MidCap Financial Investment Corporation ($MFIC)

Good morning, and welcome to the earnings conference call for the period ended March 31, 2026, 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. We appreciate your interest in MidCap Financial Investments Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Kenny Seifert, Chief Financial Officer. Howard Widra, our Executive Chairman, 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 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 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 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 when we use MidCap Financial, we 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 quarterly earnings conference call. Yesterday after market closed, we issued our earnings press release and filed our quarterly Form 10-Q for the period ending March 31, 2026. I'll begin today's call with an overview of MFIC's first quarter results, followed by a discussion of our share repurchase activity and our dividend announcement. Following that, I'll hand the call over to Ted, who will walk through our investment activity for the quarter, including a review of our software exposure. Kenny will then review our financial results in detail. Net investment income or NII per share for the quarter was $0.38, while GAAP net loss per share was $0.30. Net asset value per share at the end of March was $13.82, representing a 2.5% decline from the prior quarter. The $0.36 per share decrease in NAV was driven by a net loss of $0.67 on the portfolio, which was partially offset by net investment income exceeding the dividend by $0.07 per share, plus approximately $0.24 per share of accretion from stock repurchases executed below NAV. As a result of the net loss on our stock buyback activity, which I will discuss in more detail shortly, net leverage increased to 1.55x at quarter end. We plan to reduce MFIC's net leverage by continuing to deemphasize new commitments and through expected repayments. Subsequent to quarter end, we completed the existing share repurchase authorization and have received net repayments in excess of $100 million, demonstrating our commitment to enhancing shareholder value and deleveraging. Our net loss for the quarter was driven by a combination of market-related write-downs, reflecting credit spread widening and multiple compression, particularly within the technology sector, including software as well as credit weakness across certain positions. Our net loss was roughly evenly split between market-related factors and credit-related weakness. The vast majority of our direct lending portfolio is valued using a yield approach. Changes in market spreads are incorporated into quarterly valuation of our investments. As always, our third-party valuation firms ensure our marks reflect current market conditions, including spread widening, the impact of heightened market volatility, increasing uncertainty around software valuations alongside broader macroeconomic and geopolitical pressures. Despite the loss this quarter, we believe our focus on first lien positions, cautious usage of PIK and low software exposure keeps us well positioned. As discussed last quarter, given the size of the stock's discount to NAV, we believe it was prudent to prioritize allocating capital towards stock repurchases rather than deploying capital into new investments. Consistent with that view, new investment activity during the March quarter was relatively modest with MFIC making $50 million of new commitments across the transactions. Given the modest amount of new commitments, we had net repayments of $142 million in the quarter, which included a $22 million repayment from Merx. At the end of March, MFIC's investment in Merx totaled approximately $81 million at fair value, representing 2.7% of the portfolio at fair value. Let me remind you about what remains at Merx. MFIC's remaining investment in Merx consists of 4 aircraft plus the value associated with Merx's servicing platform. Merx earns income through its servicing activities for Navigator, Apollo's dedicated aircraft leasing fund, which currently owns 36 aircraft. Having fully deployed its equity commitments, Navigator is in the harvest period and as such, the fund is opportunistically monetizing assets to optimize fund level returns. Merx receives a remarketing fee on each aircraft sale. At the end of March, the servicing business represent approximately 38% of the total value of Merx. The servicing component of Merx will naturally decline as servicing income is received. Turning back to stock repurchases. As mentioned, we have been actively repurchasing shares, including through a 10b5-1 trading plan. We have fully utilized our existing $107.9 million authorization with $76 million repurchased in the first quarter and the remaining $31.9 million repurchased post quarter end in April. The authorization was fully utilized more quickly than anticipated, driven by the increase in our trading volume. Moving to the dividend. On May 5, 2026, our Board of Directors declared a quarterly dividend of $0.31 per share for stockholders of record as of June 9, 2026, payable on June 25, 2026. With that, I will now turn the call over to Ted.

Thank you, Tanner. Good morning, everyone. I'm going to spend a few minutes reviewing our first quarter investment activity and then provide some details on our investment portfolio. As Tanner mentioned, new investment activity during the March quarter was relatively modest. MFIC's new commitments in the quarter totaled $50 million with a weighted average spread of 469 basis points across 8 different companies. The vast majority of these new commitments were made prior to our decision to allocate more capital to stock buybacks. The weighted average net leverage on new commitments was 3.6x in the quarter. Gross fundings, excluding revolvers totaled $68 million. Sales and repayments, excluding revolvers and Merx totaled $181 million. Net revolver fundings were approximately $1 million. And as previously mentioned, we received a $22 million paydown from Merx. In aggregate, net repayments for the quarter totaled $142 million. Shifting to our investment portfolio. At the end of March, our portfolio had a fair value of $2.97 billion and was invested in 236 companies across 45 different industries. Direct origination and other represented 96% of the total portfolio. Merx represented less than 3% of the total portfolio and liquid positions acquired during our mergers with 2 funds in 2024 totaled approximately 1%. All of these figures are on a fair value basis. Specific to the direct origination portfolio, at the end of March, 99% was first lien and 94% was backed by financial sponsors, both on a fair value basis. The average funded position was $12.6 million. The median EBITDA was approximately $51 million. Approximately 94% had one or more financial covenants on a cost basis. Covenant quality is a key point of differentiation for the core middle market as substantially all of our deals have at least one covenant. The weighted average yield at cost on our direct origination portfolio was 9.6% on average for the March quarter, down from 10% for the December quarter. The sequential decrease in the portfolio yield was driven by lower base rates as well as a decline in the average spread across the portfolio. At the end of March, the weighted average spread on the directly originated corporate lending portfolio was 538 basis points, down 8 basis points compared to the end of December. Next, let me make a few comments about our software exposure. You can find additional details on our software exposure on Page 5 of the earnings supplement. As of March 31, software represented just 11% of MFIC's portfolio at fair value, which is well below the BDC industry average. These positions are primarily cash pay, 100% first lien and highly diversified across 28 borrowers, with an average position size of $12 million. Our software book is diversified across a wide range of end markets and carries a low average LTV of 35%. The median EBITDA of our software portfolio companies is $50 million. Only one borrower is picking and taking income from our software portfolio is de minimis. The weighted average interest coverage of our software portfolio is 2.3x, in line with the overall portfolio. The weighted average net leverage is 4.4x, down from 4.6x in the prior quarter and is below the overall portfolio. The weighted average spread of the software portfolio is 533 basis points, roughly in line with the overall portfolio. MidCap's approach to lending to software companies has remained consistent, though has become more selective in the current environment. The strategy is always centered on borrowers with mission-critical products, high switching costs and strong revenue visibility supported by long-term contracts. Turning now to credit quality. On the overall portfolio, investments on nonaccrual status increased to 3.5% of the total 4.6% at the end of the prior quarter. The 2 largest contributors to the increase were Midwest Vision and Tasty Chicken. Underlying portfolio company credit metrics were stable quarter-over-quarter. Borrower net leverage or debt to EBITDA was 5.29x at the end of March, unchanged from the end of December. And the weighted average interest coverage ratio was 2.3x, also unchanged from the end of December. We believe the steady revolver utilization rate we see from our borrowers is an indicator of greater financial stability and provides us with incremental and more frequent financial information. Revolving facilities provide insight into a company's liquidity position through draw behavior. At the end of March, the percentage of our leverage lending revolver commitments that were drawn was essentially flat compared to the prior quarter. PIK income represented 4.7% of total investment income for the month quarter, down slightly. With that, I'll now turn the call over to Kenny to discuss our financial results in detail.

Thank you, Ted. Good morning, everyone. Total investment income for the March quarter was approximately $71.8 million, a decline of $6.5 million or 8.3% from the prior quarter. The decrease was driven by lower interest income resulting from lower base rates, fewer accrual days in the quarter, a decrease in the size of the portfolio, an increase in nonaccruals, as well as lower fee income. As a reminder, the impact of changes in base rates on our interest income occurs with a lag, depending on the reset frequency of our loans. During the December quarter, the average daily 3-month SOFR declined 38 basis points compared to the prior quarter. Prepayment income was approximately $2.7 million, up from $2.4 million last quarter. Fee income was approximately $500,000, down from $1 million. Dividend income was approximately $300,000. Net expenses for the quarter were $37.6 million, a decline of $4.8 million or 11.3% from the prior quarter. This decline was driven primarily by lower interest expense resulting from lower base rates as well as lower administrative service expenses. In addition, the total return feature in our incentive fee calculation eliminated the incentive fee again this quarter. Portfolio had a net loss of $61.1 million or $0.67 per share. For the March quarter, net investment income per share was $0.38, while GAAP net loss per share was $0.30. On to the balance sheet. At the end of March, the portfolio had a fair value of $2.97 billion. Total principal debt outstanding was $1.87 billion and total net assets stood at $1.18 billion or $13.82 per share. Company ended the quarter at 1.55 net leverage. As Tanner mentioned, we plan to reduce MFIC's net leverage by continuing to deemphasize new commitments and through expected repayments. Our cost of debt for the quarter declined to 5.61%, down from 5.95% in the prior quarter, largely driven by lower base rates and somewhat from the refinancing activities that occurred during the December quarter. With respect to the $125 million of 4.5% fixed rate notes maturing in July 2026, we intend to repay those notes using availability under our revolving credit facility. At today's base rates, the revolving credit facility carries a higher cost relative to the notes, which is expected to modestly increase our cost of debt. This concludes our prepared remarks. Operator, please open the call to questions.

[Operator Instructions] We'll take our first question from Arren Cyganovich from Truist Securities.

You utilized your share repurchases rather quickly. Maybe you could talk a little bit about future repurchases. I know you've used the entire approved repurchases. Is that something that you expect to continue to do? Or do you think that you'll start to grow the portfolio again?

Yes. Thanks, Arren. As we called out in the prepared remarks, the dynamic with the increased trading volume enabled us to, under our 10b5-1 plan, repurchase more quickly than we thought. We also separately had some prepays that pushed, and we guided to the fact that we've already seen $100 million in the quarter-to-date period since March 31. And then obviously, the loss leaves us at a leverage level that is elevated. And so at this juncture, we believe it prudent not to make a decision with respect to a share buyback or commencing of deployment until such time as we get down to the lower end of our range or lower. And then at that point, evaluate the capital allocation decision. Importantly, I will also call your attention to the statements we made on our last earnings call, we are very focused on shareholder value. And we wanted to make a big statement with the size of the buyback and with the ultimate goal of trying to narrow the discount between our trading price and NAV and that logic and that goal will be top of mind when we do make that decision as we get down to a leverage level again at or below the bottom end of our range.

Okay. That makes sense. The nonaccruals increased. I think they're over 5% at cost now. So it seems, I don't know, a little bit worse than what I would say for kind of a normal credit environment. How are you viewing credit broadly? And what led to these increases in nonaccruals you mentioned the two companies?

Yes, sure. Thanks, Arren. When we look at the overall portfolio, we did see very healthy revenue and EBITDA growth across the 200-plus borrowers that we have. We do have some borrowers that are suffering challenges and some of that is thematic. We have exposure -- modest, very small exposure to quick service restaurant industries. One of the companies we mentioned is in that category. And so we also see some credit challenges in companies where they're seeing cost pressures, whether that's from goods inflation, labor inflation, et cetera, and pressure or revenue reliance on the low end of the consumer. And so when we see those factors coming together, that's where we tend to see problems. Usually, if you have a credit go on nonaccrual, it's not due to one factor. It's due to a confluence of several factors. And as we think about the outlook, the vast majority of the credits are performing quite well, the names on our watch list and in conjunction with the portfolio management functions of MidCap Financial, we're on top of those names. And so I think your question kind of started off with for a normal credit cycle, it seems high. And I think if we kind of look across the lending environment, you do start to see nonaccruals ticking up kind of around the sector. And so I think that -- I think we should just all ask ourselves like where are we in the credit cycle.

And then just, Arren, just to clean up, the other nonaccrual that we called out is in Midwest Vision, and that happens to be an ophthalmology PPM. The good news, broadly speaking, is we're relatively under-indexed to PPMs. The bad news, we do have actually two, and this is one of them. The challenges there are well understood in terms of cost pressures and also a dynamic wherein those business models are particularly sensitive to cost of capital, the ability to roll up and ultimately, the valuation of those franchises to maintain the relationships with doctors and retain those doctors. And so unfortunately, in that particular case, that those stresses resulted in a deterioration in that credit and hence, that name also got put on nonaccural.

We'll take our next question from Rick Shane with JPMorgan.

Look, you guys have set out on a pretty different path from a lot of your peer companies in terms of how you're approaching returning capital and growth. And if you kind of look at the questions we've asked in many of your peers over the last quarter and similar companies, in theory, it's a view that we share. [Audio Gap] analog here, which is ARI, another Apollo vehicle, where they facing the same dynamics chose to sell off the vast majority of their assets at close to carrying value and are now sort of considering strategic alternatives. I am curious, given that the analog, how you guys are thinking about growth long term? And what are -- what is the path forward if BDCs continue to trade at discounts to NAV, if publicly traded BDCs continue to trade at discounts to NAV?

Thanks for the question, Rick, and a very good one. So as we've stated and then as you rightly pointed out, manifesting in the firm's approach to ARI, we're very focused as a firm, where we manage public vehicles, making sure we are operating them with the objective of maximizing value to shareholders. What I would point you to is structurally, a BDC and the ARI structure are different. And so the arrows in the quiver, so to speak, for a BDC are limited relative to ARI and thus, the path that was afforded in the case of ARI is not -- did not avail itself to us in quite the same way. That said, I would and at the risk of being redundant, call your attention to, irrespective of all the options that are available, our focus remains on and doing our best to narrow the discount. And so as a result, as we look at the situation right now, we're focused on -- in the current moment, obviously, as I alluded to, getting leverage down, but also upon getting down to that leverage, making that capital allocation decision based on, obviously, where market is and where we're trading at the time.

Got it. And look, I think you guys realize I'm newly revisiting the name, but have a lot of history with the company. And my experience is that over time, you guys have been very thoughtful about premiums and discounts and thinking about what that means for shareholders. And it is interesting to see you take what I think is a pretty different path from some of your peers right now. At what point do you worry that if you -- if this continues, that not only is there a financial leverage issue, but you lose operating leverage on the platform?

So another very good question, Rick. I appreciate it. So there's a couple of things there. I think it's very important and what we've kind of stressed as a team as we've evaluated these options is we have a kind of think of it as a macro, but each individual decision as it presents itself has to be looked at kind of in the current market framework. I don't need to tell you that things are changing quite a bit and thus, it's informed by what's on the field at the particular time. In terms of operating leverage, we obviously have SG&A at the BDC. As we shrink that there is a deleterious effect there, but that's relatively modest. I think one of the other dynamics that's important to consider and one of the -- that enabled us to make this decision is, Rick, if you think about our MidCap business, it's -- overall, it's a $50 billion business between the balance sheet of MidCap and the various sidecars and the assets that are managed there. And thus, when we thought about undertaking this decision, we were fortunate given that setup, given those dynamics that MFIC's nonparticipation in a particular deal and hence -- or indicative of where we are right now where we're not deploying, does not impair our ability to deliver the solution for the client. The capital on the MidCap balance sheet and in all those other sidecars enables us to continue to operate and make commitments at scale to our sponsor clients and our corporate clients. And as a result, the operating leverage, if you will, is not impaired there or from a business standpoint, I should say, we still have the ability to prosecute our business. And so again, we're fortunate to be in this position that enabled us to undertake that decision. And then getting back to the other part of the question, there is a modest effect on SG&A, not as efficiently levered. But again, in summation, we still feel that this is the prudent right approach for our company at this time.

Got it. Look, whether people agree or disagree with the strategy, I think investors value an alternative way of looking at the space and their ability to express their views as well. So thank you.

[Operator Instructions] We'll take our next question from Kenneth Lee with RBC Capital Markets.

I apologize if this has been covered before, I've just been hopping on different calls. I think I heard in the prepared remarks that there's a potential deemphasis on new investments go forward. Just curious, does that mean go-forward originations are mainly going to be driven by incumbent kind of financings? And then obviously, letting the prepayment activity slowly get leverage back down to the more lower end of the leverage range there.

Ken, thanks for the question. I think to summarize kind of what we have said around deleveraging and origination and stock buybacks, step 1, which is what we're in right now is to deleverage back to the lower end or slightly below of the targeted range that we have presented to the market over the last several years. And then once that -- as we approach that level, we, along with our Board, will be evaluating the capital allocation decision for new originations versus stock buybacks and kind of the inputs there are, what are the market conditions at the time and where is our stock trading at the time. So we're not saying that we're not originating.

I would just add to that just for the -- just for clarity, Ken, a lot of the transactions that are done in the middle market or in the direct lending space come with delayed draws and revolvers, and we've already committed to many of those across our borrowers. We will obviously be honoring those commitments. And then from time to time, it might make sense even before we get down to the target leverage. So we will still be standing up to those commitments. And then as Ted alluded to, the decision as to capital allocation will be made upon achieving our target leverage.

Got you. Very helpful there. And one follow-up, if I may, was the pickup quarter-to-quarter. Just to clarify your earlier comments, were some of the nonaccruals, the relative new ones related to any of the 2022 vintages? Or were they just throughout the portfolio there?

Yes. Yes, Ken. I think what your question was, were the nonaccruals from older vintages? And if that's the case, that's what your question was, and the answer is yes.

We'll take our next question from Heli Sheth with Raymond James.

So looking back to last year when we had Liberation Day, we kind of saw a muted M&A market following for the remainder of the year. So with the current macro factors, what are you expecting for the pipeline and activity for the remainder of the year?

Yes, sure. So we obviously still see what comes off the mid-cap pipeline, notwithstanding we are at the current juncture, not participating. And it's really become a fool's game trying to predict M&A because recent history has been littered with events that have inspired to take things offline. And so I think we're cautious. It's hard not to point to some of the geopolitical stress and the duration there as really influencing M&A. The backdrop and perhaps the reason that ourselves and many others in the market have been sanguine going into each successive year about the pickup in M&A is that you look at the private equity space and you look at the quantum of dry EPI to date and returning capital to shareholders makes them very motivated sellers in many cases. And unfortunately, they've gotten nicked up or the market has gotten nicked up by these stresses, as you alluded to [Audio Gap] amongst others. And so I think we're cautious. We're -- we exercise a little bit of humility in making such a prediction because of the speed of drivers that have impaired M&A volumes. But the broader term macro -- the broader term dynamic around the sponsor capital and the duration of those investments suggests to us that it's not a question of if, it's more of a question of when.

Got it. And a quick follow-up on leverage. Where do you see the pacing of reducing leverage going? Any incremental detail there?

Yes, sure. We called out -- we've got about $100 million, and this actually is not a terrible segue from your previous question there, is we've gotten $100 million in the quarter-to-date period. We have line of sight on a number of other prepayments. But to the question you asked previously, we are in an environment that can be -- that should be characterized and is characterized by some volatility. And so it's unclear when that happens. Our business is one where we don't necessarily control the exit. And so we're susceptible to what happens. We do benefit from a very diverse portfolio with 236 names and are confident that over time, we will be able to get back to that leverage level. But conceding that even though we have line of sight into some specific paydowns, the dynamics are ultimately, to some extent, out of our control and more a function of whether the market bears that out.

And it appears we have no further questions at this time. I'll turn it back to our presenters for any closing comments.

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

This concludes today's meeting. We appreciate your time and participation. You may now disconnect. Thank you.