MidCap Financial Investment Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2022; amounts below are in U.S. dollars. Although the request identifies 2023 Q2, this filing covers the quarter ended September 30, 2022. The company subsequently changed its fiscal year-end from March 31 to December 31, effective December 31, 2022.
Business context: MFIC is an externally managed business development company (BDC) and regulated investment company (RIC), investing primarily in middle-market company debt and, to a lesser extent, equity. It changed its name from Apollo Investment Corporation on August 1, 2022; its shares began trading as MFIC on August 12.
Financial performance and condition
| Metric | Three months ended Sept. 30, 2022 | Six months ended Sept. 30, 2022 | Prior comparable period |
|---|---|---|---|
| Investment income | $58.9 million | $112.3 million | $52.9 million and $103.4 million, respectively |
| Net investment income | $22.6 million; $0.35 per share | $46.1 million; $0.72 per share | $21.2 million and $46.6 million; $0.33 and $0.72 per share |
| Net realized and unrealized gains (losses) | $(6.6) million | $(24.5) million | $4.2 million and $11.0 million |
| Net increase in assets from operations | $16.0 million; $0.25 per share | $21.7 million; $0.34 per share | $25.4 million and $57.6 million |
| Cash from operating activities | Not presented as a quarterly figure | $87.2 million provided | $109.0 million used |
- Portfolio and NAV: Investments at fair value were $2.464 billion, versus $2.523 billion at March 31, 2022; cost was $2.719 billion. Net assets were $1.011 billion, up from $1.005 billion, while NAV per share fell to $15.45 from $15.79. At September 30, the market price was $10.22 per share.
- Portfolio mix and valuation: At fair value, 91% of investments were secured debt and 99% of the portfolio was floating-rate. Healthcare and pharmaceuticals, high tech, and aviation/consumer transport were the largest industry concentrations. Nearly all investments were Level 3, requiring significant unobservable valuation inputs. Non-accrual investments were 1.8% of investment cost and 1.0% of fair value.
- Debt and liquidity: Debt, net of financing costs and discount, was $1.504 billion, compared with $1.551 billion at March 31. Cash and cash equivalents were $60.3 million; cash, equivalents, and foreign currencies totaled $61.7 million. The senior secured facility had $741.8 million of remaining capacity, after letters of credit. The company reported compliance with debt covenants and asset coverage of $1,655 per unit, or approximately 165.5%.
- Distributions and capital: Distributions paid were $0.36 per share for the quarter and $0.72 for the six months. The company issued 1.93 million shares to an affiliate for approximately $30 million at $15.52 per share, subject to a two-year lock-up. It repurchased 128,522 shares for $1.6 million during the six months.
Changes versus the prior comparable period
- Six-month investment income rose 8.6%, mainly from higher interest income and portfolio yields; the reported average total-debt-portfolio yield increased to 8.8% from 7.9%.
- Six-month net investment income declined slightly, to $46.1 million from $46.6 million, as expenses rose 16.3% to $66.2 million. Interest and other debt expenses increased to $36.6 million from $26.6 million; annualized total debt cost increased to 4.58% from 3.54%.
- Six-month operating results fell to $21.7 million from $57.6 million, primarily reflecting $24.6 million of net unrealized losses in 2022, versus $75.7 million of unrealized gains in 2021. The prior-year comparison also included $64.7 million of net realized losses, chiefly on Spotted Hawk and Glacier Oil & Gas.
- Six-month market total return was negative 17.79%, compared with negative 0.37% in 2021. The filing reports distributions and market-price performance; investors should distinguish this return measure from NAV performance.
Outlook, risks, and unusual items
- Management said available cash, borrowing capacity, expected operating cash flows, and other resources should cover operating needs for at least the next 12 months. No numerical earnings or investment guidance was provided.
- After quarter-end, the Board declared a $0.37-per-share base distribution payable January 5, 2023, to holders of record December 19, 2022; continuation is not assured.
- The filing highlights risks from rising interest rates, inflation, Russia’s invasion of Ukraine, COVID-19 effects, foreign exchange, and the transition away from LIBOR. Most portfolio debt is floating-rate, which management said could increase income as rates rise, but borrower debt-service pressures and wider credit spreads could weaken portfolio company performance and valuations. A 100-basis-point rate increase was estimated to increase annual net investment income by $8.2 million, assuming no balance-sheet changes.
- Portfolio fair values are subject to uncertainty: substantially all investments are Level 3, and the filing cautions that realized proceeds may differ materially from reported values. Restricted securities were valued at $200.8 million, or 20% of NAV.
- Total unfunded commitments, including letters of credit, were $406.7 million at September 30. Draws depend on contractual conditions; $39.5 million of standby letters of credit were outstanding.
- The filing reports no material legal proceedings, no defaults upon senior securities, and effective disclosure controls. Interim financial information received an independent accountant’s review, not an audit opinion.
Investor facts to verify
- Confirm the reporting period: this is the quarter ended September 30, 2022, not a 2023 quarter.
- Review the portfolio’s Level 3 marks, non-accrual exposures, and major unrealized losses, particularly the Merx, NFA Group, K&N Parent, and Spotted Hawk positions.
- Assess whether higher benchmark rates improve net investment income enough to offset portfolio-company stress and higher funding costs.
- Check debt-facility availability, borrowing-base and asset-coverage headroom, and the timing and likelihood of unfunded commitment draws.
- Verify the sustainability and tax character of distributions; the filing says the final tax characterization was not yet determined.
- Review the affiliate share issuance, related-party arrangements, and the change in incentive-fee terms scheduled to take effect in 2023.