MSC Income Fund, Inc. Q2 FY2025 earnings call

• The Fund achieved a return on equity of 9% and NII per share of $0.35 after excise tax. NAV per share was $15.33. The Board declared a regular quarterly dividend of $0.35 per share and a supplemental quarterly dividend of $0.01 per share.
• The Fund is focused on its private loan strategy for new portfolio company investments. It increased the lower middle market portfolio by $16 million through follow-on investments in existing companies.
• The Fund has increased current liquidity and has a path to additional debt capacity. It will benefit from expanded regulatory leverage capacity starting at the end of January 2026, doubling the current limit.
• Most private loan portfolio companies performed well, but some with consumer exposure underperformed. Work is ongoing to maximize recoveries on these investments. Lower middle market portfolio companies generally performed positively, contributing to strong financial results.

Private Loan Portfolio: At quarter-end, 93% of the private loan portfolio was secured debt, over 99% first lien, and 97% floating rate loans. The weighted average yield was 11.5%, down 50 basis points from the end of 2024. There was a net decrease of $30 million in private loan investments during the quarter, and it represented 60% of the Fund's total investment portfolio at fair value. Lower Middle Market Portfolio: There was a net increase of $15.9 million in the lower middle market portfolio during the quarter. At fair value, it totaled $458 million, representing 37% of the Fund's total investment portfolio. The lower middle market portfolio was 54% debt (weighted average yield 13%, over 99% first lien loans) and 46% equity, with an average 9% ownership position in portfolio companies.

• The Fund recommended a regular quarterly dividend of $0.35 per share and a supplemental quarterly dividend of $0.01 per share, payable on October 31. It expects to maintain a dividend policy aligned with pretax NII.
• The Fund is confident in growing its private loan portfolio with additional liquidity and capital availability. It anticipates increased ROE through post-listing changes and leverage expansion, including the upcoming regulatory leverage capacity increase.

• Underperformance in certain private loan portfolio companies, particularly those with consumer exposure, impacting contributions from the private loan portfolio.
• Market uncertainties affecting investment activity and pricing, leading to slower-than-expected private loan investment activity in Q2.
• Tariff exposures for private loan portfolio companies and the need to monitor and mitigate these risks through discussions with portfolio company management and private equity owners.

Q: On the shrinking private loan book in the quarter, do you expect to hold the line on pricing?

A: Dwayne and Nick discuss maintaining pricing but being flexible for better deals in the second half, noting they might adjust slightly for better opportunities while aiming to maintain consistency.

Q: Regarding credit quality and nonaccruals, where are we in working through nonaccruals?

A: Dwayne and Nick state that there was a net change in nonaccruals (1 came off, 1 came on). They expect progress on several nonaccruals, with some potentially moving off nonaccrual status by the end of 2025.

Q: What's the outlook for dividend growth over the next 12-18 months?

A: Dwayne explains that dividend growth will depend on the quality of recurring income. More recurring income could lead to increases in regular or supplemental dividends, with levers like leverage expansion and fee structure changes contributing to potential growth.