MidCap Financial Investment Corporation Q2 2026 Earnings Call - Management Halts Buybacks and Pivots to Deleveraging Amid Concentrated Credit Losses

Conference Call Operator: Good morning. Welcome to the earnings conference call for the period ending June 30, 2026, for MidCap Financial Investment Corporation. At this time, all participants have been placed in a listen-only mode. The call will be open for a question-and-answer session following the speaker’s prepared remarks. If you would like to ask a question at that time, simply press star one on your telephone keypad. If you would like to withdraw your question, press star two. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Elizabeth Besen, Investor Relations Manager, MidCap Financial Investment Corporation: 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.

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: 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.

Ted McNulty, President, MidCap Financial Investment Corporation: 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.

Conference Call Operator: 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.

Ted McNulty, President, MidCap Financial Investment Corporation: 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.

Kenny Seifert, Chief Financial Officer, MidCap Financial Investment Corporation: 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.

Our cost of debt for the quarter increased slightly to 5.66%, up from 5.61% in the prior quarter. Post quarter end, we refinanced $125 million of 4.5% notes that matured in July with our revolving credit facility. At today’s base rates, the revolving credit facility carries a higher cost relative to the notes, which is expected to modestly increase our cost of debt. The fixed liquidity position remains sound with sufficient access to capital under our revolving credit facility. As of the end of the quarter, the undrawn capacity under the revolving credit facility was $925 million. Adjusting for the recent maturity of the 2026 notes, the undrawn capacity is $800 million. Our ability to utilize this capacity is subject to compliance with the borrowing base that applies varying advance rates to different types of assets. As MFIC continues to reduce its leverage, we expect our liquidity position to improve.

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

Conference Call Operator: Thank you. If you would like to ask a question, press star one on your keypad. To leave the queue at any time, press star two. Once again, that is star one to ask a question. Our first question is from Arren Cyganovich with Truist Securities. Your line is open.

Arren Cyganovich, Analyst, Truist Securities: Thanks. I guess as we’re looking at these results and you’re, I guess, seeking to delever, and you work through your buybacks, how does this impact, I guess, your ability to continue to be relevant? I know you have other funds. Maybe just talk a little about some of the dynamics of how you think about this portfolio and how you’ll be managing future investments.

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Yeah. Thanks, Arren. Thanks for the question. I think this is one of the very compelling features of MFIC in the context of our broader middle market franchise MidCap, in that we are roughly 3 billion of a $50 billion business. Our participation or non-participation in a loan that’s originated by MidCap does not ultimately affect our ability to provide that solution to that company or to that particular sponsor. As such, in the current environment, as you alluded to and we had mentioned in our prepared remarks, where we are not participating in new transactions, our MidCap franchise and our broader sponsor coverage effort, and frankly, our broader direct lending effort is not in any way compromised by our non-participation. In that regard, we do benefit from being a relatively small piece of a much bigger business.

Arren Cyganovich, Analyst, Truist Securities: What are you targeting from a leverage standpoint kind of going forward?

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Yeah, sure. The bottom end of our guidance, in the low $1.4s.

Arren Cyganovich, Analyst, Truist Securities: Okay. Not a huge decline, just a modest decline, and you expect to essentially kind of start to recycle to the extent that you start to see repayments pick up?

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Yeah. On that point, Arren, I would note that that is going to be evaluated at the time as you alluded to or implicit in your question was our focus right now is on deleveraging. When we look out, notwithstanding a relatively tepid M&A environment, all things considered, the quantum of companies that we see that are either in process or soon to be in process on a probability weight, we feel good about our ability to get leverage down, obviously subject to market conditions. As it relates to what we’ll do at that time, it will be evaluated based on market conditions at that time and successful completion of deleveraging.

Arren Cyganovich, Analyst, Truist Securities: Thank you.

Conference Call Operator: Thank you for your question. Our next question is from Robert Dodd with Raymond James. Please go ahead.

Robert Dodd, Analyst, Raymond James: Hi, guys. Obviously, there have been a lot of press reports about, for lack of a better term, strategic alternatives being reviewed for MFIC. You didn’t have any comment about that in your prepared remarks. Can you either give us any color on that, or confirm or deny whether such a review is being undertaken by the board?

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Yeah. Thanks, Robert. As you would probably imagine, as a matter of policy, we do not comment on third-party reporting or rumors in the market. That said, our focus remains and always has on maximizing value for stockholders, a principle that informs every decision we make. We believe that our buyback, frankly, is very much in that spirit. Any required disclosures would be made through the appropriate means if and when required. As I said before, unfortunately, we do not have a comment on that.

Robert Dodd, Analyst, Raymond James: Got it. Thank you. On to the markdowns. Obviously, yeah, the number of non-accruals actually went down this quarter. Some of the markdowns, like I think Thomas Scientific is not on non-accrual currently, unless I’m incorrect there. You said, EBITDA pressure, rising leverage. What’s the probability or your thoughts on whether some of these issue credits this quarter could migrate to non-accrual status over the next couple of quarters if they’re undergoing obviously EBITDA pressure and leverage going the wrong way?

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Thanks, Robert. When we look at the companies in the basket that we’re watching very closely and that are having EBITDA and leverage pressure, there’s always a number of things going on, right? We’re having conversations with the company, we’re having conversations with the sponsor, we’re having conversations with other lenders. In some cases, there are businesses that are looking to divest subsidiaries or divisions which can result in deleveraging. There are situations where the sponsor’s considering putting equity in. There are situations where the lender group is willing to put in additional funds or make other concessions to free up cash flow. When we look at the basket of those

Ted McNulty, President, MidCap Financial Investment Corporation: I think if you probability weight that, you will have some of those that are resolved super satisfactorily, you’ll have some of those where they continue to be challenged. We’ll evaluate quarter by quarter, whether we think there’s a reasonable prospect of putting it on non-accrual or not at that point in time.

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Certainly as Ted alluded to, certainly this is the bucket where there is more scrutiny. I would also call attention to the fact that many of these names, or many of the names in this bucket that we’re watching closely, perhaps not surprisingly, are from the 2020, 2021 vintage

Capital structures that were done in a different interest rate environment. Certainly the most recent slight tick up in rates and perhaps a prospect for higher for longer or even risk to the upside in terms of rates could challenge the cash flow prospects. As Ted mentioned, not to obfuscate or dodge the question, there are a lot of factors that go into evaluating each and every one of those decisions, and it’s hard to say prospectively how the quantum of those dynamics filters out in the decision that’s ultimately made.

Robert Dodd, Analyst, Raymond James: Got it. If I can, one more, not related to any of that. You respond to the earlier question. You sounded more optimistic about the ability to deliver an active market. Essentially all your competitors are saying the same thing. The M&A pipeline is building. We expect it to be a much more active second half, et cetera. I swear I can hear wolves howling in the distance. I’ve said the same thing, right? It’s not a criticism, but what’s your confidence that this time it will actually happen?

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Look, I think as you’re alluding to, a little humility is probably, for all market participants on the sanguine prognostications on a pickup in M&A. With that as a caveat, the repayment activity was actually relatively healthy in the particular quarter against a rather tepid M&A environment. Importantly when we are making that judgment, Robert, we are probability waiting, right? We’re not saying everything in a process is going to get done. We’re saying the quantum of either refi, in certain cases you have a BSL market that’s not white hot, but is receptive and getting things done. There’s opportunities for certain of our borrowers to graduate, if you will, as well as also the quantum of sale processes. Some of which as you will probably be well aware, have been deferred.

This bid ask, everyone hoping that rates would come down, it seems that another factor emerges that maybe pushes it along. Obviously many of these holdings within private equity firms are getting pretty long in the tooth, ultimately it is informed by a probability waiting and a strong quantum of things that are in process or soon to be in process or need to be in process to inform that. The market caveat that it is subject to market conditions. Then I think as your question implied, it’s necessary as a little bit of humility because we’ve all thought that M&A would come screaming back for many, many quarters and frankly years at this point.

Robert Dodd, Analyst, Raymond James: Got it. Thank you.

Conference Call Operator: Thank you for your question. Our next question is from Finian O’Shea, Wells Fargo Securities. Please go ahead.

Finian O’Shea, Analyst, Wells Fargo Securities: Hey, everyone. Good morning. Just picking up on some of this dialogue and appreciate the color you gave on leverage and buybacks and understanding that a lot of it relates to future judgment calls. Zeroing in on the leverage dynamic, as you contemplate buybacks versus new origination on the go forward, why leave leverage so high given that might be a factor that builds on the discount? Assuming it goes down the path of continued buybacks, does that 140 sort of leverage frame go down as a smaller BDC might have less tolerance for high leverage?

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: Yeah. Thanks for the question, Fin. Certainly a subject that we debate and think critically about within the management team here. Your points are well taken in terms of even at the lower end of our range, it’s a high leverage level. I think when we look at it right now, we are very much focused on getting to the 1.4 and reevaluating. As we evaluate there, to state the obvious and again, not to dodge the question, it will be a factor of where we are trading, what the forward fee payment pipeline looks like. Importantly also, which we haven’t talked about for fairly obvious reasons, that we are not deploying right now, is that when we look at the market, we did see some widening, post-Iran hostilities, some of which, particularly in the middle market, has been given back.

All things being equal, that doesn’t scream to us right now as a overly compelling redeployment opportunity. I offer that up as another factor that will go in to make that decision. To answer your question specifically, our focus is right now on getting to the lower end of the range. We take your points and know that we do debate that as a management team as well.

Finian O’Shea, Analyst, Wells Fargo Securities: Appreciate that. A follow-up on the picture of spillover. I know it’s probably going to be complicated by equity positions, Merx, et cetera, and can probably move around, but can you sort of outline that for us? What’s the degree of spillover now, and how much would sort of naturally roll off, and what the sort of pro forma might be? Any color there would be helpful.

Kenny Seifert, Chief Financial Officer, MidCap Financial Investment Corporation: Yeah. Thanks for the question. Approximately, as of midpoint, number came in just over $60 million. We’re targeting through to year-end, obviously, as you mentioned, the impacts of tax around Merx, some equity positions, some other challenging points. We’re targeting potentially up to $100 million, $1 million to $100, subject to the tax implications there.

Finian O’Shea, Analyst, Wells Fargo Securities: Sorry. Did you say $1 million or it goes from 60 to-

Kenny Seifert, Chief Financial Officer, MidCap Financial Investment Corporation: $1 million.

Finian O’Shea, Analyst, Wells Fargo Securities: Okay. That’s all for me. Thank you so much.

Conference Call Operator: Thank you for your question. Once again, if you would like to ask a question, please press star and one on your telephone keypad now. At this time, there are no further questions in the queue. I will turn the meeting back to management.

Tanner Powell, Chief Executive Officer, MidCap Financial Investment Corporation: 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 any of us if you have any additional questions. Please have a nice day.

Conference Call Operator: Thank you. This brings us to the end of today’s meeting. We appreciate your time and participation. You may now disconnect.