M&A Expectations and Dividend Sustainability: Contradictions Unveiled in MFIC's Latest Earnings Call

Merx Investment Reduction:
- MidCap Financial Investment Corporation (MFIC) reduced its investment in Merx significantly, with a planned net repayment of $90 million in the September quarter.
- This reduction will result in a positive impact to MFIC's NAV in the high-single digit per share range relative to its June 30 carrying value.
- The reduction is due to the successful sale of a large portion of Merx's aircraft fleet and insurance recoveries, enhancing risk-adjusted returns for MFIC.

Increased Market Activity and Diversification:
- MFIC made $262 million of new commitments across 29 transactions in Q2, with slightly more than half to existing portfolio companies.
- The weighted average spread on new commitments was 526 basis points, and the weighted average net leverage was 4x.
- The company benefited from its strong incumbent position and observed a slight increase in the spread per unit of leverage on new commitments, driven by market conditions and strategic positioning.

Dividend and Capital Allocation:
- MFIC declared a quarterly dividend of $0.38 per share, aiming to enhance dividend coverage following the Merx repayment.
- The Merx repayment is expected to generate approximately $0.06 per share in additional net investment income, enhancing long-term value for shareholders.
- These moves are part of MFIC's strategy to redeploy capital from underperforming assets into higher-yielding investments and maintain strong dividend coverage.

Portfolio Performance and Risk Management:
- The weighted average yield at cost of MFIC's directly originated lending portfolio was 10.5%, and the weighted average spread was 568 basis points.
- The portfolio had a fair value of $3.33 billion, with approximately 99% of loans being first lien and 90% backed by financial sponsors.
- MFIC's underwriting process has proven robust, with a net realized and unrealized loss rate of approximately 6 basis points since mid-2016 on loans sourced by MidCap Financial.