MSC Income Fund, Inc. (MSIF) Earnings Call Transcript & Summary

Thank you. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press the star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Zach Vaughn. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund's second quarter 2026 earnings conference call. Joining me today with prepared comments are Duane Hijak, Chief Executive Officer, Nick Meserve, Managing Director and Head of the Private Credit Investment Group, David Magdahl, President and Chief Investment Officer, and Corey Gilbert, Chief Financial Officer. The MSC income fund issued a press release yesterday afternoon that details the fund's second quarter financial and operating results. This document is available on the investor relations section of the fund's website at mscincomefund.com. The play of today's call will be available beginning an hour after the completion of the call and will remain available until August 14th. Information on how to access the replay was included in yesterday's earnings release. We also advise you that this conference call is being broadcast live through the internet and can be accessed on the Funds homepage. Please note that information reported on this call speaks only as of today, August 7, 2026, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call may contain forward-looking statements. Any of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, or similar expressions. are based on management's estimates, assumptions, and projections as of the date of this call, and there are no guarantees of future performance. The actual results may differ materially from the results expressed or implied in these statements. As a result of risks, uncertainties, and other factors, including but not limited to, the factors set forth in the fund's filings with the Securities and Exchange Commission, which can be found on the fund's website or at sec.gov. The income fund assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including adjusted net investment income, or ANII, and ANII before taxes. ANII is Net Investment Income, or NII, as determined in accordance with U.S. Generally Accepted Accounting Principles, or GAAP. excluding the impact of capital gains incentive fee. ANII before taxes is NII, as determined in accordance with GAAP, excluding the impact of the capital gains incentive fee and any tax expenses included in NII. The C-Income believes that presenting ANII and ANII before taxes and the related per share amounts is a useful and appropriate supplemental disclosure for analyzing the fund's financial performance, since the calculation of the capital gains incentive fee is based on realized gains and losses and unrealized fair value appreciation and depreciation, none of which are included in NII. And tax expenses included in NII may include excise tax expense, which is is not solely attributable to NII and deferred taxes, which are not payable in the current period. Please refer to yesterday's press release for reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are net asset value, or NAV, and return on equity, or ROE. is defined as total assets minus total liabilities and is also reported on a per share basis. The income fund defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. Please note that certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. Now I'll turn the call over to MSC Income Fund CEO, Dwayne Hujak. Thanks, Zach.

everyone and thank you for joining us. We appreciate your participation on this morning's call. We hope that everyone's doing well. Today's call will provide you with the fund's key quarterly updates, after which we'll be happy to take your questions. Before we provide our normal quarterly updates, I want to start by congratulating Nick Mazerve on the recent announcement of his planned transition to Chief Executive Officer of the Fund in the fourth quarter of this year. Nick is uniquely qualified to assume the role of the fund's CEO. He has led the fund's private loan investment strategy since the inception of the fund and has been part of Main Street's private loan investment strategy and activities since he joined the Main Street investment team in 2012. Nick has been a highly valuable member of our organization as we have grown the fund historically, taken it public in 2025, and focused its investment strategy on private loans. I look forward to continuing to work closely with Nick in my planned future role as the fund's executive chairman. Now turning to the fund's most recent operating results, we are pleased with the fund's performance in the second quarter, which resulted in an annualized return on equity of 15.9% and a significant net fair value appreciation in the fund's investment portfolio. Based upon the quality of the fund's existing investment portfolio, together with the favorable liquidity position and the current investment pipeline, we remain excited about our future expectations for the fund. Fund-generated adjusted net investment income, or ANII, of 33 cents per share on the quarter, or 36 cents per share on a before-taxes basis. These results, combined with our positive outlook for the future, resulted in the Fund's most recent dividend announcements, which I will discuss in more detail later. The fund finished the quarter with an NAV per share of $16.51, a 4% increase from prior quarter, and we continue to be pleased with the performance of the fund's investment portfolio. will discuss our financial results in more detail. The fund's private loan investment activity improved significantly in the second quarter, but the fund also experienced increased levels of repayments, resulting in a net increase in private loan investments of $10 million. The fund remains highly focused on executing new investment opportunities that are consistent with its historical private loan investments as we work to grow the fund's investment portfolio. This fund is also focused on maximizing the benefits from its legacy lower middle market investment portfolio and eventually recycling this capital into private loan investments as investments are exited or repaid. Reflecting on this priority, we're pleased that the fund exited its investments in one high-performing lower middle market portfolio company, Center Technologies, in the second quarter at a realized gain of over $11 million and a meaningful premium to its March 31st fair value. The fund also continues to benefit from attractive follow-on investments in existing lower middle market portfolio companies, which we believe are beneficial to both current investment income and future value creation on those existing investments. Nick and David will cover the fund's investment activity in more detail. Based upon the fund's results for the second quarter, the fund's board of directors declared regular monthly dividends for the fourth quarter of $0.11 per share, payable in each of October, November and December, and a supplemental dividend of $0.03 per share, payable in December, resulting in total dividends payable in the fourth quarter of $0.36 per share, consistent total quarterly dividends for each quarter since the fund's listing in January 2025. Going forward, the fund expects to maintain a dividend policy that provides for its total quarterly dividends, which are expected to include regular monthly dividends and a supplemental dividend to be set at a level generally consistent with the fund's ANII before taxes per share. Based upon the total dividends payable for the fourth quarter and the current stock price, the fund is providing shareholders a current dividend yield of over 12%. As we look forward to the fund's near-term investment activities, as of today, I would characterize the private loan investment pipeline as average. We're excited about the current pipeline of new investment opportunities and follow-on investment opportunities in existing portfolio companies, and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the fund's investment portfolio over the next several quarters. Now turning to other opportunities intended to add value to the fund shareholders, we're pleased to announce that the fund's Board of Directors recently authorized a new open market share repurchase plan under which the fund may repurchase up to $20 million of fund shares beginning in September 2026 and ending in February 2027 at times when the fund shares are trading at predetermined levels below the fund's NAV per share. As I noted earlier, we have a high level of comfort about the quality of the fund's investment portfolio and as a result believe that this repurchase plan can be used to create additional value for the fund's shareholders. My last few comments are reminders of the continued support the fund has received from Main Street Capital Corporation. Since Main Street's wholly-owned subsidiary was appointed the sole advisor to the fund in October 2020, Main Street has purchased over $30 million of the fund's common stock. In conjunction with the Fund's new repurchase plan, Main Street also authorized a new share purchase plan to purchase up to $20 million of the Fund's shares, with the terms of such plan being identical to the Fund's new open market share repurchase plan, resulting in a total of $40 million of potential purchases between the Fund and Main Street under such plans. and with any open market share purchases being split by the fund and Main Street on a pro rata basis. In addition to show support for the fund, Main Street, through its wholly owned investment advisor, voluntarily agreed to permanently waive approximately $260,000 of incentive fees earned for the second quarter to support the funds resulting ANII before taxes per share, resulting in total incentive fee waivers of $1.4 million. over the last year. We believe these actions demonstrate Main Street's commitment to the future success of the fund and reinforce Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy. With that, I will turn the call over to Nick.

Thanks, Duane, and good morning, everyone. We are pleased with the performance of the fund's private loan investment portfolio in the second quarter, which represents the largest portion of the fund's investment portfolio and, as a reminder, is the fund's sole focus with respect to new portfolio company investments. The overall operating performance for most of the fund's private loan portfolio companies continue to be positive. which contributed to the fund's second quarter financial results. The fund also benefited in the quarter from meaningful net fair value appreciation. Based upon the positive performance, now look for certain private loan portfolio companies where the fund has an equity investment. Given the current economic uncertainty that exists across certain parts of the economy, we are diligently working to stay in front of the fund's portfolio companies to understand their exposures to changing environments. to date, based upon those ever-evolving discussions, we are comfortable with the future outlook for the portfolio. At quarter end, 93% of the private loan portfolio was comprised of secure debt investments, over 99% of which were first lien and 95% of which were floating rate loans. The portfolio had an attractive weighted average yield of 10.4%, relatively consistent with the prior quarter end. During the second quarter, the fund invested $62 million in the private loan portfolio, which after aggregate investment activity resulted in a net increase of $10 million. The fund ended with the second quarter with investments in 81 private loan portfolio companies, totaling $848 million of fair value. representing 61% of the fund's total investment portfolio at fair value. As Duane mentioned, our current private loan pipeline is average. the end of the second quarter, we have closed three new private loan portfolio companies. We expect M&A activity will be higher in the second half of the year, and expect that activity to continue to grow our pipeline.

With that, I will turn the call over to David. Thanks, Nick. Good morning, everyone. In addition to the private loan portfolio that Nick covered, the fund also maintains a portfolio of legacy lower middle market investments. As a reminder, these are combined debt and equity investments in smaller privately held companies, whereby the fund partnered directly with the company's existing business owners and management team through co-investments with Main Street Capital Corporation, utilizing the customized one-stop debt and equity financing solutions provided by Main Street's lower middle market investment investment strategy. After the listing of the fund shares on the New York Stock Exchange in January of 2025, the fund no longer makes investments in new lower middle market portfolio companies, but continues to participate in follow-on investments in its existing lower middle market portfolio companies. to report that the overall operating performance for most of the fund's lower middle-marked portfolio companies continues to be positive, which contributed to the fund's second quarter results. Despite the continued heightened level of uncertainty in the overall economy, we remain confident in the ability of these lower middle market portfolio companies to continue to successfully navigate the current environment. During the second quarter, the fund completed $13 million in total lower middle market portfolio follow-on investments, which after aggregate investment activity resulted in a decrease in the lower middle market portfolio of $2 million. Quarter End, the lower middle market portfolio, had investments in 55 portfolio companies, totaling $504 million of fair value and representing 36% of the fund's total investment portfolio. The lower middle market portfolio at fair value is comprised of 54% debt investments and 46% equity investments. 99% of these debt investments were first lien loans and they had an attractive weighted average yield of 12.7%. equity ownership positions in all of its lower middle market portfolio companies, representing an 8% average ownership position. We expect that these investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation, and eventually meaningful realized gains upon the future exit of these lower middle market investments. A great recent example of the benefits that these portfolio companies can provide is the recent exit of the funds, investments, and center technologies in the second quarter, which resulted in a realized gain of $11.6 million. Finally, and as Duane mentioned, we continue to see interest from potential buyers in some of the fund's lower middle market portfolio companies, which we expect will lead to favorable outcomes over the next few quarters. During the fund's total investment portfolio as of June 30th, the fund continues to maintain a highly diversified portfolio with investments in 144 portfolio companies spanning across numerous industries and end markets. The fund's largest portfolio companies represented less than 4% of the total investment portfolio fair value quarter end and less than 4% of the total investment portfolio fair value quarter end. than 4% of the total investment income for the trailing 12-month period, with most portfolio investments representing less than 1% of the fund's income and assets.

With that, I'll turn the call over to Corey. Thank you, David, and thank you to everyone who has joined us today. The fund's total investment income for the second quarter was $35.7 million, consistent with Q2 2025 and an increase of $1.6 million, or 4.7%, from the first quarter. Interest income for the second quarter increased by $0.7 million from a year ago and from the first quarter. The increase in interest income from the prior year was principally attributable to higher average levels of income-producing investment portfolio debt investments, partially offset by a decrease in interest rates, primarily resulting from decreases in benchmark index rates on floating rate debt investments. negative impact from debt investments on non-approval status. The increase in interest income from the first quarter was principally attributable to higher average levels of income-producing investment portfolio debt investments partially offset by the negative impact from debt investments on non-approval status. non-accrual status. B income for the second quarter increased by $0.5 million from a year ago and by $0.7 million from the first quarter. The increase in fee income from both the prior year and the first quarter was primarily due to an increase in fees related to increased investment activity. Dividend income for the second quarter decreased by $1.1 million from a year ago and increased by $0.3 million from the first quarter. The decrease in dividend income from the prior year was primarily due to a decrease in dividends from lower middle market and private loan equity investments. The increase in dividend income from the first quarter was primarily due to an increase in dividends from lower middle market equity investments. In the second quarter of 2026, dividend included $0.5 million of non-recurring items. As we previously discussed, dividend income will fluctuate quarter to quarter based on the underlying performance, cash flows, and capital allocation activities of the fund's portfolio company. companies and certain non-recurring items. The second quarter included income considered less consistent or non-recurring in nature of $2.2 million. As we previously discussed, these non-recurring items vary quarter to quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment, repricing, and and other activity related to debt investments. These items were $1.4 million higher than the second quarter of 2025, and $1.6 million higher than the first quarter, and $1 million higher than the average of the prior four quarters. The fund's expenses net of waivers for the second quarter increased by $4 million from the second quarter of 2025 and increased by $5.5 million from the first quarter. The increase from the prior year was principally attributable to a $2.9 million increase in the capital gains incentive fee accrual, a $1.2 million increase in interest expense, and a $0.4 million increase in base management fees, partially offset by a $0.6 million decrease increase in incentive fee on income net of waivers. The capital gains incentive fee accrual increased by $2.9 million in the second quarter compared to no accrual a year ago due to the net fair value appreciation of the funds investments in the second quarter of 2026. The increase in interest expense from a year ago was largely driven by an increase in average borrowings outstanding used to fund a portion of the growth of the fund's investment portfolio and an increased weighted average interest rate on the fund's unsecured debt obligations driven by the issuance of the May 2029 notes in the first quarter of 2026, partially offset by a decreased weighted average interest rate on the credit facilities due to decreases in benchmark index rates. The increase in base management fees from a year ago is a result of the fund's increased average total assets. The $0.6 million decrease in the incentive fee on income net of waivers is the result of a decrease in the gross calculated incentive fee on income of $0.3 million and a $0.3 million voluntary permanent waiver of incentive fee on income by the Funds Investment Advisor. Decrease in the gross calculated incentive fee on income is a result of a decrease in pre-incentive fee, NII. The $5.5 million increase from the first quarter in the funds expenses net of waivers was primarily driven by increases of $3.6 million in the capital gains and CINIFI accrual, $0.9 million in interest expense, and $0.7 million in CINIFI on income net of waivers. The $3.6 million increase in the capital gains incentive fee accrual from the first quarter reflects the $2.9 million increase to the accrual recorded in the second quarter of 2026 compared to the $0.6 million reduction in the first quarter. The accrual increase was the result of the net value appreciation of the fund's investments in the second quarter. The increase in interest expense was primarily driven by an increase in weighted average balance of debt outstanding and an increase in effective interest rates on existing debt outstanding. The decrease in the net incentive fee on income was primarily due to the $0.7 million decrease in the voluntary waiver of incentive fee on income. The fund's expense ratio, calculated as the ratio of total non-interest operating expenses, excluding incentives, net of waivers, as a percentage of the fund's average total assets, was 1.9% on an annualized basis for the second quarter, consistent with the prior year, in the first quarter. The funds adjusted NII before taxes in the second quarter was $16.3 million, or 36 cents per share, decreasing from $17.3 million, or 37 cents per share, from the prior year. During the quarter, the fund recorded a net increase in the fair value of its investments of $19 million, representing the impact of $9.9 million of net realized gains and $9.1 million of net unrealized appreciation. The net fair value increase was primarily attributable to an increase of $10.7 million in the private loan portfolio and $10 million in the lower middle market portfolio, partially offset by a decrease of $1.6 million in the residual middle market portfolio. Overall, the fund's operating results for the second quarter resulted in a net increase in net assets of $29.3 million, or 65 cents per share. The fund's NAV per share was $16.51, a 64-cent increase from the first quarter, above the fund's public offering price per share in its public offering and listing on the New York Stock Exchange in January 2025. As of quarter end, the fund had investments on non-accrual status comprising 1.9% of the total investment portfolio at fair value and 5.8% at cost. As of quarter end, the fund's regulatory asset coverage ratio was 2.13 and its net debt to NAV ratio was 0.85. As we look ahead, our $150 million of October 2026 notes mature on October 30th, and we are actively evaluating our options for addressing that maturity ahead of the October date. confident in our ability to manage this maturity in a way that continues to support the fund's growth and reflects our conservative approach to the fund's capital structure. With that, I will now turn the call back over to the operator so we can take any questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset Star Keys. Our first question comes from the line of Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Hey, good morning, and thanks for taking my question. One around leverage, wondering if you could just give any updated outlook in terms of timeframes as you continue to ramp up to the targeted leverage ranges. Thanks.

Sure, Ken. Good morning. Thanks for the question. I'd say the timing of that's hard to predict or difficult to predict. It's really going to come down to the pipeline and pace of investment activity on the private loan side. As you know, the fund sold investment strategy. for new companies is focused on private loans. It's going to be concentrated in that pipeline and those activities. I think we feel good about it today, but it's really hard to predict how long it'll take us to ramp. If you were to kind of use a best guess, I'd say the next three or four quarters. I think we expect to have fairly significant investment activity of the portfolio. You could also continue to have some accelerated repayments. So that'll be another governor that we just have to manage or navigate. But Nick, if you have any other call you want to add on the pipeline? I think it'll be the goal of the next three or four quarters to get back to the target leverage.

Okay, great. And one follow-up, if I may, just in terms of the private loans pipeline that you're seeing there. any particular attractive segments or opportunities that you're seeing within the pipeline? And maybe you could just also talk about some of the terms.

pricing that you've been seeing on some of the more recent transactions? Thanks. Yes, I'd say from the target side of it, you know, I'd say the industries fit our existing portfolio. So not focused in any one industry or any one space. I think deals and portfolio companies that we've seen the portfolio in the past are what we're targeting and what we're seeing in our pipeline. Second question there on the terms. I'd say we're probably around the same spot we've been for the last quarter or so. Spreads have come wider since January, but we're probably in the same spot we were last time we talked about it last call. Got you. Very helpful there. Thanks again.

Thank you. Our next question comes from the line of Aaron. Singanovich, which was curious. Please proceed with your question.

Thanks. What are you seeing from competitive environment today in the part of the market. The pipeline's kind of average. Sometimes a little bit more of a competitive environment if it's not a ton of supply.

Yes, I do think that, you know, we talked about the last few quarters and really the last few years is the overall M&A activity in the space has been lower, especially on the private equity side. And so that has, I'd say, kept competition pretty strong. I think if we see that volume pick up, I think the overall competition level and potentially spreads and terms go a little wider. as there's less capacity for the overall deals. But to date, in the last few years, we've really just seen a kind of muted M&A market. So if that does pick up, I'd see competition getting less going forward if that's the case.

Non-accruals ticked up a little bit this quarter. It does bounce around a decent amount from quarter to quarter. Where do you see your more of an average level of non-accruals, maybe on a cost basis? your segment of the market it seems just to be a tad higher than maybe in the upper.

I think what you said there, Aaron, is correct. I think when we look at the non-accruals, at the end of the quarter. You know, they are a little elevated above where we've been historically. Obviously, you'd like that number to be as low as possible. It's never going to be zero, just given the nature of what we do. I think you're probably looking at something that's 2% on a cost basis, kind of 2% higher than where kind of more of a long-term average would be. So it's slightly elevated versus where it was on a longer-term historical average. But Nick, if you have a different view. Yes, I think that's about where we'd like to target it at. I do think some of the times,.