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 Investment Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Kenny Zyper, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please know 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 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 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 MSIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda.

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 for MidCap Financial Investment Corporation's Quarterly Earnings Commerce Call. Earlier this morning, we issued our press release and filed our Form 10-Q for the period ended June 30, 2026. I'll begin today's call with an overview of MFIC's second quarter results and investment activity. Following that, I'll hand the call over to Ted, who will walk through our investment activity in detail and provide a portfolio update. Can you then review our financial results in detail? Beginning with an overview of the results, net investment income were added per share for the quarter was $0.40, while GAAP net loss per share was $0.21.

Net adds value per share at the end of June was $13.37, representing a 3.2% decline from the prior quarter. The $0.45 decrease in NAV was driven by a net loss of $0.61 on the portfolio, which was partially offset by net investment income, exceeding the dividend by $0.09, plus approximately $0.07 of accretion in stock repurchases executed below NAP.

The quarter reflects the credit pressure within the portfolio with a net loss of $50.3 million, or $0.61 per share, concentrated among a limited number of positions.

Ted will address the largest negative contributor shortly. MFIC new commitments were intentionally modest at $5.8 million for the quarter to support three existing borrowers. Net repayments were $160 million in aggregate. As a result of the net loss, Since stock buyback activity, MFIC's net leverage declined modestly, declined only modestly to 1.54 times at quarter end. Excluding stock buybacks made in dozen quarter, MFIC's net leverage would have declined to 1.5 times at quarter end.

Looking ahead, we will make capital allocation decisions based on leverage and market conditions. At the end of June, MFIC's investment in Merck's totaled approximately $68.6 million at fair value, representing 2.5% of our portfolio. This reflects a $12.5 million pay down during the June quarter from the sale of one aircraft in a joint venture plus a modest write-up. As a reminder, Merckx earns income from its servicing activities for Navigator Apollo's dedicated aircraft leasing fund. Having fully deployed its equity commitments, Navigator is in the hardest period, and as such, the fund is opportunistically monetizing assets to optimize fund-level returns.

Merckx receives a remarketing fee on each aircraft. it. Subsequent to quarter end, Merckx has sold one aircraft and is in the process of closing on the sale of an engine. Navigator is in the process of selling a large portfolio of aircraft, which will generate servicing income for Merckx. We expect to receive additional paydowns from Merckx in the September quarter from these transactions. Turning back to the stock repurchases, as discussed on last quarter's call in April, we repurchased $31.9 million of stock through our 10B51 trading plan, and fully utilizing our authorization.

Given our focus on reducing MFIC's leverage, we are currently prioritizing capital allocation towards that objective rather than towards additional stock repurchases. Moving on to the dividend, on August 5, 2026, our Board of Directors declared a quarterly dividend of $0.31 per share for stockholder review record as of September 8, 2026, payable on September 24, 2026.

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

Thank you, Tanner. Good morning, everyone. I will summarize our investment activity for the quarter and then provide some details on our investment portfolio. As Tanner noted, MFIC's new commitments in the second quarter were $5.8 million, all in support of three existing borrowers. In aggregate, net repayments for the quarter totaled $160 million.

Shifting to our investment portfolio, at the end of June, our portfolio had a fair value of $2.77 billion and was invested in 229 companies across 45 different industries. Direct origination and other represented 97% of the portfolio. Merge represented approximately 2.5% of the portfolio. And liquid positions from 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 June, 97% was first lien, and 95% was backed by financial sponsors, both on a fair value basis. The average funded position was $12.1 million. The median EBITDA was approximately $53 million. Approximately 94% had one or more financial covenants on a cost basis. The weighted average yield at cost of our direct origination portfolio was 9.5% on average for the June quarter, compared to 9.6% in the prior quarter.

At the end of June, the weighted average spread on the directly originated corporate lending portfolio was 539 basis points, that's one basis point compared to the end of March.

Regarding software, our exposure was essentially flat quarter over quarter in dollar terms. As of June 30, 2026, software exposure represented just 11.9% of MFIC's portfolio at fair value, which is well below the BDC industry average You can find additional details in our software exposure on page five of the earnings supplement As Tanner mentioned the portfolio generated a net loss of 50 million driven by credit-related weakness concentrated in a limited number of positions. Five names contributed approximately 80% of the net loss. I will now provide some color on the largest contributors. Starting with Chiron Hego, a company that provides workflow technology for graphics creation and real-time data visualization for news and sports productions.

During the quarter, MFIC completed a debt-for-equity exchange, converting $60 million of turned debt into preferred equity and reducing the commitment on the revolver. A contraction in market multiples and a decline in EBITDA drove the value of the preferred equity lower, resulting in a $21.5 million net loss for the quarter.

The next four contributors to the net loss included Midwest Vision Partners, New Era Technology, American Restoration, and Thomas Scientific, each of which is experiencing EBITDA pressure and rising leverage. We in MidCamp remain proactive in managing these underperforming credits.

Turning to overall credit quality, no investments were placed on non-accrual status during the quarter, and two investments were restructured and restored to accrual status. At the end, at quarter end, investments on non-accrual status totaled $77.6 million, representing 2.8% of total portfolio at fair value. Borrower net leverage, or debt to EBITDA, increased to 5.36 times from 5.29 times at the end of March, while the weighted average interest coverage ratio remained 2.3 times.

Borrower revolver utilization was roughly flat quarter over quarter. PIC income represented 6.2% of total investment income for the June quarter. With that, I will now turn the call over to Kenny to discuss our financial results in detail.

Thank you, Ted, and good morning, everyone. Now, we'll begin by reviewing certain key financial information for the quarter, followed by a review of our capital position.

Total investment income for the June quarter was approximately $68.2 million, a decline of $3.6 million per cent. The decrease is primarily driven by lower interest income, resulting from a decrease in the size of the portfolio.

Prefingment income was approximately $2.7 million, and fee income was approximately $600,000, both flat compared to the prior quarter. Dividend income was approximately $200,000.

Net expenses for the quarter were $35.5 million, a decline of $2.1 million, or 5.6% from the prior quarter. The decrease was driven primarily by lower interest expenses, resulting from a lower average debt balance, as well as lower management fees and administrative service expenses.

The portfolio had a net loss of approximately $50.3 million, or 61 cents per share, which eliminated the incentive fee again this quarter.

For the June quarter, net investment income per share was 40 cents, while gap net loss was 21 cents. Shoot. Turning to the balance sheet, at the end of June, the portfolio had a fair value of $2.77 billion. Total principal debt outstanding was $1.74 billion, and total net assets stood at $1.1 billion, or $13.37 per share. Company ended the quarter at 1.54 times net leverage. As discussed on last quarter's call, during the June quarter, we repurchased approximately 2.76 million shares at an average price of $11.58, inclusive of commissions, for a total cost of $31.9 million.

As Tanner mentioned, we are currently prioritizing capital allocation towards reducing leverage rather than stock repurchases. Our cost of debt for the quarter increased slightly to 5.66%, up from 5.61% in the prior quarter.

Post-quarter end, we refinanced $125 million of 4.5% notes that matured in July with our revolving credit facility. At today's base rates, the revolving credit facility carried a higher cost relative to the notes, which is expected to modestly increase our cost of debt.

The fixed liquidity position remains sound with sufficient access to capital under a revolving credit facility. As of the end of the quarter, the undrawn capacity under the revolving credit facility was $925 million.

Adjusting for the recent maturity of the 2026 notes, the undrawn capacity is $800 million. Our ability to utilize this capacity is subject to compliance with the borrowing base that apply varying advance rates to different types of assets.

As MFIC continues to reduce its leverage, we expect our liquidity position to improve. This concludes our prepared remarks. Operators, please open the call to questions.

Yeah, thanks, Aaron. Thanks for the question. When we look at, I think this is one of the very compelling features of MSIC in the context of our broader middle market franchise, MidCap, in that we are roughly $3 billion of a $50 billion business. And so our participation or non-participation in a loan that's originated by MidCap does not ultimately affect our ability to provide that solution to that company or to that particular sponsor. And as such, in the current environment, as you alluded to and we mentioned in our fair remarks where we are not participating in new transactions our mid franchise and our broader sponsor coverage effort and frankly our broader direct lending effort is not in any way compromised by our non And so, in that regard, you know, we do benefit from being a relatively small piece of a much bigger business.

Yeah, sure. So the bottom end of our guidance, so in the low 1.4s.

Yeah, on that point, Aaron, I would note that that is going to be evaluated at the time, as you alluded to or implicit in your question was, you know, our focus right now is on deleveraging. And when we look out, notwithstanding a relatively tepid M&A environment, all things considered, you know, the quantum of companies that we see that are either in process or soon to be in process and we probability weight, we feel good about our ability to get leverage down, obviously subject to market conditions. But as it relates to what we'll do at that time, it will be evaluated based on market conditions at that time and successful completion of deleveraging.

Yeah, thanks, Robert. And as you would probably imagine, you know, as a matter of policy, we do not comment on third-party reporting or rumors in the market. You know, that said, you know, our focus remains and always has on maximizing value for stockholders, you know, a principle that informs every decision we make, and we believe that our buyback, frankly, is very much in that sphere. You know, any required disclosures would be made through the appropriate means if and when required. But as I said before, unfortunately, we do not have a comment on that.

Yeah, thanks, Robert. You know, when we look at the companies, you know, in the basket that we're watching very closely and that, you know, are having EBITDA and leverage pressure, you know, there's always a number of things going on, right? We're having conversations with the company. We're having conversations with the sponsor. We're having conversations with other lenders. You know, in some cases, there are businesses that are looking to divest, you know, subsidiaries or divisions, you know, which can result in deleveraging. There are situations where, you know, the sponsor is considering putting equity in. There are situations, you know, where the lender group, you know, is willing to put in additional funds, you know, or make, you know, other concessions to free up cash flow.

And so when we look at the basket of those, you know, I think if you probability weight that, you know, you will have some of those that are resolved super satisfactorily. And then you'll have some of those where, you know, they continue to be challenged. And, you know, we'll evaluate quarter by quarter, you know, whether, you know, we think there's a reasonable prospect of, you know, of putting it on non-acruel or not at that point in time. Yeah, but certainly, as Ted alluded to, certainly this is the bucket where there is more scrutiny. I would also call attention to the fact that many of these names are, or many of the names in this bucket that we're watching closely.

perhaps not surprisingly are from the 2020-2021 vintage capital structures that were done in a different interest rate environment. And, you know, certainly the most recent slight tick up in rates and perhaps a prospect for higher, for longer, or even risk to the upside in terms of rates, you know, could challenge the cash flow of prospects. But as Ted mentioned, you know, not to obfuscate or dodge the question, there are a lot of factors that go into evaluating each and every one of those decisions, and it's hard to say prospectively how the quantum of those dynamics, you know, filters out in this system that's ultimately made.

Look I think as you alluding to a little humility is probably for all market participants on you know the sanguine prognostications on a pickup in M So with that as a caveat, you know, the repayment activity was actually relatively healthy in the particular quarter against a, you know, rather tepid M&A environment. And, you know, importantly, when we are making that judgment, Robert, you know, we are probability waiting, right? We're not saying everything in the process is going to get done. We're saying, you know, the quantum of either refis. In certain cases, you have a BSL market that's not, you know, white hot, but is receptive in getting things done. And so there's opportunities for certain of our borrowers to graduate, if you will, as well as also the quantum of sale processes, some of which, you know, as you will probably be well aware, have been deferred.

And, you know, this bid ask, everyone hoping that rates would come down, and it seems that, you know, another factor emerges that maybe pushes it long. And, obviously, many of these holdings within private equity firms are getting pretty long in the tubes. But, ultimately, it's informed by a probability weighting and a strong quantum of things that are in process or soon to be in process or need to be in process to inform that. But the market caveat that it is subject to market conditions, and then I think as your question implied, you know, it's necessary a little bit of humility because we've all thought that M&A would come screaming back for many, many quarters and, frankly, years at this point.

Yeah, thanks for the question, Finn, and certainly a subject that we debate and think critically about within the management team here. and your points are well taken in terms of even at the lower end of our range, it's a high leverage level. I think when we look at it right now, we are very much focused on getting to the 1-4 and reevaluating.

And, you know, as we evaluate there, you know, it will, to state the obvious, And, again, not just to dodge the questions, but it will be a factor of, you know, where we are trading, what the forward payment pipeline looks like. And then importantly also, which we haven't talked about for fairly obvious reasons and that we are not deploying right now, is that when we look at the market, we did see some widening post-Iran hostilities, some of which, particularly in the middle market, has been given back.

And so, you know, all things being equal, that doesn't scream to us right now as an overly compelling redeployment opportunity. And I offer that up as, you know, another factor that will go in to make that decision. But to answer your question specifically, our focus is right now on getting to the lower end of the range. But we take your points and know that we do debate that as a manager team as well.

Yeah, thanks for the question. So approximately as the midcoin number came in, just over $60 million. And we're targeting through to year end. Obviously, as you mentioned, you know, the impacts of tax around Merckx, some equity positions, some other challenging points. you know, we're targeting potentially up to $100 million, you know, subject to, sorry, $1 million subject to, you know, the tax invocations there.

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 any of us if you have any additional questions. Please have a nice day.