MidCap Financial Investment (MFIC) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Net investment income per share for the June quarter was $0.44, exceeding the current dividend of $0.38, benefiting from higher base rates on floating rate assets [7][16] - NAV per share at the end of June was $15.20, an increase of $0.02 from the end of March, reflecting earnings in excess of dividends and stock buybacks [7][39] - Total expenses for the quarter were $39.8 million, up $1.5 million compared to the last quarter, primarily due to higher interest expense [17] Business Line Data and Key Metrics Changes - Gross funding for the corporate lending portfolio totaled $73 million, with sales and repayments amounting to $58 million, resulting in net fundings of $22 million for the quarter [11] - The weighted average yield of the corporate lending portfolio was 11.7%, up from 11.3% in the previous quarter, driven by an increase in base rates [35] - The weighted average net leverage of the companies in the corporate lending portfolio remained at 5.45 times, unchanged from the prior quarter [36] Market Data and Key Metrics Changes - The corporate lending and other portfolio, which constitutes 92% of the total portfolio, primarily consists of first lien loans, indicating a well-diversified risk profile [30] - The market environment showed a slowdown in new issue volumes driven by slower M&A activity, although financial sponsors are still seeking financing solutions in the private credit market [31] Company Strategy and Development Direction - The company is focused on reducing its investment in Merx, with a strategy to utilize aircraft sales and servicing income to pay down debt [8] - The management emphasized the importance of maintaining a conservative leverage ratio and a diversified portfolio to navigate through economic cycles [12][34] Management's Comments on Operating Environment and Future Outlook - Management noted stable credit quality in the portfolio, with no significant signs of credit weakness, although there is some deceleration in top-line growth [13] - The company is closely monitoring interest coverage ratios, which have decreased slightly, but management believes the situation is manageable due to strong liquidity among borrowers [14] Other Important Information - The Board of Directors declared a dividend of $0.38 per share, representing an annualized yield of 10% on NAV, with discussions ongoing regarding potential dividend increases [32] - The company repurchased approximately $2.3 million of stock during the quarter, contributing to NAV per share accretion [18] Q&A Session Summary Question: What is the current activity level with equity sponsors? - Management observed a modest uptick in activity from LBO sponsors, indicating a greater willingness to engage despite seasonal slowdowns [64] Question: How is the portfolio yield expected to change? - The yield is expected to expand, with a mix of base rate increases and potential tightening spreads as M&A activity picks up [44][66] Question: What is the outlook for companies with below 1X interest coverage? - Management indicated that some sponsors are injecting equity to cover interest coverage issues, and they are in active dialogue with those companies [69] Question: Is there a potential for a special dividend? - The Board is evaluating options for returning excess income to shareholders, including the possibility of a special dividend, but no definitive decision has been made [72] Question: How does the company view the current lending environment? - Management believes that the current environment presents opportunities for private credit to take market share from traditional banks, especially as capital requirements for banks increase [67]