MidCap Financial Investment Corporation Q1 FY2026 earnings call

Tanner Powell started with an overview of MFIC's first quarter results, noting net investment income per share was $0.38, GAAP net loss per share was $0.30, NAV per share was $13.82, down 2.5%. Stock repurchases: existing $107.9 million authorization fully utilized, with $76 million repurchased in Q1 and remaining $31.9 million in April. New investment activity was modest in Q1 with $50 million in new commitments. Ted McNulty reviewed investment activity, new commitments, portfolio details including direct origination and software exposure. Kenny Seifert discussed financial results, total investment income down $6.5 million, net expenses down $4.8 million, portfolio net loss $61.1 million, net leverage 1.55x at quarter end.

Direct Origination and other represented 96% of the total portfolio at fair value. MERCs represented less than 3%, and liquid positions from mergers in 2024 totaled approximately 1%. In the direct origination portfolio, 99% was first lien and 94% backed by financial sponsors at fair value. Average funding position was $12.6 million, median EBITDA was ~$51 million, weighted average yield at cost was 9.6% for the March quarter, down from 10% in the December quarter. Software exposure was 11% of the portfolio at fair value, with diversified positions, low LTV, etc.

MFIC plans to reduce net leverage by de-emphasizing new commitments and expected prepayments. Has received net repayments over $100 million in quarter-to-date. Will evaluate capital allocation decision (new originations vs stock buybacks) once net leverage gets to lower end of target range.

Market-related write-downs due to credit spread widening, multiple compression, especially in technology sector including software, and credit weakness in certain positions. Non-accrual investments increased to 3.5% of total portfolio, with contributors like Midwest Vision and Tasty Chicken. Broader macroeconomic and geopolitical pressures impact software valuations.

Q: You utilized your share repurchases rather quickly. Maybe you could talk a little bit about future repurchases. I know you've used the entire approved repurchases. Is that something that you expect to continue to do, or do you think that you'll start to grow the portfolio again?

A: Yeah, thanks, Aaron. As we called out in the prepared remarks, the dynamic with the increased trading volume enabled us to, under our 10B51 plan, repurchase more quickly than we thought. We also separately had some prepays that pushed, and we guided to the fact that we've already seen $100 million in the quarter-to-date period since March 31st, and then obviously the loss leaves us at a leverage level that is elevated. And so at this juncture, we believe it prudent not to make a decision with respect to a share buyback or commencing of deployment. until such time as we get down to the lower end of our range or lower, and then at that point, you know, evaluate the capital allocation decision. Importantly, I will also call your attention to the statements we made on our last earnings call. You know, we are very focused on shareholder value, and, you know, we wanted to – make a big statement with the size of the buyback and with the ultimate goal of trying to narrow the discount between our trading price and NAV. And that logic and that goal will be top of mind when we do make that decision as we get down to leverage level again at or below the bottom end of our range.

Q: The non-accruals increased, I think they're over 5% at cost now. So it seems, I don't know, a little bit worse than what I would say for kind of a normal credit environment. You know, how are you viewing credit broadly and, you know, what led to these increases in non-accruals? You mentioned the two companies.

A: Yeah, sure. Thanks, Aaron. You know, when we look at the overall portfolio, we did see very healthy revenue and EBITDA growth across, you know, the 200 plus borrowers that we have. You know, we do have, you know, some borrowers that are suffering challenges, you know, and We have modest, very small exposure to quick service restaurant industries. One of the companies we mentioned is in that category. And so we also see some credit challenges in companies where they're seeing cost pressures, whether that's from goods inflation, labor inflation, et cetera, and pressure. or revenue reliance on the low end of the consumer. And so when we see those factors coming together, that's where we tend to see problems. Usually if you have a credit go on non-accrual, it's not due to one factor. It's due to a confluence of several factors. And as we think about the outlook, the vast majority of the credits are performing quite well. you know, the names on our watch list. And in conjunction with the portfolio management functions of MCAT Financial, you know, we're, you know, on top of those names. And so, you know, I think your question kind of started off with, for a normal credit cycle, it seems high. And I think if we kind of look across the, you know, lending – the lending environment, you know, you do start to see non-accruals ticking up kind of around the sector. And so I think that we should just all ask ourselves, like, where are we in the credit cycle? And then just, Aaron, just to clean up, the other non-accrual that we called out is in Midwest Vision, and that happens to be an ophthalmology PPM. The good news, broadly speaking, is we're relatively under-indexed to PPMs. The bad news, we do have actually two, and this is one of them. The challenges there are well understood in terms of cost pressures and also a dynamic wherein those business models were particularly sensitive to cost of capital, the ability to roll up, and ultimately the valuation of those franchises to maintain the relationships with doctors and retain those doctors and so on. Unfortunately, in that particular case, those stresses resulted in a deterioration in that credit and hence that name also got put on quote.

Q: You guys have set out on a pretty different path from a lot of your peer companies in terms of how you're approaching returning capital and growth. And if you kind of look at the questions we've asked of many of your peers over the last quarter and similar companies, in theory, it's a view that we share. There is an interesting analog here, which is ARI, another Apollo vehicle, where they, facing the same dynamics, chose to sell off the vast majority of their assets at close to carrying value and are now sort of considering strategic alternatives. I am curious, you know, given that the analog, how you guys are thinking about growth long-term and what are, you know, what is the path forward if BDCs continue to trade at discounts to NAV, if publicly traded BDCs continue to trade at discounts to NAV?

A: Yeah, thanks. Thanks for the question, Rick, and a very good one. As we've stated, and then as you rightly pointed out, manifesting in the firm's approach to ARI, we're very focused as a firm where we manage public vehicles, making sure we are operating them with the objective of maximizing value to shareholders. What I would point you to is structurally, a BDC and an ARI structure are different. The arrows in the quiver, so to speak, for a BDC are limited relative to ARI and thus the path that was afforded in the case of ARI does not avail itself to us in quite the same way. That said, I would, and at the risk of being redundant, call your attention to, irrespective of all the options that are available, our focus remains on delivering value to shareholders. and doing our best to narrow the discount. And so, as a result, as we look at the situation right now, we're really focused on, you know, in the current moment, obviously, as I alluded to, getting leverage down. But, you know, also, you know, upon getting down to that leverage, making that capital allocation decision, based on, you know, obviously where market is and then where we are, where we're trading at the top.

Q: I've just been hopping on different calls. I think I heard in the prepared remarks that there is a potential de-emphasis on new investments to go forward. Just curious. Does that mean go forward originations are mainly going to be driven by incumbent kind of financings and then obviously letting the prepayment activity slowly get leveraged back down to the more lower end of the leverage range there?

A: Thanks, Dan. Thanks for the question. I think to summarize what we have said around deleveraging and origination and stock buybacks, step one, which is what we're in right now, is to deleverage back to the lower end or slightly below of the targeted range that we have presented to the market over the last several years. And then once that – as we approach that level, you know, we along with our board will be evaluating the capital allocation decision for new originations versus stock buybacks. And kind of the inputs there, you know, are what are the market conditions at the time and where is our stock trading at the time. So we're not saying that we're not originating. I would just add to that just for the – just for clarity here. Ken, a lot of the transactions that are done in the middle market or in the direct lending space come with delay draws and revolvers, and we've already committed to many of those across our borrowers. we will obviously be honoring those commitments. And then, you know, from time to time, it might make sense that even before we get down to the target leverage, so we will still be, you know, standing up to those commitments. And then as Ted alluded to, the decision as to capital allocation will be made upon achieving our target leverage.

Q: Looking back to last year when we had Liberation Day, we kind of saw a muted M&A market following for the remainder of the year. So with the current macro factors, what are you expecting for the pipeline and activity for the remainder of the year?

A: Yes, sure. You know, we obviously still see, you know, what comes off the mid-cap pipeline, notwithstanding we are at the current juncture not participating. And it's really become a fool's game trying to predict M&A because, you know, recent history has been littered with events that have conspired to take things offline. And so I think we're cautious. It's hard not to point to some of the geopolitical stress uh and the duration there as really influencing uh m a the the backdrop and perhaps the reason that uh ourselves and many others in the market have been sanguine going into each successive year about the pickup in m a is that you look at the private equity space and you look at the quantum of the dry powder and the limited CPI today in returning capital shareholders makes them very motivated sellers in many cases. Unfortunately, they've gotten nicked up or the market's gotten nicked up by these stresses, as you alluded to, tariffs was a big one amongst others. So I think we're cautious. We exercise a little bit of humility in making such a prediction because of the spate of drivers that have impaired M&A volumes. But the broader term macro, the broader term dynamic around the sponsor capital and the duration of those investments, suggests that it's not a question of if, it's more of a question of when.