Apollo Investment Corp

F:55O1

Earnings Call Transcript

[Operator]

Good morning, everyone. Welcome to the earnings conference call for the period ended December 31, 2025, for MidCap Financial Investment Corporation. [Operator Instructions]

I will now turn the call over to Ms. Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Please go ahead, ma'am.

[Elizabeth Besen, executive]

Thank you, operator, and thank you, everyone, for 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. Howard Widra, Executive Chairman; and Greg Hunt, our former CFO, who currently serves as a senior adviser, are on the call and available for the Q&A portion of today's call.

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, which 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 at 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, Maryland.

At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

[Tanner Powell, executive]

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MidCap Financial Investment Corporation's Fourth Quarter and Year-end Earnings Conference Call. Yesterday after market close, we issued our press release and filed our annual Form 10-K for the period ended December 31, 2025. I'll begin today's call with an overview of MFIC's fourth quarter results, followed by a discussion of our share repurchase activity, including the Board's increased authorization. Following that, I'll hand the call over to Ted, who will walk through our investment activity for the quarter and provide a portfolio update, including a review of our software exposure. Kenny will then review our financial results in detail.

Net investment income or NII per share for the quarter was $0.39. GAAP net loss per share for the quarter was $0.14. This figure includes approximately $0.04 of onetime financing-related expenses. When excluding these onetime costs, GAAP net loss per share was $0.10 for the quarter. NAV per share was $14.18 at the end of December, down 3.3% compared to the prior quarter. The decline in NAV was primarily driven by a handful of investments predominantly from 2022 and earlier vintages. Despite the loss for this quarter, we believe our focus on first lien positions, our cautious usage of PIK and low software exposure keep us well positioned.

Additionally, recent paydowns from Merx and the full repayment of a position on nonaccrual demonstrate our ability to maximize recoveries on challenged credits. During the December quarter, MFIC made $141 million of new commitments across 26 transactions. Net funded activity for the quarter was positive $25 million, which included a $7.5 million repayment from Merx. At the end of December, MFIC's investment in Merx totaled approximately $103 million at fair value, representing 3% of the portfolio fair value. Subsequent to quarter end in February, Merx repaid an additional $22 million to MFIC for a total amount of $29.5 million.

Let me remind you about what remains in Merx. MFIC's remaining investment in Merx consists of 4 aircraft, plus the value associated with Merx's servicing platform. Merx earns income through its servicing activities from Navigator, Apollo's dedicated aircraft leasing fund, which currently owns 38 aircraft. Having deployed its equity commitments, Navigator is in the harvest period and as such, the fund is opportunistically monetizing assets to optimize fund level returns, aircraft sale. At the end of December, the servicing business represented approximately 29% of the total value of Merx. The servicing component of Merx will naturally decline as servicing income is received.

Moving on, Apollo's long-standing commitment has been to deliver positive outcomes in all instances where we manage investor capital. With respect to the public vehicles we manage across different asset classes, we have been active in evaluating potential strategies and options with the objective of maximizing realizable value for stockholders.

During the fourth quarter, the market presented us with what we viewed as an attractive opportunity to repurchase our stock at a significant discount to NAV. We repurchased approximately 1.1 million shares at an average discount of 18% for an aggregate cost of $12.9 million, generating approximately $0.03 per NAV per share of NAV accretion. These trading levels, we continue to believe allocating capital towards stock repurchases is more accretive than deploying capital into new investments. Accordingly, the Board has authorized a new $100 million stock repurchase plan, which we expect to utilize aggressively in combination with a 10b5-1 trading plan to capitalize on what we believe is a compelling opportunity for our stockholders. This is in addition to our existing share repurchase authorization, of which approximately $7.9 million of repurchase capacity remains.

Accordingly, MFIC now has $107.9 million available for stock repurchases. If the current discount continues and the trading volumes remain in their current range, we anticipate fully utilizing our current authorization by late May. MFIC's investment portfolio is extremely well positioned, consisting of primarily true first lien loans with granular position sizes and limited ticket software exposures. We remain convinced that the current market price does not appropriately reflect the intrinsic value of MFIC's high-quality investment. We do not anticipate these stock repurchases will result in any material increase in our net leverage given our visibility into expected repayments.

Moving to the dividend. In light of the change in base rates and other factors, we have reassessed the long-term earnings power of the company, and the Board has concluded that it was prudent to adjust the dividend at this time. Accordingly, on February 25, 2026, our Board of Directors declared a quarterly dividend of $0.31 per share for stockholders of record as of March 10, 2026, payable on March 26, 2026.

With that, I will now turn the call over to Ted.

[Ted McNulty, executive]

Thank you, Tanner. Good morning, everyone. I'm going to spend a few moments reviewing our fourth quarter investment activity and then provide some details on our investment portfolio. MFIC's new commitments in the December quarter totaled $141 million with a weighted average spread of 497 basis points across 26 different companies. The weighted average net leverage on new commitments was 4x in the December quarter. Gross fundings, excluding revolvers and Merx totaled $156 million. Sales and repayments, excluding revolvers and Merx totaled $119 million. Net revolver fundings were approximately $12 million. And as previously mentioned, we received a $7.5 million paydown from Merx. In aggregate, net fundings for the December quarter were positive $25 million.

Shifting to our investment portfolio. At the end of December, our portfolio had a fair value of $3.17 billion and was invested in 247 companies across 46 different industries. Direct origination and other represented 96% of the total portfolio. Merx represented 3% of the total portfolio and liquid positions acquired from our mergers with 2 funds in 2024 totaled 1%. All of these figures are on a fair value basis. Specific to the direct origination portfolio, at the end of December, 99% was first lien and 92% was backed by financial sponsors, both on a fair value basis. The average funded position was $12.8 million. The median EBITDA was approximately $50 million. Approximately 94% had one or more financial covenants on a cost basis. Covenant quality is a key point of differentiation for the core middle market as substantially all of our deals have at least one covenant. The weighted average yield at cost of our direct origination portfolio was 10% on average for the December quarter, down from 10.3% for the September quarter.

The sequential decrease in the portfolio yield was driven by lower base rates, the placement of higher-yielding assets on nonaccrual status as well as the decline in the average spread across the portfolio. At the end of December, the weighted average spread on the directly originated corporate lending portfolio was 546 basis points, down 13 basis points compared to the end of September.

Next, I'll make a few comments about our software exposure, given concerns about potential AI disruption to software borrowers. You can find details on our software exposure on Page 5 of the earnings supplement. As of December 31, 2025, software represented just 11.4% of MFIC's portfolio at fair value, which is well below the BDC industry average. These positions are primarily cash pay, 100% first lien and highly diversified across 29 borrowers with an average position size of $12 million. Our software book is diversified across a wide range of end markets and carries a low average LTV of 32%. The median EBITDA of our software portfolio companies is $52 million. Only 2 borrowers are picking and PIK income from our software portfolio is de minimis. The weighted average interest coverage of our software portfolio is 2.3x, in line with the overall portfolio. The weighted average net leverage is 4.6x, modestly below the overall portfolio. And the weighted average spread of the portfolio is 548 basis points, roughly in line with the overall portfolio.

MidCap's approach to lending to software companies has remained consistent, though we have become more selective in the current environment. Our strategy is always centered on borrowers with mission-critical products, high switching costs and strong revenue visibility supported by long-term contracts.

Moving to credit quality on the overall portfolio. Investments on nonaccrual status declined to 2.6% of the portfolio at fair value, down from 3.1% at the end of the prior quarter. During the quarter, we restored 2 companies to accrual status, including our investment in LendingPoint following its restructuring as well as our investment in Compass Health, which was fully repaid after the company's sale in February. We recognized a net gain of approximately $1 million on Compass Health in the December quarter, reflecting an increase in its valuation from 84% at the end of September to 94.5% at the end of December. We were repaid at par in February and an additional gain of approximately $0.5 million will be recorded in the March quarter. This is an example of our ability to maximize value from challenged names.

During the quarter, we placed 3 investments on nonaccrual status, including our investments in Bird Rides, Banner Solutions and Renovo. These 3 names accounted for about 36% of the total net loss for the quarter. Underlying portfolio company credit metrics were relatively stable quarter-over-quarter. Borrower net leverage or debt-to-EBITDA was 5.29x at the end of December, unchanged from the end of September. And the weighted average interest coverage ratio improved to 2.3x, up from 2.2x last quarter, driven primarily by lower base rates and to a lesser extent, by earnings growth. We believe the steady revolver utilization rate we see from our borrowers is an indicator of greater financial stability and provides us with incremental and more frequent financial information.

Revolving facilities provide insight into a company's liquidity position through draw behavior. At the end of December, the percentage of our leverage lending revolver commitments that were drawn was essentially flat compared to the prior quarter. PIK income represented 4.8% of total investment income for the December quarter, roughly stable quarter-over-quarter.

With that, I will now turn the call over to Kenny to discuss our financial results in detail.

[Kenneth Seifert, executive]

Thank you, Ted. Good morning, everyone. Total investment income for the December quarter was approximately $78.4 million, a decline of $4.2 million or 5.1% from the prior quarter. This reduction was largely driven by lower interest income resulting from decreased base rates, new nonaccrual positions and continued asset spread compression. Weighted average yield at cost of our directly originated lending portfolio averaged 10% for the December quarter compared to 10.3% in the previous quarter. Prepayment income was approximately $2.4 million, down from $3.2 million last quarter. Fee income was approximately $1 million, up from about $0.5 million last quarter. Dividend income was $231,000, relatively flat quarter-over-quarter.

Our net expenses for the quarter were $42.4 million, a decline of $4.9 million or 10.4% the prior quarter. This decline was driven primarily by the absence of incentive fees, reflecting the impact of the total return hurdle feature, which eliminated the incentive fee as well as lower interest expense, partially offset by higher administrative services. Portfolio had a net loss of $45.3 million or $0.49 per share. Negative contributors for the quarter included our investments in LendingPoint, Renovo, Amplity, Bird Rides, New Era and Banner Solutions, among others. Positive contributors to performance for the quarter included our investment in Merx and Compass Health amongst others. As discussed on last quarter's call, in October, we extended and repriced our revolving credit facility, and we upsized and repriced our first CLO.

In connection with these financing activities, we recorded a realized loss of approximately $3.4 million or $0.04 per share in the December. Cost of debt for the quarter declined to 5.95%, down from 6.37% in the prior quarter, largely driven by these refinancing activities as well as lower base rates. For the December quarter, net investment income per share was $0.39. GAAP net loss per share was $0.14 or $0.10, excluding the $0.04 impact related to the onetime financing costs.

Turning to the balance sheet. At the end of December, the portfolio had a fair value of $3.17 billion. Total principal debt outstanding was $2.00 billion and total net assets stood at $1.31 billion or $14.18 per share. Company ended the quarter at 1.45x net leverage. Gross fundings for the quarter, excluding revolvers totaled $156 million and net fundings for the quarter were positive $25 million.

This concludes our prepared remarks. Operator, please open the call to questions.

[Operator]

[Operator Instructions] We'll go first this morning to Rick Shane with JPMorgan.

[Richard Shane, analyst]

And look, our pattern on all these calls recently has been asked about buying back stock, and you guys have leaned into that a little bit. But look, we follow Apollo Commercial ARI. They recently made a very interesting strategic decision sort of looking at the landscape for different types of closed-end funds and these types of vehicles. I am curious as you guys sort of look forward what you think the future is. For now, it looks like some of these discounts are going to be pretty persistent, makes it hard to grow these vehicles. Does it make sense to continue to run MFIC in this way? Or would you consider some more aggressive strategies to sort of unlock that value?

[Tanner Powell, executive]

Yes. I mean, I think we'll consider everything. Like if we continue to perceive that the discount is like I'm connected to the value. I think it's sort of -- the point we're trying to make, it's like our obligation, it was true with AR to our obligation is to get the shareholders sort of what their true return should be. So I think you're pointing out the right issues. I mean I think we have to see how it plays out. The persistence of these discounts certainly, I agree, feels likely given everything that's going on across the whole market right now, but things can change. So the answer is we'll continue to consider everything with an eye towards just sort of making sure that like the shareholders get the full value that we feel like they're entitled to in whatever form we can get it to them.

[Richard Shane, analyst]

Got it. I appreciate that. I was almost hoping I was going to get a Greg Hunt answer to my question just so I could feel like an episode of this is your life.

[Operator]

We'll go next now to Kenneth Lee with RBC.

[Kenneth Lee, analyst]

Just a follow-up on the repurchases there. To clarify, the new $100 million, is it discretionary? And I assume that the normal restrictions of open trading windows apply there, if that's the case, but I just wanted to check on that.

[Tanner Powell, executive]

Yes, that's exactly right, Ken. Thanks for the question. As we noted in the prepared remarks, and as you alluded to, you do enter quiet periods. And for those periods, we would expect to implement a 10b5-1 that would enable us to be in market during those periods such that we can maximize our share purchase activity. And then I would also call your attention to the comment we made in the prepared remarks whereby if the current level of activity continues, we would expect to be able to exhaust our current authorization by late May.

[Kenneth Lee, analyst]

Got you. Very helpful there. And just one follow-up, if I may, just around dividends. In terms of the new level here, I wonder if you could just talk a little bit more about some of the macro assumptions that went to that and what gives you confidence that the new level is going to be sustainable over a certain period of time?

[Tanner Powell, executive]

Yes, sure. And certainly, as we undertake these models and try to sensitize to the myriad factors that can influence, our assessment was that when we looked at the earnings power and we looked at the models, $0.31 was appropriate and achievable. And we've taken the action this quarter. And certainly, as I think we telegraphed in previous quarters, the move from -- of rates from 5.4% to 3.8% level compounded by spreads in our primary market coming down have certainly influenced the earnings power. We have made a lot of progress as we've called out with Merx. The Merx exposure is yielding roughly 2% on our books today.

And so as that comes back, and we would expect the balance of our exposure to be -- or a lion's share of our exposure to be repaid in the next 12 months, that presents some opportunity to cushion the dividend as well as also the capital structure initiatives that we have undertaken to reduce our cost of capital on our CLO, our first Bethesda CLO as well as our revolver, which we were able to price down as ways to mitigate the effects of lower base rates and the current spread environment.

[Operator]

[Operator Instructions] We'll go next now to Robert Dodd with Raymond James.

[Robert Dodd, analyst]

First, yes, to applaud the expansion of the buyback, but not just that, but the aggressive plan to use it. I think that's kind of the confidence that shareholders not particularly not just the NAV accretion, but you've got the liquidity to actually do that. On -- the main other questions, to flip to software, you have below average exposure, right, 11.5%. Not only that, I appreciate the other metrics that you gave, the net leverage in your software book is 4.5%. There's a lot of fear out there, some of it probably well placed, the software leverage might not apply, it might not even be EBITDA, but if it does exist, the leverage is much higher.

So that I mean, can you tell us the type of businesses that enable you to get software exposure with portfolio average spreads and net leverage that's likely at least a turn, if not more, below kind of what the market expectation is for the amount of leverage that's on a software business?

[Howard Widra, executive]

Yes. This is Howard. Let me try to take a crack at that because some of this is derivative of what MidCap originates. So like MidCap has financed itself historically through bank lines and CLOs and availability of credit on both of those was limited to effectively 6x EBITDA and not really ARR availability. And so what we originated into as the market sort of elevated to doing 7x, 8x deals or even just doing ARR-only deals, we just -- was not where we focused. So we focused on sort of companies that inherently were sort of more -- were already cash flow and had sort of more embedded consistency in their performance.

Like in other words, didn't need to spend huge amounts of money to continue to drive growth to sort of get to sort of some outsized valuation, which obviously can be a great equity thesis, but sometimes it is the debt. So like what ended up being the MFIC share of that was sort of that portion of the portfolio. if that makes sense. So it was sort of an offset of the strategy that MidCap had, which was driven some by the -- so it wasn't like we had an unbelievably special sauce where we found different deals than other people found. It's that -- the deals that we tried to win met those criteria.

[Tanner Powell, executive]

Yes. sorry. I would emphasize, Robert, as we've talked with you in the past, as a derivative of MidCap and our focus on the middle market, the average obligor size of $52 million. And importantly, in those software names in our software book, 90% has financial covenants and so there's also an element of it, which is related to the part of the market that we are focusing on and also anchored to the dynamics that Howard mentioned with respect to our financing and how we've approached our entire business and software.

[Robert Dodd, analyst]

Got it. I appreciate that incremental color. And again, congrats on the buyback.

[Operator]

We'll go next now to Casey Alexander with Compass Point.

[Casey Alexander, analyst]

My first really only question is pretty simple. Your statement that the handful of credits all share a similar vintage suggests that there's a common thread that runs through the issue there. And so I was wondering if you could speak to what the common thread is that ties them together that emanates from that particular vintage.

[Howard Widra, executive]

I mean I don't -- I think the common thread is really that these are not like sort of new issues that have come up. These are credits that we have been working through over time. And so this is not like although the markdowns were a little bit higher, obviously, than we wanted this quarter, it wasn't like there was some precipitous change of what's going on. These are sort of longer-dated credits that have -- many of which have had been on watch list or I think all of which have been on watch list for a while.

[Tanner Powell, executive]

Yes. And...

[Casey Alexander, analyst]

Go ahead.

[Tanner Powell, executive]

I would emphasize also, to some extent, the seasoning of a portfolio, it's natural that the vintage would be several years prior. Obviously, in that intervening time, we obviously had the increase of rates, some level of support or moderation with the recent decline. And then to your point about your common themes, we have talked with you, Casey, and the market about there are pockets of stress in the market, notwithstanding against the backdrop of a fairly sanguine economic environment. We talked about the lower end of the K.

And when we look at these credits, these credits often have idiosyncratic issues that are sometimes compounded by some of those pockets of stress and in particular, some self-induced such as acquisition strategies that either were not properly integrated and/or were very, very aggressive, which has compounded some of those thematic. So a balance of idiosyncratic issues within those credits. The vintage happened to be one where you'd naturally start to see some deterioration in terms of where you do have problems and obviously, recognizing that in the intervening 4 years, there's been a steep increase to borrowing rates, base rates that has affected the companies as well.

[Operator]

[Operator Instructions] And ladies and gentlemen, it appears we have no further questions today. I'd like to turn the conference back to management for any closing comments.

[Ted McNulty, executive]

Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the entire team, we thank you for your time today. Please feel free to reach out to us if you have any other questions. Have a good day.

[Operator]

Thank you. Again, ladies and gentlemen, that will conclude the MidCap Financial Investment Corporation's earnings call. Again, thanks so much for joining us, everyone. We wish you all a great day. Goodbye.