MidCap Financial Investment (US:MFIC)2023-02-22 00:45Financial Data and Key Metrics Changes - Net investment income per share for the December quarter was $0.43, an increase from $0.35 in the September quarter and the same period last year [35] - Net asset value (NAV) per share at the end of December was $15.10, a decline of 2.3% quarter-over-quarter, primarily due to losses outside of the first-lien corporate lending strategy [19][36] - The weighted average interest coverage ratio was 2.5 times, down from 2.7 times in the previous quarter [33] Business Line Data and Key Metrics Changes - The first lien corporate lending portfolio grew to nearly $2 billion at fair value by the end of December 2022, with total losses during the period amounting to approximately $7 million or 12 basis points on a cumulative basis [2][3] - The corporate lending portfolio comprised 94% first liens, with a weighted average spread of 610 basis points [55] - The investment in Merx was reduced to approximately $199 million or 8.3% of the portfolio at fair value after a significant transaction [6][7] Market Data and Key Metrics Changes - In 2022, MidCap Financial closed approximately $16.4 billion in new commitments, including $4 billion in the December quarter [21] - The weighted average net leverage of new commitments made during the quarter was 4.8 times, which is 0.7 times below the average of the portfolio [32] - The yield on the corporate lending portfolio increased to approximately 11% at the end of December, compared to 9.6% at the end of September [58] Company Strategy and Development Direction - The company is focused on being a pure-play, senior secured middle market BDC, emphasizing the reduction of investments in Merx and increasing exposure to first lien corporate loans [5][23] - The establishment of a new fee structure and equity investment into the BDC by MidCap Financial reinforces the company's commitment to democratizing finance [22] - The corporate lending portfolio is designed to weather a more challenging economic environment, focusing on floating rate investments at the top of the capital structure [29][61] Management's Comments on Operating Environment and Future Outlook - The macroeconomic environment remains volatile due to ongoing Federal Reserve interest rate hikes aimed at curbing inflation, with expectations of further rate increases [10][25] - Despite the challenges, the company believes that increased volatility in public markets has created attractive investment opportunities for direct lenders [26] - The company is well-positioned to grow earnings in the coming quarters due to the rising interest rate environment, estimating that a 50 basis point increase in base rates could result in incremental annual earnings of approximately $0.06 [38] Other Important Information - The company has changed its fiscal year-end from March 31 to December 31 to align with other Apollo Global entities [57] - The incentive fee on income has been permanently reduced from 20% to 17.5%, and the base management fee was also reduced, making it the lowest among listed BDCs [59] Q&A Session All Questions and Answers Question: What is the outlook for Merx and its paydowns? - Management indicated that while they expect additional paydowns in 2023, these may not occur evenly and will depend on market conditions [7][63] Question: How is the company managing its exposure to the high-tech industry amid volatility? - Management noted that their high-tech exposure includes various sectors, and they have structured deals to maintain lower loan-to-value ratios, providing a cushion against market challenges [64] Question: Can you elaborate on the nature of the writedown from NAV this quarter? - The writedown was primarily due to spread widening, with a significant markdown coming from the KNN investment, which underwent a restructuring [70][82]