管理層發言
Good morning and welcome to the Earnings Conference Call for the period ending September 30, 2024 for MidCap Financial Investment Corporation. At this time, all participants have been placed in a listen-only mode and the call will be open for your questions and answers session following the speakers' prepared remarks. I would now like to turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Please go ahead.
Thank you, operator, and thank you everyone for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Greg Hunt, Chief Financial Officer. Our Executive Chairman, Howard Widra, is available for the Q&A portion of today's call. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available on 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 our call over to Tanner Powell, MFIC's Chief Executive Officer.
Thank you, Elizabeth. Good morning, everyone, and thank you for joining MFIC's call. I'll start today's call by discussing the successful completion of our mergers with Apollo Senior Floating Rate Fund, or AFT, and Apollo Tactical Income Fund, or AIF, listed closed-end funds previously managed by Apollo. I will then provide an overview of MFIC's third quarter results and share our perspective on the current market environment. Ted will discuss our investment activity and provide an update on the investment portfolio, including the progress we've made rotating certain of the assets acquired in the mergers, results, and capital position in more detail. Let me start with a brief update on the closing of our mergers, which we view as a significant and transformational event. As I mentioned, MFIC successfully closed its mergers with AFT and AIF during the quarter. As we've said before, we believe these mergers offer substantial financial benefits.
We are excited about the long-term benefits that we believe this transaction will create. More importantly, we expect these mergers will benefit all shareholders. As a result of the mergers, MFIC's net assets increased by over 40%, generating significant investment capacity. Last quarter, we onboarded approximately 600 million of investments from the closed-end funds, with approximately one-third in directly originated loans, which are considered to be core and intend to retain. The remaining two-thirds were non-directly originated loans consisting of broadly syndicated loans, high-yield loans, and other assets. We started rotating the non-directly originated assets when the mergers closed, prioritizing the lower-yielding assets. The non-directly originated assets are progressing well, and we are on track to complete these sales over the next few quarters. We are focused on prudently deploying capital to generate funds for these sales and additional investment capacity created from the mergers.
Based on our target leverage ratio of 1.4x and the remaining capital to reposition, we have approximately 600 million of capital to deploy into directly originated middle-market loans. We are fortunate to have access to all the necessary origination to deploy this capital, given the significant volume of commitments originated by MidCap Financial. Over the past four quarters, MidCap has closed 18.7 billion of commitments, including 5.1 billion in the third quarter. That said, we are committed to deploying this capital in a steady and measured manner while maintaining discipline in terms of asset mix and market vintage exposure. We have a clear and straightforward plan to gradually increase leverage over the coming quarters, and we believe MFIC's future results are well positioned to benefit as we capitalize on this growth. We expect to be able to reach our target leverage in the next couple of quarters.
Turning to our results for the September quarter, please note that the mergers closed on July 22. Consequently, results for the quarter include approximately 10 weeks of combined company revenue and income. MFIC's net investment income per share for the September quarter was $0.44, which corresponds to an annualized return on equity, or ROE, of 11.5%, and reflects a partial incentive fee. Results for the quarter reflect strong recurring interest income from our predominantly floating-rate portfolio. We recorded a modest net loss on our portfolio. GAAP EPS for the quarter was $0.31. NAV per share was $15.10 at the end of September, down $0.08, or approximately 0.5% from the end of June, excluding the impact of the one-time $0.20 per share special cash distribution paid during the quarter in connection with the mergers. These mergers were a deleveraging event for MFIC. And at the end of September, MFIC's net leverage was 1.16 compared to 1.45 at the end of June.
The current market environment continues to benefit from a solid economic backdrop. Economic growth continues at a healthy rate, and we've witnessed continued strength in the consumer, strong wage growth, high stock prices, and strong credit markets. In terms of credit markets, we've seen an increase in activity levels. The volume in the year-to-date period has been more concentrated in opportunistic refinancings and repricings, lowering spreads, pushing out maturities, and improving capital structures. More recently, we have seen some pickup in new money transactions, particularly sponsor M&A, following the September rate cuts, and are cautiously optimistic that activity levels will increase in the back half of Q4 and into 2025. In addition to rate cuts, we note the dynamics with financial sponsors seeking liquidity events for fundraising and the pressure to return capital as hold periods have continued to stretch, along with significant dry powder, may also serve to increase M&A volumes into 2025.
As you know, MFIC is squarely focused on investing in first lien loans to middle-market companies sourced by MidCap Financial, a leading middle-market lender with one of the largest direct lending teams in the U.S., consisting of close to 200 investment professionals. MidCap Financial, founded in 2009, has a long track record that includes closing on approximately 124 billion of lending commitments since 2013. This origination track record provides us with a substantial data set of middle-market company financial information across all industries, making MidCap Financial one of the most informed and experienced middle-market lenders in the market. Apollo Global's affiliation with MidCap Financial provides MFIC and the broader Apollo platform with significant deal flow. In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high yield market.
Turning to our dividend, during the September quarter, in addition to our regular quarterly dividend of $0.38, we paid a special one-time $0.20 dividend to shareholders in connection with the mergers. On November 4, 2024, our Board declared a quarterly dividend of $0.38 per share for shareholders of record as of December 10, 2024, payable on December 26, 2024. With that, I will now turn the call over to Ted.
Thank you, Tanner. Good morning, everyone. I'll spend a few minutes reviewing our third quarter investment activity and then provide details about our portfolio. In the September quarter, we started actively deploying the capital from the mergers. MFIC's new commitments in the September quarter totaled $371 million, up 30% from the prior quarter, and were across 27 different borrowers for an average new commitment of $13.7 million. All new commitments were first lien. The weighted average spread on our new commitments in the September quarter was 533 basis points. Net leverage on new commitments was 4.7 times. For the quarter, gross funding totaled $288 million, excluding revolvers and assets from the mergers. Net revolver fundings were $13 million, and we received a $7.5 million paydown from Merx. In total, net fundings for the quarter totaled $222 million, excluding assets from the mergers.
As mentioned on last quarter's call, we onboarded $596 million in assets from the closed-end funds, of which $207 million, or 35%, were directly originated loans, and $389 million, or 65%, were non-directly originated loans. We sold, or were repaid, on $234 million of these assets, including two positions that were on non-accrual status. In aggregate, net funding for the quarter totaled $585 million, including assets from the mergers. With respect to the non-directly originated loans acquired in the mergers, these assets are being managed throughout the Apollo platform, which is facilitating both the credit monitoring and the sales process. Turning to our investment portfolio, at the end of September, our portfolio had a fair value of $3.03 billion and was invested in 250 companies across 26 industries. Direct origination and other, including the directly originated loans acquired from the closed-end funds, represent 88% of the total portfolio.
The non-directly originated loans acquired from the closed-end funds represented 6%, and Merx accounted for approximately 6% of the total portfolio on a fair value basis. As you can see on Page 6 in the earnings supplement, we've added a row to break out the non-directly originated assets that we acquired from the mergers. Taking into account the remaining non-directly originated loans that we intend to sell, plus the additional investment capacity based on a target leverage of 1.4 times, we have approximately $600 million of capital to deploy into directly originated middle-market loans. We continue to monetize the non-directly originated assets, although the pace may vary as we remain committed to deploying the capital in a steady and measured manner. At the end of September, 98% of our directly originated portfolio was first lien at fair value. Approximately 99% of our direct origination portfolio on a cost basis had one or more financial covenants, and 91% of our direct origination portfolio is backed by financial sponsors with whom we have long-standing relationships.
The average funded direct origination debt position was $13 million. The weighted average yield at cost of our directly originated lending portfolio was 11.6% on average for the September quarter, down from 12% last quarter. The decline in the weighted average yield was primarily due to the decline in base rates, and to a lesser extent, the decline in the spread on assets. At the end of September, the weighted average spread on the directly originated corporate lending portfolio was 577 basis points, down 24 basis points compared to the end of June. The decline in the yield on the direct origination portfolio was not materially impacted by the closed-end fund assets. In terms of credit quality, we believe the overall credit quality of MFIC's direct origination portfolio remains healthy. The financial sponsors and management teams of our borrowers have been effectively managing their liquidity.
In a handful of more challenged situations, we are seeing good financial sponsor support. We have not seen a significant increase in amendment requests related to covenants or liquidity, and the requests we have seen are generally accompanied by equity infusions. At the end of September, the weighted average net leverage of our direct origination portfolio increased slightly to 4.3 times from 4.38 times last quarter. At the end of September, the weighted average interest coverage ratio was 1.9 times, flat compared to last quarter. The median EBITDA of MFIC's origination portfolio companies was approximately $52 million. We believe the stable level of revolver utilization we are seeing from our portfolio companies is also an indicator of portfolio health. At the end of September, approximately 31% of our leverage lending revolver commitments were drawn, consistent quarter-over-quarter. We believe a steady revolver utilization rate can indicate greater financial stability.
Our underwriting on mid-cap 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, our annualized net realized and unrealized loss rate is around four basis points on loans sourced by MidCap Financial. This performance data shows how well the strategy has been executed. No investments were added to non-accrual status during the quarter. We exited two investments from the acquired closed-end fund portfolios that were on non-accrual status. At the end of September, investments on non-accrual were 1.8% of the total portfolio at fair value, or 2.3% at cost. When assessing a BDC's credit quality, we think it is important to look at investments on non-accrual status in combination with the BDC's level of PIK income. We believe allowing borrowers to PIK can make non-accrual levels appear artificially low as the financial stress of borrowers is not fully reflected in the non-accrual statistics and potentially masking underlying issues.
We do recognize that it makes sense to allow borrowers to opt to PIK in certain circumstances. MFIC's PIK income remains low, representing approximately 3.6% of total investment income from the quarter, well below the BDC average. Moving to Merx, as we've discussed in the past, we're focused on reducing our investment in our aircraft leasing and servicing business. While we don't expect paydowns to occur evenly, we believe aircraft sales and servicing income should allow for the paydown of third-party debt and MFIC's investment in Merx over time. During the September quarter, Merx paid $9.1 million, including $1.6 million of interest and a $7.5 million return of capital, which we highlighted on our last earnings call. At the end of September, MFIC's investment in Merx totaled $183 million, representing 6% of the total portfolio at fair value. The blended yield across our total investment in Merx was approximately 3.3% at fair value, and the continued rotation of capital from Merx into directly originating corporate loans should have a beneficial impact on MFIC's income.
We expect MFIC's exposure to Merx to decline in the coming quarters, driven by additional paydowns and the continued growth in the investment portfolio as we deploy the capital acquired in the mergers. We believe the current environment for selling aircraft is very attractive due to limited availability and strong demand, and we expect to make meaningful progress reducing our exposure in the near future. With that, I will now turn the call over to Greg to discuss our financial results in detail.
Thank you, Ted, and good morning, everyone. Beginning with our results, as previously mentioned, the mergers closed on July 22nd. Consequently, results for the September quarter include approximately 10 weeks of combined company revenue and income. Net investment income per share for the September quarter was $0.44, and GAAP EPS was $0.31. This reflects a $0.13 per share net loss. Results for the quarter correspond to an annualized return on equity, or ROE, based on net investment income of 11.5% and annualized ROE based on net income of 8.1%. I will now discuss several factors that impacted MFIC's results for the September quarter. First, as previously noted, the mergers were a deleveraging event for MFIC. Accordingly, results for the September quarter reflect below target leverage as we sold certain assets acquired in the mergers and deployed capital into directly originated loans. We ended the September quarter with a net leverage of 1.16 times, below our target.
As Tanner mentioned, we intend to prudently increase leverage over the coming quarters, and we see no impediment to doing so. Second, prepayment and fee income were below normal levels. For the September quarter, prepayment income was approximately $900,000, down from $3.2 million in the prior quarter. Fee income was approximately $1 million, up slightly from last quarter. Third, MFIC's base management fee, $4.4 million, was unchanged from the previous quarter. Our base fee is calculated as $1.75 on net assets as of the beginning of the quarter. Consequently, the increase in net assets from the merger did not impact the management fee in the September quarter. In the December quarter, the base management fee would be approximately $6.2 million. Fourth, results for the quarter include a net loss of $11.4 million, or $0.13 per share. MFIC's incentive fee for the quarter was approximately $4.6 million.
We are focused on deploying the capital from the mergers and repositioning the remaining non-directly originated loans, while increasing MFIC's earnings power. Taking all of this into account, at the end of September, MFIC's NAV per share was $15.10, down $0.08 quarter-over-quarter for approximately 0.5%, excluding the one-time $0.20 per share special dividend paid in connection with the mergers. The $0.08 decline was driven by a $0.13 per share net loss, partially offset by net income in excess of our regular dividend. Moving to capital, MFIC issued 28.5 million shares at NAV during the quarter as part of the consideration for the merger. As a result, MFIC now has approximately 93.8 million shares outstanding. In accordance with IAS 33, MFIC's NII and EPS denominators were based on the weighted average shares outstanding during the quarter. Since 28.5 million shares were issued approximately three weeks into the quarter, the EPS denominator for the September quarter was approximately 87.3 million.
In terms of recent debt capital activity, as previously disclosed, in October we were pleased to extend the maturity of our Senior Secured Revolving Credit Facility by approximately 18 months, pushing the maturity to October 2029. We maintained existing pricing and terms. Total lender commitments under the facility were increased by $110 million to $1.6 billion, with the number of lenders increasing to 18. We announced MFIC's merger with the closed-end funds. We highlighted improved access to capital as a key potential benefit, and we are pleased to see this benefit materialize. We successfully added a new lender to the facility who was previously a credit provider to the closed-end funds. I'd like to review the accounting aspects of the mergers. Mergers are being accounted for in accordance with the Asset Acquisition Method of Accounting under ASC 805-AFT. As a reminder, AFT and AIF merged with and into MFIC in two stock-for-stock transactions, with shares being exchanged on a NAV-for-NAV basis.
The exchange ratios for the mergers were based on each fund's NAV per share as of July 19, 2024. Accordingly, MFIC issued 0.9547 shares of its common stock for each AFT share and 0.9441 shares of its common stock for each AIF share. In total, MFIC issued 28.5 million shares of MFIC to the closed-end funds, resulting in 93.8 million MFIC outstanding shares following the merger. At the time of the merger closing, MFIC was trading at a slight discount to its current NAV. In connection with the mergers, an affiliate of Apollo paid a $0.25 per share special cash payment to the closed-end fund shareholders for a total payment of $7.5 million. In accordance with accounting guidance, a portion of this cash payment was due to the merger consideration, which resulted in the fair value of the consideration paid to both closed-end funds being equal to the fair value of the acquired assets, resulting in no purchase discount or premium.
As a result, there is no impact on the cost basis of the acquired assets, and therefore no impact on our financial statements. The fair value of the closed-end assets at close became MFIC's cost basis without any adjustments. This concludes our prepared remarks. Please open the call to questions.
分析師問答
Certainly. We will take our first question from Kenneth Lee with RBC Capital Partners Markets. Please go ahead.
Hey, good morning, and thanks for taking my question. Just one on the fee income there. Could you just remind us again if MFIC is more levered to prepayments for fee income, and therefore as prepayments pick up, you should see a little bit more of a pickup there? Thanks.
Thanks, Ken, and good morning. The loan asset class doesn't typically have a lot of call protection, and in particular in markets like this, you start to see that become less robust. It's rarely ever more than 102 or 101. Our practice is to take OID and amortize it over time, and so prepayments will create a pull forward of that OID if you will, if the loan is redeemed prior to maturity. But outside of, and the one exception within our portfolio is in our Life Sciences vertical, where we typically will have call protection. So, notwithstanding that, there is a dynamic where, yes, there is a pickup when you do see prepayments, but outside of Life Sciences, it's not too dramatic on any given loan.
Got you. Very helpful there. And just one follow-up, if I may, in terms of the ongoing rotation for the non-directly originated assets, you mentioned during the prepared remarks that the pace could vary over the next few quarters. Any updated outlook in terms of what factors could drive the pace there? Is it based on macro or pricing or rates? Just any kind of color on that?
Yes, sure, Ken. It's a little bit of all of those things. We want to manage our deployment appropriately and we don't want to over-index to one particular quarter in terms of vintage. As we noted, the mergers were a deleveraging event. And so as we look to redeploy capital, build back to our target leverage and thus full earnings capacity, we want to balance the market risk of the closed-end funds with redeployment capacity as well as just overall exposure. This is generally the overall sentiment. When we started to sell these assets, we initially focused on the lowest-yielding assets, so we were able to move those quickly and efficiently. What remains in the book now has better earnings capacity than the overall portfolio, and we'll continue to manage risk and earnings as we move forward over the next few quarters.
I'd like to make one quick addition to that, Ken. At the risk of stating the obvious, within the pool of loans that came over, certain of those loans or high-yield bonds had varying degrees of liquidity. We are placing a lot of emphasis on the level of liquidity in the underlying loan to ensure that selling that loan or bond would not catalyze a loss. We are being very deliberate in that regard as well.
Gotcha. Very helpful there. Thanks again.
Thank you. We will take our next question from Mark Hughes with Truist. Please go ahead.
Yes, thank you. Good morning. Just looking at the direct origination commitments, I guess this is on the presentation. The average commitment size has been moving up the last few quarters. And I think you pointed out the net leverage for the loans this quarter is a little bit higher. Anything to see there? I know you're trying to kind of make that shift in assets expeditiously. Is that contributing to that evolution?
Yes, I'd say quickly that we did have knowledge of the merger closing, and knowing it was going to be a deleveraging event, we aimed to over-index into the origination. As we alluded to on the call, we were at 1.45 leverage going into this quarter. Furthermore, the early part of Q2 and the beginning of this quarter showed very healthy M&A activity. Just to take that one step further, we have seen somewhat a reduced level of activity, perhaps in anticipation of the election. Anecdotally, we expect auction activity to pick up kind of post-election. The number of NDAs we are signing reflects that. This is also aided by the rate cut that we saw in September. While auction activity is expected to increase, there is a gestation period, which might drive deployment in the latter part of this quarter and into 2025. Overall, strong origination had to do with healthy market activity in Q2 and early Q3, and we are optimistic about the growing pipeline into the back half of this quarter and into 2025.
And how about the spread on the field this quarter relative to last quarter? How do you see the competitive environment?
Yes, I think overall, the market has become more borrower-friendly. If you look at where CLOs are pricing these days, all the money that private capital is raising is significant. On the other hand, you see a slowdown in M&A activity as Tanner mentioned, anticipating elections and rate cuts. The supply-demand imbalance has tilted in the borrower's favor. Therefore, we've seen spread compression starting from last December. The spreads were notably high relative to historical norms in 2023. Overall, the loans are not as attractive as 2023, but they remain attractive on a historical basis. Given our competitive positioning with the large universe of borrowers we engage with, we feel secure.
Appreciate that. Thank you.
Thank you. We will take our next question from Matthew Hewitt with Jefferies. Please go ahead.
Hi, guys. Congrats on the quarter and the close of the mergers. Can you not ask me to be an expert on politics or policy, but can you just talk about maybe your high-level thoughts about what the election could mean for your business or portfolio companies at this point?
Yes, this is Howard. I think you've seen the forward curve move up. So that is probably the most obvious indication of where the market thinks it's going, which is a more benign regulatory environment and a potentially more inflationary environment, indicating interest rates are going up. That can cut both ways, but it generally provides a more growth-oriented backdrop for companies. The other part is the regulatory oversight, and obviously, a change at the FTC might change the view of mergers and the practicality of merging. You would expect deals to rise. Those are probably the first-order effects. Second, third, and fourth-order effects are harder to determine. Specific companies also have unique issues arising as policies change.
And to add on to that, it's highly likely that tariffs go up. When we consider our borrowers, we're mandated to focus on U.S.-based entities. Thus, the market that they're selling into is less impactful. However, we are critically analyzing the supply chains of our underlying borrowers, ensuring that this is integrated into our underwriting framework to assess the risk on our books and evaluate new investment opportunities.
Okay, thanks. That's great context. And then can I just ask, the $0.10 unrealized and realized loss per share for the quarter, can you give some color on which portfolio companies drove that?
Sure. We think about the portfolio in a couple of different ways. One is considering what we acquired from the closed-end funds. Those assets were largely flat. We did take small losses, particularly from exiting some of the non-accrual status names, but that was offset by gains from other sales. One significant loss occurred with a company that we restructured, moving from preferred equity to a second lien. Overall, shifting from non-current to current income and moving up the capital stack is beneficial. Many of the larger movements involved companies on our watch list or those undergoing a sales process. We're in the process of highlighting the uncertainty of those outcomes and marking them down slightly.
Thanks very much.
Thank you. We will take our next question from Paul Johnson with KBW. Please go ahead.
Yeah. Good morning. Thanks for taking my questions. My only question is just kind of, given the weakness in the stock during the quarter, post-closing the merger, in a competitive market with a weighted average spread on investments of around 570 basis points, and your leverage being relatively low due to the merger closing. Can you explain your thoughts around the buyback? When you would potentially consider repurchasing shares if that's an option? Why not consider that in this scenario with leverage looking to increase in a tight market?
It's ironic because the previous questions were regarding the merger and why our leverage was so high. But we have always stated that we'll buy back stock when it's accretive versus other capital uses. Our guideline has previously been around 0.8 for price analysis. We believe that the stock price has traded down compared to peers since the merger, as people capable of holding this stock have cleared out. This is an ongoing concern. Lastly, what you observed in the last quarter is not necessarily indicative of our future strategy. We're not open to the idea of trading without good reason. A significant number of trading days during the quarter were not open. Therefore, our approach remains unchanged. We view available capital as a strength.
Got it. Does the relationship change to where you would potentially look to buy back? I mean, how does that change regarding overall market returns, in relation to the spread compression we've seen this year?
Yes, there are many elements that factor into this. The cost of debt is also decreasing. If in the long run we believe all senior loans would be priced at 400 over, the calculus would change. There would be different expectations for ROE across the entire market. That balance would have to alter. Remember, the recent 150 basis points decrease in spreads follows a similar increase in spreads just prior. We must not overreact to current spread levels but rather evaluate them over the cycle.
I appreciate that. That's all my questions for now. Congrats on a good quarter, guys. Thanks.
Thank you. There are no further questions at this time. I'll turn the call to management for any closing remarks.
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, and have a good day.
Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.