MidCap Financial Investment Corporation 8.00% Notes due 2028 2026 Q2 Earnings Call

Thank you, operator. Thank you everyone for joining us today. We appreciate your interest in MidCap Financial Investment Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Kenny Seifert, Chief Financial Officer. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press release. I'd also like to call your attention to the customary safe harbor disclosure in our press release regarding forward-looking information. Today's conference call and webcast may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and that may adversely affect any forward-looking statements we make.

We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit either the SEC's website at www.sec.gov or our website at www.midcapfinancialic.com. I'd also like to remind everyone that we posted a supplemental financial information package on our website which contains information about the portfolio as well as the company's financial performance. Throughout today's call, we will refer to MidCap Financial Investment Corporation as either MFIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda. At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

Thank you, Elizabeth. Good morning, everyone. Thank you for joining for MidCap Financial Investment Corporation's quarterly earnings conference call. Early this morning, we issued our press release and filed our Form 10-Q for the period ending June 30th, 2026. I'll begin today's call with an overview of MFIC's second quarter results and investment activity. Following that, I'll hand the call over to Ted, who will walk through our investment activity in detail and provide a portfolio update. Kenny will then review our financial results in detail. Beginning with an overview of the results, net investment income or NAV per share for the quarter was $0.40 while GAAP net loss per share was $0.21. Net assets value per share at the end of June was $13.37, representing a 3.2% decline from the prior quarter.

The $0.45 decrease in NAV was driven by a net loss of $0.61 on the portfolio, which was partially offset by net investment income exceeding the dividend by $0.09, plus approximately $0.07 of accretion from stock repurchases executed below NAV. The quarter reflects some credit pressure within the portfolio with a net loss of $50 million-$50.3 million, or $0.61 per share, concentrated among a limited number of positions. Ted will address the largest negative contributors shortly. MFIC new commitments were intentionally modest at $5.8 million for the quarter to support three existing borrowers. Net repayments were $160 million in aggregate. As a result of the net loss and stock buyback activity, MFIC's net leverage declined only modestly to 1.54 times at quarter end. Excluding stock buybacks made during the quarter, MFIC's net leverage would have declined to 1.5 times at quarter end.

Looking ahead, we will make capital allocation decisions based on leverage and market conditions. At the end of June, MFIC's investment in Merx totaled approximately $68.6 million at fair value, representing 2.5% of our portfolio. This reflects a $12.5 million paydown during the June quarter from the sale of one aircraft in a joint venture plus a modest write-up. As a reminder, Merx earns income from its servicing activities for Navigator, Apollo's dedicated aircraft leasing fund. Having fully deployed its equity commitments, Navigator is in the harvest period, and as such, the fund is opportunistically monetizing assets to optimize fund level returns. Merx receives a remarketing fee on each aircraft sale. Since quarter end, Merx has sold one aircraft and is in the process of closing on the sale of an engine.

Navigator is in the process of selling a large portfolio of aircraft which will generate servicing income for Merx. We expect to receive additional paydowns from Merx in the September quarter from these transactions. Turning back to the stock repurchases, as discussed on last quarter's call in April, we repurchased $31.9 million of stock through our 10b5-1 trading plan, fully utilizing our authorization. Given our focus on reducing MFIC's leverage, we are currently prioritizing capital allocation towards that objective rather than towards additional stock repurchases. Moving on to the dividend, on August 5th, 2026, our board of directors declared a quarterly dividend of $0.31 per share for stockholders of record as of September 8th, 2026, payable on September 24th, 2026. With that, I will now turn the call over to Ted.

Thank you, Tanner. Good morning, everyone. I will summarize our investment activity for the quarter and then provide some details on our investment portfolio. As Tanner noted, MFIC's new commitments in the second quarter were $5.8 million, all in support of three existing borrowers. In aggregate, net repayments for the quarter totaled $160 million. Shifting to our investment portfolio, at the end of June, our portfolio had a fair value of $2.77 billion and was invested in 229 companies across 45 different industries. Direct origination and other represented 97% of the portfolio. Merx represented approximately 2.5% of the portfolio, and liquid positions from our mergers with two funds in 2024 totaled approximately 1%. All of these figures are on a fair value basis.

Specific to the direct origination portfolio, at the end of June, 97% was first lien and 95% was backed by financial sponsors, both on a fair value basis.

The average funded position was $12.1 million. The median EBITDA was approximately $53 million. Approximately 94% had one or more financial covenants on a cost basis. The weighted average yield at cost of our direct origination portfolio was 9.5% on average for the June quarter, compared to 9.6% in the prior quarter. At the end of June, the weighted average spread on the directly originated corporate lending portfolio was 539 basis points, up one basis point compared to the end of March. Regarding software, our exposure was essentially flat quarter-over-quarter in dollar terms. As of June 30th, 2026, software exposure represented just 11.9% of MFIC's portfolio at fair value, which is well below the BDC industry average. You can find additional details on our software exposure on page five of the earnings supplement.

As Tanner mentioned, the portfolio generated a net loss of $50.3 million, driven by credit-related weakness concentrated in a limited number of positions. Five names contributed approximately 80% of the net loss. I will now provide some color on the largest contributors. Starting with ChyronHego, a company that provides workflow technology for graphics creation and real-time data visualization for news and sports productions. During the quarter, MFIC completed a debt for equity exchange, converting $60 million of term debt into preferred equity and reducing the commitment on the revolver. A contraction in market multiples and a decline in EBITDA drove the value of the preferred equity lower, resulting in a $21.5 million net loss for the quarter. The next four contributors to the net loss included Midwest Vision Partners, New Era Technology, American Restoration and Thomas Scientific, each of which is experiencing EBITDA pressure and rising leverage.

We at MidCap remain proactive in managing these underperforming credits. Turning to overall credit on accrual status during the quarter, two investments were restructured and restored to accrual status. At quarter end, investments on non-accrual status totaled $77.6 million, representing 2.8% of total portfolio at fair value. Borrower net leverage or debt to EBITDA increased to 5.36x from 5.29x at the end of March, while the weighted average interest coverage ratio remained 2.3x. Borrower revolver utilization was roughly flat quarter-over-quarter. PIK income represented 6.2% of total investment income for the June quarter. With that, I will now turn the call over to Kenny to discuss our financial results in detail.

Thank you, Ted, and good morning, everyone. I will begin by reviewing certain key financial information for the quarter, followed by a review of our capital position. Total investment income for the June quarter was approximately $68.2 million, a decline of $3.6 million from the prior quarter. The decrease was primarily driven by lower interest income resulting from a decrease in the size of the portfolio. Prepayment income was approximately $2.7 million, and fee income was approximately $600,000, both flat compared to the prior quarter. Dividend income was approximately $200,000. Net expenses for the quarter were $35.5 million, a decline of $2.1 million or 5.6% from the prior quarter. The decrease was driven primarily by lower interest expenses resulting from a lower average debt balance, as well as lower management fees and administrative service expenses.

The portfolio had a net loss of approximately $50.3 million or $0.61 per share, which eliminated the incentive fee again this quarter. For the June quarter, net investment income per share was $0.40, while GAAP net loss was $0.21. Turning to the balance sheet. At the end of June, the portfolio had a fair value of $2.77 billion. Total principal debt outstanding was $1.74 billion, and total net assets stood at $1.1 billion or $13.37 per share. Company ended the quarter at 1.54 times net leverage. As discussed on last quarter's call, during the June quarter, we repurchased approximately 2.76 million shares at an average price of $11.58, inclusive of commissions, for a total cost of $31.9 million. As Tanner mentioned, we are currently prioritizing capital allocation towards reducing leverage rather than stock repurchases.