MFIC outlines dividend strategy and targets $9.4M NII impact mitigation amid rate cuts

Earnings Call Insights: MidCap Financial Investment Corporation (MFIC) (mfic) Q3 2025

MANAGEMENT VIEW

* CEO Tanner Powell highlighted a net investment income (NII) per share of $0.38 for the September quarter, translating to an annualized return on equity (ROE) of 10.3%, and reported GAAP net income per share of $0.29 for an annualized ROE of 8%. Powell noted the portfolio company Merx repaid approximately $97 million, contributing to a NAV per share of $14.66, down 0.6% from the prior quarter. The decrease was attributed to a handful of positions added to non-accrual status, partially offset by the gain from Merx. Powell stated, "The increase in non-accruals reflects company-specific issues, and we believe is not representative of a broader deterioration in credit quality."
* Powell discussed a $16.6 million gain related to Merx and emphasized ongoing efforts to further reduce MFIC's exposure, with an expected $25 million additional payment by late 2025 or early 2026. He outlined the Board's declaration of a $0.38 quarterly dividend and addressed the impact of rate cuts, warning, "A 100 basis point reduction in base rates would reduce MFIC's annual net investment income by approximately $9.4 million or $0.10 per share."
* President Ted McNulty noted increased sponsor M&A activity and disciplined underwriting, with new commitments totaling $138 million across 21 companies. McNulty explained, "The weighted average net leverage on new commitments was 3.8x in the September quarter, down from 4x in the prior quarter."
* CFO Kenneth Seifert reported, "Total investment income for the September quarter was approximately $82.6 million, up $1.3 million or 1.6% compared to the prior quarter." Seifert also described enhancements to the capital structure, including an extended revolving credit facility and a reset of the MFIC Bethesda 1 CLO, which reduced the blended cost of debt.

OUTLOOK

* Management maintained a cautious stance on the dividend, with Powell stating the Board declared a $0.38 per share dividend and is monitoring the effects of base rate declines. He detailed, "We are actively working on a couple of initiatives to help offset some of the impact from declining base rates. These initiatives, including pursuing additional paydowns from Merx and resolving certain non-accrual and earning assets."
* The outlook remains focused on mitigating the impact of lower rates and deploying proceeds from Merx deliberately to enhance earnings power.

FINANCIAL RESULTS

* NII per share for the quarter was $0.38 and GAAP net income per share was $0.29. Total investment income reached $82.6 million, an increase from the prior quarter. Prepayment income rose to $3.2 million, and fee income to $458,000, while dividend income held steady at $200,000.
* The portfolio's fair value stood at $3.18 billion, with net assets of $1.37 billion. Net leverage was reported at 1.35x, with average net leverage excluding Merx at 1.37x. Net expenses increased to $47.3 million, largely due to higher incentive fees. The weighted average yield at cost of the directly originated lending portfolio was 10.3% for the quarter.
* One-time expenses related to the credit facility amendment and CLO reset are expected to total approximately $3.3 million in the December quarter, but management expects these actions to result in lower long-term financing costs.

Q&A

* Arren Cyganovich, Truist Securities, asked about the increases in non-accruals and whether there was a common theme. Ted McNulty responded, "If you look at the companies that went on non-accrual, there's not really a theme that ties them all together... Overall, not a real theme, very idiosyncratic across each one."
* Cyganovich also questioned the sustainability of increased M&A activity. McNulty identified several drivers, including private equity dynamics and reduced tariff volatility, stating, "All those factors should lead to ongoing activity."
* Melissa Wedel, JPMorgan, asked about mitigation actions for lower base rates and timing for dividend decisions. Powell explained, "We want to err on the side of creating a really, really granular portfolio... The conclusion is we can do it quickly. We want to be measured, and we want to do it consistent with how we've deployed."
* Wedel followed up on portfolio leverage, to which Powell responded, "Our target for leverage is unchanged, and we would endeavor over the next period of time to get back to the 1.4 level."
* Paul Johnson, KBW, inquired about share repurchases post-liability amendments. Powell said, "We have been an active repurchaser historically. It is a very compelling tool for driving shareholder value... we have a nice room under our current authorization."
* Kenneth Leon, CFRA, asked about dividend coverage amid the rate outlook. Powell confirmed, "We were able to meet $0.38, benefiting from a slightly lower incentive fee in the current quarter... The Board has made a decision at the current moment to leave the dividend intact."

SENTIMENT ANALYSIS

* Analysts pressed on credit quality, dividend sustainability, and mitigation strategies for lower rates, with a neutral to slightly concerned tone, particularly around non-accrual trends and base rate sensitivity.
* Management presented a confident tone in prepared remarks and Q&A, emphasizing deliberate portfolio management and strategic capital actions. Powell said, "We want to do it in a deliberate manner... we can do it quickly."
* Compared to the previous quarter, management continues to project confidence but with increased acknowledgment of base rate risks and a heightened focus on mitigation efforts.

QUARTER-OVER-QUARTER COMPARISON

* Net investment income per share decreased slightly from $0.39 to $0.38, and GAAP net income per share rose from $0.19 to $0.29. NAV per share declined from $14.75 to $14.66. Non-accruals increased from 2% to 3.1% of the portfolio at fair value.
* New commitments dropped from $262 million (29 transactions) to $138 million (21 transactions). Weighted average yield at cost fell from 10.5% to 10.3%.
* Management's tone shifted to more active mitigation of base rate pressure and non-accruals, while analysts maintained a cautious approach on credit quality and dividend coverage.

RISKS AND CONCERNS

* Management cited rising non-accruals due to company-specific issues and warned about the sensitivity of NII to declining base rates.
* Initiatives to offset base rate declines include further paydowns from Merx and resolving non-accrual assets.
* Analysts remained focused on non-accrual growth, dividend sustainability, and the ability to manage through a lower rate environment.

FINAL TAKEAWAY

MFIC's third quarter call centered on the successful reduction of its Merx exposure, continued strong capital deployment, and deliberate strategies to manage declining base rates. Management affirmed the $0.38 dividend and outlined initiatives to mitigate projected NII pressure of $9.4 million from a 100 basis point rate cut, signaling a measured approach to deployment and risk management amid evolving market conditions.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/mfic/earnings/transcripts]

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