Good morning, and welcome to the Earnings Conference Call for the period ended June 30, 2024 for MidCap Financial Investment Corporation. At this time, all participants have been placed in listen-only mode. The call will be opened for a question-and-answer session following the speakers' prepared remarks. [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 on 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 website at www.sec.gov or our website at www.midcapfinancialic.com. I'd also like to remind everyone that we posted a supplemental 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 the 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 would like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

Thank you, Elizabeth, and thank you to everyone who has joined today's call, especially those of you who may be newer to MFIC. I will begin today's call with an update on the successful completion of our mergers with our previously affiliated funds, Apollo Senior Floating Rate Fund Inc. and Apollo Tactical Income Fund Inc., which we will refer to as AFT and AIF or the CEFs throughout today's call. I will then provide an overview of MFIC's second quarter results and will also provide our perspective on the current environment. Ted will then discuss our investment activity and provide an update on the investment portfolio. He will also review the assets that we acquired in connection with the mergers. Greg will then review our financial results in greater detail and will also review some of the accounting aspects of the mergers. Beginning with the mergers, we are pleased to announce that on July 22, MFIC successfully closed its mergers with AFT and AIF, two listed closed-end funds managed by Apollo. We believe these mergers mark an important step in MFIC's evolution to becoming a leading pure-play middle-market BDC. We remain enthusiastic about realizing the potential benefits that we highlighted when we announced the mergers last November. Let me remind you of some of these key benefits. First, we expect these mergers will be both ROE and NII per share accretive for all shareholders as we rotate the CEF's lower-yielding investments in the ordinary course into higher-yielding directly originated loans that align with MFIC's investment strategy. Second, the mergers are expected to enhance MFIC's portfolio diversification and improve certain portfolio metrics. Third, we expect to be able to realize operational synergies from the elimination of certain duplicative expenses from the mergers. And lastly, we believe that the larger market capitalization…

Thank you, Tanner. Good morning, everyone. I will spend a few minutes reviewing our second quarter investment activity and our investment portfolio. I will then review the investments we acquired via the mergers with the closed-end funds. During the June quarter, MFIC's new investment commitments totaled $285 million across 28 different borrowers for an average new commitment of $10.2 million, as we continue to focus on diversification by borrower. 23% of new commitments were made to existing portfolio companies. Despite spread compression, we believe the risk return profile on these new commitments remains compelling. The weighted average spread on our new commitments in the June quarter was 559 basis points. Net leverage on new commitments was 3.3 times, down from 3.9 times last quarter. The weighted average OID for new commitments was approximately 157 basis points. This spread in OID translates into very attractive unlevered asset yield of over 11%, assuming a 5% base rate. In terms of funded investment activity for the quarter, gross fundings for the corporate lending portfolio, excluding revolvers, totaled $214 million. Sales and repayments totaled $131 million. Net corporate lending revolver fundings were positive $10 million, and we received a $3 million paydown from Merx. In aggregate, net fundings for the quarter totaled $90 million. Turning to our investment portfolio. We've built what we believe is a well-diversified senior corporate lending book. At the end of June, prior to the close of the mergers with the closed-end funds, our portfolio had a fair value of $2.4 billion, and was invested in 165 companies across 23 different industries. Corporate lending and other represented over 92% of the total portfolio and Merx accounted for less than 8% of total portfolio on a fair value basis. 97% of corporate lending portfolio was first lien and over 99% of…

Thank you, Ted, and good morning, everyone. Beginning with our financial results, net investment income per share for the June quarter was $0.45, which reflects solid recurring interest income as well as strong fee and prepayment income. For the quarter, prepayment income was $3.2 million and fee income was approximately $900,000. PIK income remains low, representing approximately 3.6% of total investment income for the quarter. GAAP net income per share for the quarter was $0.35. Results for the quarter correspond to an annualized return on equity, or ROE, based on net investment income of 11.8%, and an annualized ROE based on net income of 9%. Results for the latest 12-month period correspond to an annualized ROE based on net investment income of 11.6% and an annualized ROE based on net income of 11.1%. MFIC NAV per share at the end of June was $15.38, down $0.04 quarter-over-quarter, which reflected net investment income of $0.45, which is $0.07 above the $0.38 distribution and an $0.11 per share net loss in the portfolio. As Ted mentioned, the vast majority of our corporate lending portfolio continues to have strong fundamental performance. MFIC's net assets increased by $450 million from the mergers. Both the NAV per share of $15.38 and the $450 million increase in net assets exclude the impact of the one-time special distribution of $0.20 or $18.8 million made in connection with the mergers. Net expenses for the quarter were $39.6 million, down slightly compared to the prior quarter, primarily due to lower incentive fees and lower administrative expenses, offset by higher interest expense given the increase in the size of the portfolio. The weighted average interest rate on our debt for the quarter was approximately 7%. We intend to continue to evaluate and monitor capital raising transactions going forward. Management fees…

[Operator Instructions] We'll take our first question from Kenneth Lee of RBC Capital Markets.

Hey, good morning. Thanks for taking my question. Just in terms of the portfolio rotation over the next few quarters, the non-directly originated assets being sold, I assume you're talking about the BSLs, the structured credit and the high-yield bonds from the closed-end funds. Granted that the BSL market is fairly liquid, but just want to get a better understanding of any kind of key constraints around the pace of sales, for example, like the structured credit, the high-yield bonds? Thanks.

Yeah, thanks, Ken, And thanks for the question. I think -- so, first of all, as we mentioned in the prepared remarks, we've already, even since closing the mergers on July 22, made some good progress and sold or raised roughly $125 million of proceeds. So, some really good progress out of the gate. And I think your question is alluding to a very important piece of how we are going to proceed from here. And that being, if you look across the roughly $400 million that's in those three respective buckets of type of investment, there's going to be a number of securities or loans that are not as liquid. And so, we would look at this program and this rotation strategy as not contingent on selling every last broadly syndicated loan or high-yield bond. And obviously, certain of those securities or loans don't have the same liquidity, would require us to take a discount to fair market value, which we would not want to take. And as a result, you should see us continue to make progress in reducing that, but by no means should expect us to sell out of all $400 million, and importantly, consider reinvestment yield and the type of discount one might have to take in order to transact on those bonds and loans.

Great. Very helpful there. And just one follow up, if I may. Any updated outlook on potential ROE or ROE accretion just going forward? Thanks.

No, we are not going to update that guidance. Obviously, we're looking at the potential for lower base rates, but as we outlined in our prepared remarks, as well as which referenced our November materials, we see significant synergies to improve both ROI -- ROE and NII.

Got you. Very helpful. Thanks again.

We'll take our next question from Melissa Wedel of JPMorgan.

Good morning. Thanks for taking my questions. I'm trying to sort of reconcile the math around the rotation strategy that you described and also growing leverage -- or building leverage in the portfolio back up to target levels. It seems like there's a lot of rotation and just sort of organic churn that we should be expecting in the portfolio, but also, it seems like a pretty short timeframe within two quarters or so to get back to the target. Hoping you can, like, help walk us through that a little bit, but also just confirm the target range that you're thinking about in this environment. Thank you.

Yeah, sure. Thanks, Melissa. So, if we start with the lower end of our guided leverage range of 1.4 times and the pro forma leverage that we reported or we disclosed in the prepared remarks of 1.13 times, if you just took up leverage, if you just got to that 1.4 times, that would be investment capacity of nearly $400 million, $386 million to be more exact. And obviously, that's growth, net of any sell-offs you have there. And then, this will reference the --- my answer to Ken's question is, if you look at the broadly syndicated, I did allow for the fact that the goal is not necessarily to sell every last bond and loan and to be discriminating in how we sell and ensure that we're not sacrificing FMV to move that risk. But just for argument's sake, if you were to rotate out of all that $389 million of non-directly originated assets that came over with the mergers, it brings us to total investment capacity of roughly $775 million. And so that's -- so if you think about this from two perspectives, Melissa, on one hand, we have the $389 million to sell, of which we've sold $125 million, and caveat that the goal is not necessarily to sell all $389 million. That's one piece of it, and that will be market-dependent over the next couple quarters. Importantly, and I think this has been a really important piece of our strategy -- of our story for quite some time, and thus it's worth emphasizing, on the other side, in terms of deployment, we're extremely lucky to be now just over $3 billion of assets, which itself is roughly only one-tenth of the assets within the MidCap Financial ecosystem. That's in excess of a $30 billion business. And so, from a deployment standpoint, we have never had an issue with deployment or access to assets. And with this incremental capital, whether it's playing an increased number of deals or increased -- a roughly higher average size of deal, that piece of the equation, i.e., the redeployment itself is very much provided for by the breadth of the MidCap Financial origination platform that we're very lucky to have access to.

Thank you.

We'll take our next question from Finian O'Shea of Wells Fargo Securities.

Hey, everyone. Good morning. Higher-level question. With Howard moving over to Apollo and taking on what seems to be building out the direct origination effort and marrying that with MidCap's, can you outline the sort of firm-wide direct lending setup such as how do you collaborate and maybe compete? Do you split up sponsors? Do you go by deal size on who leads? Anything that you think would be important for the MidCap investor? Thank you.

Yeah, I can take that, Fin. It's Howard. So, again, like, to the market, we have one offering, which is the combined Apollo-MidCap menu of direct lending options. So, we -- there is a calling effort to sponsors which combines resources at Apollo and MidCap, which I'm responsible for, which basically goes to market and says, we're available for your capital needs. Those capital needs are these direct lending loans, which you see go into sort of the large market Apollo effort and the MidCap effort. There's also other things we provide, sponsors, which could be NAV loans or GP capital generally or rediscount loans when they have finance capacity, equipment loans, whatever the case may be. So, we are going to the market and we are saying, here is our catalog of capabilities. And then, when a deal comes in, there are sort of two strategies which overlap, which I think is the most relevant part of the question. So, one is, if there is a core middle-market deal, say, $50 million -- $40 million, $50 million of EBITDA being done at 5 times, that is being executed by MidCap. And, often, portions of the Apollo ecosystem will take some of that loan, especially because in the 40 Act, you want to be part of transactions as they grow. So, they may take a little bit. On the other side of the spectrum, $300 million EBITDA company that's doing whatever, $1.5 billion private credit deal, three parties $500 million. Let's say, Apollo's taking down, that will be by and large -- or that will be done by sort of the [AGS, CDC] (ph), and other satellite entities. And we have the option, meaning MFIC has the option to take part of the -- in those, but generally won't. Might…

Awesome. A lot of color and really appreciate that. I guess just another high-level follow-up. With the mergers complete, and congratulations on that, what's your -- I assume you probably want to be one of these $5 billion BDCs, maybe, maybe not. What would the sort of path forward be? Some of your peers do large private to publics. There's a lot of those going on. Some are going in publics secondary-style growth. Like, how do you look at all that? And I guess, what is the -- anything in the immediate future?

Well, just I'm going to channel [indiscernible] for a second, which is he sort of says, like, the size of the BDC is not the goal, it's the reward for doing the business the right way. So, we are focused on, and our expectation is we will continue to sort of generate appealing risk-adjusted returns. So, our -- there will be an ability to grow in the normal course, meaning, hopefully trading well in sort of -- trading well on an absolute basis in order sort of people to want to invest more. So, that's like the core focus. Continue to execute, and we will be rewarded, and we will be able to grow. With regard to sort of other sort of less tactical growth opportunities, I think what -- generally, our view has been everything we -- and this almost goes to the other thing. Everything we do, we want to be accretive to our shareholders. So, in other words, like, we don't want to grow at the expense of that. And so, we'll look at everything. That could be, like, which -- as you know, we haven't seen in our industry. Like, everybody would love to merge in another BDC and take in another contract and grow if you think you could deploy the capital well. That stuff hasn't really happened, so it's hard to predict that. But, like, any of the -- any ways to sort of access capital that are accretive to our current shareholder base, we'll consider. I'll stop there. I don't know if Greg or Tanner have anything to add.

No. And I think that's well stated.

All right. Thanks so much, everybody.

[Operator Instructions] We'll take our next question from Mark Hughes of Truist.

Yeah, thank you. Good morning. I wonder if you could talk a little bit about the commitment activity in the quarter. Your average borrower exposure continues to move down a little bit. The leverage of 3.3 times versus 3.9 times is down sequentially and this quarter's activity well below the overall portfolio net leverage. What are you seeing in the market? What are you kind of focusing on? Just sort of curious with those movements.

Yeah, sure, Mark. Hi, it's Ted. In the first half of the year, broadly speaking, M&A was down. But as we kind of moved through the second quarter, in the marketplace, we saw the pipeline building as private equity firms were starting to line up more LBO activity. That may not have shown itself in all of the stats that are more backward looking, but I think certainly and you probably heard this from others, as we look at our pipeline going forward, it's building very nicely. And in terms of deployment in the second quarter, we did some of which were based on incumbency, but then part of that was, as we look to accelerate ahead of the merger, we knew where that was coming out. So, we did accelerate our deployment. So, we finished at 1.45 times, still in the low end of the range, but certainly was in anticipation of the merger closing and then deleveraging down post that closing. So, in terms of activity, like, again, what are we focusing on, we focus on the same thing quarter after quarter, which is middle market loans, top of the capital structure, cash pay, floating rate and continue to try to build and stay diverse across sectors and sponsors.

I'd add one thing, your specific question around commitment amount and I'll actually allude to a comment that Howard made is that given the limitations from a 40 Act standpoint, it behooves us to participate at the time the deal is originally originated, Mark, such that we'll have the opportunity to do follow-ons to the extent that we don't participate where you're -- we're necessarily crowded out. So, you'll see that. And then, also with regard to commitment size and Ted alluded to this, but just maybe dig in another level deeper is ultimately, a lot comes from incumbency as he said, and ultimately that will have a lot to do with how big of an acquisition that particular company is doing and that would influence our commitment size. And so, I think, I wouldn't read too much into it, it's going to ebb and flow based on that. But for emphasis, one of the real -- I'll go back to this point about our access to the MidCap origination. If you look at MidCap, there is roughly 500 borrowers, pro forma for the merger, we obviously have a significantly number of obligors. And over time, we hope to be able to -- though roughly $1.4 billion in net assets, be able to run a really, really diversified portfolio and show obligors well in excess of 200 to stress the benefit our platform has of access to very, very diverse deal flow and be reflected in the diversification of our portfolio.

Yeah, thank you for that. And then, the expense synergies associated with the merger, have you talked about timing on that and potential impact on returns or NII?

Yeah, well, the expense are -- when you kind of looked at the consolidated group, right, with the closed-end funds and MFIC, so the expenses essentially are eliminated at this closed-end funds, and very little increase in expenses at MFIC, you'll have some valuation increases. So, it's already happened, okay? So, it was really looking at that consolidated expense level, it was about $3 million -- a little bit over $3 million of expenses taken out of the closed-end funds, but -- and so the MFIC will stay relatively the same from an SG&A basis.

Thank you.

And there are no further questions at this time. I'd be happy to return the call to our host for any concluding 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 day.

This does conclude the MidCap Investment Corporation for the period ended June 30, 2024 earnings call. You may now disconnect your lines and everyone have a great day.