MidCap Financial Investment (MFICL) FY 2026 earnings call transcript

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 Widger, 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 MidCamp 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 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 on those 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. midcalffinancialic. 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 MidCalf Financial Investment Corporation as either MFIC or the BDC, and we will use MidCap Financial for 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 10Q 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 purchase 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 and provide a portfolio update, 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 GAP 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 NAV 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 in our stock buyback activity, which I will discuss in more detail shortly, net leverage increased to 1.55 times at quarter end.

We plan to reduce MFIC's net leverage by continuing to de-emphasize new commitments and through expected prepayments. Thus, quick 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 personal positions, our cost usage of PIC, 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 each 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 Merckx.

At the end of March, MFIC's investment in Merckx totaled approximately $81 million at fair value, representing 2.7% of the portfolio in fair value. Let me remind you about what remains of Merckx. MFIC's remaining investment in Merckx consists for four aircraft, plus the value associated with Merck's servicing platform. Merck serves 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 charts.

Merck receives a remarketing fee on each aircraft sale. At the end of March, the servicing business represent approximately 38% of the total value of Marks. The servicing amount of Marks will naturally decline as servicing income received. Turning back to stock repurchases, as mentioned, we have been actively repurchasing shares, including through a 10v5-1 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 were purchased post-quarter and 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 stock dollars a record as of June 9, 2026, payable on June 25, 2026.

With that, I will now turn the call over to Tim.

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 eight 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 3.6 times in the quarter. gross fundings excluding revolvers totaled 68 million sales and repayments excluding revolvers and merks totaled 181 million net revolver fundings were approximately 1 million and as previously mentioned we received a 22 million dollar pay down from merks 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.

Merch represented less than 3% of the total portfolio. And liquid positions acquired during our mergers with two 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 funding 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 the 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 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 31st, 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's picking and picking income from our software portfolio is de minimis. The weighted average interest coverage of our software portfolio is 2.3 times, in line with the overall portfolio. The weighted average net leverage is 4.4 times, down from 4.6 times 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. Mid-CAP's approach to lending to software companies has remained consistent, though it 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 non-recurial status increased to 3.5% of the total portfolio at fair value, compared to 2.6% at the end of the prior quarter. The two largest contributors to the increase were Midwest Vision and Tasty Chicken.

Underlying portfolio company credit metrics were stable quarter over quarter. Borrow or net leverage or debt to EBITDA was 5.29 times at the end of March, unchanged from the end of December. and the weighted average interest coverage ratio is 2.3 times, 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 leveraged lending revolver commitments that were drawn was essentially flat compared to the prior quarter. The income represented 4.7% of total investment income for the month quarter, down slightly compared to the prior quarter.

With that, I will 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% in the prior quarter. The decrease was driven by lower interest income resuming from lower base rates. fewer accrual days in the quarter, a decrease in the size of the portfolio, an increase in non-accruals, 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 three-month SOFR declined 38 basis points compared to the prior quarter.

Repayment 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 $61.190, or $0.67 per share. For the March quarter, net investment income per share was $0.38, while gap net loss per share was $0.30.

On 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. The company ended the quarter at 1.55 net leverage.

As Tanner mentioned, we plan to reduce MIFIC's net leverage by continuing to de-emphasize new commitments and through expected repayments. The cost of debt for the quarter declined to 5.61%, down from 5.95% in the prior quarter, largely given by lower base rates and somewhat from the refinancing activities that occurred during the December quarter. With respect to the $125 million or 4.5% fixed rate notes featuring in July 2026, we intend to repay those notes using availability under a revolving credit facility.

At today's base rates, the revolving credit facility carries a higher cost followed into the notes, which is expected to modestly increase our cost of debt. This concludes our prepared remarks. Operator, please open up all the questions.

Yeah, thanks, Aaron. As we called out in the prepared remarks, the dynamic with the increased trading volume enabled us to, under our 10B51 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 31st. 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, you know, evaluate the capital allocation decision. Importantly, I will also call your attention to the statements we made on our last earnings call. You know, we are very focused on shareholder value. And, you know, 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, you know, top of mind when we do make that decision as we get down to leverage level again at or below the bottom end of our range.

You know how are you viewing credit broadly and you know what led to these increases in non You mentioned the two companies Yeah sure Thanks Aaron You know when we look at the overall portfolio we did see very healthy revenue and EBITDA growth across you know the 200-plus borrowers that we have. You know, we do have, you know, some borrowers that are suffering challenges, you know, and some of that, you know, is thematic. You know, we have, you know, 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, you know, those factors coming together, you know, that's where we tend to see problems. Usually if you have a credit go on nonaccrual, it's, you know, not due to one factor. It's due to a confluence of several factors.

And, you know, as we think about, you know, the outlook, you know, the vast majority of the credits are performing quite well. You know, we are monitoring very closely, you know, the names on our watch list. and in conjunction with the portfolio management functions of MidCAP Financial, you know, we're, you know, on top of those names. And so, you know, 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, you know, lending environment, you know, you do start to see non-accruals ticking up kind of around the sector. And so I think we should just all ask ourselves, like, where are we in the credit cycle?

And then, Aaron, just to clean up, the other non-accrual 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 were 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 on. And unfortunately, in that particular case, those stresses resulted in a deterioration in that credit, and hence that name also got put on.

Thank you.

Yeah, thanks. Thanks for the question, Rick, and a very good one. So, as we've stated and then as you rightly pointed out, manifest 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, you know, the arrows and 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 does not avail itself to us in quite the same way. And that said, I would, and at the risk of being redundant, you know, call your attention to, irrespective of all the options that are available, you know, our focus remains on, you know, delivering value to shareholders and doing our best to narrow the discount. And so, as a result, as we look at the situation right now, we're really focused on, you know, in the current moment, obviously, as I alluded to, getting leverage down.

But, you know, also, you know, upon getting down to that leverage, making that capital allocation decision based on, you know, obviously where market is and where we are trading at the top.

So another very good question, Rick. So I appreciate it. So there's a couple 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, you know, kind of think of it as a macro framework of what we're operating to, but each individual decision as it presents itself has to be looked at, you know, 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, you know, what's on the field at the particular time. You know, in terms of operating leverage, you know, we obviously have SG&A at the BDC.

As we shrink, 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 that enabled us to make this decision is, Rick, if you think about our mid-cap business, overall it's a $50 billion business between the balance sheet of mid-cap 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 non-participation in a particular deal, and hence 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 leathered. But, you know, again, in summation, we still feel that this is the prudent right approach for our company at this time.

Thanks, Ray.

Thanks, Dan. Thanks for the question. You know, I think to summarize kind of what we have said around, you know, deleveraging and origination and stock buybacks, you know, step one, which is what we're in right now, is to, you know, de-leverage back to the lower end or slightly below of the targeted range that we have, you know, presented to the market, you know, over the last several years.

And then once that – as we approach that level, you know, we, along with our board, will be evaluating the capital allocation decision for new originations versus stock buybacks, and kind of the inputs there, you know, or 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 clarity, Ken, you know, a lot of the transactions that are done in the middle market or in the direct lending space, you know, come with delay draws and revolvers, and we've already committed to many of those across our borrowers, we will obviously be honoring those commitments. And then, you know, from time to time, it might make sense that 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.

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

Yeah, sure. So, you know, we obviously still see, you know, 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, you know, recent history has been littered with events that have conspired 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 know, you look at the private equity space and you look at the quantum of the dry powder and the limited TPI to date in returning capital to shareholders makes them very motivated sellers in many cases.

And, you know, unfortunately, they've gotten nicked up or the market's gotten nicked up by these stresses, as you alluded to, tariffs was a big one amongst others. And so, you know, I think we're cautious. We exercise a little bit of humility in making such a prediction. because of the spate 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 that it's not a question of if, it's more of a question of when.

Yeah, sure. We pulled 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. You know, 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 a 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.

Thank you.

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.