MidCap Financial Investment Corporation — Q2 2023 Form 10-Q
Business context and period. MFIC is an externally managed business development company and regulated investment company that primarily lends to U.S. middle-market businesses. This filing covers the quarter and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $68.6 | $53.4 | $136.4 | $108.1 |
| Net investment income | $28.9 | $23.5 | $58.3 | $50.4 |
| Net realized and unrealized gains (losses) | $(3.4) | $(17.8) | $(2.8) | $(40.5) |
| Net increase in assets from operations | $25.4 | $5.7 | $55.5 | $9.9 |
| Basic earnings per share | $0.39 | $0.09 | $0.85 | $0.16 |
- Income and costs: Investment income rose 28% in Q2 and 26% for the six-month period, primarily as higher floating-rate yields lifted interest income. Net investment income increased about 23% and 16%, respectively. The filing reports no conventional operating-company revenue or profit margin; MFIC reports investment income and net investment income.
- Expenses and interest cost: Net expenses increased to $39.8 million in Q2 from $29.9 million, and to $78.1 million for six months from $57.8 million. Interest and other debt expense rose with borrowing costs: annualized total debt cost was 7.04% in Q2 and 6.94% for six months, versus 4.02% and 3.81% in the comparable 2022 periods.
- Portfolio and NAV: Investments at fair value were $2.409 billion, versus $2.398 billion at year-end; investment cost was $2.617 billion. Net assets were $991.7 million and NAV was $15.20 per share, up from $988.1 million and $15.10. The reported market price was $12.56 per share at June 30.
- Debt and liquidity: Debt on the balance sheet was $1.483 billion, compared with $1.483 billion at year-end. Cash and cash equivalents were $49.4 million; cash, cash equivalents and foreign currencies totaled $50.2 million. For the six months, operating cash flow was $54.2 million and financing cash outflow was $91.1 million. The revolving facility had $634.2 million of available capacity, after letters of credit, and $1.705 billion of lender commitments.
- Distributions and leverage: MFIC paid $0.38 per share in Q2 and $0.76 per share for six months. Asset coverage was 164% at June 30. The six-month annualized ratio of net investment income to average net assets was 11.87%, compared with 10.11% in 2022.
Material changes and portfolio developments
- MFIC’s portfolio was 91% secured debt at fair value, including 88% first-lien debt. All investments in its corporate debt portfolio were reported as floating-rate. Weighted average yield on the total debt portfolio at amortized cost increased to 11.8% from 10.9% at year-end.
- Portfolio exposure was concentrated in high tech (18.6% of investments at fair value), healthcare and pharmaceuticals (18.3%), and business services (12.0%). The portfolio had 150 companies, versus 135 at year-end.
- Q2 unrealized losses were $3.3 million, compared with $18.1 million a year earlier. Management attributed Q2 2023 valuation pressure primarily to Ambrosia Buyer Group underperformance and widening credit spreads. For the first half, management also cited Berner Foods underperformance.
- Investments on non-accrual declined to 1.0% of investment cost and 0.3% of fair value, from 1.9% and 0.6% at year-end. PIK income was $1.6 million for the six months; it is non-cash income that may still need to be distributed to stockholders.
- Unfunded commitments totaled $340.3 million, including $66.7 million of standby letters of credit. The company also disclosed a $118.9 million unfunded revolver commitment to its controlled affiliate Merx Aviation Finance.
Outlook, commentary, risks and unusual items
- Management stated that cash, short-term investments, facility availability and expected operating cash flows should be adequate for daily operations for at least the next 12 months. The filing gives no earnings or portfolio-growth guidance.
- The board declared a $0.38-per-share base distribution on August 2, 2023, payable September 28; the company cautioned that future distributions at this level are not assured.
- MFIC amended and restated its senior secured revolving facility in April 2023, extending final maturity to April 2028. The facility is secured by substantially all portfolio assets and has financial, borrowing-base and other covenants. The company reported compliance with all debt covenants at June 30.
- Interest-rate exposure is material: MFIC estimated that a 100-basis-point increase would raise annual net investment income by $9.2 million, while a 100-basis-point decrease would reduce it by the same amount, assuming no change in portfolio or borrowing structure. Changes in rates can also affect portfolio-company credit quality and investment valuations.
- Nearly all investments—$2.408 billion, or 99.9%—were Level 3, valued using significant unobservable inputs. MFIC warns that actual sale proceeds may differ materially from reported fair values. Other risks include portfolio-company credit deterioration, illiquidity, foreign-currency exposure and the requirement to distribute taxable income, including some non-cash PIK income.
- Effective February 2023, Merx and Apollo terminated several aircraft-related service arrangements and the fee-offset agreement in exchange for a $7.5 million termination fee; Merx is reducing its aviation platform while continuing to service certain legacy investments. The filing does not clearly state the fee’s income-statement treatment.
- The Chief Accounting Officer notified MFIC of his intention to resign in June; the filing says the transition was not due to a disagreement. Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting. MFIC reported no material legal proceedings.
Most important facts for investors to verify
- How Level 3 valuations, particularly the Ambrosia, Berner Foods and other weaker investments, compare with subsequent borrower performance and recoveries.
- Whether rising debt costs, floating-rate borrower stress, non-accruals and PIK income affect future net investment income and cash distributions.
- The availability and borrowing-base headroom of the secured facility, including the impact of $66.7 million of letters of credit and $340.3 million of total unfunded commitments.
- Whether the $0.38-per-share distribution remains supported by recurring cash income, rather than non-cash accruals or other sources.
- The economic and accounting effects of the Merx platform reduction and $7.5 million termination fee, as well as progress in the Chief Accounting Officer transition.