Good afternoon, and welcome to the earnings conference call for the period ended December 31, 2022, for MidCap Financial Investment Corporation. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Greg Hunt, Chief Financial Officer. Howard Widra, Executive Chairman as well as additional members of the management team are on the call and 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 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 our website at www.midcapfinancialic.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 MidCap Financial Investment Corporation as either MFIC or the BDC and we will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland. At this time, I'd like to turn the call over to our Chief Executive Officer, Tanner Powell.

Thank you, Elizabeth. Good afternoon, everyone, and thank you for joining us today. I'd like to begin today's call by highlighting our results for the quarter, followed by a review of our investment strategy, including some performance data, which we believe shows why we're so confident in our strategy. I will then provide an update on some of the good progress we have made reducing our investment in Merx and will conclude with the increase to our quarterly dividend. Following my remarks, Ted will review our investment activity and provide an update on portfolio credit quality. Lastly, Greg will review our financial results in detail and provide some additional comments on Merx. We will then open the call to questions. Beginning with our financial results after market closed today, we reported net investment income per share of $0.43, which benefited from the positive impact of higher base rates. As a reminder, there's generally some lag before we see the full impact of higher base rates due to the timing of loan resets. At the end of December, net asset value per share was $15.10, a decline of 2.3% quarter-over-quarter, mostly due to losses outside of our first lien corporate lending strategy. Regarding investment activity, new commitments continue to focus on first lien corporate loans sourced by MidCap Financial. We have also made significant progress reducing our exposures outside of our core strategy. Sales and repayments during the quarter included nearly all of our remaining oil and gas exposure, which is now less than $1 million at fair value. In addition, post quarter end, we received a significant pay down from Merx, reducing our position by roughly 24%. Pro forma for this pay down Merx represents approximately 8.3% of the portfolio at fair value. Shifting to a review of our investment…

Thank you, Tanner. Beginning with a few thoughts on the current evolving macroeconomic environment. Volatility in the leverage finance and equity capital markets continued during the period as the Federal Reserve continued to raise interest rates to curb inflation amid ongoing concerns around slowing economic growth. In 2022, the Federal Reserve increased rates 425 basis points and has increased rates by an additional 25 basis points so far this year with more rate increases expected, albeit at a slower pace. More recently, we have seen some signs of easing inflation, however, and Fed hawkishness is expected to keep markets volatile in the near term. As a result, primary new issuance in the leveraged loan and high-yield markets continues to be negatively impacted. We believe it will take time for the Federal Reserve's actions to be fully absorbed by the economy, and therefore, M&A transaction volumes will remain slower in the near term. We believe that the increased volatility in the public markets has created more attractive investment opportunities for direct lenders as more companies turn to the private debt markets. We're seeing wider spreads, lower leverage and tighter documentation across our origination platform and continue to be selective seeking to finance companies with defensible market share and resilient balance sheet. For example, credit spreads are at least 100 to 150 basis points higher than last year across our origination platform. With this as the market backdrop, we thought it would be worthwhile to remind everyone how we have constructed our corporate lending investment portfolio. We believe MFIC has 1 of the most senior secured portfolios among BDCs. Our corporate lending portfolio is focused on floating rate investments at the top of the capital structure, which we believe positions us well going into a weaker economic environment. In order to understand…

Thank you, Ted, and good afternoon, everyone. Before discussing our results, I wanted to remind everyone that MFIC has changed its fiscal year-end from March 31 to December 31. The change in fiscal year was done to better align MFIC's reporting calendar with other Apollo Global entities. The transition report on Form -- on Form 10-K, which was filed today, includes a 9-month period from April 1, 2022, through December 31, 2022. MFIC's next fiscal year will cover the period from January 1, 2023 to December 31, 2023. You can see the year-over-year results in the 10-K that we filed today. Shifting to our results. Net investment income per share for the December quarter was $0.43 compared to $0.35 for the September quarter and $0.35 in the year-ago quarter. Net investment income for the December quarter continued to benefit from higher base rates on our floating rate assets, solid fee and prepayment income, as well as a lower incentive fee compared to the comparable periods. Prepayment income was $2.8 million, down slightly from last quarter, and fee income was approximately $700,000 compared to $1.5 million last quarter. Dividend income was essentially flat quarter-over-quarter. The yielded cost on our corporate lending portfolio was 10.3% on average for the quarter, an increase of 140 basis points from last quarter, driven by the increase in base rates. This yield figure is an average of the beginning and the end of the quarter. At the end of December, the yield of the corporate lending portfolio was approximately 11% compared to 9.6% at the end of September. NAV per share at the end of December was $15.10, a 2.3% decrease quarter-over-quarter, primarily driven by losses outside of our first lien lending book. In that regard, and as previously indicated, our corporate lending portfolio of $2.1…

[Operator Instructions] And our first question will come from Mark Hughes with Truist.

For Merx, I think you talked about the opportunity for more paydown in 2023. Are transactions required in order to generate that? Or can they pay down just from operating cash flow?

Yes. So -- thanks, Mark. So the answer there is, it's not necessary for big wholesale transactions. We've got, as Greg mentioned, 43 planes in the portfolio today. To state the obvious, these are not CUSIP securities. So they're not -- cannot be traded on the wire. They take long -- it's a long process in order to execute on these sales. And there are tax considerations as well. We have -- we do have a yield on the portfolio today. To see substantial moves in the reduction of the -- of our exposure there, you would expect to need sales of assets either individually or in larger groups.

Within the portfolio, the high-tech industry is about 17%, I think. Any impact there has been some volatility in the tech on the job front. Are you seeing any of that within your portfolio?

No. In our -- in high tech, we -- this was a delineation that was made back in '06 when the fund was founded and it catches a lot of things, including software, which is something that the broader market has done quite a bit. When we think about the exposure there, the good news from a software standpoint is oftentimes the software itself, is the different companies are targeting different underlying markets with different fundamentals. And oftentimes, we're creating -- those deals typically are adding even lower LTV than our average LTV across our leveraged lending portfolio, which is roughly 50%. So there's significant cushion in any event, notwithstanding, as you rightly pointed out, there are some broader challenges in the tech space.

Our next question will come from Robert Dodd with Raymond James.

Just 1 other question. I think in your prepared remarks, you said, I mean, spreads have widened significantly 100 to 150 basis points, and we've heard others say the same thing. But to that point, when I look at your new commitments, 680 this quarter, it was 639 last quarter, but it was also 639 a year ago. So that's about 40 basis points in widening and on the new commitments, the leverage is about the same. So could you give us -- have you taken the opportunity -- I assume that 100 to 150 is kind of like-for-like. Have -- over the course of the year, have you taken the opportunity to go even more cautious on the assets and maybe that's following back the visibility of the spread expansion in new commitments? Or any color you hearing on that?

Yes. Thanks, Robert. I think it's absolutely that, and it's a little bit also that when we quote those numbers, we're looking kind of across our businesses, across our -- kind of across our middle market lending platform and what we're doing at MidCap. And I think this is a good point to emphasize, this is 1 of the dynamics that drove our decision to reduce our cost structure and give us the ability to participate in an even greater percentage of what MidCap is sourcing. And so while we were always trying to be in the 600s where we could in the most recent quarter, you do see us deploying roughly $75 million at the 680, which we think is reflective of the market. And to your point, reflects both 1 that we're trying to stay a little bit more conservative as well as also in anticipation of the broader market -- sorry, the fee change that we can participate in a greater percentage of the deals and effectively, our cost of capital has come down.

Got it. Got it. I appreciate that. I mean 1 -- on kind of the energy exits. I mean, was that -- I don't know, I don't want to [ work this little way ]. I mean I presume that's something that's been worked on a while other than just a decision to just get out once this quarter. So I mean, obviously, there were some realized losses but we kind of knew that. But is -- could you give us any color on getting rid of more than 1 quarter, which is quite active. What really drove that? Or is this just all happen to come together?

Yes. Sure, Robert. Happy to address that. So several years ago, we began the process of migrating towards the broader strategy. And starting in 2020 and then in 2021, we took the opportunity to work with the management teams and restructure the business and get those businesses ready to go to market and then did so in 2022. In some cases, hiring advisors, running processes, and this is across oil and gas as well as the shipping assets that we sold last year. And it just so it turns out that for both of the assets, they ended up closing in the quarter, the 2 oil and gas assets. So they have been worked on for operationally, financially for a couple of years and then in terms of actual M&A process over the course of the year.

[Operator Instructions] Our next question will come from Ryan Lynch with KBW.

I had a -- my first question was just on kind of the nature that you guys described the write-down from the NAV this quarter. I believe you said they were mostly due to spread widening. But wasn't the largest markdown really coming from your corporate lending book, and that was really just driven by the debt-to-equity restructuring of K&N, which to us would seem like kind of a credit markdown. So I guess, I'm just a little bit confused unless I'm misunderstanding of why, but the markdowns this quarter were kind of describe that as mostly spread widening versus credit?

Yes. No, I think the -- and thanks for the comments and happy to clarify that. You're right, there was 1 part of the write-down component that was second lien. That was the K&N investment that went through a restructuring, which was completed post quarter end. And then I think in the prepared comments, the comment was within the first lien credit book, the write-down within the first lien credit was the mark-to-market. So it's really kind of 2 different components there.

Yes. The prepared remarks, Ryan, we're emphasizing that it was outside of the first lien strategy that we saw the big decline and you're exactly right. That had -- that was largely due to the K&N write-down.

And within the corporate strategy, it was a mark-to-market.

Got you. And then you guys gave some statistics on weighted average interest coverage, 2.5x on trailing 12 months, 1.9x in September annualized. Have you guys done any sort of analysis that looks at what that interest coverage is going to look like in calendar 2023 when kind of LIBOR SOFR kind of peak out? And then obviously, the weighted average interest coverage is kind of the mostly quoted statistic, but from a credit standpoint, I don't think most investors are sort of worried about the average borrower default and I think it's more likely in the risk or more in the tailwinds of potential borrowers having issues. So have you guys done any sort of analysis on, at what interest coverage would look like on a forward basis and what percentage of your portfolio would fall below that 1x interest coverage level?

Yes, sure. So I appreciate there's -- these numbers are a little bit backward looking. And so what we've done or of all the analysis to distill it down to the conclusion, when you take the current LIBOR kind of thinking the 477 or the LIBOR as of 12, LIBOR/SOFR at the end of the year. We just have a handful kind of less than 5 names that fall below 1x coverage. And then we stress that another 100 basis points, which is slightly above what the market is pricing in, in terms of increases to LIBOR/SOFR/interest rates. That number only increases by 3 or 4 names. And so still in that context, even with, call it, 5.75% to 6% SOFR, we're seeing fewer than 10 names below 1:1. And that, of course, is before the benefit of the year to address and offset some of that increase in the underlying companies.

Okay. That's really helpful. And then just 1 final one. On the reduction in Merx that -- those interests being sold, is that what we should sort of expect going forward is more sort of these chunkier dispositions that kind of come over time? Or do you guys expect sort of a gradual repayment schedule of those to the extent that you guys can predict anything like that, which may not be possible?

Yes. I mean I think we would expect it to be a little bit of a step function, which would be lumpy, but probably not as lumpy as the 1 this quarter. So there are, like, sets of assets that sort of obviously go together, same lessor, for example -- lessee, for example, that we would expect to exit. So yes, so I mean, I think it will be more plane by plane as opposed to sort of like complete entities, but it won't necessarily be just like 1 by 1 by 1. So I know that's like an imperfect answer. So -- but that's our expectation.

No, that makes sense. It's a perfect sort of process trying to sell these things off, so I definitely understand the unpredictability.

[Operator Instructions] And our next question will come from Melissa Wedel with JPMorgan.

I was hoping you could touch on portfolio leverage and how you're feeling about current levels. I would assume that with where you're at currently at about -- just about 1.4x on a net basis, but you're still in sort of a bit of a capital recycling mode as repayments come in and exits occur. Is that a fair assumption? Or are you thinking about things differently?

I think that's a fair assumption. That is the 1.41x where we came out this quarter, is at the bottom of our range. We did provide guidance last quarter that we would expect to operate in and around that range. And to your point, redeploying what comes back to us. I would note, and hopefully, it's obvious from some of the other comments and questions is we do believe that further economic volatility notwithstanding, this will be a good vintage for credit lenders on account of good spread, improving documentation and lower all-in leverage. And so we do want to participate in this market and make sure we are properly indexed to what we believe is a good market for private credit and make sure MFIC is the beneficiary of that.

Okay. I appreciate that. And I think as a follow-up on some of the outstanding commitments, and I'm looking at Slide 18 in your deck specifically. As you think about sort of the commitments available to be drawn down on, I think I'm looking about $193 million, kind of rounding $193 million. As you think about the potential for a more challenging operating environment, are you expecting to see that number start being drawn upon by existing portfolio companies? And if that's the case, I assume that the terms have already been set, so they're not sort of dictated by the current environment, but by the terms that were agreed upon when that commitment was made. Could you just kind of elaborate on that process a little and how you're thinking about it?

Yes, sure, Melissa, very good question. And so the first point is we have not seen a tick up in revolver utilization across MFIC or our broader business. And I think on this account, good news, bad news is, the bad news is we went through COVID. But the good news is in having gone through COVID, and experienced those instances wherein there was the preemptive drawing down of the revolvers, we had the opportunity, both in new loans as well as also in existing loans to put in the type of terms to protect on the margin against such as anti-cash hoarding and eliminating netting in terms of covenant compliance. And so while, if stresses are more acute than we expect or are continuing at the level, obviously, cash flows may become challenging. You would expect a higher utilization, but we haven't seen and at a minimum, on account of what we've been able to do from a documentation standpoint, think that, that risk of excessive drawdowns within our revolvers to be much less risk than what we've seen historically.

And then on the term loans, those have defined use of proceeds as well. So they're primarily in place to support sponsors, going to make acquisitions to grow their portfolio of companies. And so the delayed draw term loans, which is I think what you were pointing out on the slide, those can't be drawn down just for liquidity purposes.

Thank you. And at this time, we have no further questions in the queue, so I would like to turn it back over to management for any additional or closing remarks.

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 evening.

Thank you, ladies and gentlemen. This does conclude today's conference call, and we appreciate your participation. You may disconnect at any time.