MidCap Financial Investment (US:MFIC)2023-11-08 19:13Financial Data and Key Metrics Changes - For the quarter ended September 30, 2023, net investment income per share was $0.43, which is above the current dividend of $0.38, reflecting the benefits of higher base rates on floating rate assets [49][34] - GAAP net income per share for the same quarter was $0.46, indicating a modest gain on the investment portfolio [59] - Net asset value (NAV) per share increased to $15.28, up $0.08 or 0.5% from the previous quarter [25][59] Business Line Data and Key Metrics Changes - The investment portfolio had a fair value of $2.37 billion, with 92% in corporate lending and 8% in Merx [29] - New investment commitments totaled $19.8 million, all in first lien loans, with an average commitment of $2.2 million across 9 borrowers [28] - The weighted average yield at cost of the corporate lending portfolio was 12%, up from 11.7% in the previous quarter [29] Market Data and Key Metrics Changes - New issue leveraged loans are rebounding, driven by refinancings and repricings, despite concerns about inflation and recession [51] - The market remains broadly lender-friendly, with favorable pricing and terms on new commitments compared to prior vintages [51][75] - The weighted average interest coverage ratio was 1.9x, down from 2.1x in the previous quarter, with 4 companies below 1x [57] Company Strategy and Development Direction - The company aims to become a leading pure-play middle market BDC, focusing on first lien floating rate loans to middle market companies [5] - The merger with Apollo Senior Floating Rate Fund and Apollo Tactical Income Fund is expected to enhance scale and earnings power, increasing net assets by approximately 43% [8][46] - The company plans to rotate liquid assets into higher-yielding directly originated loans [9][46] Management's Comments on Operating Environment and Future Outlook - Management noted that corporate lending portfolio companies are demonstrating revenue and earnings growth despite a challenging operating environment [12] - The company expects to realize operational synergies from the mergers, estimating annual savings of approximately $3.1 million [45] - Management remains confident in the credit quality of the portfolio, with no significant signs of overall credit weakness [31][50] Other Important Information - A special cash dividend of $0.20 per share will be paid following the merger closings [6][44] - The company has sufficient debt financing in place to execute the transactions, estimating a requirement of approximately $600 million [22] - The company closed its first CLO transaction, enhancing liquidity and diversifying funding sources [61] Q&A Session Summary Question: Are you seeing any portfolio companies forgo CapEx activity? - Management indicated that while some companies may be cautious, overall credit quality remains stable, and companies are managing cash flow effectively [39][63] Question: What is the long-term outlook for ROE improvement post-mergers? - Management expects ROE to improve as the portfolio is rotated and capital is redeployed, estimating an accretive effect of $0.07 to $0.10 per share annually [40][65] Question: Why merge both funds now? - The timing is based on the improved stability and profile of the company, with robust investment opportunities exceeding available capital [69][71] Question: What will the target leverage look like post-merger? - The company plans to maintain its target leverage range of 1.4x to 1.6x, with an initial lower leverage post-merger [94][106] Question: How will the liability structure look post-merger? - The company will repay existing credit facilities from the closed-end funds, focusing on diversifying financing sources while leveraging the CLO market [109]