Prepared remarks
Good morning, and welcome to the earnings conference call for the period ending June 30, 2025 for MidCap Financial Investment Corporation. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corp.
Thank you, operator, and thank you, everyone, for joining us today. We appreciate your interest in MidCap Financial Investment Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Kenny Seifert, our newly appointed Chief Financial Officer. Howard Widra, Executive Chairman; and Greg Hunt, our former CFO, who now serves as an adviser, 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 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 filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit either the SEC's website at www.sec.gov or our website at www.midcapfinancialic.com. 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, 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.
Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MidCap Financial Investment Corporation's Second Quarter Earnings Conference Call. In case you missed our mid-June filing, we're pleased to share that Kenny Seifert has been appointed as MFIC's new Chief Financial Officer, which took effect as of the close of business on June 30. Kenny has been a key leader within Apollo's finance and accounting team since 2015. Kenny previously served as the CFO of both AFT and AIF, the two funds that MFIC merged with last year. Greg Hunt, MFIC's former CFO, will continue to support the company as an adviser through the end of December to ensure a smooth and effective transition. Additionally, Howard Widra, MFIC's Executive Chairman, informed our Board of his intention to retire from Apollo at the end of 2026. We are thankful to both Greg and Howard for their many contributions to MFIC.
For today's call, I will begin by providing an overview of MFIC's second quarter results, along with an update on the meaningful progress we've made reducing our investment in Merx. I will then turn the call over to Ted, who will share our views on the current market environment, walk through our investment activity for the period, and provide an update on the portfolio. Kenny will then review our financial results and capital position. Yesterday after the market closed, we reported results for the second quarter. Net investment income, or NII, per share was $0.39 for the June quarter, which corresponds to an annualized return on equity, or ROE, of 10.5%. GAAP net income per share was $0.19 for the quarter, which corresponds to an annualized ROE of 5.2%. NAV per share was $14.75 at the end of June, down 1.2% compared to the prior quarter. The decline in NAV per share was primarily due to a handful of positions that are experiencing company-specific challenges, partially offset by a gain on Merx, which we will touch on shortly, and NII slightly exceeding the dividend.
During the June quarter, MFIC made $262 million of new commitments across 29 transactions. MidCap's strong incumbent position continues to be a competitive advantage, as evidenced by the fact that slightly more than half of the 29 commitments were made to existing portfolio companies. This underscores the power of incumbency, particularly in a muted M&A environment. We also observed a slight increase in the spread per unit of leverage on new commitments compared to the prior quarter, which Ted will discuss later. Moving on to Merx, our aircraft leasing portfolio company, which, as you know, we have been actively working to reduce. During the June quarter, Merx sold one aircraft, which resulted in an $8.5 million paydown to MFIC. We are very pleased to share several recent positive developments related to our investment in Merx that occurred subsequent to quarter-end. As mentioned on last quarter's call, we were working on multiple sales campaigns and anticipated MFIC's exposure to Merx to decline in the coming quarters.
We are happy to report that we've made significant progress toward this objective. Post quarter-end, Merx successfully completed a sales transaction covering the majority of its aircraft. Given the strong market environment, we were able to sell these aircraft at above the value embedded in Merx's valuation, which resulted in a modest write-up on our investment during the June quarter. In addition, in July, Merx received payments from insurers related to the three aircraft detained in Russia in the amount of $30.9 million, which brings Merx's total recoveries to date to approximately $47.4 million on those three aircraft. Similar to the sales transaction, the insurance proceeds were slightly above the amount assumed in Merx's valuation. Following the sales transaction and the insurance recoveries, Merx will be repaying approximately $90 million to MFIC on a net basis in the September quarter, reducing MFIC's investment by nearly half.
As part of the sale transaction, Merx is also expected to receive additional consideration of approximately $30 million anticipated by year-end 2025 or early 2026. Both the insurance recoveries and the sales transaction combined are expected to result in a positive impact to NAV in the high-single digit per share range relative to its June 30, 2025 carrying value. To facilitate the Merx sales transaction, MFIC temporarily provided additional capital to Merx. As a result, MFIC has incurred incremental interest expense associated with this temporary capital infusion in the September quarter of approximately $1 million or $0.01 per share. On a pro forma basis, adjusting Merx's $185 million fair value as of the end of June for this $90 million net paydown, MFIC's investment in Merx will total approximately $95 million, representing approximately 2.8% of the total portfolio, down from 5.6% at the end of June.
Of the $90 million net repayment, approximately $25 million will be used to reduce the Merx' revolver and the remaining $65 million applied to our equity investment in Merx. As mentioned, MFIC will be receiving additional consideration totaling approximately $30 million by the end of 2025 or in early 2026, which will further reduce MFIC's exposure to Merx. Let me now walk you through what remains at Merx. MFIC's remaining investment in Merx consists of four aircraft, plus the value associated with Merx's servicing platform. As a reminder, Merx earns income through its servicing activities for Navigator, Apollo's dedicated aircraft leasing fund. Navigator is actively pursuing the sale of its fleet. Merx receives a servicing fee on each aircraft sale. Pro forma for the sale transaction, the servicing business represents approximately 40% of the total value. Taking a step back, this reduction in our exposure to Merx lowers MFIC's exposure to an under-yielding asset and provides us with capital to deploy into first lien middle market loans sourced by MidCap Financial, which we believe will deliver a higher and more attractive risk-adjusted return.
At the current base rates, we estimate that reinvesting $90 million, comprising of $25 million from Merx's revolver and $65 million from equity, is expected to generate approximately $0.06 per share in additional annual net investment income, enhancing long-term value for our shareholders. The remaining value of Merx, once realized and reinvested, will generate another approximate $0.06 per share in additional net investment income at current base rates. Turning to our dividend. On August 5, 2025, our Board of Directors declared a quarterly dividend of $0.38 per share for shareholders of record as of September 9, 2025, payable on September 25, 2025. As mentioned, we intend to redeploy the capital repaid from Merx, which should be accretive to MFIC's earnings power and strengthen our dividend coverage going forward. With that, I will now turn the call over to Ted.
Thank you, Tanner. Good morning, everyone. Let's start with the market environment. The quarter began with increased volatility due to the U.S. presidential administration's announcement of aggressive tariffs. This announcement temporarily slowed down activity, leading to a pause in new issuance. However, as the quarter continued, market sentiment improved significantly, and issuance activity increased, especially after a pause on tariffs was announced and several trade deals were established. Despite the turbulent start, most major asset classes achieved positive returns. We're also noticing an uptick in sponsor M&A activity. The U.S. economy remains stable, with high but decreasing inflation in spite of the tariffs. The labor market remains resilient with stable unemployment levels. As a result, the Federal Reserve has maintained its policy rate, waiting for more clarity on the economic effects of changing trade and fiscal policies.
We believe the core middle market, which we focus on, does not directly compete with the broadly syndicated loan market or the high-yield bond market. Even with muted M&A activity, many of our borrowers still require add-on financing, which is a vital source of deal flow. Next, I will review our second quarter investment activities and provide details about our investment portfolio. As a reminder, MFIC focuses on lending to the core middle market on a first lien senior secured basis. We believe this part of the direct lending market offers attractive risk-adjusted yields and is less competitive than other segments. MidCap Financial's strong presence in the middle market, along with its extensive sponsor relationships, allows us to see a broad range of appealing investment opportunities. Consequently, we believe the risk-adjusted returns available to firms like MidCap Financial and MFIC are among the most attractive in the direct lending market across various cycles.
In the June quarter, we continued to invest in assets we consider to have strong credit attributes. MFIC's new commitments for the June quarter totaled $262 million, with a weighted average spread of 538 basis points across 29 different companies. Excluding two outlier commitments, the weighted average spread was 526 basis points. We also saw a slight decrease in net leverage on new commitments, with a weighted average of 4x in the June quarter, down from 4.2x in the previous quarter. Our fee structure, being one of the lowest among listed BDCs, enables us to generate attractive ROEs at current spreads. Gross fundings, excluding revolvers, reached $254 million, while sales and repayments, excluding revolvers and Merx, totaled $108 million. Net revolver fundings were around $7 million, and we received an $8.5 million paydown for Merx. Overall, net fundings amounted to $144 million. Regarding our investment portfolio, at the end of June, it had a fair value of $3.33 billion and was invested in 249 companies across 51 industries.
We transitioned our industry classification from the Moody's system to the Global Industry Classification System in the March quarter. Direct origination and other investments accounted for 92% of the total portfolio, a figure we expect to rise next quarter due to the Merx paydown. Non-directly originated loans from closed-end funds constituted only 2% of the portfolio at the end of June. Merx represented 5.6% of the total portfolio then, but has since decreased to about 2.8% following the post quarter-end paydown. All figures discussed are based on fair value. Specifically, within the direct origination portfolio, 99% was first lien and 90% was backed by financial sponsors, again on a fair value basis. The average funded position was $13.1 million, with a median EBITDA of around $50 million. About 96% of the positions had one or more financial covenants on a cost basis. Covenant quality distinguishes the core middle market since nearly all our deals have at least one covenant, unlike larger deals that typically lack them.
The weighted average yield at cost of our direct origination portfolio was 10.5% for the June quarter, down from 10.7% for the March quarter. The weighted average spread on the directly originated corporate lending portfolio was 568 basis points at the end of June, a slight decrease from March. Since the initial tariff announcements this year, we have been evaluating the potential impacts across our portfolio on a company-by-company basis, and this review is ongoing. We primarily lend to U.S. service-oriented businesses and are cautious with companies heavily reliant on imports and exports. Our underwriting process always considers downside scenarios, which we have enhanced in light of the tariffs. MidCap Financial leads and serves as the administrative agent on the majority of MFIC's direct lending transactions. At the end of June, either MidCap Financial or Apollo acted as the agent on 72% of MFIC's direct lending portfolio at fair value.
This position allows us to maintain active communication with our borrowers and enhances our information flow, particularly in volatile times. Being the agent enables us to identify and address issues early. Our underwriting of MidCap Financial source loans has proven effective. Since mid-2016, when we began utilizing our co-investment approach, our annualized net realized and unrealized loss rate on loans sourced by MidCap Financial has been about 6 basis points. This performance data indicates strong strategy effectiveness. We noticed a slight rise in the net leverage or debt-to-EBITDA of our borrowers, with a weighted average of 5.32x at the end of June, up from 5.25x at the end of March. This small increase was due to a few existing positions and was partially offset by new investments, which had a net leverage of 4.0x. By the end of June, the weighted average interest coverage ratio remained stable at 2.1x, similar to last quarter.
These metrics are generally based on financial data as of March 2025. We consider the stable level of revolver utilization as another indicator of the health of our portfolio companies. As of the end of June, the percentage of our leveraged lending revolver commitments that were drawn remained relatively unchanged from the previous quarter. A consistent revolver utilization rate suggests financial stability. During the quarter, we moved three positions back to accrual status after successfully restructuring two of them, showcasing our ability to handle credit challenges. We also placed three first lien positions on nonaccrual status due to specific company issues: New Era, Amplity, and Compass Health. Investments in nonaccrual status comprised 2% of the portfolio at fair value, up from 0.9% last quarter, although the number of companies in nonaccrual status decreased by one. PIK income accounted for 6.4% of total investment income for the June quarter. With that, I will now hand the call over to Kenny to discuss our financial results in detail.
Thank you, Ted, and good morning, everyone. I'm honored to join MFIC as Chief Financial Officer and I'm excited to be part of the team and look forward to connecting with each of you soon. Since stepping into the role a little over a month ago, I've been working closely with Greg to ensure a seamless transition. I will now review our second quarter results in greater detail. Total investment income for the June quarter was approximately $81.3 million, up $2.6 million or 3.2% compared to the prior quarter. The increase was primarily attributable to higher interest income due to growth in the portfolio, as well as higher prepayment income, partially offset by a decline in fee income and the impact from an increase in investments on nonaccrual status. Prepayment income was approximately $1.2 million, up from $0.6 million last quarter. Fee income was approximately $220,000, down from approximately $330,000 last quarter.
Dividend income was approximately $200,000, essentially flat quarter-over-quarter. The weighted average yield at cost of our directly originated lending portfolio was 10.5% on average for the June quarter, down from 10.7% last quarter. Net expenses for the quarter were $44.9 million, up from $44.4 million last quarter. This increase was driven by higher interest expenses and G&A expenses, partially offset by a lower incentive fee. Interest expense rose due to a higher amount of debt outstanding due to growth in the portfolio. Other G&A expenses totaled $1.6 million for the quarter, up from $1.2 million in the March quarter. As discussed on the last quarter's call, during the March quarter, we received a reimbursement from Merx for certain expenses previously incurred by MFIC on Merx's behalf. This was recorded as a contra expense. As mentioned on last quarter's call, we expect other G&A to average around $1.6 million per quarter.
This amount is in addition to administrative service expenses, which are around $1 million per quarter. MFIC's stated incentive fee rate is 17.5% and is subject to a total return hurdle with a rolling 12-quarter look back. Given the total return hurdle feature and the net loss incurred during the look-back period, MFIC's incentive fee for the June quarter was $3.9 million or 9.6% of pre-incentive fee NII. For the June quarter, net investment income per share was $0.39 and GAAP earnings per share or net income per share was $0.19. These results correspond to an annualized ROE based on net investment income of 10.5% and an annualized ROE based on net income of 5.2%. Results for the quarter include a net loss of approximately $18.3 million or $0.20 per share, primarily due to losses on a handful of investments as previously mentioned. Turning to the balance sheet. At the end of June, the portfolio had a fair value of $3.33 billion, total principal debt outstanding of $2.05 billion, and total net assets stood at $1.3 billion or $0.1475 per share.
Net leverage at the end of the quarter was 1.44x. Average net leverage for the June quarter was 1.35x, reflecting the timing of investment activity. This compares to average net leverage of 1.21x for the March quarter. Given our visibility to the anticipated Merx paydown, we adjusted our pace of deployment in the June quarter accordingly. On a pro forma basis, including the approximate $90 million net repayment from Merx, net leverage at the end of June would have been around 1.37x. Gross fundings for the quarter, excluding revolvers, totaled $254 million. Net fundings for the quarter were $144 million. Turning to our capital base. We currently intend to reprice and upsize our first CLO, MFIC Bethesda CLO 1, in the fall. CLO spreads have tightened considerably since our first CLO priced in September 2023. Of course, the timing and pricing of any future CLO transaction is subject to prevailing market conditions. Lastly, we were pleased that in June, Kroll affirmed MFIC's investment-grade rating of BBB- with a positive outlook. This concludes our prepared remarks. Operator, please open the call to questions.
Questions and answers
Congratulations on Merx and the recent appointments. I wanted to revisit Merx as there was a lot of information. Will the pro forma include 40% of the servicing business and the remaining equity? Does this mean that the rest will essentially remain as it is now, with a leveraged aircraft business and part of the servicing business, and that this will continue as a strategic portfolio position?
So thanks, Fin. So that's generally correct. Let me modify how you described it. The 40% is correct; of the remaining roughly $95 million of exposure, 40% is in the servicing business. The slight modification I would make to how you described it is that it is not a strategic investment. We are not taking on any more servicing contracts there. And the 40% represents previously signed contracts, in particular the servicing of our drawdown commingled fund Navigator. Those revenues will come in over time. So, it's not a strategic business but is related to the servicing of planes. So there's no balance sheet risk for Merx. Merx will be paid a portion of the rent that is paid to Navigator. And then, when we sell transactions, Merx will benefit from a payment with regards to the amount of the planes that are sold. So not strategic, but it is related to the servicing.
And again, does that run off with the current Navigator fund family? Or is that complex growing? And is that service business expected to grow?
No. So, that good question and helpful clarification. That will run off over time, as we sell the remaining planes that are in Navigator. That is not expected to grow.
Okay. Just a follow-up on co-investment. It looks like you did sort of back-to-back orders here. I know there's regulatory relief, but seeing what that sort of plain English means for MidCap and if more Apollo funds are straightforwardly entitled to MidCap origination?
So generally speaking, the movement in the order has been positive. There were COVID-related modifications that were enhanced, some of which became permanent. And generally speaking, the direction has been one where it has allowed for greater flexibility. In terms of the MidCap origination, the availability of the origination is the same as it always was. But the modification in the rules and the clarification of some of the rules has generally meant a greater flexibility for balance sheets across Apollo to participate in transactions. For instance, to get a little bit more granular, some of the new rulemaking has enabled funds to come in even if they didn't participate in the original transaction, and so, generally speaking, given more flexibility. But in principle, the dynamic is the same as it was, wherein the origination is available more broadly. These rules just add to the flexibility.
I was just hoping you could talk a little bit about investing expectations for the second half of the year, what you're seeing, how busy the pipeline is, etc.
Yes. Thanks for the question, Arren. Just taking it from the beginning of the year, there were high expectations for a pretty robust M&A market. And then, in the first half, what kind of played out was uncertainty around tariffs and what type of legislation was going to get passed. I would say by the end of April, we started to see a little more clarity around all of those things, and kind of market sentiment started to get a little more bullish. If you look at most major markets, they're up for the year. And what we've seen over the last several months is that the M&A pipeline has continued to build. It's not always one-to-one in terms of the deals that we're screening and taking to investment committee that actually get transacted, but just the number of deals that we're seeing. Sponsors are very active. There's been reports out there about how the sponsors have a longer duration of their portfolio.
They've been holding on to companies longer. There's still a lot of dry powder that needs to go to work. There's a lot of liquidity in the private credit markets. And so, we see all of that coming together to be a pretty active second half. And to the extent that, that doesn't play out for whatever reason, with the power of incumbency that we have, we think there'll be plenty of activities to deploy. We've talked about in the past, MidCap has a very large origination business, and MFIC only needs a small percentage of that to meet its quarterly and annual origination needs. And so, within the broader market, but also within the mid-cap and Apollo ecosystem, we see plenty of activity and opportunities to deploy.
Great. I appreciate that. And then, the other question was around leverage. It ticked up this quarter to 1.44 net. And I just want to know where you're expecting that to trend? And is that a bit higher than what you like? Or is that in the same ballpark that you're okay with?
Yes, I think we should start with new deployments. We're deploying at a rate of 4x to 4.5x, with 4x this quarter and 4.2x last quarter. This is the range we are comfortable with in the market for new deployments. Most of our deals involve middle market strategies where borrowers are looking to acquire. You will notice sponsors buying at 4x, and our expectation is that as they engage in additional transactions, there will be times when these companies increase their leverage for acquisitions, but will eventually reduce it again over time. We recognize this dynamic profile. Regarding the weighted average figures for our overall portfolio, we feel good about those numbers. At the fund level, our net leverage ratio is at 1.43x, and we anticipated a Merx transaction, which is why we were deploying ahead of that to capitalize on good market opportunities.
And I think to Ted's point, if I could add to that, Arren, quickly, we assigned a non-zero probability of getting the Merx transaction done, so we came in a little hot. For the avoidance of doubt, it is our intention to operate in and around the bottom end of our range. And you should expect us to do that going forward. And then, importantly, as we weigh the back half of the year, we're very hopeful, as Ted alluded to, that we will see the pickup in M&A, and that will create some new credit creation opportunities and create a little bit more resiliency and stability to spreads. But we, as we always are, will be very deliberate and take account of the risk and what the market is showing us in terms of opportunities as we redeploy the Merx proceeds that we received.
Just one on Merx. And to clarify, it sounds like after all the announced sales transactions, there's going to be four aircraft remaining in addition to the services platform. Is that the four aircraft remaining related to one of the two securitizations you had left? Or I just want to clarify how many of the securitizations will be left to wind down?
So thanks, Ken. At this juncture, the securitizations have been completely paid off. And so these are four planes that we own on balance sheet at Merx without any leverage.
Okay. Great. And then, just another point here. In terms of the insurer payments at this point, is there anything remaining there?
So thanks, Ken. Good question. And without going into excruciating detail, the dynamics of the court process in the U.K. are such that the court fines with respect to the insurance claims. And then, there's a subsequent trial that is needed to adjudicate the interest, the cost of carry, if you will, as well as the recovery of legal. And as is often the case in legal processes irrespective of whether you're in the U.S. or the U.K., there are settlements in advance of trials or one can settle at any given time. And so, we have conservatively estimated what those remaining proceeds will be. But at this juncture, given that we have settled on the primary claims and we've settled a portion of those auxiliary claims, if you will, forgive the term, it would only be expected to be relatively modest in total size. The vast majority of our claims and potential inflows from our Russia exposures are largely already received.
Got you. Great. And just one follow-up, if I may, just on the new nonaccruals in the quarter there. Any commonalities that you're seeing there? And how many were either indirectly or directly related to tariffs perhaps?
Yes, I believe there are various types of businesses experiencing cost pressures across the board due to factors such as interest rates and labor. However, in most restructuring cases, there isn't a single cause; rather, it's a combination of different elements that lead to restructuring. One aspect we are monitoring is the balance sheets created in a lower interest rate environment, particularly for companies that have strong operations but weak balance sheets. This has been a significant factor, likely our most important one.
Just on the spread environment and the opportunities going into the rest of the year, I think it was Ted said, right, the weighted average portfolio yield in this presentation was 5.68%. The new deployments, excluding a couple of outliers, were 5.26%. So there's about a 40 basis point gap between what's coming on versus what's in the portfolio. So should we continue to expect spread compression in the portfolio? Even if deployment spreads remain stable, should we expect spread compression? Or is that kind of a mix thing, right? Because it's not necessarily like-for-like on the type of assets that have a 5.75% spread versus the type of assets that are coming on a 5.25% spread. I mean, what's kind of the outlook there?
Yes, thanks, Robert. The math is quite straightforward. Our existing portfolio, developed over the past few years, particularly during favorable periods in '22 and '23, is currently at 5.68%. The primary market is in the low-5s and often dipping into the 4s. When we analyze the spread from the risks we've taken this quarter, we've benefited from our established position by deploying capital into existing portfolio companies at slightly higher rates than the primary market. Therefore, as we see our rate at 5.68% and the primary market around 5% or lower, a decline is expected. We've observed that the pace of repricing has slowed, partly because much of it has already occurred. Looking ahead to the latter half of the year, despite consistent underperformance in the market in generating new M&A and credit creation, we remain optimistic that things will improve, bringing some stability to the spread environment.
It's important to note that as our liabilities have improved, we've had success with CLO Bethesda 2 earlier this year and are optimistic about the spreads on Bethesda 1. The current levels still allow us to generate strong returns, bolstered by how we've adjusted our liabilities to maintain net interest margin or counteract the impacts of the spread environment. While we anticipate some reduction, with better management of liabilities and lower capital costs, we are confident in our ability to achieve solid risk-adjusted returns for our shareholders, especially considering current base rates.
I understand. The leverage drop for new deployments was down to 4 this quarter, which is significantly lower than your overall portfolio average. You've mentioned that the M&A pipeline is starting to improve. Do you anticipate that the leverage request will increase in the second half of this year or into next year? Four turns for what you're acquiring is notably below the portfolio average. It relates to the risk-reward balance. What are your thoughts on whether market activity will recover at a higher leverage request from sponsors? Additionally, how do you view the pricing for that?
Yes. As we look ahead, I want to acknowledge that several factors could ultimately affect our outlook. However, I believe that right now, with a bit more clarity as tariff uncertainties have decreased and there's more visibility from legislation and the tax bill, coupled with the need to utilize our M&A capital, the market remains favorable for borrowers. This is also influenced by the current M&A environment, where there’s a significant supply of capital resulting in tighter spreads and overall favorable terms for borrowers. Looking towards the latter half of the year and into 2026, we expect to see borrower-friendly requests increase, and it's likely that leverage levels will rise. This expectation is paired with our hope for an increase in M&A volumes, which would help ease some of the current market pressures. Additionally, comparing our business to peers, we typically have a stronger focus on first lien or stretch senior positions and are willing to accept lower spreads in exchange for lower leverage. However, to answer your specific question, I believe that the figure of four might be on the low side, and generally, if M&A volumes don’t pick up—or even if they do—given the available capital and what sponsors require to achieve their internal rates of return, it wouldn’t be surprising to see leverage increase in the latter half of the year.
Got it. And one just final sort of clarification. To the point on the net leverage at the end of the quarter, I mean, you basically already redeployed the capital you're getting back from Merx at the end of Q2, right? So there's not going to be a lag of you getting a chunk of cash coming in. It's already been redeployed into earning assets. Is that right?
Yes, that's generally correct. However, I want to emphasize that there are many factors to consider as we approach year-end. Coming out at 1.44 was slightly higher than expected, but it's not a significant concern. That figure can vary quite a bit, especially when funding occurs, and is within our target range. As we've indicated previously, we usually aim for the lower end of that range. A portion of the $90 million has already been invested. That said, it’s not unusual to see some fluctuations in that 1.44 figure at the end of the quarter due to the variety of processes we are managing and the timing of funding. There’s no need to be overly exact or prescriptive in our management approach.
And Robert, one just quick data point would be, if you include the $90 million net repayment from Merx, net leverage at the end of June would have been 1.37x. So to Tanner's point, kind of 1.4 plus or minus is where we're trying to be.
Many of the questions have already been addressed, but I wanted to briefly discuss repayment expectations, particularly outside of Merx. You've provided a clear outline of what you anticipate for the third quarter and later this year, extending into early 2026. Apart from Merx, if there is an increase in M&A activity, do you anticipate a corresponding rise in repayments? Is there anything else you can share regarding visibility in the near term across the portfolio?
Yes, we don't have any major specific deals planned for repayment. There are a few companies we are discussing with the sponsor. Most of our portfolio is below the threshold for term loan B, so financing at that level doesn't happen often. Regarding M&A, if activity increases, we will have opportunities to deploy capital, but some deals may be lost to us. Overall, we believe we can maintain our target leverage levels while staying deployed.
Okay. And then, as I think about the rough math you gave in terms of expectations around additional earnings potential as you rotate that Merx investment of about $0.06 a share annually in NII, are you thinking of that as being essentially an offset to any base rate pressure or declining base rates that we might see? And in terms of what that means for dividend coverage, are you feeling good about that $0.38 and fully covering that through NII, given these portfolio developments?
Sure, I would refine your point, Melissa. We don't focus on it in a specific way, but you've highlighted key factors. Generally, lower base rates do put pressure on dividends. One aspect we can consider is the redeployment of Merx. There are many elements at play. To directly address your question, it largely hinges on the extent of the base rate cuts. We feel optimistic about the current path, especially with the $0.06 we estimate to come from the redeployment of Merx. However, there is a threshold, and if the cuts are much deeper, our calculations and outlook would change. Nonetheless, with the current trend, we are confident in our position regarding the dividend.
Just a clarification on the impact of the Merx transactions. The 10-Q says they should result in a positive impact to NAV in the high-single digit per share range. By high-single digit per share, do you mean $0.06 to $0.09 or something else?
Yes, $0.06 to $0.09.
Thank you. And ladies and gentlemen, that does conclude today's conference. We appreciate your participation. Have a wonderful day.