MidCap Financial Investment (MFIC) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The financial statements for the quarter ended June 30, 2020, show a decrease in net assets to $998 million from $1.024 billion at March 31, 2020, with Net Asset Value (NAV) per share declining from $15.70 to $15.29. For the quarter, the company generated a net increase in net assets of $3.0 million, a significant drop from $23.8 million in the prior year's quarter, primarily due to lower investment income and net realized/unrealized losses. The investment portfolio's fair value stood at $2.67 billion, concentrated in first-lien secured debt. Statements of Assets and Liabilities Comparison of Assets and Liabilities (June 30, 2020 vs. March 31, 2020) | Financial Metric | June 30, 2020 (Unaudited) (in thousands) | March 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Investments at Fair Value | $2,671,040 | $2,785,433 | | Total Assets | $2,808,975 | $2,871,058 | | Total Debt | $1,755,104 | $1,794,617 | | Total Liabilities | $1,811,032 | $1,846,743 | | Net Assets | $997,943 | $1,024,315 | | Net Asset Value (NAV) Per Share | $15.29 | $15.70 | - Net assets decreased by $26.4 million, or 2.6%, from March 31, 2020 to June 30, 2020[11] Statements of Operations Comparison of Operations (Three Months Ended June 30) | Metric | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Total Investment Income | $56,669 | $66,516 | | Net Expenses | $28,440 | $31,982 | | Net Investment Income | $28,229 | $34,534 | | Net Realized and Change in Unrealized Gains (Losses) | ($25,234) | ($10,705) | | Net Increase (Decrease) in Net Assets from Operations | $2,995 | $23,829 | | Earnings (Loss) Per Share — Basic | $0.05 | $0.35 | - Net investment income decreased by 18.3% year-over-year, primarily due to a $9.8 million reduction in total investment income, which was driven by lower interest income[13] - The company experienced a significant increase in net realized and unrealized losses, moving from a loss of $10.7 million in Q2 2019 to a loss of $25.2 million in Q2 2020[13] Statements of Changes in Net Assets - Net assets decreased by $26.4 million during the three months ended June 30, 2020, resulting from a $3.0 million net increase from operations, offset by $29.4 million in distributions to stockholders[16] - In the prior-year period (three months ended June 30, 2019), the company repurchased $15.1 million of its common stock. No stock was repurchased in the current period[16] Statements of Cash Flows Summary of Cash Flows (Three Months Ended June 30) | Activity | 2020 (in thousands) | 2019 (in thousands) | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $71,032 | ($185,729) | | Net Cash Provided by (Used in) Financing Activities | ($70,310) | $175,049 | | Net Increase (Decrease) in Cash | $722 | ($10,680) | - The significant shift in operating cash flow from a use of $185.7 million in 2019 to a source of $71.0 million in 2020 was primarily driven by lower purchases of investments and higher proceeds from sales and repayments[18] Schedule of Investments - As of June 30, 2020, total investments at fair value were $2.67 billion, down from $2.79 billion at March 31, 2020[58][94] Portfolio Composition by Investment Type (at Fair Value, June 30, 2020) | Investment Type | Fair Value (in thousands) | % of Net Assets | | :--- | :--- | :--- | | First Lien Secured Debt | $2,093,720 | 209.8% | | Second Lien Secured Debt | $309,111 | 31.0% | | Common Equity/Interests | $249,457 | 25.1% | | Structured Products and Other | $9,815 | 1.0% | | Preferred Equity | $8,720 | 0.8% | | Total | $2,671,040 | 267.7% | Top 5 Industry Concentrations (at Fair Value, June 30, 2020) | Industry Classification | Percentage of Total Investments | | :--- | :--- | | Healthcare & Pharmaceuticals | 16.9% | | Business Services | 13.0% | | Aviation and Consumer Transport | 12.9% | | High Tech Industries | 12.4% | | Transportation – Cargo, Distribution | 5.9% | Notes to Financial Statements - The company has elected to be treated as a Business Development Company (BDC) under the 1940 Act and a Regulated Investment Company (RIC) for tax purposes[174] - The company warns that the COVID-19 pandemic has created significant uncertainty, which could materially affect estimates and assumptions used in the financial statements[181][183] - As of June 30, 2020, the company had total unfunded commitments of $475.9 million, including revolver obligations, letters of credit, and delayed draw loans[305][306] - On August 6, 2020, the Board declared a quarterly distribution of $0.31 per share and a supplemental distribution of $0.05 per share, both payable on October 7, 2020[316] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the decrease in Q2 2020 investment income primarily to a lower average yield on the debt portfolio and reduced prepayment fees. The COVID-19 pandemic has adversely impacted investment valuations, leading to increased unrealized losses. Net expenses decreased due to lower interest costs following the repayment of senior notes and a decline in LIBOR. The company maintains adequate liquidity through its credit facility and cash from operations but acknowledges the ongoing economic uncertainty from the pandemic poses significant risks to its portfolio companies and future performance. COVID-19 Developments - Management states that the COVID-19 pandemic has created significant disruption and could continue to adversely impact economic and market conditions, potentially leading to a global recession[330] - The company expects certain portfolio companies to experience financial distress, potentially defaulting on obligations, which could result in a decrease in the value of those investments[331] - The fair value of the investment portfolio has been adversely impacted by the pandemic, and management notes that valuations are inherently less certain and may differ materially from what is ultimately realized[332] Portfolio and Investment Activity Investment Activity (Three Months Ended June 30) | Activity (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Investments made | $137.9 | $435.3 | | Investments sold | ($69.1) | ($9.6) | | Investments repaid | ($163.8) | ($210.7) | | Net investment activity | ($95.0) | $215.0 | - The portfolio's composition at fair value as of June 30, 2020 was 90% secured debt (78% first lien, 12% second lien) and 10% common equity/interests and warrants[341] - The weighted average yield on the total debt portfolio at amortized cost decreased from 8.7% at March 31, 2020, to 8.1% at June 30, 2020[341] Results of Operations - Total investment income decreased by $9.8 million year-over-year, primarily due to a $10.1 million drop in interest income (including PIK). This was caused by a lower average portfolio yield (8.4% vs. 10.0% in the prior year) and a significant reduction in prepayment fees[363][364] - Net expenses decreased by $3.6 million year-over-year, mainly from a $2.1 million reduction in interest and debt expenses due to a lower total cost of debt (3.4% vs. 5.6%) after repaying the 2043 Senior Unsecured Notes[363][367] - Net realized losses for the quarter were $8.4 million, primarily driven by a $6.1 million realized loss on ZPower, LLC, which was previously recorded as an unrealized loss[369] - Net change in unrealized losses was $16.8 million for the quarter, with significant unrealized depreciation in Carbonfree Chemicals ($10.0M), Dynamic Product Tankers ($9.2M), and Merx Aviation Finance ($4.3M)[371] Liquidity and Capital Resources - The company's primary sources of liquidity are its Senior Secured Facility, debt offerings, and cash flows from operations and investment repayments[372] Debt Obligations as of June 30, 2020 | Obligation | Principal Outstanding | Final Maturity Date | | :--- | :--- | :--- | | Senior Secured Facility | $1,409.6 million | Nov 19, 2023 | | 2025 Notes | $350.0 million | Mar 3, 2025 | | Total Debt | $1,759.6 million | | - As of June 30, 2020, the company had $394.1 million of unused capacity under its Senior Secured Facility[375] - On March 19, 2020, the company suspended its stock repurchase program due to market conditions[304] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company identifies its primary market risks as investment valuation risk and interest rate risk. A significant portion of the portfolio is comprised of Level 3 assets, whose fair value is determined in good faith by the board due to the lack of active markets. As of June 30, 2020, 100% of the debt portfolio had variable interest rates, making net investment income sensitive to changes in benchmark rates like LIBOR. The company notes that the planned phase-out of LIBOR by the end of 2021 introduces uncertainty. - The company's main financial market risks are changes in interest rates and the valuation of its investment portfolio, with the COVID-19 outbreak introducing significant volatility[384] - As of June 30, 2020, 100% of the company's debt portfolio investments bore interest at variable rates, generally tied to LIBOR, making net investment income sensitive to interest rate changes[388] Estimated Annual Impact of Interest Rate Changes on Net Investment Income | Basis Point Change | Impact on Net Investment Income | | :--- | :--- | | Up 200 bps | $1.9 million | | Up 100 bps | ($4.1) million | | Up 50 bps | ($4.0) million | | Down 25 bps | $1.5 million | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of June 30, 2020, and concluded they were effective. No material changes to internal control over financial reporting were identified during the quarter. - As of June 30, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at providing reasonable assurance that required information is properly recorded, processed, and reported[390] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[391] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is a defendant in a lawsuit filed by the bankruptcy trustee of DSI Renal Holdings, alleging participation in a "fraudulent conveyance." The complaint seeks damages of approximately $425 million, of which the company's share would be about $41 million plus interest. The company intends to vigorously defend itself and has not determined if the action will be material. - The company is a defendant in a complaint by the bankruptcy trustee of DSI Renal Holdings, alleging participation in a "fraudulent conveyance" related to a 2010-2011 restructuring and sale[395] - The complaint seeks damages of approximately $425 million, with the company's potential share being around $41 million plus interest and punitive damages. The company intends to vigorously defend the action[395][398] Item 1A. Risk Factors This section refers to the risk factors detailed in the company's Annual Report on Form 10-K for the year ended March 31, 2020, indicating no material changes or additions to those previously disclosed risks. - The report directs readers to the Risk Factors section of the Annual Report on Form 10-K for the fiscal year ended March 31, 2020, for a comprehensive discussion of risks[399] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not have any unregistered sales of equity securities. Under its publicly announced repurchase plans totaling $250 million, the company has repurchased $223.1 million of its common stock to date, with $26.9 million remaining available. No shares were repurchased during the quarter ended June 30, 2020. Status of Share Repurchase Plans as of June 30, 2020 | Plan Date | Maximum Authorized (in millions) | Cost of Shares Repurchased (in millions) | Remaining Authorization (in millions) | | :--- | :--- | :--- | :--- | | August 6, 2015 | $50.0 million | $50.0 million | $0 | | December 14, 2015 | $50.0 million | $50.0 million | $0 | | September 14, 2016 | $50.0 million | $50.0 million | $0 | | October 30, 2018 | $50.0 million | $50.0 million | $0 | | February 6, 2019 | $50.0 million | $23.1 million | $26.9 million | | Total | $250.0 million | $223.1 million | $26.9 million | - No shares were repurchased during the three months ended June 30, 2020[298][299]