MidCap Financial Investment (MFIC) 8 Aug 24 2024 Q2 Earnings call transcript

MidCap Financial Investment Corporation's second quarter earnings call highlighted a period of significant growth and strategic repositioning for the company. The successful completion of mergers with Apollo Senior Floating Rate Fund, Inc. and Apollo Tactical Income Fund, Inc. marked a crucial step towards becoming a leading pure-play middle-market Business Development Company (BDC). This evolution is expected to bring benefits such as enhanced portfolio diversification, improved portfolio metrics, and operational synergies.

The mergers have significantly bolstered MidCap Financial's net assets, increasing them by approximately 44%. This increase in net assets has positioned the company well to deploy capital into true First Lien Senior Secured Loans sourced by MidCap Financial, a leading middle market lender with a strong origination track record. The company's focus on investing in First Lien loans to middle market companies has resulted in stable credit quality, with borrowers demonstrating solid performance despite higher borrowing costs.

During the quarter, MidCap Financial's new investment commitments totaled $285 million across 28 different borrowers, reflecting a focus on diversification by borrower. The weighted average spread on new commitments was 559 basis points, and the net leverage on new commitments was 3.3x. These figures underscore MidCap Financial's commitment to maintaining a well-diversified senior corporate lending book.

The company's investment portfolio, valued at $2.4 billion, was invested in 165 companies across 23 different industries, with corporate lending and other investments accounting for over 92% of the total portfolio. The company has been reducing its investment in its aircraft leasing and servicing business, Merx, with the goal of paydowns allowing for the paydown of third-party debt and MFIC's investment in Merx over time. As of June 30, 2024, the investment in Merx totaled $187 million, representing 7.7% of the total portfolio at fair value.

MidCap Financial's focus on First Lien loans, sourced by MidCap Financial, a leading middle market lender, has proven to be a sound strategy. The underwriting on mid-cap source loans has shown annualized net realized and unrealized loss around 3 basis points on loans sourced by Midcap Financial since mid-2016. This performance data demonstrates the strategy's success and underscores the company's expertise in the middle market lending space.

The macro environment remains favorable, with Apollo's Chief Economist expecting the Fed to cut rates by 25 basis points in September, signaling a soft landing for the economy. The credit market continues to be strong, and M&A and LBO activity have shown an increase in Q2 2024, despite lagging expectations. Auction activity has also seen a meaningful pickup, and MidCap Financial is well-positioned to capitalize on this trend, given its access to a large and diverse deal flow.

The company's strategic focus on middle market loans, top of the capital structure, cash pay, and floating rate loans, has resulted in a well-diversified portfolio. The company's underwriting on mid-cap source loans has proven to be sound, and the company's disciplined approach to portfolio construction, coupled with its large dedicated portfolio management team, ensures that it is well-equipped to identify and address issues early, providing meaningful downside protection.

In conclusion, MidCap Financial Investment Corporation's earnings call highlighted a period of strategic repositioning and growth. The successful completion of mergers and strategic focus on middle market loans have positioned the company well to capitalize on the strong credit market and favorable economic conditions. The company's disciplined approach to portfolio construction, coupled with its access to a large and diverse deal flow, bodes well for its future performance.