MidCap Financial: A Well-Covered 9.4% Yield, But Don't Chase It

Core Viewpoint - MidCap Financial Investment Corporation (MFIC) has a diversified portfolio primarily focused on senior secured loans, with a significant portion in floating-rate loans, which may face challenges if interest rates decline in the future [1][4][10]. Portfolio Overview - As of March 2024, MFIC's portfolio is valued at $2.35 billion, with 97% in first liens and 100% in floating-rate loans [1]. - The portfolio includes an investment in Merx Aviation, representing 8% of the total portfolio value, providing unique positioning in the BDC market [1]. Financial Performance - In 1Q24, MFIC earned $68.3 million in total investment income, a 1% increase year-over-year, but net investment income fell by 3% due to higher interest and debt expenses [7]. - The net investment income per share was $0.44, down $0.01 year-over-year, with a consistent dividend payout of $0.38 per share [8]. Credit Quality - The non-accrual ratio for MFIC was 0.6% based on fair value, reflecting a slight increase of 0.4 percentage points quarter-over-quarter, indicating robust credit quality [11]. - The BDC's credit quality is comparable to Ares Capital Corp., which reported a non-accrual ratio of 0.7% in 1Q24 [5]. Dividend Metrics - MFIC maintains a dividend payout ratio of 86%, indicating a stable dividend supported by consistent earnings and cash flow [8][13]. - The current dividend yield stands at 9.4%, with a stable payout ratio over the past year, ranging between 83% and 88% [13]. Market Position and Valuation - MFIC's stock is currently trading at a 5% premium to book value, compared to a 9% discount when first recommended, suggesting a shift in market perception [14]. - The company is expected to face challenges in sustaining its premium valuation in a potentially lower interest rate environment [14][15].