MidCap Financial Investment (MFIC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The financial statements present the company's financial position and operational results, highlighting a decrease in Net Asset Value (NAV) per share driven by net unrealized losses despite an increase in net investment income Statements of Assets and Liabilities Total assets and liabilities rose due to increased investments and debt, while net assets and Net Asset Value (NAV) per share declined Statements of Assets and Liabilities (in thousands, except per share data) | Metric | December 31, 2019 (Unaudited) | March 31, 2019 | | :--- | :--- | :--- | | Total Investments at fair value | $2,967,197 | $2,408,132 | | Total Assets | $3,060,024 | $2,497,797 | | Total Debt | $1,785,637 | $1,128,686 | | Total Liabilities | $1,844,142 | $1,185,170 | | Net Assets | $1,215,882 | $1,312,627 | | Net Asset Value Per Share | $18.27 | $19.06 | Statements of Operations Total investment income and net investment income increased year-over-year, but significant net realized and unrealized losses reduced the net increase in net assets from operations Statements of Operations Highlights (in thousands) | Metric | Nine Months Ended Dec 31, 2019 | Nine Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Total Investment Income | $205,316 | $193,666 | | Net Expenses | $98,828 | $98,469 | | Net Investment Income | $106,488 | $95,197 | | Net Realized and Change in Unrealized Losses | $(75,305) | $(55,096) | | Net Increase in Net Assets from Operations | $31,183 | $40,101 | | Earnings Per Share — Basic | $0.46 | $0.56 | Statements of Changes in Net Assets Net assets decreased primarily due to distributions to stockholders and common stock repurchases, which outweighed the net increase from operations Changes in Net Assets (Nine Months Ended Dec 31, 2019, in thousands) | Category | Amount | | :--- | :--- | | Net Assets at beginning of period | $1,312,627 | | Net Increase from Operations | $31,183 | | Distributions to Stockholders | $(90,741) | | Repurchase of common stock | $(37,187) | | Net decrease in net assets | $(96,745) | | Net Assets at End of Period | $1,215,882 | Statements of Cash Flows Net cash used in operating activities increased significantly due to higher investment purchases, while net cash from financing activities rose from higher debt issuances Cash Flow Summary (Nine Months Ended, in thousands) | Activity | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(510,507) | $(46,251) | | Net Cash Provided by Financing Activities | $511,413 | $55,821 | | Net increase in cash and equivalents | $906 | $9,570 | Schedule of Investments The investment portfolio, valued at $2.97 billion, is primarily composed of first and second lien secured debt and is diversified across industries like Healthcare and Business Services Total Investments (December 31, 2019, in thousands) | Metric | Amount | | :--- | :--- | | Total Investments at Cost | $3,075,456 | | Total Investments at Fair Value | $2,967,197 | Portfolio Composition by Industry (at Fair Value, Dec 31, 2019) | Industry Classification | Percentage of Total Investments | | :--- | :--- | | Healthcare & Pharmaceuticals | 16.2% | | Business Services | 14.1% | | Aviation and Consumer Transport | 12.6% | | High Tech Industries | 10.3% | | Transportation – Cargo, Distribution | 5.7% | Portfolio Composition by Investment Type (at Fair Value, Dec 31, 2019) | Investment Type | Percentage of Net Assets | | :--- | :--- | | First Lien - Secured Debt | 191.0% | | Second Lien - Secured Debt | 34.3% | | Structured Products and Other | 1.0% | | Preferred Equity | 1.4% | | Common Equity/Interests | 16.5% | | Warrants | 0.0% | Notes to Financial Statements The notes detail the company's BDC and RIC status, accounting policies, related party agreements, investment portfolio specifics, debt, and shareholder equity transactions - The company is a closed-end, externally managed, non-diversified management investment company that has elected to be treated as a Business Development Company (BDC) and a Regulated Investment Company (RIC)[196][199] - For investments without readily available market quotes (Level 3), the company uses a multi-step valuation process involving the Investment Adviser, senior management, independent third-party firms, and the Board of Directors[215] - The Investment Adviser (AIM) receives a base management fee (1.50% on gross assets, reduced to 1.00% above 200% leverage) and a two-part performance-based incentive fee[245][247][248] - As of December 31, 2019, the company had $592.6 million in total unfunded commitments, including revolver obligations, letters of credit, and delayed draw loans[346][348] Debt Obligations (as of December 31, 2019, in thousands) | Debt Instrument | Principal Amount Outstanding | Final Maturity Date | | :--- | :--- | :--- | | Senior Secured Facility | $1,440,666 | 11/19/2023 | | 2025 Notes | $350,000 | 03/03/2025 | | Total Debt | $1,790,666 | | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting increased investment income from a larger portfolio, higher interest expenses from increased leverage, and a portfolio shift towards first lien debt Portfolio and Investment Activity Net investment activity increased substantially, with the portfolio's composition shifting towards safer first lien secured debt while the weighted average yield decreased Net Investment Activity (in millions) | Period | Investments Made | Investments Sold/Repaid | Net Investment Activity | | :--- | :--- | :--- | :--- | | Nine Months Ended Dec 31, 2019 | $1,442.0 | $(849.1) | $593.0 | | Nine Months Ended Dec 31, 2018 | $1,027.8 | $(934.6) | $93.2 | Portfolio Composition at Fair Value | Investment Type | Dec 31, 2019 | Mar 31, 2019 | | :--- | :--- | :--- | | First lien secured debt | 78% | 66% | | Second lien secured debt | 14% | 23% | | Total secured debt | 92% | 89% | | Other | 8% | 11% | Results of Operations Investment income grew due to a larger portfolio, while higher interest costs increased expenses and unrealized depreciation in certain assets widened net losses - The increase in total investment income for the nine months ended Dec 31, 2019, was primarily due to a higher income-bearing investment portfolio, partially offset by a decrease in the average yield[406] - The increase in net expenses for the nine-month period was driven by a $12.0 million rise in interest and other debt expenses, attributed to an increase in average debt outstanding to $1.44 billion[408] - For the nine months ended Dec 31, 2019, the company recorded a net realized loss of $6.3 million and a net change in unrealized losses of $69.0 million, with significant unrealized losses in Spotted Hawk ($23.8M) and Glacier Oil & Gas ($13.3M)[410][412] Liquidity and Capital Resources The company's liquidity is sourced from its Senior Secured Facility and debt offerings, with significant debt obligations and continued activity in its share repurchase program - As of December 31, 2019, the company had total debt obligations of $1.79 billion, with maturities primarily between 3 to 5 years for the Senior Secured Facility and beyond five years for the 2025 Notes[415] - The company maintains an 'opt out' dividend reinvestment plan and paid distributions totaling $91.8 million, or $1.35 per share, for the nine months ended December 31, 2019[417][419] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk due to its floating-rate loans and debt, with a net positive sensitivity to rising interest rates Interest Rate Sensitivity Analysis (as of December 31, 2019) | Basis Point Change | Estimated Annual Impact on Net Investment Income | | :--- | :--- | | Up 200 basis points | $13.0 million | | Up 100 basis points | $6.3 million | | Down 100 basis points | $(4.4) million | | Down 200 basis points | $1.0 million | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - Management concluded that as of December 31, 2019, the company's disclosure controls and procedures were effective at a reasonable assurance level[426] - No changes in internal control over financial reporting occurred during the third fiscal quarter of 2020 that materially affected, or are reasonably likely to materially affect, the company's internal controls[427] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is a defendant in a 'fraudulent conveyance' lawsuit related to the DSI Renal Holdings bankruptcy, facing a potential liability of approximately $41 million - The company is involved in a legal proceeding related to the bankruptcy of DSI Renal Holdings, with the complaint alleging 'fraudulent conveyance' and seeking damages where the company's potential share is approximately $41 million plus punitive damages[431] Item 1A. Risk Factors No material changes have been made to the risk factors previously disclosed in the company's most recent Annual Report on Form 10-K - The report refers to the Risk Factors section of the Annual Report on Form 10-K for the year ended March 31, 2019, indicating no material changes[432] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company had no unregistered equity sales and has $41.9 million remaining under its authorized share repurchase program Share Repurchase Plan Status (as of Dec 31, 2019, in millions) | Status | Amount | | :--- | :--- | | Maximum Authorized for Repurchase | $250.0 | | Cost of Shares Repurchased | $208.1 | | Remaining for Repurchase | $41.9 | Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the reporting period - None[437]