MidCap Financial Investment Corp. — 2023 Form 10-K
Business context and reporting period. MFIC is an externally managed business development company and regulated investment company. It primarily provides directly originated, privately negotiated loans to U.S. middle-market companies, with a stated objective of current income and, secondarily, long-term capital appreciation. This 10-K covers the year ended December 31, 2023. MFIC changed its fiscal year-end in 2022, so the prior December 2022 reporting period was a nine-month transition period; some period comparisons are not like-for-like.
Key financial and portfolio metrics
| Metric | 2023 / December 31, 2023 | Comparison or context |
|---|---|---|
| Total investment income | $276.5 million | Interest income was $268.1 million; PIK interest income was $3.0 million. |
| Net investment income | $116.0 million; $1.78 per average share | Filing’s nine-month 2022 comparison: $74.1 million; $1.15 per average share. |
| Net increase in assets from operations | $118.8 million; earnings per share $1.82 | Included $0.2 million of realized gains and $2.6 million of net unrealized gains. Nine-month 2022 comparison: $22.9 million. |
| Expenses | $160.5 million net expenses | Interest and other debt expenses were $103.2 million; the annualized cost of debt increased to 7.10% from 4.68% in the filing’s stated comparison. |
| Assets and net asset value | Total assets $2.50 billion; net assets $1.01 billion; NAV $15.41 per share | December 2022 NAV was $15.10 per share. |
| Cash and cash flow | $93.6 million cash and cash equivalents; $122.1 million including foreign currencies. Operating cash flow was $196.4 million; financing cash outflow was $161.4 million. | Cash, cash equivalents and foreign currencies increased by $35.0 million during the year. |
| Debt and liquidity | $1.47 billion principal debt outstanding; asset coverage 168%. Senior secured facility had $1.00 billion of unused capacity. | Debt included $683.0 million under the facility, $232.0 million of CLO Class A-1 notes, and $555.0 million of unsecured notes. |
| Portfolio | $2.33 billion fair value across 152 companies; 90% secured debt and 7% common equity/interests and warrants. | 100% of the corporate lending debt portfolio was floating rate. Weighted average yield was 12.1% on debt and 10.1% on the total portfolio, at current cost basis. |
| Distributions and stock performance | Declared $0.38 per share each quarter, or $1.52 for the year; $123.6 million of distributions were paid. | Total shareholder return was 34.9% for 2023. The $13.68 year-end market price was below $15.41 NAV. |
The filing reports investment income of $276.5 million for 2023 and $230.4 million in a stated 2022 comparison, but the 2022 reporting period is affected by the fiscal-year change. Treat comparisons with that period cautiously; the filing also provides nine-month comparisons where available.
Material changes versus the prior period
- Net investment income increased to $116.0 million from $74.1 million for the nine-month transition period. The filing attributes higher investment income primarily to higher portfolio yields; higher interest and debt expense partly offset the increase.
- Interest and other debt expenses rose to $103.2 million from $73.1 million in the filing’s stated comparison, with the annualized cost of debt rising materially amid higher rates.
- Net realized results improved to a $0.2 million gain from a $71.3 million loss in the stated 2022 comparison, which included write-offs of Dynamic Product Tankers and Glacier Oil & Gas.
- Portfolio fair value declined to $2.33 billion from $2.40 billion, while the number of portfolio companies increased from 135 to 152. NAV per share rose from $15.10 to $15.41.
- MFIC completed a $402.4 million term debt securitization in November and issued $80.0 million of 8.00% notes due 2028 in December.
Outlook, commentary, risks and unusual items
- Management said available cash, short-term investments, borrowing capacity and expected operating cash flows should meet day-to-day needs for at least the next 12 months. No specific earnings or distribution growth guidance is provided.
- MFIC expected its proposed mergers with Apollo Senior Floating Rate Fund and Apollo Tactical Income Fund to close in the first half of 2024, subject to stockholder and other closing approvals. The mergers are not contingent on each other. If completed, the company planned a $0.20-per-share cash distribution to MFIC stockholders; AFT and AIF stockholders were also to receive a $0.25-per-share special payment from the adviser or its affiliates.
- The portfolio is materially exposed to credit and valuation risk: 99.9% of investments were Level 3 at year-end, requiring significant unobservable inputs. Non-accrual investments were 1.2% of investments at amortized cost and 0.2% at fair value.
- Management identified portfolio-specific pressure, including ViewRay’s bankruptcy proceedings and widening credit spreads, partly offset by improved Merx cash flows and higher fair value of US Auto securitization assets. Merx reported a $34.1 million net loss for 2023 and had $74.1 million drawn on its revolver.
- Interest rates affect both loan income and borrower credit quality. Management estimated that a 100-basis-point increase in base rates would increase annual net investment income by about $9.3 million, or $0.143 per share, assuming no balance-sheet changes; a decrease would have the opposite effect.
- MFIC terminated its aircraft-related fee-offset agreement in February 2023 for a $7.5 million termination payment. The 2028 notes bear an 8.00% coupon; the company’s debt maturities include $350 million in 2025 and $125 million in 2026.
- The auditor issued unqualified opinions on the financial statements and internal controls. The critical audit matter was valuation of Level 3 investments. MFIC reported no material legal proceedings and no material cybersecurity incidents affecting the company.
Important facts for investors to verify
- Whether the AFT and AIF mergers closed, their final exchange ratios, transaction costs, realized synergies and effects on NAV, leverage and shareholder ownership.
- Portfolio credit quality, including non-accrual trends, borrower covenant issues, and performance of ViewRay, Merx, ChyronHego and other concentrated exposures.
- Valuation assumptions and independent support for the predominantly Level 3 portfolio, particularly where fair value differs from cost or relies on uncertain recoveries.
- Liquidity and refinancing capacity as the 2025 and 2026 notes mature and facility commitments step down after December 2024; also monitor the 150% asset-coverage requirement and lender covenants.
- Whether recurring cash income supports distributions: 2023 net investment income was $1.78 per average share versus $1.52 declared per share, but some taxable income, including PIK, is non-cash and distributions remain subject to board approval and regulatory constraints.