MidCap Financial Investment Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. MFIC is an externally managed business development company (BDC) focused primarily on privately negotiated senior secured loans to U.S. middle-market companies. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $68.2 | $58.9 | $204.6 | $167.0 |
| Net investment income | $27.9 | $22.6 | $86.2 | $73.0 |
| Net increase in net assets from operations | $30.0 | $16.0 | $85.5 | $25.9 |
| Basic earnings per share | $0.46 | $0.25 | $1.31 | $0.40 |
| Net realized and unrealized gains (losses) | $2.1 | $(6.6) | $(0.7) | $(47.1) |
- Balance sheet at September 30: Total assets $2.455 billion; investments at fair value $2.369 billion; debt carrying value $1.434 billion; cash and cash equivalents $43.0 million; net assets $996.8 million; NAV per share $15.28, compared with $15.10 at December 31, 2022.
- Portfolio and credit: Investment fair value was down from $2.398 billion at year-end. First-lien secured debt was 88% of investments at fair value; 91% of the portfolio was secured debt. The weighted average yield on the total debt portfolio at amortized cost was 12.0%, versus 10.9% at year-end. All portfolio debt was reported as floating-rate, subject to the exclusions described in the filing.
- Profitability and costs: Nine-month net investment income was 11.62% of average net assets on an annualized basis, versus 9.70% a year earlier. Total expenses were 15.94% versus 12.49%; interest and other debt expenses were 10.26% versus 6.71% of average net assets.
- Cash flow: Operating activities provided $118.0 million in the first nine months, versus $139.6 million in 2022. Financing activities used $161.9 million, including $98.7 million of distributions paid; ending cash, cash equivalents and foreign currencies totaled $43.2 million. Cash interest paid was $81.2 million, up from $47.9 million.
- Debt and liquidity: Average debt outstanding was $1.452 billion for the nine months, down from $1.587 billion. Annualized total debt cost rose to 7.02% from 4.25%. The revolving Senior Secured Facility had $1.705 billion of commitments and $681.6 million of available capacity at quarter-end, after accounting for borrowings and letters of credit. The company reported compliance with all debt covenants and 169% asset coverage.
Material changes versus comparable periods
- Q3 investment income increased $9.3 million year over year, chiefly as higher portfolio yields lifted interest income; the total debt portfolio’s average yield cited for the quarter rose to 12.0% from 9.6%.
- Q3 net expenses increased $4.0 million, principally because higher borrowing costs added $5.9 million of interest and debt expense. For the nine months, interest and debt expense rose $25.7 million as the annualized debt cost increased.
- Nine-month unrealized losses improved substantially from $45.2 million in 2022 to a $0.5 million gain in 2023. The 2022 period included significant write-downs, notably Merx Aviation; in 2023, management cited improved Merx cash flows alongside weaker ViewRay performance and wider credit spreads.
- The portfolio remained highly concentrated in Level 3 valuations: $2.368 billion, or approximately 99.9% of investments, used significant unobservable inputs at September 30. Non-accrual investments represented 1.3% of amortized cost and 0.5% of fair value, compared with 1.9% and 0.6% at year-end.
- During the nine months, investment purchases were $283.0 million and sales and repayments were $323.7 million, resulting in net investment outflows of $40.7 million. The number of portfolio companies was 149, versus 136 a year earlier.
Outlook, risks and notable items
- Management stated that cash on hand, short-term investments, available facility capacity and expected operating cash flows should be adequate for daily operations for at least the next 12 months. The filing provides no numerical earnings or investment guidance.
- Rate sensitivity analysis estimated that a 100-basis-point increase in base rates would raise annual net investment income by $9.2 million ($0.14 per share), while a 100-basis-point decrease would reduce it by the same amount, assuming no change in the investment or borrowing structure.
- Key risks include portfolio-company credit deterioration, higher borrowing costs, valuation uncertainty and limited liquidity in private investments. MFIC noted that fair values may differ materially from realizable sale values. PIK income is non-cash but may still need to be distributed to maintain RIC tax treatment.
- Unfunded commitments totaled $324.5 million at quarter-end, including $67.6 million of standby letters of credit. Funding is conditional in some cases; the filing notes that performance tests and other borrowing conditions may apply.
- MFIC disclosed non-accrual investments and distressed positions in its schedule, including ViewRay and certain other holdings. The filing also notes overdue-maturity investments and expected recoveries tied to bankruptcy proceedings or other corporate actions.
- MFIC completed a $402.4 million debt securitization on November 2, 2023; proceeds were used to repay facility borrowings. The company retained all Class A-2 and subordinated notes.
- After quarter-end, MFIC announced proposed mergers with Apollo Senior Floating Rate Fund Inc. (AFT) and Apollo Tactical Income Fund Inc. (AIF), anticipated in the first half of 2024, subject to stockholder and other approvals. Exchange ratios will be based on NAVs near closing; each merger is independent of the other. Following consummation, MFIC expects to distribute $0.20 per share, subject to applicable law. Merger agreements include termination fees in specified circumstances and substantial execution, integration and market-price risks.
- The board declared a $0.38-per-share distribution on November 7, payable December 28, 2023 to holders of record December 12. The filing cautions that future distributions are not assured. The Merx/Apollo fee-offset arrangement was terminated in February 2023 in exchange for a $7.5 million termination fee, as MFIC reduced its aviation leasing platform.
Most important facts for investors to verify
- Whether rising portfolio yields continue to exceed higher funding costs, and how floating-rate assets and liabilities reset under changing rates.
- The credit quality, non-accrual status, recovery outlook and valuation assumptions for challenged investments, including Level 3 holdings.
- Availability of revolving credit after letters of credit, covenant requirements and the timing of near-term note maturities, including the $350 million 2025 Notes.
- The size and timing of unfunded commitments, and whether borrowers satisfy the conditions required for MFIC to fund them.
- Stockholder approvals, final NAV-based exchange ratios, transaction costs, termination provisions and integration risks for the proposed AFT and AIF mergers.
- Whether distributions remain covered by taxable income and cash receipts; the filing says the final tax character of 2023 distributions was not yet known.