MidCap Financial Investment Corp (MFIC) (Q1 2024) Earnings Call Transcript Highlights: ...

• Net Investment Income Per Share: $0.44 for the March quarter.

• Annualized Return on Equity (ROE): 11.4% based on net investment income.

• GAAP EPS: $0.39 for the March quarter.

• Dividend: Declared at $0.38 per share, payable on June 27, 2024.

• NAV Per Share: Increased slightly to $15.42 at the end of March.

• Portfolio Value: Fair value of $2.35 billion invested across 154 companies.

• Corporate Lending Portfolio: 92% of total portfolio, with 97% first lien positions.

• New Investment Commitments: $149 million in new first lien commitments during the March quarter.

• Weighted Average Yield at Cost: 12.1% for the corporate lending portfolio.

• Net Leverage Ratio: 1.35 times at the end of March.

• Warning! GuruFocus has detected 4 Warning Sign with MFIC.

Release Date: May 08, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• MidCap Financial Investment Corp (NASDAQ:MFIC) reported a slight increase in net asset value per share and stable credit performance.

• The company continued to de-risk its portfolio, reducing exposure in second-lien positions and focusing on first-lien loans, which now constitute 97% of the corporate lending portfolio.

• MFIC declared a consistent dividend of $0.38 per share, representing an annualized yield of approximately 9.9% based on NAV per share as of March 31.

• The company has a strong pipeline of investment opportunities, with $149 million of new first lien commitments during the quarter, indicating robust future growth potential.

• MFIC benefits from its affiliation with Apollo and MidCap Financial's extensive experience and data in middle-market lending, providing a competitive advantage in the market.

Negative Points

• Despite the overall positive performance, GAAP EPS for the March quarter was $0.39, reflecting a $0.05 loss on the net on the investment portfolio.

• The company is exposed to a 'higher for longer' interest rate environment, which could impact borrower costs and investment valuations.

• There is ongoing geopolitical uncertainty and elevated inflation, which could pose risks to economic stability and MFIC's operations.

• The competitive landscape in the middle market lending space is intensifying, with some compression in spreads observed.

• MFIC is undergoing significant changes, including proposed mergers with Apollo Senior Floating Rate Fund Inc. and Apollo Tactical Income Fund, Inc., which could lead to integration challenges and uncertainties.

Q & A Highlights

Q: Given the broadly syndicated markets, have you perceived much in the way of competitive moves impacting spreads in the middle market? A: Howard Widra, Executive Chairman of the Board, explained that while there is competition causing compression, it's not directly from the broadly syndicated market. The middle market remains somewhat insulated due to the need for comprehensive coverage and continuity with sponsors, which larger market players typically do not provide.

Q: Can you comment on the trajectory of spreads this year, from January to now? A: Tanner Powell, CEO, noted that while there has been significant tightening reflected in deals commenced last year, there is now some stability in spreads post-December. The current environment allows for new credit asset creation with a full pipeline, indicating a stable yet tight spread scenario in the middle market.

Q: Post-merger, what will the pro forma leverage look like? A: Tanner Powell mentioned that post-merger, the leverage would be approximately between 1.15 times and 1.2 times.

Q: With the merger, is there a shift to a more offensive strategy in terms of investment? A: Tanner Powell clarified that the merger would allow for more capital deployment but emphasized that the strategy of investing in loans sourced by MidCap remains unchanged. The merger is seen as an opportunity to enhance this strategy further.

Q: How are you managing the mix between floating rate and fixed rate liabilities given the current rate environment? A: Gregory Hunt, CFO, explained that the strategy involves matching liabilities with assets, considering the fixed rate notes and the use of swaps to manage interest rate exposure effectively.

Q: Given the high interest rate environment and its potential persistence, have there been any changes in sponsor activities or increased amendment requests? A: Gregory Hunt noted that companies have become more efficient in preparation for longer-term holds. There is still significant dry powder in the market, driving transactions despite high rates. Early discussions about extensions and repricings are occurring, but there is no significant increase in amendment requests yet.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.