired from the CEFs, represented 90% of the total portfolio, up from 88% last quarter.
Tanner Powell: The non-directly originated loans acquired from the CEFs, which includes high-yield bonds, broadly syndicated loans, and structured credit positions, represented 4% down from 6%.
Tanner Powell: As you can see on page 6 of the earnings supplement, we break out the non-directly originated assets that we acquired from the mergers. Lastly, Merck's accounted for approximately 6% of the total portfolio. All of these figures are on a fair value basis.
Tanner Powell: Specific to the direct origination portfolio, at the end of December, 98% was first lien and 91% was backed by financial sponsors, both on a fair value basis.
Tanner Powell: Approximately 99% had one or more financial covenants on a cost basis.
Tanner Powell: Covenant quality is another key point of differentiation from the upper middle market, as substantially all of our deals have at least one covenant compared to larger deals, which are generally without covenants.
Tanner Powell: The average funded position was $13.1 million. The median EBITDA was approximately $48 million.
Tanner Powell: The weighted average yield at cost of our direct origination portfolio was 11% on average for the December quarter, down from 11.6% for the September quarter. The decline in the yield was primarily due to the decline in base rates.
Tanner Powell: At the end of December, the weighted average spread on the directly originated corporate lending portfolio was 578 basis points, up one basis point compared to the end of September.
Tanner Powell: Regarding credit quality, we believe the overall credit quality of MFIC's direct origination portfolio remains stable. We are not observing any signs of general credit weakness. Our portfolio companies continue to show good financial performance as evidenced by continued positive revenue and EBITDA growth.
Tanner Powell: The financial sponsors and management teams of our borrowers have been effectively managing growth and liquidity. In a handful of more challenged situations, we are seeing good financial sponsor support. We have seen a slight decrease in amendment requests related to covenants or liquidity.
Tanner Powell: We saw an improvement in the weight average interest coverage ratio, which is primarily attributable to the decline in base rates and the origination of new investments with higher interest coverage ratios.
Tanner Powell: At the end of December, the weighted average interest coverage ratio was 2.1 times, up from 1.9 times last quarter.
Tanner Powell: At the end of December, the weighted average net leverage for the direct origination portfolio increased slightly to 5.0 times, up from 5.43 times last quarter.
Tanner Powell: We believe the stable level of revolver utilization we are seeing from our portfolio companies is an additional sign of the health of our portfolio.
Tanner Powell: At the end of December, the percentage of our leveraged lending revolver commitments that were drawn was essentially unchanged quarter over quarter. We believe a steady revolver utilization rate is an indicator of financial stability.
Tanner Powell: Our underwriting on MidCap source loans has proven to be sound, based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment order.
Tanner Powell: our annualized net realized and unrealized loss rate is around five basis points on loan sourced by MidCap Financial. We think this performance data shows how well the strategy is performed.
Thank you very much.
Tanner Powell: The amount of investments on non-accrual status decreased on both a cost and fair value basis compared to the prior quarter.
Tanner Powell: At the end of December, investments on non-accrual were 1.3% of the portfolio at fair value, down from 1.8% last quarter. During the December quarter, we exited one position that was on non-accrual status, which we acquired from the CEFs, and we placed one legacy second-leading position on non-accrual status.
Tanner Powell: MFIC's peak income remains relatively low, representing approximately 5.7% of total investment income for the quarter and 4% for the full year.
Tanner Powell: In addition, we are closely reviewing our portfolio for any potential impacts from tariffs or other changes to government policies. We're generally underweight businesses that rely on imports and exports to and from the targeted countries and thus believe the impact will be limited should tariffs be put in place.
Tanner Powell: We supplement our underwriting process in response to the past and potential tariffs as well as other new risks that may emerge.
Greg: With that, I will now turn the call over to Greg to discuss our financial results in detail.
Greg: Thank you, Ted, and good morning, everyone. Starting with our operating results, total investment income for December was approximately $82.2 million flat compared to the prior quarter as a sequential increase in interest income was offset by a decline in fee income.
Greg: The sequential increase in interest income was driven by a full quarter impact from the mergers and increase in prepayment income, higher average leverage, partially offset by the impact of declining rates.
Greg: The weighted average yield at cost on our directly originated portfolio was 11%.
Greg: for December, down from 11.6 percent last quarter, due primarily to lower base rates. Dividend income was flat quarter over quarter.
Greg: Net expenses for the quarter were $45.1 million, an increase of $1.1 million compared to the prior quarter, driven by higher management and incentive fees, partially offset by a decline in interest expense and other G&A.
EFFICS
Greg: Management fee for the quarter was approximately 6.2 million compared to 4.4 million in the December quarter. As a reminder, our base fee is 1.75% on net assets.
Greg: Calculated as of the beginning of the quarter. The increase in net assets from the merger did not impact the management fee in the September quarter, but resulted in a higher management fee in the December quarter.
MFIC's incentive fee is 17 and a half percent.
Thanks for tuning in.
Greg: Interest expense declined due to lower base rates, partially offset by higher leverage during the quarter.
Greg: For the December quarter, net investment income was $0.40 per share, resulting in a full year net investment income per share of $1.71.
Greg: or net income per share was $0.26, resulting in a full year gap EPS per share of $1.27. For the December quarter and the full year, annualized return on equity based on net investment income was 10.5% and 11.2% respectively.
Greg: The December quarter and full year annualized return on equity-based net income was 6.8% and 8.3% respectively.
Greg: Results for the quarter include a net loss of approximately $13 million or $0.14 per share.
Speaker Change: Annette Barber. Roughly 60 percent of that net loss was from positions that were on nonaccrual at the beginning of the quarter.
Speaker Change: We ended the year with net leverage of 1.16 times. We are operating below our target of around 1.4 times given the deleveraging impact of the equity issued in July in connection with MFIC's mergers with the closed-end funds.
Tanner Powell: As Tanner and Ted mentioned, we intend to prudently increase leverage over the coming quarters, and we see no impediment to do so. At the end of December, our portfolio had a fair value of $3 billion.
Speaker Change: We had approximately $1.75 billion in debt and total assets were $1.4 billion or $14.98 per share.
Speaker Change: Shifting to our capitalization, given the attractive nature of term-based financing in the CLL market,
The composition of our
Speaker Change: Corporate Portfolio, and Leveraging Mid-Cap Financials, CLO Success and Expertise, we expect CLOs to be an important source of debt financing for MFIC going forward.
Speaker Change: In late December, MFIC priced a $529 million CLO, our second on-balance sheet CLO.
Speaker Change: earlier this week. We sold the single A tranche, adding approximately
Speaker Change: $400 million of low-cost, secure debt at a blended cost of $161 basis point spread. The spreads on middle market CLOs
Speaker Change: tranches have tightened considerably over the past year due to strong investor interest. The spread on the senior AAA in the second CLO was 148 basis points compared to 248 basis points in our inaugural CLO which we closed in November of 23rd.
A tightening of 92 basis points.
Speaker Change: We believe this was amongst one of the tightest levels achieved in the middle market CLO, reflecting the high quality of the underlying funds.
Speaker Change: The CLO has a reinvestment period through April 2029 and does not mature until January 2037. The proceeds from the CLO are effectively being used to repay
Speaker Change: $359 million of unsecured notes which come due next week with the remaining balance used to pay down our revolving credit facility.
This concludes our remarks. Operator, please open all the questions.
Speaker Change: Absolutely. At this time, if you would like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing star and two.
Speaker Change: We'll take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead, your line is open.
Thank you.
Thank you.
Speaker Change: Hi everyone, good morning. Tanner, I appreciate the comments. The post-quarter insurance recovery for Merck's, can you talk about
Speaker Change: any impact there, you know, or if that was a full recovery of, you know, what you have valued or if there's any earnings headwind if that came in short. Thanks.
Speaker Change: Yeah, thanks. The recoveries are, you know, approximately at our mark, so we're very happy with the results.
Thank you. Thank you. Thank you.
Speaker Change: And does that imply like a more expedited wind down or return of capital there as well?
Tanner Powell: Well yes, I mean if you think we do have three planes that we have insurance recoveries on. As Tanner mentioned, the court proceedings were done in London and so we do expect resolution of those claims this year.
Speaker Change: Okay, that's helpful. Then I guess, like, Merck's franchise-wide, like, what are you feeling nowadays for the, you know, eventual exit?
maybe this year or more likely a next year thing.
Speaker Change: Yeah, we, I mean I think as Tanner mentioned, we have some good line of sight.
Speaker Change: for the sale of a significant amount of the portfolio that Merck's has.
will be reporting when we are able to.
do so with signed contracts.
Okay, that's all for me. Thanks so much.
Mark Hughes: We'll take our next question from Mark Hughes with Truist. Please go ahead, your line is open.
Mark Hughes: Yeah thanks, good morning. If things calm down in Russia and the Ukraine, would that be an opportunity for better recoveries or is that already locked in?
Speaker Change: Now, the recoveries are locked. I mean, they're somewhat, you know, this is insurance-based, so it's essentially what the insurers are willing to, you know, resolve the claims for. It's been very positive.
Speaker Change: because the claims that we settled were pre the finalization of the court hearing so it was more the momentum trying some of the insurers to get out front of on you know the ultimate conclusion by the courts which you think would be positive on an insurance basis.
Thank you for joining us. Thank you.
Speaker Change: to emphasize that the resolution of the claims are now inextricably linked to the the insurance process unrelated to what's happening on the ground.
Speaker Change: Yeah, okay. Talked about an increase in spreads in the quarter and then leverage was a little bit lower. How much of that was mixed or was there some market movement that contributed to that?
Mark Hughes: Yes, sure. Thanks. Thanks, Mark, and we tried to capture the nuance in the prepared remarks.
Speaker Change: We are still seeing spread compression, as we noted, not as significant or pronounced as maybe in other parts of the broader syndicated market or upper middle market, but notwithstanding, still some spread compression and new deployments are at lower spreads than what our average book is.
Speaker Change: run rating at right now. The relative increase, quarter over quarter, had more to do, as we tried to call out in our prepared remarks, with the over weighting to existing portfolio companies.
Speaker Change: And so we don't, we did not intend for this to imply that spreads are widening, but rather just, you know, the power of incumbency and what we're able to drive with our existing borrowers where the friction costs are such that we typically do better when we're redeploying into existing portfolio companies versus
Speaker Change: new credit creation opportunities which continue to be at tight spreads relative to the rest of our book.
and Ted McNulty. Thank you. Thank you.
Speaker Change: Thanks for that detail. How much more in your book is there to a refi, do you think, the kind of investment into existing borrowers?
Speaker Change: current spreads. How much more do you anticipate might just be a natural consequence of this recent spread compression?
Speaker Change: Yeah, I think it's tough to estimate, you know, you can look at, you can look at, you know, you can look at what our average spread is at 578 and you can see where the market is deploying at 500.
or so, or 525.
Speaker Change: on average, you know, obviously in our particular quarter, as I already alluded to, we were a little bit higher than that on account of reinvesting into current portfolio companies.
Speaker Change: But notwithstanding, you know, I would answer your question with that will have a lot to do with, you know, part of spreads going there is that
Speaker Change: M&A has been relatively muted. You know, the bid-ask spread for financial sponsors on account of a higher cost of capital has made it harder to get deals done.
Speaker Change: and as a result, the level of repricing and the level of repayment
Speaker Change: is a function of that as well. So it's tough to estimate and would caveat that, you know, to the extent that we saw significant new credit creation opportunities, i.e. a pickup in M&A, you could see some stabilization in yields and even widening in certain cases because the market...
Speaker Change: on average is still grappling with a little bit of a technical overhang where there's more capital than there are new credit creation opportunities and that's one of the reasons you've seen spreads go as tight as they have and that's true across all markets.
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Speaker Change: Yeah, and then pick income up a little bit compared to earlier in the year. I assume maybe that's part of the merger. Where should that trend as we progress through 2025?
Yeah, so thanks Mark.
Speaker Change: In terms of pick income, I think when you look at our overall portfolio, we continue to be comfortable with where the performance is, by and large.
Speaker Change: You know, we've seen interest rates come down over the last few quarters.
you know that should help you know I don't think
Speaker Change: anyone's forecasting kind of lower interest even lower interest rates going forward but that'll be one component to it and then you know obviously you know the performance of the underlying borrowers which you know as as with everyone else in the street we have a handful of names that you know we watch very closely
Speaker Change: But, as we said in the prepared remarks, overall, the credit quality does remain stable.
Thank you.
Speaker Change: We'll take our next question from Sean Paul Adams with Raymond James. Please go ahead, your line is open.
Hey, guys. Good morning.
Speaker Change: I did see non-accruals did take a dip for the quarter. Is it correct there's only four non-accruals remaining from the legacy CEF portfolio on the books? And what's the status of the existing non-accrual prospective resolutions? Thank you.
Yeah, sure. I'll kind of hit that in reverse.
Speaker Change: So, the positions on non-accrual, without going into too much detail,
Speaker Change: There were a number of restructuring transactions that occurred in the fourth quarter or into the current quarter, which have put those in a more stable place. And so we'll be...
Speaker Change: watching those going forward. Obviously, we have from a portfolio standpoint, you know, a monitoring process around what's on a rule, you know, what's on a watch list, et cetera.
Speaker Change: and in terms of the kind of details of non-accrual, page 11 in the earnings supplement, you know, lays out, you know, all of the names that and where they came from and so yeah, there are four names on non-accrual from the mergers.
Got it. Thank you. I appreciate it.
Speaker Change: We'll take our next question from Matthew Herwitt with Jeffreys. Please go ahead, your line is open.
Matthew Herwitt: Morning everyone, hope you're well. Just following on the non-accrual conversation, can you give an update on Naviga and Renovo?
Speaker Change: just what might be happening for those companies recently and then what led to Securus being added to the list this quarter. Thanks.
Speaker Change: Yeah, so I mean both of the, or I guess all three of those names, you know, are going through processes.
Speaker Change: where lenders are collaborating and working together to try to maximize the recoveries for where those ultimate recoveries do come out and what the right amount of debt is to be carried by the company going forward.
Speaker Change: And I think, you know, in terms of, you know, where we keep those on non-accrual and the addition of Securus, as well as the...
Speaker Change: you know, ultimate outcome there is going to be driven by, you know, these restructuring processes and, you know, kind of on underlying performance of the companies going forward.
Speaker Change: Yeah, I would just say also, you know, we talk a lot about, you know, all of these are from the vintage kind of prior to COVID, and we talk a lot about
Speaker Change: what has the increase in interest rates in each of these companies.
Speaker Change: re-invest in the business and it would be those types of names that have been impacted in the current environment made worse by underlying idiosyncratic issues within the companies.
Speaker Change: Okay, thanks, that's helpful. And then just on your current dividend, it's obviously well supported by earnings, but given interest rate headwinds and spread compression, how confident are you in the sustainability of the dividend going forward?
Speaker Change: We're very comfortable with it, considering where our leverage profile is and our expected origination pace.
Okay, thanks very much.
https://www.kenhub.com
Speaker Change: We'll take our next question from Paul Johnson with KBW. Please go ahead, your line is open.
Paul Johnson: Yeah, thanks. Thanks. Good morning. Thanks for taking my questions. In terms of just the stability in the credit metrics that, you know, the certain credit metrics that you're seeing, I was just wondering if you could expand on that a little bit in terms of what you're observing.
Paul Johnson: Yeah, sure. So, you know, one of the things that we've been pointing out for the last several quarters is revolver utilization.
Paul Johnson: and that has been pretty stable, quarter over quarter, which shows that the companies are able to grow without pulling on their board and capital facilities.
Paul Johnson: and also just kind of manage overall working capital and produce positive cash flow. So, and then in terms of interest coverage ratio, you know, we noted that that has improved. I think part of that is a combination of interest rates, the reduction in interest rates.
Paul Johnson: But then also a part of it is what we're seeing in terms of new opportunities and the leverage that's there out of the box.
Paul Johnson: Our overall portfolio leverage did tick up a little bit, but that's primarily a weighted average number that's based on a few positions, but if you look at it on an oblique or basis, overall it's steady to down.
Speaker Change: Yeah, just to emphasize that last part of what Ted said, is we report that on a, you know, and to be consistent with how we report it historically, it's a composite and it's a weighted average.
And so the dynamics there are...
It can be influenced by some underperformers.
Speaker Change: And so, our commentary and the nuance in our commentary had to do with the fact that, yes, we have seen some improvement on interest coverage and then also when we...
look overall to borrowers or we look in quartiles.
Speaker Change: consistent with the comments that we made in the prepared remarks, see a stability in underlying performance across the portfolio outside of some of the idiosyncratic.
names we've called out and mentioned in the supplement.
Speaker Change: Thanks for that, that's helpful. And then just in terms of kind of the write-downs this quarter, I understand there were some restructurings.
Speaker Change: So there's a few things going on, but was there anything in particular that was kind of driving the net depreciation this quarter? Was it in legacy assets or were there any, you know, particular investments that were kind of driving that?
I think as we said in our remarks
Speaker Change: You know, if you looked at it, you know, over 60% of the decline were in positions that were already on non-accrual. Those are, you know, companies that, you know, both Ted and Tanner have addressed and that we're working through with the sponsors.
Speaker Change: restructurings of those and or sales of those businesses. So they're more, the valuation's gonna be more based upon enterprise value, so therefore you have more fluctuation quarter to quarter.
Speaker Change: Okay, I missed that, missed that comment. And then last one for me, in terms of the CLO financing, congrats on that, that's, you know, pretty attractive pricing. So do you expect, you know, that to change the unsecured funding mix at all going forward with, you know, more attractive, potentially more attractive spread pricing in the securitization market?
Speaker Change: Yes, yes we do. We, you know, I think it's credit to
Speaker Change: The portfolio that we've been building over time and leveraging off of our relationship with MidCap Financial.
Speaker Change: They have 12 CLOs out there, now we have two. And I think when you look at the BDC space, there's a convergence of not only unsecured kind of spreads and secured spreads.
and so therefore...
The secured spreads are inside, the unsecured...
Speaker Change: And we believe it's a very favorable use of, or source of capital for us going forward. But it's a credit, it's...
Speaker Change: If you look at the portfolio, it's a function of what we have, the type of borrowers we have, and the strength of that portfolio.
Thank you, that's all for me.
Speaker Change: And as a reminder, if you'd like to ask a question, please press the star and one keys on your telephone keypad. We'll take our next question from Melissa Weddle with J.P. Morgan. Please go ahead. Your line is open.
Melissa Weddle: Thank you. Good morning. Most of my questions have already been asked and answered, but I wanted to follow up a little bit on just the volume of repayment activity or exit activity in 4Q.
Melissa Weddle: And just by virtue of your talking about getting to target leverage in the next few quarters, it sounds like you're anticipating that deployment.
Melissa Weddle: over the upcoming quarters. But I'm just curious, were you surprised at all by some of the repayment activity that you saw?
Melissa Weddle: In 4Q, it would seem like it might have been a little bit elevated, even though you are doing a lot of sort of recycling of capital from the sort of post-merger period. I'd just like to understand how you think about that.
Speaker Change: Yeah, sure. Thanks, Alyssa. So, I mean, first of all, on the deployment side, you know, if we kind of target, you know, 10% plus or minus of the portfolio of new commitments every quarter, you know, we'll be back to target leverage in the next few quarters.
Speaker Change: you know the last you know third quarter fourth third and fourth quarter of last year you know as you point out we're dragged down by the the sales of the CEF so I think you know there were
Speaker Change: that was on target so I'd say none of that was a surprise.
You know, we're almost done with...
the recycling of the capital from the CES.
Speaker Change: And so going forward, you know, it will be really re-levering, will really be a function of the deployment, you know, which we feel very comfortable with given MidCap's, you know, recent track record, well, long-term track record, recent deployment, and what our pipeline looks like.
Speaker Change: And then it'll be, you know, kind of back to what I would say normal course of repayments.
Speaker Change: and that should allow us to achieve our goals in terms of re-levering.
Okay, appreciate that.
Speaker Change: And then just one follow-up question. I want to make sure we're understanding the realized losses correctly. Just by going through some of the tables in the K, it looks like most of those realized losses were exited pretty close to where you had those investments marked. Referring more to the larger
larger positions that drove that in 4Q.
Speaker Change: Yes, and it was also yes, it was we did exit those they were also you were you were moving from unrealized to realized Right, we were cleaning up the SOI cleaning up. You kind of come in to the end of the year and That's kind of what we typically do. So you're corrected
Ted Powell
Speaker Change: We'll take our next question from Casey Alexander with Compass Point. Please go ahead, your line is open.
Casey Alexander: Yeah, good morning. I'm just curious because the originations in the quarter were actually lower than your quarterly average for the year.
as well as repayments. And you've often talked about...
Casey Alexander: How MidCap has substantial origination capacity and, you know, in the past the reason that you didn't see more of it in the BDC was because the BDC was up against its leverage limits.
Speaker Change: So it seems to me that, given those previous statements, that the decision not to take up the total value of the portfolio was a conscious decision. Can you...
Speaker Change: Can you speak to that, I mean you talked about higher spreads, what was it that kept you from increasing the size of the portfolio and moving up the leverage ratio this quarter?
Yes, sure. Thanks, Casey. And I think the...
Speaker Change: in our estimation and how we very deliberately try to run the book is...
Speaker Change: When you look at that that swath of origination we quoted the all-in numbers from MidCap
The emphasis for us as a management team
Speaker Change: has been to stay true to that requisite level of granularity within the portfolio. And so you can see the number of names that we were deploying into.
Speaker Change: was substantial, but the average deployment in a given name kind of lagged and or we chose not to run it up. And as we've said in the past,
Speaker Change: Yes, it was lower in this quarter versus last quarter. That does not reflect a decision not to. There are some things that are won and lost and ebbs and flows.
Speaker Change: and what happens and what doesn't happen. And we're very comfortable with the level of deployment, as Ted alluded to. We feel very comfortable about the ability to get back up to 1.4 and are cognizant of wanting to build in the granularity.
Speaker Change: The number of obligors actually went down quarter over quarter as a result of the names that we're selling out of CEFs are on average lower position sizes, but we aspire as, you know, a lot of the larger BDCs and a function of the fact that we
Speaker Change: We have 500 obligors across its business. Over time we would like to get to that.
You know, ideally, we're at 233 right now, ideally...
Speaker Change: get to a 300 number and show a really, really diverse level. And then finally, you know, the decision or whatever part of this that was a deliberate decision
Casey Alexander: it goes to not wanting to over-index to any one quarter. So take your comment, Casey, objectively, this was a lower commit than last quarter, has a little bit to do with.
Casey Alexander: granularity but overall very comfortable about the access to the origination and this not representing a deliberate decision on the part of management not to deploy.
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Also, if I can only call...
Go ahead. Can I just... Yeah.
Casey Alexander: You know, the general theme is, you know, we are obviously targeting as interest rates have gone down or maybe stabilized now, having continuing to not only cover the dividend, but have cushion to cover the dividend. As you know, we have a few tailwinds to that, which is levering up.
Casey Alexander: and the redeployment of Merck's. And then we have, you know, and we added another tailwind this quarter, which is we got cheaper financing, I think, than we projected. Obviously, we have some headwinds.
which is, you know, the repricing.
you know, most notably.
Speaker Change: And so when we sort of like target to make sure that we continue to have comfort level to cover the dividend and actually expand that, that's sort of, that's, you know, sort of our timeline. So when Tanner's talking about the choices that we're making, like levering up is.
Speaker Change: you know, an important part of our strategy, meaning like at the end point we want to be at the right leverage level. But we also are, you know, have, I don't know if luxury is the right word, but we have some flexibility in terms of sort of choosing.
Speaker Change: granularity, which ones we pick, how we carry things forward, you know, when we exit and not, and so we're taking advantage of that.
Speaker Change: So, I think Tana's right, I don't think you should read into sort of exactly one, you know, one quarter.
Speaker Change: But you, you know, hopefully we'll read into, you know, hopefully the consistency with which we can.
Speaker Change: lay out a story that continues to have room to cover the dividend and have some cushion in different letters.
That's my only question. Thank you.
Speaker Change: And there are no further questions on the line at this time. I'll turn the program back to management for any closing comments.
Speaker Change: Thank you, operator. Thank you everyone for listening to today's call. On behalf of the entire team, we thank you for your time today. Please feel free to reach out to us if you have any other questions. Have a good day.
For more information, visit www.FEMA.gov
Speaker Change: This does conclude today's program. Thank you for your participation and you may now disconnect.
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