MidCap Financial Investment Corporation 8.00% Notes due 2028 (MFICL) Q2 2026 Earnings Report, Transcript and Summary

Good morning, and welcome to the earnings conference call for the period ending June 30, 2026, 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. We appreciate your interest in MidCap Financial Investment Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Kenny Seifert, Chief Financial Officer. 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 either the SEC's website at www.sec.gov or our website at www.midcapfinancialic.com. I'd also like to remind everyone that we 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. At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

Thank you, Elizabeth. Good morning, everyone, and thank you for joining for MidCap Financial Investment Corporation's quarterly earnings conference call. Earlier this morning, we issued our press release and filed our Form 10-Q for the period ended June 30, 2026. I'll begin today's call with an overview of MFIC's second quarter results and investment activity. Following that, I'll hand the call over to Ted, who will walk through our investment activity in detail and provide a portfolio update. Kenny will then review our financial results in detail. Beginning with an overview of our results, net investment income or NII per share for the quarter was $0.40, while GAAP net loss per share was $0.21. Net asset value per share at the end of June was $13.37 representing a 3.2% decline from the prior quarter. The $0.45 decrease in NAV was driven by a net loss of $0.61 on the portfolio, which was partially offset by net investment income exceeding the dividend by $0.09 plus approximately $0.07 of accretion from stock repurchases executed below NAV. The quarter reflected some credit pressure within the portfolio with a net loss of $50 million -- $50.3 million or $0.61 per share concentrated among a limited number of positions. Ted will address the largest negative contributor shortly. MFIC new commitments were intentionally modest at $5.8 million for the quarter to support 3 existing borrowers. Net repayments were $160 million in aggregate. As a result of the net loss and stock buyback activity, MFIC's net leverage declined modestly -- declined only modestly to 1.54x at quarter end. Excluding stock buybacks made during the quarter, MFC's net leverage would have declined to 1.5x at quarter end. Looking ahead, we will make capital allocation decisions based on leverage and market conditions. At the end of June, MFIC's investment in Merx totaled approximately $68.6 million at fair value, representing 2.5% of our portfolio. This reflects a $12.5 million paydown during the June quarter from the sale of one aircraft in a joint venture plus a modest write-off. As a reminder, Merx earns income from its servicing activities for Navigator, Apollo's dedicated aircraft leasing fund. Having fully deployed its equity commitments, Navigator is in the harvest period, and as such, the fund is opportunistically monetizing assets to optimize fund level returns. Merx received a remarketing fee on each aircraft sale. Subsequent to quarter end, Merx has sold one aircraft and is in the process of closing on the sale of an engine. Navigator is the process of scaling a large portfolio of aircraft, which will generate servicing income for Merx. We expect to receive additional paydowns from Merx in the September quarter from these transactions. Turning back to the stock repurchases. As discussed on last quarter's call in April, we repurchased $31.9 million of stock through our 10b5-1 trading plan fully utilizing our authorization. Given our focus on reducing MFIC's leverage, we are currently prioritizing capital allocation towards that objective rather than towards additional stock repurchases. Moving on to the dividend. On August 5, 2026, our Board of Directors declared a quarterly dividend of $0.31 per share for stockholders of record as of September 8, 2026, payable on September 24, 2026. With that, I will now turn the call over to Ted.

Thank you, Tanner. Good morning, everyone. I will summarize our investment activity for the quarter and then provide some details on our investment portfolio. As Tanner noted, MFIC's new commitments in the second quarter were $5.8 million, all in support of 3 existing borrowers. In aggregate, net repayments for the quarter totaled $160 million. Shifting to our investment portfolio. At the end of June, our portfolio had a fair value of $2.77 billion and was invested in 229 companies across 45 different industries. Direct origination and other represented 97% of the portfolio. Merx represented approximately 2.5% of the portfolio and liquid positions from our mergers with 2 funds in 2024 totaled approximately 1%. All of these figures are on a fair value basis. Specific to the direct origination portfolio, at the end of June, 97% was first lien and 95% was backed by financial sponsors, both on a fair value basis. The average funded position was $12.1 million. The median EBITDA was approximately $53 million. Approximately 94% had one or more financial covenants on a cost basis. The weighted average yield at cost of our direct origination portfolio was 9.5% on average for the June quarter compared to 9.6% in the prior quarter. At the end of June, the weighted average spread on the directly originated corporate lending portfolio was 539 basis points, up 1 basis point compared to the end of March. Regarding software, our exposure was essentially flat quarter-over-quarter in dollar terms. As of June 30, 2026, software exposure represented just 11.9% of MFIC's portfolio at fair value, which is well below the BDC industry average. You can find additional details on our software exposure on Page 5 of the earnings supplement. As Tanner mentioned, the portfolio generated a net loss of $50.3 million, driven by credit-related weakness concentrated in a limited number of positions. 5 names contributed approximately 80% of the net loss. I will now provide some color on the largest contributors. Starting with ChyronHego, a company that provides workflow technology for graphics creation and real-time data visualization for news and sports productions. During the quarter, MFIC completed a debt for equity exchange, converting $60 million of term debt into preferred equity and reducing the commitment on the revolver. The contraction in market multiples and a decline in EBITDA drove the value of the preferred equity lower, resulting in a $21.5 million net loss for the quarter. The next 4 contributors to the net loss included Midwest Vision Partners, New Era Technology, American Restoration and Thomas Scientific, each of which is experiencing EBITDA pressure and rising leverage. We and MidCap remain proactive in managing these underperforming credits. Turning to overall credit quality. No investments were placed on nonaccrual status during the quarter and 2 investments were restructured and restored to accrual status. At the end -- at quarter end, investments on nonaccrual status totaled $77.6 million, representing 2.8% of the total portfolio at fair value. Borrower net leverage or debt to EBITDA increased to 5.36x from 5.29x at the end of March, while the weighted average interest coverage ratio remained 2.3x. Borrower revolver utilization was roughly flat quarter-over-quarter. PIK income represented 6.2% of total investment income for the June quarter. With that, I will now turn the call over to Kenny to discuss our financial results in detail.

Thank you, Ted, and good morning, everyone. I will begin by reviewing certain key financial information for the quarter, followed by a review of our capital position. Total investment income for the June quarter was approximately $68.2 million, a decline of $3.6 million [ from the prior quarter ]. The decrease was primarily driven by lower interest income resulting from a decrease in the size of the portfolio. Prepayment income was approximately $2.7 million and fee income was approximately $600,000, both flat compared to the prior quarter. Dividend income was approximately $200,000. Net expenses for the quarter were $35.5 million, a decline of $2.1 million or 5.6% from the prior quarter. The decrease was driven primarily by lower interest expenses resulting from a lower average debt balance as well as lower management fees and administrative service expenses. The portfolio had a net loss of approximately $50.3 million or $0.61 per share, which eliminated the incentive fee again this quarter. For the June quarter, net investment income per share was $0.40, while GAAP net loss was $0.21. Turning to the balance sheet. At the end of June, the portfolio had a fair value of $2.77 billion. Total principal debt outstanding was $1.74 billion and total net assets stood at $1.1 billion or $13.37 per share. Company ended the quarter at 1.54x net leverage. As discussed on last quarter's call, during the June quarter, we repurchased approximately 2.76 million shares at an average price of $11.58, inclusive of commissions for a total cost of $31.9 million. As Tanner mentioned, we are currently prioritizing capital allocation towards reducing leverage rather than stock repurchases. Our cost of debt for the quarter increased slightly to 5.66%, up from 5.61% in the prior quarter. Post quarter end, we refinanced $125 million of 4.5% notes that matured in July with our revolving credit facility. At today's base rates, the revolving credit facility carries a higher cost relative to the notes, which is expected to modestly increase our cost of debt. MFIC's liquidity position remains sound with sufficient access to capital under our revolving credit facility. As of the end of the quarter, the undrawn capacity on the revolving credit facility was $925 million. Adjusting for the recent maturity of the 2026 notes, the undrawn capacity is $800 million. Our ability to utilize this capacity is subject to compliance with the borrowing base that applies varying advance rates to different types of assets. As MFIC continues to reduce its leverage, we expect our liquidity position to improve. This concludes our prepared remarks. Operator, we can please open the call to questions.

[Operator Instructions] Our first question is from Arren Cyganovich with Truist Securities.

I guess as we're looking at these results and you're kind of, I guess, seeking to delever and you work through your buybacks, how does this impact, I guess, your ability to continue to be relevant. I know you have other funds. But maybe just talk a little bit about some of the dynamics of how you think about this portfolio and how you'll be managing future investments.

Yes. Thanks, Arren. Thanks for the question. When we look at -- I think this is one of the very compelling features of MFIC in the context of our broader middle market franchise, mid-cap in that we are roughly $3 billion of a $50 billion business. And so our participation or nonparticipation in a loan that's originated by MidCap does not ultimately affect our ability to provide that solution to that company or to that particular sponsor. And as such, in the current environment, as you alluded to, and we had mentioned in our prepared remarks, where we are not participating in new transactions, our MidCap franchise and our broader sponsor coverage effort and frankly, our broader direct lending effort is not in any way compromised by our non-participation. And so in that regard, we do benefit from being a relatively small piece of a much bigger business.

And what are you targeting from a leverage standpoint kind of going forward?

Yes, sure. So the bottom end of our guidance, so in the low 14s.

Okay. So not a whole -- not a huge decline, modest decline and you expect to essentially kind of start to recycle to the extent that you start to see repayments pick up?

Yes. On that point, Arren, I would note that, that is going to be evaluated at the time. As you alluded to or implicit in your question was our focus right now is on deleveraging. And when we look out, notwithstanding a relatively tepid M&A environment, all things considered the quantum of companies that we see that are either in process or soon to be in process and we probability weight, we feel good about our ability to get leverage down, obviously, subject to market conditions. But as it relates to what we'll do at that time, it will be evaluated based on market conditions at that time and successful completion of deleveraging.

Our next question is from Robert Dodd with Raymond James.

Obviously, there have been a lot of press reports about, lack of better term strategic alternatives being reviewed for MFIC. You didn't have any comment about that in your prepared remarks. But can you either give us any color on that or confirm or deny whether such a review is being undertaken by the Board?

Yes. Thanks, Robert. And as you would probably imagine, as a matter of policy, we do not comment on third-party reporting or rumors in the market. That said, our focus remains and always has on maximizing value for stockholders, a principle that informs every decision we make. And we believe that our buyback, frankly, is very much in that spirit. Any required disclosures would be made through the appropriate means if and when required. But as I said before, unfortunately, we do not have a comment on that.

Got it. On to the markdowns, I mean, obviously, yes, the number of nonaccruals actually went down this quarter. But some of the markdowns, like I think Thomas Scientific is not on nonaccrual currently, unless I'm incorrect there. And I mean, you said EBITDA pressure, rising leverage. I mean, -- what do you -- what's the probability or your thoughts on whether some of these issue credits this quarter could migrate to nonaccrual status over the next couple of quarters if they're undergoing, obviously, EBITDA pressure and leverage going the wrong way?

Yes. Thanks, Robert. When we look at the companies in the basket that we're watching very closely and that are having EBITDA and leverage pressure, there's always a number of things going on, right? We're having conversations with the company. We're having conversations with the sponsor. We're having conversations with other lenders. In some cases, there are businesses that are looking to divest subsidiaries or divisions, which could result in deleveraging. There are situations where the sponsor is considering putting equity in. There are situations where the lender group is willing to put in additional funds or make other concessions to free up cash flow. And so when we look at the basket of those, I think if you probability weight that, you will have some of those that are resolved super satisfactorily. And then you'll have some of those where they continue to be challenged. And we'll evaluate quarter-by-quarter whether we think there's a reasonable prospect of putting it on nonaccrual or not at that point in time.

Yes. But certainly, as Ted alluded to, certainly, this is the bucket where there is more scrutiny. I would also call attention to the fact that many of these names are -- or many of the names in this bucket that we're watching closely, perhaps not surprisingly are from the 2020, 2021 vintage capital structure accruals that were done in a different interest rate environment. And certainly, the most recent slight tickup in rates and perhaps a prospect for higher for longer or even risk to the upside in terms of rates could challenge the cash flow prospects. But as Ted mentioned, not to obvious state or dodge the question, there are a lot of factors that go into evaluating each and every one of those decisions, and it's hard to say prospectively how the quantum of those dynamics filters out in this [indiscernible].

Got it. If I can one more, not related to any of that. Your response to the early question, I mean, you sounded more optimistic about the ability to deliver an active market. I mean, essentially, all your competitors are saying the same thing. The M&A pipeline is building. We expect it to be a much more active second half, et cetera. I swear I can hear [ wolf falling ] in the distance. I mean I've said the same thing, right? I mean it's not a criticism. But what's your confidence that this time it will actually happen?

Look, I think that as you're alluding to, a little humility is probably for all market participants on the sanguine prognostications on a pickup in M&A. So with that as a caveat, the repayment activity was actually relatively healthy in the particular quarter against a rather tepid M&A environment. And importantly, when we are making that judgment, Robert, we are probability waiting, right? We're not saying everything in the process is going to get done. We're saying the quantum of either rethought in certain cases, you have a BSL market that's not white hot, but is receptive in getting things done. And so there's opportunities for certain of our borrowers to graduate, if you will, as well as also the quantum of sale processes, some of which, as you will probably be well aware, have been deferred. This bid ask everyone hoping that rates would come down, and it seems that another factor emerges that maybe pushes it long. And obviously, the -- many of these holdings within private equity firms are getting pretty long in the tubes. But ultimately, it is informed by a probability weighting and a strong quantum of things that are in process or soon to be in process or need to be in process to inform that. And but the market caveat that it is subject to market conditions. And then I think as your question implied, it's necessary a little bit of humility because we've all thought that M&A would come screaming back for many, many quarters and frankly, years at this point.

Our next question is from Finian O'Shea, Wells Fargo Securities.

Just picking up on some of this dialogue, and I appreciate the color you gave on leverage and buybacks and understanding that a lot of it relates to future judgment calls. But zeroing in on the leverage dynamic, like as you contemplate buybacks versus new origination on the go forward, why leave leverage so high given that might be a factor that builds on the discount? And then assuming you -- it goes down the path of continued buybacks, does that 140 sort of leverage frame go down as a smaller BDC might have less tolerance for high leverage?

Yes. Thanks for the question, Fin, and certainly a subject that we debate and think critically about within the management team here. And your points are well taken in terms of even at the lower end of our range, it's a high leverage level. I think when we look at it right now, we are very much focused on getting to the 1.4 and reevaluating. And as we evaluate there, it will -- to state the obvious, and again, not to dodge the question, but it will be a factor of where we are trading, what the forward prepayment pipeline looks like. And then importantly, also, which we haven't talked about for fairly obvious reasons and that we are not deploying right now is that when we look at the market, we did see some widening post Iran hostilities, some of which particularly in the middle market has been given back. And so all things being equal, that doesn't scream us right now as a overly compelling redeployment opportunity. And then -- and I offer that up as another factor that will go in to make that decision. But to answer your question specifically, our focus is right now on getting to the lower end of the range, but we take your points and know that we do debate that as a management team as well.

Appreciate that. And a follow-up on the picture of spillover. If you can give -- I know it's probably going to be complicated by equity positions, Merx, et cetera, and can probably move around. But can you sort of outline that for us, like what's the degree of spillover now and how much would sort of naturally roll off and where you -- what the sort of, I guess, pro forma might be? Any color there would be helpful.

Yes. Thanks for the question. So approximately as of midpoint number came in just over $60 million and we're targeting through year-end. Obviously, as you mentioned, the impacts of tax around Merx, some equity positions and some other challenging points. We're targeting potentially up to $100 million subject to -- sorry, $1 million to $100 million subject to the tax implications there.

Sorry, did you say $1 million or it goes...

[Operator Instructions] At this time, there are no further questions in the queue. I will turn the meeting back to management.

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 any of us if you have any additional questions. Please have a nice day.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.