MidCap Financial Investment (MFIC) 21 Feb 232022 Q4 Earnings call transcript

Good afternoon, and welcome to the earnings conference call for the period ended December 31, 2022 for MidCap Financial Investment Corporation. [Operator Instructions]

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

Thank you, operator, and thank you, everyone, for joining us today.

Speaking on today’s call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Greg Hunt, Chief Financial Officer. as on additional for the portion today’s Chairman, management of the Executive of are team call call. Widra, well members as the Q&A Howard and available

press are that the Information are of about strictly of broadcast MidCap release. and replay call everyone in that Corporation property advise this Investment the available any to Please note audio like and I’d in call prohibited. webcast that being Financial any recorded. they is our today’s is unauthorized form

to information. like to may customary call also attention I’d call press the webcast safe your our in release and include statements. harbor Today’s disclosure forward-looking regarding forward-looking conference

any most SEC www.midcapfinancialic.com. undertake unless risks should to copies that required forward-looking our update to our the affect make. of obtain our with and our visit projections website that statements do We please recent forward-looking You to statements we not apply by for SEC or at business To our refer adversely filings, law. filings may

also MFIC on our Maryland. and everyone I’d we'll MidCap Corporation package portfolio contains today's about information company’s headquartered performance. financial which review as Financial either Bethesda, BDC Throughout Financial in that a refer the supplemental MidCap to to financial like as to call, we as website, or information the posted the refer remind well we'll Investment to it's the lender

turn to like Executive over Powell. to Tanner call I’d the time, this At Chief Officer, our

investment quarterly an results you then we'll the we've strategy, good our everyone, our data, progress in thank today's made on I'd afternoon, the for our Good confident which a by to dividend. and in Elizabeth. and we by so the why believe our performance some update with to Merx, strategy. review investment quarter call for increase us reducing I'll you, conclude our joining begin Thank including like shows provide we're followed highlighting of today.

quality. credit provide activity remarks, portfolio update Following an our on review Ted investment will and my

Lastly, additional will and review provide some Greg in results Merx. detail on comments our financial

then will We questions. to open the call

results, income market today, of financial the of our investment positive close with $X.XX, reported net rates. we base share Beginning higher after which benefited impact from per

reminder, a rates the was X.X% loan timing to net end share of of quarter-over-quarter, to full of before impact resets. generally of first-lien our the lending see we asset base value As due due At there's decline strategy. of higher $XX.XX, lag the some mostly losses outside December, corporate a per

corporate focus continue sourced Regarding investment first-lien by on new activity, commitments loans to Financial. MidCap

included strategy. our than We less and at exposures have repayments Sales reducing which exposure, core during value. fair remaining million $X our outside and the of also significant our now made of is progress oil quarter nearly gas all

we a paydown, forma XX%. In the represents X.X% significant this addition, of by post approximately received quarter for Merx, paydown position value. Pro roughly our at portfolio fair reducing end, from Merx

investment into the of the change Shifting a establishment to to MidCap which August, recall, forefront BDC in the we you MFIC of made fee a equity at commitment a the Management's being announcements, industry-leading review of our for of finance. key Apollo and These may Global in structure the investment underscored and democratization by name. announcements strategy, and Financial several new included company's as

listed at market BDC. position shareholder institutional a announcements BDCs. senior-secure credit These reinforce a as pure-play to c quality best-in-class MFIC's middle private access providing among public structure,

Financial, over, the leading one first shifted have years, our into last the As portfolio of market track lenders primarily the sourced by we us the several discuss previous with MidCap world's you've corporate BDC's loans, calls record. middle heard a lien on proven

the We XXX MFIC, MidCap United Apollo Financial States, largest with market lending the lending. direct one in close with capital market has one professionals. makes investment participants other combined managed Financial of teams of MidCap largest believe the to of middle scale the part in of

For The loans Financial commitments, reference access to December strategic relationship is including new and between billion $X Financial, MidCap be approximately Apollo fortunate billion MidCap in sourced quarter. XXXX, by the the have MidCap position in BDC to to given Financial $XX.X in in closed a unique Global.

with of relationship its we MFIC MidCap data, well concurrent a this 'XX, moment performed. our wanted to Mid the provide historical I has some Financial. which In order, leverage to strategy how shows receipt think Apollo focus co-investment take strategic Global's performance shifted with to

utilizing date totaled upon As portfolio co-investment of corporate XXXX, which first $XXX is June began our order, our which the lending approximately we approximately lien million.

on in we the funded X.X grown nearly lien portfolio billion loans corporate have corporate approximately those losses that a $X million end lien MidCap first or period basis. basis XXXX, fair by lending of points lien first Over at of during $X.X our billion loans had value. that At sourced approximately on December Total been XX Financial. period, year cumulative $X corporate first new

basis annually. cumulative two points Our are basis

these we how how appreciated have forward. over not we market extended going the because because may inform it of do and highlighting to has are help firstly lending lien track corporate an perform We believe should record assets time, period believe our performed this fully portfolio

distinct It today's by asset-based lending, first life only finance, product science groups; franchise finance. noting corporate not lien that and worth lending well-diversified is borrowing industry, also also across lender leverage but is portfolio lending five lending,

Merx. market on Moving being consistent in senior focus a play, reduction investment the focused strategic our middle secured pure to remain we BDC, accelerating our of with Merx's on

to we progress in have We this made significant that regard. are pleased report

to Merx Post of MFIC's by $XX in transaction fair had value repaid reducing investment investment MFIC, the million quarter the portfolio roughly interest revolver, end value. of of size fair end, million or MFIC's in December, of $XXX a venture which its the and to of $XXX joint significant the was XX.X% selling in fair million, to a representing at At total approximately at a executed Merx Merx portfolio applied X.X% value. the

expect we We in paydowns the remain to will pay provide subject while occur the Merx Greg our call. focused some additional XXXX in conditions. reduction on to to investment marketing downs expect don't do and continuing evenly, color later on in to we see additional reduce during Merx,

base base we board lower yielding benefit fee to seeing on $X.XX to the will that rates, additional This be legacy generate new The given forward from rates, of and marks based became of dividend higher dividend, will yield and quarterly has rates positioned by current assets the on January increase structure, this net third are December in new XXXX, some XX, our increased base the increases MFIC's exit our equates our which to from increase dividend quarterly elevated from we for $X.XX At excess and our nonearning quarterly are NAV. effective to rate the level. in well income consecutive a XX% benefit dividend. expected investment remain Moving which there curve time. $X.XX, regular indicates dividend dividend

evaluate As continue the additional supplemental the operating our or earnings, to dividend. dividend board base environment to increase whether continues retain will to evolve, declare

will I that, turn over With to call the Ted.

Thank rates by this more pace. In curb ongoing rate concerns you, expected, continued XXX economic far Tanner. at current growth. as capital to increased increases volatility albeit so with thoughts basis an finance XXXX, and markets XX around rates points Federal basis has rates increased year, Reserve the leveraged Beginning raise a the Federal amid and the macroeconomic points slowing additional continued the with few equity Reserve on evolving interest in inflation during to a environment, the period slower

inflation, of seen hawkishness markets fed More the keep near some recently, expected signs volatile we and to have easing however, in is term.

economy, time primary take impacted. new high the the slower for a We will actions be therefore, loan and yield volumes result, Reserve's in leverage to be As transaction the believe issuance fully to will near it by term. negatively M&A in the and markets absorbed continues remain Federal

origination opportunities lenders, private attractive more markets. leverage turn as the We created market volatility seeking direct to debt that share markets to increased has companies be seeing for the selective, We're believe and resilient spreads, tighter platform and with balance and public the to across finance in documentation continue defensible wider sheets. companies lower more our investment

points least origination spreads higher last credit example, XXX basis our one are XXX points basis than platform. year, to across For at

it one worthwhile the among the remind senior be portfolio. would we our MFIC investment this everyone of lending secured to how portfolios market With corporate BDCs. We believe have we has as thought constructed most backdrop,

portfolio is focus which we top weaker understand positions going stability the the believe us into safety structure, think order portfolio, point. well on the investments and at capital floating a lending our of important of on corporate Our to we rate to is economic focused environment. In it attachment

was At that will structure, weighted the of end X.X could be times, By operating as on focusing to of environment. corporate the attachment believe the the most for in credit are in of that first part of portfolio risks mitigate the the more lending underscores invested refer which lien. we what capital we we point the a to some able we structure senior challenging capital top arise our true of average December,

the more their generally Despite evidenced well, our current fundamental as landscape, by performance. borrowers environment been able to macroeconomic navigate uncertain have the

more but beyond meaningful Our with recent revolver growth. amendment portfolio To or increase conditions. We able levels. fundamentals potentially normal entering in in lower we not generally challenging year-over-year solid sound, activity are date, experienced companies slightly the companies growth be and our positive and any the quarter EBITDA weather revenue believe drawdowns most to seen portfolio either have will XXXX

in we economic challenges a That companies can will said, in in pickup activity environment we have the coming quarters. and acknowledge that some slower amendment see a

MFIC to management Importantly, which maximize benefits address MidCap identify dedicated issues portfolio professionals, help and team of early investment XX Financial's, from nearly value.

we is activity, market investment investment opportunities. middle the to generating believe Moving attractive

floating basis quarter. commitments $X made nine new XXX lending a commitments. $X.X up $XX in Financial was million basis approximately the compared December totaled earlier, for average with first mentioned points spread an were companies points new MidCap of during As new in rate MFIC's the prior all These quarter, commitment million. across In billion XX lien of loans weighted commitments December closing the to active corporate quarter, average new commitments

another was our X.X average made below A earnings X.X times, weighted spread of is average new see. during commitments times quarter which tailwind new the of higher The leverage portfolio. is commitments we continue net on to the times X.X

for growth totalled million. $XXX Net for fundings $XXX sales net $XX million. totalled totalled revolvers repayments revolvers, for million, and repayments quarter quarter the and $XX the In Excluding totaled aggregate million. repayments

$X XXXX, gas the now ships our strategy. sales continue and million than million roughly notable, and we from which our sold to exposure, at our and assets value. included accelerate is less lien of fair we gas all repayments execution remaining of oil In first as Especially true and oil $XX

and Turning represented to portfolio, XX% value. companies industries. the the Corporate in XX% of different had fair fair of December overall total XX represented portfolio, Merx our at lending and value billion end at a the of of $X.X investment other across portfolio XXX the portfolio

of X% XX% approximately As total fair corporate mentioned, to end first the Tanner of quarter been end, lending of Merx has basis the of average December, points. spread a At portfolio lien, post with our XXX was at reduced value. weighted portfolio

These last the weighted through for data ratios during interest X.XX the company based on interest times quarter. credit lending end X.X X.X ratio interest was and the quarter. average last net coverage are portfolio weighted quarter. weighted metrics weighted remain down portfolio relatively the times, times was months from last September using interest times stable annualized months company the EBITDA. on an of was September. expense leverage X.XX down At coverage average December, for Our of of corporate average X.X ratio coverage from The the average last twelve times XX The quarter based the

nonaccrual Given coverage of end the and monitoring fair nonaccrual were on investments investments portfolio, future base current fixed across of increase million, we're X.X% No placed and significant $XX the rates, December, the process. or active coverage status on status interest as component the portfolio at during ratios charge of an quarter. At risk and focused on total rapid a total value. the in

turn now discuss financial to the in to detail. Greg will over results I call that, With our

Thank you, good everyone. afternoon, Ted, and

reporting year form today, transition the XXXX. nine The filed Form-XXK, calendar remind XX, XX to was discussing will I better XX, fiscal was XX, on our cover from December results, Global fiscal to change period year March year on December to January to a XXXX Before which with to fiscal XXXX from month XX. XX, from -- The April align other that December MFIC XXXX. period next entities. its Apollo everyone done in Form-K report wanted includes end MFIC's has changed MFIC's

today. You results XX-K the can filed year-over-year see the we in that

investment fee compared solid net higher Net from base continued results, for rate prepayment as and a compared year the floating our to benefit $X.XX to share December our and $X.XX to comparable incentive the rates income the for to December on Shifting periods. income lower income, was quarter $X.XX September assets, well as fee the investment in per quarter ago quarter for the quarter.

from income income income to of The slightly fee on flat down average last costs last compared Prepayment million quarter was at the of the points is driven XX.X% the At approximately of average by compared rates. and was from and corporate the of portfolio for increase $X.X lending quarter-over-quarter. end essentially the base corporate on yield $XXX,XXX our million, $X.X an was basis end XX%, last yielding portfolio quarter, XXX quarter. of September. This in beginning the Dividend end the quarter, an December, was X.X% to the figure was shield the increase of quarter. approximately lending

by book. outside is first million previously to widening losses driven first book was end corporate share of less opposed than at loss. lending indicated, our was lien December to In our adjustments made as credit lending the as primarily or attributed of portfolio and and first primarily fundamental mark-to-market of lending per that were $X.X Losses, XX% XX% liens. corporate from up spread $XX.XX, due NAV our X.X% to quarter-over-quarter, $X.X our of billion lien a regard of losses decreased

are Additional shown loss details the losses -- on net earnings the Page in net XX our supplement. on

rolling includes look with on XX incentive income a fee -- a quarter hurdle XX return back. total MFIC's months

incentive were December Given the fees significantly in on net reduced. the loss the portfolio, quarter

BDCs BDC to MFIC's on was management equity, XX, total value. the from feature. permanently quarters is a one believe base provides is was now listed asset charge greater January only income a XX.X% reduced listed retain equity. fees and reminder, the permanently MFIC's fee we on on and we rate also on return on Among to XX% incentive focus to which As net lowest alignment fee management beginning management three The in XXXX, reduced the fee and

X.X December, our the from on next in at amend target revolving times our months. end intend We net perspective, the Moving sheet balance of stood facility our to leverage our extend range. at few and within credit

Although no rate a years. experienced NAV implies corporate lending X.X has trading the we first significantly quarter, higher than stock discount lien was purchased the loss MFIC's our believe portfolio to during over last

exposure Moving to to MFIC note the venture, X.X% as approximately mentioned, investment the XX write-down to nominal sale, This XX% XX today. the a joint combination Merx, Merx Tanner Proceeds taken from portfolio in of other Merx's resulting Merx, January, quarter. value. interest in to were sold investment from in steps sale at its our connection aircraft fair on reducing applied with Merx the in during with in a fleet to reduction the of our in our reducing

we are interest outlook, we in Turning rising to grow quarters the to earnings our positioned due believe to environment. coming rate the well

and approximately base respectively. and $X.XX on earnings based that incremental rates in basis estimate quarter XX a basis rates, riser perspective, $X.XX annual have For of increase in point resulted and we point a would XXX

We our in have provided additional information XX-K. on the sensitivity

MFIC, lending prepared is the enter very our diversity weather XXXX, believe we to call economic feel to remarks, challenging please portfolio, our the which This open constructive more for we concludes questions. of up corporate a outlook given we and the about As environment. operator, designed

instructions] And question come [Operator Hughes first Mark our Truist. with from will

is Your open. line

thank Good Yeah, you. afternoon.

cash that more transactions down you Are opportunity For or flow? from required in for order just generate think Merx, talked I paydown pay they to in XXXX. about can operating

thanks, so Yes, Mark.

obvious, got, it state not CUSIP So XX these for the securities. Greg To wholesale necessary answer is portfolio transactions. today. there in planes the are is, big not as mentioned, We've the

it's and long are execute there in on a traded well. on they're as tax wire. order process long sales So They be not these take considerations -- to the cannot --

portfolio yield -- do our see to the -- We exposure substantial of in reduction moves the have have we a on the today of there.

of You would larger assets expect groups. sales need in individually either or to

on or Maybe of tech tech the about front portfolio? volatility I within is high within been are there job you any portfolio, in industry that impact the some -- has seeing your the Any XX% think. the

was delineation it average are leverage underlying software in something done and is the oftentimes, our deals When good we're think is things, market has a high roughly the which back broader which tech, different there, even is lending 'XX including software, a software at founded news than bit. markets from lot we fund that with and catches was in standpoint quite portfolio, the No, itself LTV our when the made the fundamentals that the is those targeting and this a LTV about oftentimes, exposure a different -- XX%. companies different was of are our typically lower creating across an

you significant are challenges there's some as cushion in space. the there So broader text notwithstanding out, in pointed any event, rightly

question will from James. Raymond come next with Our Robert Dodd

Your line is open.

guys. Hi,

of thing, your XXX we questions, I one in last point, say the ago. heard it widening Just significantly XXX but quarter, was quarter, said, commitments a at to when prepared that new you XXX points but also spreads year basis basis remarks, points, others think and points look I your basis was this same it the to XXX

So new widening in commitment. that's on points XX the basis about

is that So about leverages same. the

So back basis you of could XXX like-for-like taken the us assume on us can more or the have to visibility the cautious you and any spread expansion is the year, that give -- new points even go opportunity the and assets give that's you opportunity over of I on maybe that? you folding basis to color kind commitments -- of in the course the XXX points taken have

Robert. thanks, Yes,

we're the what give think our structure also I quote decision us an of businesses, it's emphasize. numbers, percentage little greater platform market when think our to it's and participate and our a what This that dynamics across I those that in sourcing. to we're of point the is cost doing kind drove to across is is we and our ability at one looking of mid-cap good mid-cap, this a even absolutely that, bit lending and middle reduce

a is And roughly XXXs we as $XX million in anticipation both the more could the to as trying so, do basis most a in at to broader while market. point, deploying see quarter, you in we're which we the basis and were recent be reflects the market, always to bit that stay the conservative points of where well your also trying reflective one, think of we XXX points, us little

the Sorry, participate has of of a and greater the cost fee effectively, capital deals that down. percentage change our we can come in

that. appreciate rather that, I exists, I a of decision one I is out this a presume want on the One been was while way. or than as just quarter. work just more, once worked a on this kind to to energy that that's has something don't get

quarter, So, obviously, kind losses of yeah, is, more than could realized there which give one were either on knew we comment hope was together? that of getting is that, I but that quite us rid to you just some any what really, active, a come

Yes, address Happy sure, Robert. that. to

some process strategy, work to broader then businesses we in in did XXXX business took So several migrating processes. the to in the running opportunity in then towards the XXXX, and advisers, with go the ready years restructure those and the and and market we get of ago, hiring teams so began to starting cases XXXX and management

in that and this that of last the oil gas out the the across turns and two it we gas so oil they closing And the as ended the for both up is year, quarter, as sold assets, shipping well assets. and just assets

over financially M&A course have the terms the couple been then and for of years year. they a on operationally, of in process of So actual worked for

you. it. thank Got

question Our Ryan KBW. from will with instructions] [Operator next come Lynch

open. is line Your

described NAV said, on just that largest us markdown really of kind I really restructuring a the kind writedown you to my debt good guys -- the seem quarter. the due book, were corporate driven first question which of Hey, would from lending from afternoon. the mostly the just wasn't your down. they spread this but coming believe like that and you by to KNN, had credit nature I mark equity of widening, was was

markdown little described mostly a misunderstanding as credit. just and I'm confused bit guess on this of versus what's quarter why kind the I were widening spread So of

I Yes, clarify the for thanks think that. no, think and I and happy comment, to we're

the I part credit comment was lien in the post one that down a end, quarter restructuring, the You're secondly first mark-to-market. within book that the right, prepared the write through that the which there think within was investment comments, completed, component first and was KNN the lien the was was was went writedown of lien, then credit

So it really of there. two components kind was different

Ryan, and of largely remarks, was that lien we big KNN right, the prepared due that had that you're was outside strategy exactly emphasizing saw the the Yeah, were decline, it to the writedown. first

strategy, the Okay. And corporate wasn't it mark-to-market. within

annualized. you kind guys you And X.X way X.X looks particular that is Have at weighted quoted interest trailing to statistics mostly calendar out kind covers of analysis any done gave on when that kind that in XXXX XX then going the on is sort some what in and LIBOR/SOFR, coverage guys of months, of times times September the peak statistic. like average look coverage interest of then obviously,

a from don't bar I sort about of standpoint, investors likely borrowers think most or credit worried tailwinds of more defaulting issues. average think risks more potential in are the we're in I the it's having the and But

that interest would times basis a forward would coverage done your any of interest that like level? on of what So portfolio fall analysis and on you below look sort have coverage guys percentage one what

below times to to Yes, bit the basis market current And XXX down fall in, of distil and are little sure, when rates. we X.XX% handful less as the slightly the the increases looking, thinking numbers pricing appreciate, another of five then or so you stress names we've have LIBOR/SOFR one of it take LIBOR backward analysis all a is XX terms coverage. these the or end what conclusion, that to which points, of of year, we is of the in just the a than LIBOR/SOFR/interest kind at so the done LIBOR the that what above kind

in to or with three of and increases offset XX X.XX% of the context, seeing, SOFR, underlying before is increase year in fewer address X% one course, and that, even only than names, four it the number to still call MIMs one, we're of by some that to companies. below that the and so That benefit

dispositions one we of And on Okay. what in going helpful. is as sort that just you then sort sold, reduction time? be should one, of schedule Or sort the of both come That's repayment a predict final these that expect guys that interests that, do really Merx kind forward guys those over gradual more the you can anything being extent like of that of expect to chunkier not possible? which may

Yes, one to be lumpy, would probably would I of but lumpy a a quarter. not think we the it expect as which step little bit function, this as be

there to like let's go assets exit. we see, of that for sets example, example, same obviously So, that for together, of or less expect would sort are

by yes, like by think will but like, one it one plane-by-plane more be so, So I necessarily it just be complete as one. won't opposed to entities,

answer, an expectation. know that's So our that's imperfect I like but

this to to these It the make sense. In I the process, unpredictability trying it. sort things perfect time understand of appreciate of try sell definitely afternoon. I also,

our from instructions] JPMorgan. come question Wedel will [Operator next from And Melissa

Your open. line is

and are in Thanks about differently? X.X% thinking is that you're still just a of mode currently things you assumption and how leverage could bit repayments today. touch my about on basis afternoon. at current was or come fair exist you a I you're with about levels. recycling of and that that would occur, in hoping taking where a a Good feeling on sort as capital portfolio net about I questions you're for assume

we range, that's last the think our on for account comments around this questions will one we it's good would documentation that a the point, notwithstanding, credit and vintage range. to expect improving a make and good -- in properly came make we operate good credit obvious sure, from fair is do is sure this where believe we of is if we one for what indexed provide we economic of and your market to participate would bottom to quarter I of We is believe all-in and That us. I lower the and further do and to is in that. beneficiary comes for did a spread, a you're that out so at back some what lenders guidance assumption. leverage, are it, volatility I private and quarter see be of other and and and that to redeploying market note want hopefully, that this

that's Okay. drawn that, and available the of terms kind already you I set. see to the been the on, think about you commitments, are and to I potential appreciate at commitments environment, assume million think if have challenging that start think sort more as some $XXX your million, the looking as on $XXX operating I looking up case, I'm think rounding, of expecting being that the in specifically, and follow XX about outstanding by the number Slide down back a I of you for drawn upon I'm about existing companies, be portfolio

were thanks the process but much? a that on not current environment, by thinking and dictated they're you're that of Could just that sort how so it, about was made. commitment agreed by So upon, terms elaborate when little you the

having point loans as and in eliminating wherein Yes, through, is the in this the margin up of in drawing first so bad news the opportunity revolvers, sure, protect news, Melissa, question, seen netting down is very in bad account, gone type compliance. covenant terms those news there also and instances in we is as put hoarding, the but was COVID, good or through I to on good MFIC of anti-cash we've broader experienced through both new had the we the of preemptive in COVID well think and and to the a terms good we went existing went news loans the against not as business such tick our revolver is across and utilization on

of a if but And haven't higher we you may than so expect think excessive obviously, we've account historically. drawdowns a to seen risk stresses do well, at be are more that within been seen I challenging, the are become than would revolvers at from what cash we on acute we've continuing documentation and level, risk expect a flow able our minimum, that, utilization, of or much standpoint, what less to

And the as proceeds loans, defined well. use of then on have term those

going in purposes. of draw grow So the drawn you're companies just can't those they're slide, which their portfolio on at, so support to liquidity what be loans, term sponsors make I down and place delayed to for pointing to acquisitions and the think primarily

further questions at time, in queue. no And we this have the

management closing So I would to remarks. like or over additional any back for to turn it

everyone today. to evening. Thank out for today's of a you, good questions. listening behalf you free Have have operator. feel Please you Thank entire call. other reach if for us thank to team, we you, time your to any On the

Thank and your conference we this and appreciate gentlemen, today's does call, you. participation. Ladies conclude

disconnect at may any You time.