Release Date: August 08, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Successful completion of mergers with Apollo Senior Floating Rate Fund Inc. and Apollo Tactical Income Fund Inc., enhancing MFIC's portfolio diversification and operational synergies.
- Net investment income per share for the June quarter was $0.45, corresponding to an annualized return on equity of 11.8%.
- MFIC's net assets increased by approximately 44% due to the mergers, providing significant investment capacity.
- Strong recurring interest income from a predominantly floating rate portfolio, with a weighted average yield at cost of 12%.
- MidCap Financial's extensive origination track record and large data set provide MFIC with significant deal flow and attractive investment opportunities.
Negative Points
- Net asset value per share decreased by $0.04 from the end of March to $15.38 at the end of June.
- The weighted average spread on the corporate lending portfolio decreased by 20 basis points compared to the end of March.
- Investments on non-accrual were 1.8% of the total portfolio at fair value, indicating some credit quality concerns.
- The blended yield across the total investment in Merx is less than 4%, which is lower than the overall portfolio yield.
- The process of selling non-directly originated assets acquired from the mergers is ongoing and may take several quarters to complete.
Q & A Highlights
Q: Can you provide more details on the portfolio rotation strategy and any constraints around the pace of sales for non-directly originated assets?
A: Tanner Powell, CEO: We've made good progress, selling roughly $125 million since the mergers. The strategy isn't contingent on selling every asset, especially those less liquid, like certain structured credits and high-yield bonds. We aim to avoid discounts to fair market value, so not all $400 million will be sold. The focus is on reinvestment yield and avoiding unnecessary discounts.
Q: Any updated outlook on potential ROE or ROE accretion going forward?
A: Tanner Powell, CEO: We are not updating that guidance currently. While we anticipate potential lower base rates, we see significant synergies to improve both ROE and NII, as outlined in our previous communications.
Q: Can you explain the strategy for building leverage back to target levels and the timeframe for this?
A: Tanner Powell, CEO: Starting from a pro forma leverage of 1.13 times, reaching the lower end of our target range of 1.4 times would provide nearly $400 million in investment capacity. Including the rotation of non-directly originated assets, we have about $775 million to deploy. The deployment is supported by MidCap Financial's extensive origination platform.
Q: How does the firm-wide direct lending setup work, especially with Howard Widra's new role at Apollo?
A: Howard Widra, Executive Chairman: We present a unified offering to sponsors, combining Apollo and MidCap's capabilities. Deals are executed based on size and strategy, with MidCap handling core middle-market deals and Apollo managing larger transactions. MFIC has the option to participate in larger deals selectively.
Q: What are the expense synergies from the merger, and how will they impact returns or NII?
A: Gregory Hunt, CFO: The merger eliminates over $3 million in expenses from the closed-end funds, with minimal increase in MFIC's expenses. This reduction is already in effect, enhancing overall efficiency.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
