Apollo Investment Corporation Aktie

Good morning, and welcome to the earnings conference call for the period ended March 31, 2026, for MidCap Financial Investment Corporation. [Operator Instructions]

I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Thank you, operator, and thank you, everyone, for joining us today. We appreciate your interest in MidCap Financial Investments Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Kenny Seifert, Chief Financial Officer. Howard Widra, our Executive Chairman, is 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 may include forward-looking statements. You should refer to our most recent filings with the SEC for risks that 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 when we use MidCap Financial, we 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.

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MidCap Financial Investment Corporation's quarterly earnings conference call. Yesterday after market closed, we issued our earnings press release and filed our quarterly Form 10-Q for the period ending March 31, 2026.

I'll begin today's call with an overview of MFIC's first quarter results, followed by a discussion of our share repurchase activity and our dividend announcement. Following that, I'll hand the call over to Ted, who will walk through our investment activity for the quarter, 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 $0.38, while GAAP net loss per share was $0.30. Net asset value per share at the end of March was $13.82, representing a 2.5% decline from the prior quarter. The $0.36 per share decrease in NAV was driven by a net loss of $0.67 on the portfolio, which was partially offset by net investment income exceeding the dividend by $0.07 per share, plus approximately $0.24 per share of accretion from stock repurchases executed below NAV.

As a result of the net loss on our stock buyback activity, which I will discuss in more detail shortly, net leverage increased to 1.55x at quarter end. We plan to reduce MFIC's net leverage by continuing to deemphasize new commitments and through expected repayments. Subsequent to quarter end, we completed the existing share repurchase authorization and have received net repayments in excess of $100 million, demonstrating our commitment to enhancing shareholder value and deleveraging.

Our net loss for the quarter was driven by a combination of market-related write-downs, reflecting credit spread widening and multiple compression, particularly within the technology sector, including software as well as credit weakness across certain positions. Our net loss was roughly evenly split between market-related factors and credit-related weakness. The vast majority of our direct lending portfolio is valued using a yield approach. Changes in market spreads are incorporated into quarterly valuation of our investments.

As always, our third-party valuation firms ensure our marks reflect current market conditions, including spread widening, the impact of heightened market volatility, increasing uncertainty around software valuations alongside broader macroeconomic and geopolitical pressures. Despite the loss this quarter, we believe our focus on first lien positions, cautious usage of PIK and low software exposure keeps us well positioned.

As discussed last quarter, given the size of the stock's discount to NAV, we believe it was prudent to prioritize allocating capital towards stock repurchases rather than deploying capital into new investments. Consistent with that view, new investment activity during the March quarter was relatively modest with MFIC making $50 million of new commitments across the transactions.

Given the modest amount of new commitments, we had net repayments of $142 million in the quarter, which included a $22 million repayment from Merx. At the end of March, MFIC's investment in Merx totaled approximately $81 million at fair value, representing 2.7% of the portfolio at fair value. Let me remind you about what remains at 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 for Navigator, Apollo's dedicated aircraft leasing fund, which currently owns 36 aircraft. 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. At the end of March, the servicing business represent approximately 38% of the total value of Merx. The servicing component of Merx will naturally decline as servicing income is received.

Turning back to stock repurchases. As mentioned, we have been actively repurchasing shares, including through a 10b5-1 trading plan. We have fully utilized our existing $107.9 million authorization with $76 million repurchased in the first quarter and the remaining $31.9 million repurchased post quarter end in April. The authorization was fully utilized more quickly than anticipated, driven by the increase in our trading volume.

Moving to the dividend. On May 5, 2026, our Board of Directors declared a quarterly dividend of $0.31 per share for stockholders of record as of June 9, 2026, payable on June 25, 2026. With that, I will now turn the call over to Ted.

Thank you, Tanner. Good morning, everyone. I'm going to spend a few minutes reviewing our first quarter investment activity and then provide some details on our investment portfolio.

As Tanner mentioned, new investment activity during the March quarter was relatively modest. MFIC's new commitments in the quarter totaled $50 million with a weighted average spread of 469 basis points across 8 different companies. The vast majority of these new commitments were made prior to our decision to allocate more capital to stock buybacks. The weighted average net leverage on new commitments was 3.6x in the quarter.

Gross fundings, excluding revolvers totaled $68 million. Sales and repayments, excluding revolvers and Merx totaled $181 million. Net revolver fundings were approximately $1 million. And as previously mentioned, we received a $22 million paydown from Merx. In aggregate, net repayments for the quarter totaled $142 million.

Shifting to our investment portfolio. At the end of March, our portfolio had a fair value of $2.97 billion and was invested in 236 companies across 45 different industries. Direct origination and other represented 96% of the total portfolio. Merx represented less than 3% of the total portfolio and liquid positions acquired during our mergers with 2 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 March, 99% was first lien and 94% was backed by financial sponsors, both on a fair value basis. The average funded position was $12.6 million. The median EBITDA was approximately $51 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 on our direct origination portfolio was 9.6% on average for the March quarter, down from 10% for the December quarter. The sequential decrease in the portfolio yield was driven by lower base rates as well as a decline in the average spread across the portfolio. At the end of March, the weighted average spread on the directly originated corporate lending portfolio was 538 basis points, down 8 basis points compared to the end of December.

Next, let me make a few comments about our software exposure. You can find additional details on our software exposure on Page 5 of the earnings supplement. As of March 31, software represented just 11% 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 28 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 35%. The median EBITDA of our software portfolio companies is $50 million. Only one borrower is picking and taking 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 4.4x, down from 4.6x in the prior quarter and is below the overall portfolio. The weighted average spread of the software portfolio is 533 basis points, roughly in line with the overall portfolio.

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

Turning now to credit quality. On the overall portfolio, investments on nonaccrual status increased to 3.5% of the total 4.6% at the end of the prior quarter. The 2 largest contributors to the increase were Midwest Vision and Tasty Chicken.

Underlying portfolio company credit metrics were stable quarter-over-quarter. Borrower net leverage or debt to EBITDA was 5.29x at the end of March, unchanged from the end of December. And the weighted average interest coverage ratio was 2.3x, also unchanged from the end of December. 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 March, the percentage of our leverage lending revolver commitments that were drawn was essentially flat compared to the prior quarter.

PIK income represented 4.7% of total investment income for the month quarter, down slightly.

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

Thank you, Ted. Good morning, everyone. Total investment income for the March quarter was approximately $71.8 million, a decline of $6.5 million or 8.3% from the prior quarter. The decrease was driven by lower interest income resulting from lower base rates, fewer accrual days in the quarter, a decrease in the size of the portfolio, an increase in nonaccruals, as well as lower fee income.

As a reminder, the impact of changes in base rates on our interest income occurs with a lag, depending on the reset frequency of our loans. During the December quarter, the average daily 3-month SOFR declined 38 basis points compared to the prior quarter. Prepayment income was approximately $2.7 million, up from $2.4 million last quarter. Fee income was approximately $500,000, down from $1 million. Dividend income was approximately $300,000.

Net expenses for the quarter were $37.6 million, a decline of $4.8 million or 11.3% from the prior quarter. This decline was driven primarily by lower interest expense resulting from lower base rates as well as lower administrative service expenses. In addition, the total return feature in our incentive fee calculation eliminated the incentive fee again this quarter. Portfolio had a net loss of $61.1 million or $0.67 per share. For the March quarter, net investment income per share was $0.38, while GAAP net loss per share was $0.30.

On to the balance sheet. At the end of March, the portfolio had a fair value of $2.97 billion. Total principal debt outstanding was $1.87 billion and total net assets stood at $1.18 billion or $13.82 per share. Company ended the quarter at 1.55 net leverage. As Tanner mentioned, we plan to reduce MFIC's net leverage by continuing to deemphasize new commitments and through expected repayments.

Our cost of debt for the quarter declined to 5.61%, down from 5.95% in the prior quarter, largely driven by lower base rates and somewhat from the refinancing activities that occurred during the December quarter.

With respect to the $125 million of 4.5% fixed rate notes maturing in July 2026, we intend to repay those notes using availability under 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.

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

[Operator Instructions] We'll take our first question from Arren Cyganovich from Truist Securities.

You utilized your share repurchases rather quickly. Maybe you could talk a little bit about future repurchases. I know you've used the entire approved repurchases. Is that something that you expect to continue to do? Or do you think that you'll start to grow the portfolio again?

Yes. Thanks, Arren. As we called out in the prepared remarks, the dynamic with the increased trading volume enabled us to, under our 10b5-1 plan, repurchase more quickly than we thought. We also separately had some prepays that pushed, and we guided to the fact that we've already seen $100 million in the quarter-to-date period since March 31. And then obviously, the loss leaves us at a leverage level that is elevated.

And so at this juncture, we believe it prudent not to make a decision with respect to a share buyback or commencing of deployment until such time as we get down to the lower end of our range or lower. And then at that point, evaluate the capital allocation decision. Importantly, I will also call your attention to the statements we made on our last earnings call, we are very focused on shareholder value.

And we wanted to make a big statement with the size of the buyback and with the ultimate goal of trying to narrow the discount between our trading price and NAV and that logic and that goal will be top of mind when we do make that decision as we get down to a leverage level again at or below the bottom end of our range.

Okay. That makes sense. The nonaccruals increased. I think they're over 5% at cost now. So it seems, I don't know, a little bit worse than what I would say for kind of a normal credit environment. How are you viewing credit broadly? And what led to these increases in nonaccruals you mentioned the two companies?

Yes, sure. Thanks, Arren. When we look at the overall portfolio, we did see very healthy revenue and EBITDA growth across the 200-plus borrowers that we have. We do have some borrowers that are suffering challenges and some of that is thematic. We have exposure -- modest, very small exposure to quick service restaurant industries. One of the companies we mentioned is in that category.

And so we also see some credit challenges in companies where they're seeing cost pressures, whether that's from goods inflation, labor inflation, et cetera, and pressure or revenue reliance on the low end of the consumer. And so when we see those factors coming together, that's where we tend to see problems. Usually, if you have a credit go on nonaccrual, it's not due to one factor. It's due to a confluence of several factors.

And as we think about the outlook, the vast majority of the credits are performing quite well, the names on our watch list and in conjunction with the portfolio management functions of MidCap Financial, we're on top of those names.

And so I think your question kind of started off with for a normal credit cycle, it seems high. And I think if we kind of look across the lending environment, you do start to see nonaccruals ticking up kind of around the sector. And so I think that -- I think we should just all ask ourselves like where are we in the credit cycle.

And then just, Arren, just to clean up, the other nonaccrual that we called out is in Midwest Vision, and that happens to be an ophthalmology PPM. The good news, broadly speaking, is we're relatively under-indexed to PPMs. The bad news, we do have actually two, and this is one of them.

The challenges there are well understood in terms of cost pressures and also a dynamic wherein those business models are particularly sensitive to cost of capital, the ability to roll up and ultimately, the valuation of those franchises to maintain the relationships with doctors and retain those doctors.

And so unfortunately, in that particular case, that those stresses resulted in a deterioration in that credit and hence, that name also got put on nonaccural.

We'll take our next question from Rick Shane with JPMorgan.

Look, you guys have set out on a pretty different path from a lot of your peer companies in terms of how you're approaching returning capital and growth. And if you kind of look at the questions we've asked in many of your peers over the last quarter and similar companies, in theory, it's a view that we share.

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analog here, which is ARI, another Apollo vehicle, where they facing the same dynamics chose to sell off the vast majority of their assets at close to carrying value and are now sort of considering strategic alternatives. I am curious, given that the analog, how you guys are thinking about growth long term? And what are -- what is the path forward if BDCs continue to trade at discounts to NAV, if publicly traded BDCs continue to trade at discounts to NAV?

Thanks for the question, Rick, and a very good one. So as we've stated and then as you rightly pointed out, manifesting in the firm's approach to ARI, we're very focused as a firm, where we manage public vehicles, making sure we are operating them with the objective of maximizing value to shareholders. What I would point you to is structurally, a BDC and the ARI structure are different.

And so the arrows in the quiver, so to speak, for a BDC are limited relative to ARI and thus, the path that was afforded in the case of ARI is not -- did not avail itself to us in quite the same way. That said, I would and at the risk of being redundant, call your attention to, irrespective of all the options that are available, our focus remains on and doing our best to narrow the discount.

And so as a result, as we look at the situation right now, we're focused on -- in the current moment, obviously, as I alluded to, getting leverage down, but also upon getting down to that leverage, making that capital allocation decision based on, obviously, where market is and where we're trading at the time.

Got it. And look, I think you guys realize I'm newly revisiting the name, but have a lot of history with the company. And my experience is that over time, you guys have been very thoughtful about premiums and discounts and thinking about what that means for shareholders. And it is interesting to see you take what I think is a pretty different path from some of your peers right now. At what point do you worry that if you -- if this continues, that not only is there a financial leverage issue, but you lose operating leverage on the platform?

So another very good question, Rick. I appreciate it. So there's a couple of things there. I think it's very important and what we've kind of stressed as a team as we've evaluated these options is we have a kind of think of it as a macro, but each individual decision as it presents itself has to be looked at kind of in the current market framework. I don't need to tell you that things are changing quite a bit and thus, it's informed by what's on the field at the particular time.

In terms of operating leverage, we obviously have SG&A at the BDC. As we shrink that there is a deleterious effect there, but that's relatively modest. I think one of the other dynamics that's important to consider and one of the -- that enabled us to make this decision is, Rick, if you think about our MidCap business, it's -- overall, it's a $50 billion business between the balance sheet of MidCap and the various sidecars and the assets that are managed there.

And thus, when we thought about undertaking this decision, we were fortunate given that setup, given those dynamics that MFIC's nonparticipation in a particular deal and hence -- or indicative of where we are right now where we're not deploying, does not impair our ability to deliver the solution for the client. The capital on the MidCap balance sheet and in all those other sidecars enables us to continue to operate and make commitments at scale to our sponsor clients and our corporate clients.

And as a result, the operating leverage, if you will, is not impaired there or from a business standpoint, I should say, we still have the ability to prosecute our business. And so again, we're fortunate to be in this position that enabled us to undertake that decision. And then getting back to the other part of the question, there is a modest effect on SG&A, not as efficiently levered. But again, in summation, we still feel that this is the prudent right approach for our company at this time.

Got it. Look, whether people agree or disagree with the strategy, I think investors value an alternative way of looking at the space and their ability to express their views as well. So thank you.

[Operator Instructions] We'll take our next question from Kenneth Lee with RBC Capital Markets.

I apologize if this has been covered before, I've just been hopping on different calls. I think I heard in the prepared remarks that there's a potential deemphasis on new investments go forward. Just curious, does that mean go-forward originations are mainly going to be driven by incumbent kind of financings? And then obviously, letting the prepayment activity slowly get leverage back down to the more lower end of the leverage range there.

Ken, thanks for the question. I think to summarize kind of what we have said around deleveraging and origination and stock buybacks, step 1, which is what we're in right now is to deleverage back to the lower end or slightly below of the targeted range that we have presented to the market over the last several years.

And then once that -- as we approach that level, we, along with our Board, will be evaluating the capital allocation decision for new originations versus stock buybacks and kind of the inputs there are, what are the market conditions at the time and where is our stock trading at the time. So we're not saying that we're not originating.

I would just add to that just for the -- just for clarity, Ken, a lot of the transactions that are done in the middle market or in the direct lending space come with delayed draws and revolvers, and we've already committed to many of those across our borrowers. We will obviously be honoring those commitments. And then from time to time, it might make sense even before we get down to the target leverage.

So we will still be standing up to those commitments. And then as Ted alluded to, the decision as to capital allocation will be made upon achieving our target leverage.

Got you. Very helpful there. And one follow-up, if I may, was the pickup quarter-to-quarter. Just to clarify your earlier comments, were some of the nonaccruals, the relative new ones related to any of the 2022 vintages? Or were they just throughout the portfolio there?

Yes. Yes, Ken. I think what your question was, were the nonaccruals from older vintages? And if that's the case, that's what your question was, and the answer is yes.

We'll take our next question from Heli Sheth with Raymond James.

So looking back to last year when we had Liberation Day, we kind of saw a muted M&A market following for the remainder of the year. So with the current macro factors, what are you expecting for the pipeline and activity for the remainder of the year?

Yes, sure. So we obviously still see what comes off the mid-cap pipeline, notwithstanding we are at the current juncture, not participating. And it's really become a fool's game trying to predict M&A because recent history has been littered with events that have inspired to take things offline.

And so I think we're cautious. It's hard not to point to some of the geopolitical stress and the duration there as really influencing M&A. The backdrop and perhaps the reason that ourselves and many others in the market have been sanguine going into each successive year about the pickup in M&A is that you look at the private equity space and you look at the quantum of dry EPI to date and returning capital to shareholders makes them very motivated sellers in many cases.

And unfortunately, they've gotten nicked up or the market has gotten nicked up by these stresses, as you alluded to

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amongst others. And so I think we're cautious. We're -- we exercise a little bit of humility in making such a prediction because of the speed of drivers that have impaired M&A volumes. But the broader term macro -- the broader term dynamic around the sponsor capital and the duration of those investments suggests to us that it's not a question of if, it's more of a question of when.

Got it. And a quick follow-up on leverage. Where do you see the pacing of reducing leverage going? Any incremental detail there?

Yes, sure. We called out -- we've got about $100 million, and this actually is not a terrible segue from your previous question there, is we've gotten $100 million in the quarter-to-date period. We have line of sight on a number of other prepayments. But to the question you asked previously, we are in an environment that can be -- that should be characterized and is characterized by some volatility. And so it's unclear when that happens.

Our business is one where we don't necessarily control the exit. And so we're susceptible to what happens. We do benefit from a very diverse portfolio with 236 names and are confident that over time, we will be able to get back to that leverage level. But conceding that even though we have line of sight into some specific paydowns, the dynamics are ultimately, to some extent, out of our control and more a function of whether the market bears that out.

And it appears we have no further questions at this time. I'll turn it back to our presenters for any closing comments.

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.

This concludes today's meeting. We appreciate your time and participation. You may now disconnect. Thank you.

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.

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.

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.

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.

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

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?

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.

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.

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

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.

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.

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?

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

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?

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.

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.

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

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

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.

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.

Yes. And...

Go ahead.

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 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.

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.

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.

Good morning, and welcome to the earnings conference call for the period ended September 30, 2025, for MidCap Financial Investment Corporation. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Thank you, operator, and 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. 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 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've 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.

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MidCap Financial Investment Corporation's Third Quarter Earnings Conference Call. To begin today's call, I'll provide an overview of MFIC's third quarter results and the significant repayment from our investment in Merx, our aircraft leasing portfolio company that we highlighted on our call last quarter.

I'll also share some thoughts on the outlook for our dividend. Following that, I'll hand the call over to Ted, who will share our perspective on the current market environment, walk through our investment activity for the quarter and provide a portfolio update. Kenny will then review our financial results in detail and recent financing-related activities.

Yesterday after market closed, we reported results for the third quarter. Net investment income or NII per share was $0.38 for the September quarter, which corresponds to an annualized return on equity or ROE of 10.3%. GAAP net income per share was $0.29 for the quarter, which corresponds to an annualized ROE of 8%.

As discussed last quarter's call, we're pleased to report portfolio company repaid approximately $97 million to MFIC during the quarter. NAV per share was $14.66 at the end of September, down 0.6% compared to the prior quarter. The decline in NAV was primarily due to a handful of positions that were added to non-accrual status, partially offset by a gain on our investment in Merx. The increase in non-accruals reflects company-specific issues, and we believe is not representative of a broader deterioration in credit quality.

During the September quarter, MFIC made $138 million of new commitments across 21 transactions. We believe MidCap Financial's strong incumbent position continues to be a significant competitive advantage as evidenced by the fact that slightly more than half of our new commitments by number were made to existing portfolio companies. In a muted M&A environment, incremental commitments are an important source of deal flow.

While sourcing assets is generally considered to be among the biggest challenges for many market participants in the market environment, MFIC benefits from access to assets sourced by MidCap Financial, one of the largest and most experienced lenders in the middle market, which is consistently ranked near at the top of the league tables.

Our affiliation with MidCap Financial provides a significant deal sourcing advantage for MFIC. We are fortunate to have the access to significant volume of commitments originated by MidCap Financial, which allows MFIC to select assets, which we believe to have the most attractive risk-reward characteristics.

During the September quarter, MidCap Financial closed approximately $5.8 billion of commitments. MidCap Financial has what we believe one of the largest direct lending teams in the U.S. with over 200 investment professionals.

MidCap Financial was founded in 2009 and has a long track record, includes closing on approximately $150 billion of lending commitments since 2013. This origination track record provides us with a vast data set of middle market company financial information across all industries, and we believe that this makes MidCap Financial one of the most informed and experienced middle market lenders in the market.

Key members of MidCap Financial's management team have been working together for more than 25 years, resulting in strong collaboration and an enhanced ability to navigate challenging market conditions, leading to improved credit quality and risk management.

We believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high-yield market. MFIC's affiliation with MidCap Financial has enabled us to successfully build a portfolio of predominantly first lien loans to sponsor-backed companies.

Moving on to Merx, our aircraft leasing company. As discussed on last quarter's call, during the September quarter, Merx completed a sale transaction covering the majority of its owned aircraft. In addition, Merx received additional payments from insurers related to 3 aircraft detained in Russia.

Both the sale transaction and the insurance proceeds exceeded the assumptions in Merx's June valuation, resulting in a $16.6 million gain recorded during the September quarter. Merx repaid approximately $97 million to MFIC on a net basis during the September quarter. Approximately $72 million of the paydown was applied to equity and the remaining $25 million was applied to the revolver.

At the end of September, MFIC's investment in Merx totaled $105 million at fair value, representing 3.3% of the portfolio, down from 5.6% at the end of June, which reflects the $97 million paydown and a net gain recorded during the quarter. As part of the sale transaction, Merx expects to receive approximately $25 million of additional consideration by the end of 2025 or in early 2026, which will be paid to MFIC and further reduce our exposure.

Let me remind you about what remains at 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 39 aircraft. 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. At the end of September, the servicing business represented approximately 25% of the total value of Merx. The servicing component of Merx will naturally decline as servicing income is received.

Turning to our dividend. On November 4, 2025, our Board of Directors declared a quarterly dividend of $0.38 per share for stockholders of record as of December 9, 2025, payable on December 23, 2025.

Before I turn the call over to Ted, I would like to take a moment and make a few comments about our dividend, given increasing investor focus in light of the recent Fed cuts and market expectation for additional cuts and the resulting decline in the SOFR forward curve.

Due to the asset-sensitive nature of our balance sheet, all else equal, declines in base rates will put pressure on net investment income. For context, the current SOFR forward curve is projected to trough around mid- to late 2026 at around 3%, which is roughly 80 to 90 basis points below current levels.

As shown on Page 16 in the earnings supplement, 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, which includes the impact of incentive fees. 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. Post quarter end, we made a couple of enhancements to our capital structure, which will also improve MFIC's earnings power, which Kenny will discuss.

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

Thank you, Tanner. Good morning, everyone. Starting with the market backdrop. U.S. economy has remained resilient, which has helped ease concerns about a recession. Inflation remains elevated. Consumer spending and business spending have been strong, although consumer sentiment is worsening. In response to rising unemployment risk, the Federal Reserve cut interest rates by 25 basis points in September. The Fed cut another 25 basis points in October.

Torsten Slok, Apollo's Chief Economist, says private labor data suggests that the labor market is doing okay. He also sees growing upside risk to inflation driven by tariffs, a weakening U.S. dollar, a strong economy and wage pressures in certain sectors. As the significant tariff-driven volatility has eased and there's more clarity with respect to the trajectory of rates, we're seeing an increase in sponsor M&A activity. That said, given the significant capital raise for direct lending, we continue to see pressure on both spreads and OID.

We believe the core middle market where we are focused, does not compete directly with either the broadly syndicated loan market or the high-yield bond market. Regardless of recent M&A activity levels, we see that many of our borrowers continue to have add-on financing needs, which is an important source of deal flow.

Next, I'm going to spend a few minutes reviewing our third quarter investment activity and then provide some detail on our investment portfolio. In the September quarter, we continued to deploy capital into assets with what we believe to be strong credit attributes. As mentioned, MFIC's new commitments in the September quarter totaled $138 million with a weighted average spread of 521 basis points across 21 different companies. Despite the competitive environment, MidCap Financial has remained disciplined in its underwriting. The weighted average net leverage on new commitments was 3.8x in the September quarter, down from 4x in the prior quarter. Our fee structure, which is one of the lowest among listed BDCs, allows us to generate what we believe to be attractive ROEs even at current spreads.

Gross fundings, excluding revolvers and Merx totaled $142 million. Sales and repayments, excluding revolvers and Merx totaled $197 million. Net revolver fundings were approximately $3 million. As previously mentioned, we received a $97 million net paydown for Merx. In aggregate, net repayments for the September quarter were $148 million. Excluding the $97 million net repayment from Merx, net repayments for the quarter totaled $51 million.

Shifting now to our investment portfolio. At the end of September, our portfolio had a fair value of $3.18 billion and was invested across 246 companies across 48 different industries. Direct origination and other represented 95% of the total portfolio, up from 92% at the end of June, primarily driven by the Merx paydown. Merx accounted for 3.3% of the total portfolio at the end of September, down from 5.8% at the end of June. At the end of September, the non-directly originated loans acquired from the closed-end funds represented approximately 2% of the portfolio. All of these figures are on a fair value basis.

With respect to recent headlines, we have no exposure to either First Brands or Tricolor. Specific to the direct origination portfolio, at the end of September, 98% was first lien and 91% was backed by financial sponsors, both on a fair value basis. The average funded position was $12.9 million. The median EBITDA was approximately $51 million. Approximately, 95% 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 10.3% on average for the September quarter, down from 10.5% for the June quarter. At the end of September, the weighted average spread on the directly originated corporate lending portfolio was 559 basis points, down 9 basis points compared to the end of June.

Underlying portfolio company credit metrics showed a slight improvement quarter-over-quarter, although we saw an uptick in investments on non-accrual status. We observed a modest decrease in borrower net leverage or debt to EBITDA, with the weighted average leverage decreasing to 5.29x at the end of September, down from 5.32x at the end of June. This trend reflects the lower leverage on new commitments, which helped offset increases in certain existing investments.

Additionally, the weighted average interest coverage ratio improved slightly to 2.2x, up from 2.1x last quarter. Looking ahead, all else equal, if base rates decline as currently expected, we anticipate a positive impact on portfolio company credit quality through even higher interest coverage ratios. These metrics are generally based on financial information as of the end of June 2025.

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 September, the percentage of our leverage lending revolver commitments that were drawn was essentially flat compared to the prior quarter.

During the quarter, we reinstated a portion of our investment in Nuera to accrual status following a restructuring, which converted our first lien debt position into a combination of first lien debt and preferred equity. Conversely, we placed 5 investments on non-accrual status due to company-specific challenges, noting that one of these investments was acquired in last year's mergers.

A portion of our investment in LendingPoint was moved to non-accrual status in anticipation of a forthcoming restructuring. In total, investments on non-accrual status represented 3.1% of the portfolio at fair value, up from 2% at the end of the prior quarter. Subsequent to quarter end, we were repaid on our position in Global Eagle, a position acquired in the mergers, which was on non-accrual.

Toward the end of October, we became aware that one of our portfolio companies, Renovo, would be filing for bankruptcy. The company filed in early November. As of September 30, MFIC had a $7.9 million exposure to the company. PIK income declined to 5.1% of total investment income for the September quarter and 5.8% over the LTM period. Our PIK income remains relatively low compared to other BDCs, which we view as a positive indicator of portfolio health and reflects our focus on cash pay investments.

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. Total investment income for the September quarter was approximately $82.6 million, up $1.3 million or 1.6% compared to the prior quarter. The increase in fee income, partially offset by a decline in recurring interest income, which is due to a tightening of base rates, a modest uptick in non-accruals and a slightly lower average portfolio size.

Prepayment income was approximately $3.2 million, up from $1.2 million last quarter. Our fee income was $458,000, up from $220,000 last quarter. Dividend income was $200,000, flat quarter-over-quarter. The weighted average yield at cost of our directly originated lending portfolio was 10.3% on average for the September quarter. This is down from 10.5% last quarter due to the aforementioned tightening in rates.

Net expenses for the quarter were $47.3 million, up from $44.9 million in the prior quarter. This increase was primarily driven by higher incentive fees. MFIC stated incentive fee rate is 17.5% and is subject to a total return hurdle with a rolling 12-quarter look back. Given the total return hurdle feature and the net loss incurred during the look-back period, MFIC's incentive fee for the September quarter was $5.8 million or 14.1% of pre-incentive fee net investment income.

Other G&A expenses totaled $1.6 million for the quarter and administrative service expenses totaled $1 million. Both figures are essentially unchanged from the prior quarter and in line with our previously communicated expectations of $1.6 million and $1 million, respectively.

For the September quarter, net investment income per share was $0.38, and GAAP earnings per share or net income per share was $0.29. These results correspond to an annualized ROE based net investment income of 10.3% and an annualized return on equity based on net income of 8%. Results for the quarter included a net loss of approximately $7.9 million or $0.08 per share, primarily due to losses on a handful of investments, as previously mentioned.

Turning to the balance sheet. At the end of September, the portfolio had a fair value of $3.18 billion. Total principal debt outstanding of $1.92 billion and total net assets stood at $1.37 billion or $0.1466 per share. Company ended the quarter at net leverage of 1.35x with average net leverage, excluding the impact of Merx equating to 1.37x. This was up slightly from the prior quarter's average of 1.35x.

Gross fundings for the quarter, excluding revolvers totaled $142 million. Debt repayments for the quarter were $148 million. Excluding the $97 million repayment from Merx, net repayments for the quarter would have been $51 million.

Turning to the liability side of the balance sheet. We have been focused on extending our debt maturities and reducing our financing costs. On October 1, we amended our revolving credit facility and extended the final maturity to October 2030. Part of this amendment, the funded spread on the facility was reduced by 10 basis points from 197.5 basis points to 187.5 basis points. Just a reminder, this includes the 10 basis points of credit spread adjustment. The unused fee was reduced from 37.5 basis points to 32.5 basis points.

Size of the facility was reduced by $50 million to $1.61 billion. The remaining material terms of the facility were unchanged. As a result of this amendment, we expect to recognize a one-time expense of approximately $1.5 million in the December quarter due to the acceleration of unamortized debt issuance costs associated with one lender whose commitment was reduced.

In addition, in October, we upsized and repriced MFIC Bethesda 1 CLO, which originally priced in September 2023. We increased the size of the CLO collateral from $400 million to $600 million. As part of this reset, we sold through the single A tranche generating approximately $456 million of relatively low-cost secured debt, which equates to a blended advance rate of 76%. The blended cost of the notes sold was 161 basis points.

Spreads on middle market CLO debt tranches have tightened considerably since the CLO originally priced. Spread on the senior AAA tranche on the CLO reset was 149 basis points compared to 240 basis points when the CLO originally priced, tightening of 91 basis points. CLO has a reinvestment period of 4 years and the net proceeds from the CLO transaction were used to repay borrowings under our revolving credit facility.

As discussed on prior calls, we continue to view CLOs as an attractive source of term financing. We will recognize a one-time expense of approximately $1.8 million in the December quarter related to the reset, which reflects the acceleration of unamortized debt issuance costs for the original CLO. As always, MFIC benefited from MidCap Financial and Apollo's experience and expertise in CLO management and structuring this transaction.

While these financing transactions will result in approximately $3.3 million of one-time expenses in the December quarter, the expected reduction in financing costs is expected to lead to a rapid payback period. Weighted average cost of debt for the September quarter was 6.37%. Weighted average spread on our floating rate liabilities will decline from 195 basis points as of September 30 to 176 basis points, a 19 basis point reduction. This decrease is driven by both the amendment of the revolving credit facility and the CLO reset.

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

[Operator Instructions] We will take our first question from Arren Cyganovich with Truist Securities.

I'd just like to discuss the increases in non-accrual. It wasn't a lot, maybe 1% or so on cost, but there were several companies. Maybe you could just talk a little bit about what is driving this? Is there any kind of theme between them? Are they tariff related? Maybe just a little bit more detail around the issues that were affecting those companies?

Yes. Sure, Aaron. This is Ted. Thanks for the question. If you look at the companies that went on non-accrual, there's not really a theme that ties them all together. We have one that was impacted by tariffs. We have one that does have some pressure from weakened consumer sentiment. Overall, not a real theme, very idiosyncratic across each one.

In terms of the increase in M&A activity that you're seeing in the marketplace, is this something that you feel like will be sustainable through 2026? Maybe just a little more of your thoughts on the outlook for investing environment.

Yes. I mean, Arren, I think there's a couple of factors at play. One, you have some private equity companies or held companies that have been in the portfolio for a long time. You also have dry powder, and so you need a combination of putting money to work as well as returning capital back to the LPs. From that perspective, there should be ongoing demand.

You also have with kind of tariffs not going away, but at least some of that volatility being muted as we talked about, a little more certainty, which can narrow the bid-ask spread between buyer and seller.

Then with rates starting to come down and kind of some consensus around where the curve is going to shake out. I think Tanner mentioned troughing mid next year around 3%, you start to see the financing costs come down and the financing -- the cost, the certainty of that financing and the cost starts to stabilize. All those factors should lead to ongoing activity.

We will take our next question from Melissa Wedel with JPMorgan.

I wanted to revisit the comment you made about some of the mitigating actions that you're taking to help offset the impact of lower base rates. I realize that those things can take a while to ramp up and it can take some time to rotate assets. I'm curious how your team is evaluating the timing difference there and how that could impact dividend decisions? Essentially, how long might you wait to give those efforts time to kick in?

Yes, sure. Thanks, Melissa. When we look at deployment, as we've alluded to quite a bit, we're very lucky to be roughly $3 billion of a sourcing engine for $50 billion and so have a lot of opportunities for deployment in an improving M&A market.

Importantly, when we look at deployment, and I think this rhymes with our approach with respect to the proceeds we generated from the sales of the broadly syndicated and high-yield loans, we want to do it in a deliberate manner. Importantly, instead of just getting right back to target leverage from the Merx proceeds immediately, we want to continue to, one, not over-indexed in any one market and then also take the opportunity, which we're afforded by virtue of that really wide origination funnel to be very granular in what we're doing.

Importantly, all things being equal, you'd love to get right back up to target leverage. In the case of Merx, we've gotten $97 million back, and we anticipate another $25 million, which was otherwise only earning 2.5% on our balance sheet, so clearly, a nice accretion opportunity. When we go to deploy, it's got to be balanced by -- and even if it does take a little bit of time. We want to err on the side of creating a really, really granular portfolio.

Importantly, the other aspect of that is, of course, now as Kenny alluded to, having reset our first CLO down 90 basis points and upsized our all-in secured cost of capital, which is our financing strategy to become more secured heavy in our liability side is roughly 1.75% and putting us in a good position to be able to still generate nice NIM in what is very clearly a tightening spread environment or a tight spread environment.

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 across a really diverse pool of 244 obligors in our portfolio.

Appreciate that detail. You mentioned portfolio leverage as part of your answer. Can you give us an update on how you're thinking about portfolio leverage in the context of this environment given where spreads are right now?

Yes. Our target for leverage is unchanged, and we would endeavor over the next period of time to get back to the 1.4 level. We do think, as we've said in the past, that the execution through very, very attractive levels of investment grade within the CLO is indicative of our confidence in being able to run at a little bit higher leverage level. We would endeavor to get back to that 1.4 level, again, drawing on the comment to your previous question, again, but doing it in a measured way.

[Operator Instructions] We will take our next question from Paul Johnson with KBW.

I only have just one. I mean with the recent liability amendments and I guess, addressing kind of -- it looks like you're making room to kind of address the upcoming bond maturity, but kind of getting your ducks in a row, I guess, on the liability side, does that change anything around your interest in potentially repurchasing shares?

Yes. Thanks, Paul. I think when we look at share repurchases, which are obviously very topical now in light of where BDCs have traded as of recently. We have been an active repurchaser historically. It is a very compelling tool for driving shareholder value, which, of course, needs to be weighed against liquidity and where we stand in terms of leverage and outlook, importantly, of course, weighed against the opportunity to deploy into new loans. That said, we do believe, as we have in the past, that it is a compelling tool.

Would note also on share repurchases, Paul. Historically, it has been our view that instead of implementing the 10b5, we would prefer to utilize share repurchases when the windows open and thus, we can have the latest and greatest information, which obviously limits the amount of time you can be repurchasing. Notwithstanding, we do believe it's compelling, and we have a nice room under our current authorization.

[Operator Instructions] We will take our next question from Kenneth Leon with RBC Capital Markets.

This may have been already covered, unfortunately, I'm indulging a few calls. What's the latest and any updated thoughts around dividend coverage just given the current rate outlook there?

Yes, sure. When we look at the dividend, Ken, we were able to meet $0.38, benefiting from a slightly lower incentive fee in the current quarter. Then as we mentioned in the prepared remarks, we do have considerable proceeds from Merx that were yielding on our books a significantly lower yield. That's a nice accretion opportunity for us. Then we've also undertaken an opportunity in the current market environment, which is as those spreads on our assets have come down, we've been able to remark our liabilities. As that plays through our numbers between those dynamics and then in addition to the fact that there is an opportunity to work through our non-accrual positions, those 3 drivers give us an opportunity to mitigate the effects of lower base rates.

The Board has made a decision at the current moment to leave the dividend intact. Then as we see those 3 levers that we have playing through and we assess importantly, the actual trajectory of rates versus what's anticipated, we will continue to reevaluate. We also did call out a 100 basis point decline in rates would be about $0.10 of annual NII and thus, taking into account what the actual trajectory of rates is against those 3 levers will enable us to make kind of a more informed decision as we move forward over the coming quarters.

At this time, there are no further questions in queue. I will now turn the meeting back to Tanner Powell for any closing remarks.

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 with any other questions, and have a good day.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.

Good morning, and welcome to the earnings conference call for the period ending June 30, 2025 for MidCap Financial Investment Corporation. [Operator Instructions]

I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corp.

Thank you, operator, and 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, our newly appointed Chief Financial Officer. Howard Widra, Executive Chairman; and Greg Hunt, our former CFO, who now serves as an adviser, is 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 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've 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.

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MidCap Financial Investment Corporation's Second Quarter Earnings Conference Call. In case you missed our mid-June filing, we're pleased to share that Kenny Seifert has been appointed as MFIC's new Chief Financial Officer, which took effect as of the close of business on June 30. Kenny has been a key leader within Apollo's finance and accounting team since 2015. Kenny previously served as the CFO of both AFT and AIF, the 2 funds that MFIC merged with last year. Greg Hunt, MFIC's former CFO, will continue to support the company as an adviser through the end of December to ensure a smooth and effective transition. Additionally, Howard Widra, MFIC's Executive Chairman, informed our Board of his intention to retire from Apollo at the end of 2026. We are thankful to both Greg and Howard for their many contributions to MFIC.

For today's call, I will begin by providing an overview of MFIC's second quarter results, along with an update on the meaningful progress we've made reducing our investment in Merx. I will then turn the call over to Ted, who will share our views on the current market environment, walk through our investment activity for the period and provide an update on the portfolio. Kenny will then review our financial results and capital position.

Yesterday after market closed, we reported results for the second quarter. Net investment income, or NII, per share was $0.39 for the June quarter, which corresponds to an annualized return on equity, or ROE, of 10.5%. GAAP net income per share was $0.19 for the quarter, which corresponds to an annualized ROE of 5.2%. NAV per share was $14.75 at the end of June, down 1.2% compared to the prior quarter. The decline in NAV per share was primarily due to a handful of positions that are experiencing company-specific challenges, partially offset by a gain on Merx, which we will touch on shortly, and NII slightly exceeding the dividend.

During the June quarter, MFIC made $262 million of new commitments across 29 transactions. MidCap's strong incumbent position continues to be a competitive advantage, as evidenced by the fact that slightly more than half of the 29 commitments were made to existing portfolio companies. This underscores the power of incumbency, particularly in a muted M&A environment. We also observed a slight increase in the spread per unit of leverage on new commitments compared to the prior quarter, which Ted will discuss later.

Moving on to Merx, our aircraft leasing portfolio company, which, as you know, we have been actively working to reduce. During the June quarter, Merx sold 1 aircraft, which resulted in an $8.5 million paydown to MFIC. We are very pleased to share several recent positive developments related to our investment in Merx that occurred subsequent to quarter-end. As mentioned on last quarter's call, we were working on multiple sales campaigns and anticipated MFIC's exposure to Merx to decline in the coming quarters. We are happy to report that we've made significant progress toward this objective. Post quarter-end, Merx successfully completed a sales transaction covering the majority of its aircraft. Given the strong market environment, we were able to sell these aircraft at above the value embedded in Merx's valuation, which resulted in a modest write-up on our investment during the June quarter. In addition, in July, Merx received payments from insurers related to the 3 aircraft detained in Russia in the amount of $30.9 million, which brings Merx's total recoveries to date to approximately $47.4 million on those 3 aircraft. Similar to the sales transaction, the insurance proceeds were slightly above the amount assumed in Merx's valuation.

Following the sales transaction and the insurance recoveries, Merx will be repaying approximately $90 million to MFIC on a net basis in the September quarter, reducing MFIC's investment by nearly half. As part of the sale transaction, Merx is also expected to receive additional consideration of approximately $30 million anticipated by year-end 2025 or early 2026. Both the insurance recoveries and the sales transaction combined are expected to result in a positive impact to NAV in the high-single digit per share range relative to its June 30, 2025 carrying value.

To facilitate the Merx sales transaction, MFIC temporarily provided additional capital to Merx. As a result, MFIC has incurred incremental interest expense associated with this temporary capital infusion in the September quarter of approximately $1 million or $0.01 per share. On a pro forma basis, adjusting Merx's $185 million fair value as of the end of June for this $90 million net paydown, MFIC's investment in Merx will total approximately $95 million, representing approximately 2.8% of the total portfolio, down from 5.6% at the end of June. Of the $90 million net repayment, approximately $25 million will be used to reduce the Merx' revolver and the remaining $65 million applied to our equity investment in Merx. As mentioned, MFIC will be receiving additional consideration totaling approximately $30 million by the end of 2025 or in early 2026, which will further reduce MFIC's exposure to Merx.

Let me now walk you through what remains at Merx. MFIC's remaining investment in Merx consists of 4 aircraft, plus the value associated with Merx's servicing platform. As a reminder, Merx earns income through its servicing activities for Navigator, Apollo's dedicated aircraft leasing fund. Navigator is actively pursuing the sale of its fleet. Merx received a servicing fee -- Merx receives a servicing fee on each aircraft sale. Pro forma for the sale transaction, the servicing business represents approximately 40% of the total value.

Taking a step back, this reduction in our exposure to Merx lowers MFIC's exposure to an under-yielding asset and provides us with capital to deploy into first lien middle market loans sourced by MidCap Financial, which we believe will deliver a higher and more attractive risk-adjusted return. At the current base rates, we estimate that reinvesting $90 million, comprising of $25 million from Merx's revolver and $65 million from equity, is expected to generate approximately $0.06 per share in additional annual net investment income, enhancing long-term value for our shareholders. The remaining value of Merx, once realized and reinvested, will generate another approximate $0.06 per share in additional net investment income at current base rates.

Turning to our dividend. On August 5, 2025, our Board of Directors declared a quarterly dividend of $0.38 per share for shareholders of record as of September 9, 2025, payable on September 25, 2025. As mentioned, we intend to redeploy the capital repaid from Merx, which should be accretive to MFIC's earnings power and strengthen our dividend coverage going forward.

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

Thank you, Tanner. Good morning, everyone. Beginning with the market environment, the quarter began with heightened volatility, driven by the U.S. presidential administration's announcement of aggressive tariffs. This announcement temporarily disrupted activity, leading to a pause in new issuance. However, as the quarter progressed, we observed a significant improvement in market sentiment, and issuance activity picked up, particularly after a pause on tariffs was announced and several trade deals were struck.

Despite the turbulent start to the quarter, most major asset classes delivered positive returns. Importantly, we are beginning to see signs of a pickup in sponsor M&A activity. The U.S. economy has continued to show stability, characterized by high but gradually moderating inflation despite the pressure from tariffs. The labor market has shown resilience with unemployment holding steady. In response, the Federal Reserve has kept its policy rate unchanged, opting to wait for greater clarity on the economic impact of evolving trade and fiscal policies. We believe the core middle market where we are focused does not compete directly with either the broadly syndicated loan market or the high-yield bond market. Regardless of muted M&A activity, we see that many of our borrowers continue to have add-on financing needs, which is an important source of deal flow.

Next, I'm going to spend a few minutes reviewing our second quarter investment activity and then provide some detail on our investment portfolio. As a reminder, MFIC is focused on lending to the core middle market on a first lien senior secured basis. We believe this segment of the direct lending market offers attractive risk-adjusted yields and is less competitive compared to other segments of the direct lending market. MidCap Financial's long-standing presence in the middle market and its deep network of sponsor relationships enables us to continue to see a wide range of attractive investment opportunities. As a result, we believe the risk-adjusted returns available to firms like MidCap Financial and MFIC are among the most attractive in the direct lending market across cycles.

In the June quarter, we continued to deploy capital into assets with what we believe to be strong credit attributes. As mentioned, MFIC's new commitments in the June quarter totaled $262 million with a weighted average spread of 538 basis points across 29 different companies. Excluding 2 outliers, the weighted average spread on new commitments was 526 basis points.

We also observed a slight decline in the net leverage on new commitments. The weighted average net leverage on new commitments was 4x in the June quarter, down from 4.2x in the prior quarter. Our fee structure, which is one of the lowest among listed BDCs, allows us to produce attractive ROEs at current spreads.

Gross fundings, excluding revolvers, totaled $254 million. Sales and repayments, excluding revolvers and Merx, totaled $108 million. Net revolver fundings were approximately $7 million. And as mentioned, we received an $8.5 million paydown for Merx. In aggregate, net fundings were $144 million.

Moving to our investment portfolio. At the end of June, our portfolio had a fair value of $3.33 billion and was invested in 249 companies across 51 industries. As a reminder, in the March quarter, we transitioned our industry classification from the Moody's industry system to Global Industry Classification System, or GICS. Direct origination and other represented 92% of the total portfolio. We expect this percentage to increase next quarter, given the Merx paydown. At the end of June, the non-directly originated loans acquired from the closed-end funds represented just 2% of the portfolio. Merx accounted for 5.6% of the total portfolio at the end of June, but today, it's closer to 2.8%, given the post quarter-end paydown. All of the figures above are on a fair value basis.

Specific to the direct origination portfolio, at the end of June, 99% was first lien and 90% was backed by financial sponsors, both on a fair value basis. The average funded position was $13.1 million. The median EBITDA was approximately $50 million. Approximately 96% 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 compared to larger deals, which are generally without covenants.

The weighted average yield at cost of our direct origination portfolio was 10.5% on average for the June quarter, down from 10.7% for the March quarter. At the end of June, the weighted average spread on the directly originated corporate lending portfolio was 568 basis points, down 1 basis point compared to the end of March.

Since the initial tariff announcements earlier this year, MidCap has been analyzing the potential impacts across the entire portfolio on a company-by-company basis. This review has been refined and is ongoing. As a reminder, we primarily lend to U.S. service-oriented businesses, and we are underweight businesses that are heavily dependent on imports and exports. Our underwriting process always includes a downside scenario, and we have supplemented our underwriting process in response to the tariffs. MidCap Financial leads and serves as administrative agent on the vast majority of MFIC's direct lending deals. At the end of June, MidCap Financial or Apollo was the agent on 72% of MFIC's direct lending portfolio at fair value. This leadership position allows us to be in active dialogue with our borrowers and have enhanced information flow, which is particularly valuable during volatile periods. Being agent allows us to detect and address any issues early.

Our underwriting on MidCap Financial source loans has proven to be sound. Based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment order, our annualized net realized and unrealized loss rate is approximately 6 basis points on loans sourced by MidCap Financial. We think this performance data shows how well the strategy has performed.

We observed a slight increase in net leverage or debt-to-EBITDA of our borrowers. The weighted average net leverage was 5.32x at the end of June, up from 5.25x at the end of March. The increase was small -- was due to a small number of existing positions, partially offset by new investments. As mentioned, new commitments made during the quarter had a net leverage of 4.0x. At the end of June, the weighted average interest coverage ratio was 2.1x, flat compared to last quarter. These metrics are generally based on financial information as of the end of March 2025.

We believe the stable level of revolver utilization is an additional sign of the health of our portfolio companies. At the end of June, the percentage of our leveraged lending revolver commitments that were drawn was roughly unchanged from the prior quarter. We believe a steady revolver utilization rate is an indicator of financial stability. During the quarter, we restored 3 positions to accrual status, following the successful restructuring in 2 of these cases, highlighting our ability to navigate credit issues. We also placed 3 first lien positions on nonaccrual status due to company-specific challenges, New Era, Amplity and Compass Health. Investments on nonaccrual status represented 2% of the portfolio at fair value, up from 0.9% last quarter, and the number of companies on nonaccrual decreased by 1. PIK income represented 6.4% 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'm honored to join MFIC as Chief Financial Officer and excited to be part of the team and look forward to connecting with each of you soon. Since stepping into the role a little over a month ago, I've been working closely with Greg to ensure a seamless transition.

I will now review our second quarter results in greater detail. Total investment income for the June quarter was approximately $81.3 million, up $2.6 million or 3.2% compared to the prior quarter. The increase was primarily attributable to higher interest income due to growth in the portfolio, as well as higher prepayment income, partially offset by a decline in fee income and the impact from an increase in investments on nonaccrual status. Prepayment income was approximately $1.2 million, up from $0.6 million last quarter. Fee income was approximately $220,000, down from approximately $330,000 last quarter. Dividend income was approximately $200,000, essentially flat quarter-over-quarter. The weighted average yield at cost of our directly originated lending portfolio was 10.5% on average for the June quarter, down from 10.7% last quarter.

Net expenses for the quarter were $44.9 million, up from $44.4 million last quarter. This increase was driven by higher interest expenses and G&A expenses, partially offset by a lower incentive fee. Interest expense rose due to a higher amount of debt outstanding due to growth in the portfolio. Other G&A expenses totaled $1.6 million for the quarter, up from $1.2 million in the March quarter. As discussed on the last quarter's call, during the March quarter, we received a reimbursement from Merx for certain expenses previously incurred by MFIC on Merx's behalf. This was recorded as a contra expense. As mentioned on last quarter's call, we expect other G&A to average around $1.6 million per quarter. This amount is in addition to administrative service expenses, which are around $1 million per quarter.

MFIC's stated incentive fee rate is 17.5% and is subject to a total return hurdle with a rolling 12-quarter look back. Given the total return hurdle feature and the net loss incurred during the look-back period, MFIC's incentive fee for the June quarter was $3.9 million or 9.6% of pre-incentive fee NII.

For the June quarter, net investment income per share was $0.39 and GAAP earnings per share or net income per share was $0.19. These results correspond to an annualized ROE based on net investment income of 10.5% and an annualized ROE based on net income of 5.2%. Results for the quarter include a net loss of approximately $18.3 million or $0.20 per share, primarily due to losses on a handful of investments as previously mentioned.

Turning to the balance sheet. At the end of June, the portfolio had a fair value of $3.33 billion, total principal debt outstanding of $2.05 billion, and total net assets stood at $1.3 billion or $0.1475 per share. Net leverage at the end of the quarter was 1.44x. Average net leverage for the June quarter was 1.35x, reflecting the timing of investment activity. This compares to average net leverage of 1.21x for the March quarter. Given our visibility to the anticipated Merx paydown, we adjusted our pace of deployment in the June quarter accordingly. On a pro forma basis, including the approximate $90 million net repayment from Merx, net leverage at the end of June would have been around 1.37x. Gross fundings for the quarter, excluding revolvers, totaled $254 million. Net fundings for the quarter were $144 million.

Turning to our capital base. We currently intend to reprice and upsize our first CLO, MFIC Bethesda CLO 1, in the fall. CLO spreads have tightened considerably since our first CLO priced in September 2023. Of course, the timing and pricing of any future CLO transaction is subject to prevailing market conditions. Lastly, we were pleased that in June, Kroll affirmed MFIC's investment-grade rating of BBB- with a positive outlook.

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

[Operator Instructions] We'll take our first question from Finian O'Shea with Wells Fargo Securities.

Congrats on Merx and all the new appointments. I actually wanted to hit on Merx again. There was a lot there. Is the pro forma going to be part -- I think you said, 40% of servicing business and the remaining equity. Does that mean the remaining kind of looks like what it does now, a levered aircraft business and then part of servicing business and that, that will stay in place as a strategic, I guess, portfolio position?

So thanks, Fin. So the -- so that's generally correct. Let me modify how you described it. The 40% is correct is that of the remaining roughly $95 million of exposure, 40% is in the servicing business. The slight modification I would make to how you described it, it is not a strategic investment. We are not taking on any more servicing contracts there. And the 40% represents previously signed contracts, and in particular, servicing of our drawdown commingled fund Navigator. And that is -- those are revenues that will come in over time. And so, it's not a strategic business but is related to the servicing of planes. So there's no balance sheet risk for Merx. Merx will be paid a portion of the rent that is paid to Navigator. And then, when we sell transactions, Merx will benefit from a payment with regards to the amount of the planes that are sold. So not strategic, but it is related to the servicing.

And again, does that run off with the current Navigator fund family? Or is that complex growing? And is that service business expected to grow?

No. So, that -- so good question and helpful clarification. That will run off over time, as we sell the remaining planes that are in Navigator. That is not expected to grow.

Okay. Just a follow-up on co-investment. It looks like you did sort of back-to-back orders here. I know there were some -- there's some regulatory relief, but seeing what that sort of plain English means for MidCap and if more Apollo funds are straightforwardly entitled to MidCap origination?

So generally speaking, the movement in the order has been positive. There were COVID-related modifications that were enhanced, some of which became permanent. And generally speaking, the direction has been one where it has allowed for greater flexibility.

In terms of the MidCap origination, that is -- the availability of the origination is the same as it always was. And -- but the modification in the rules and the clarification, frankly, of some of the rules has generally meant a greater flexibility for balance sheets across Apollo to participate in transactions. For instance, to get a little bit more granular, some of the new rulemaking has enabled funds to come in even if they didn't participate in the original transaction, and so, generally speaking, given more flexibility. But in principle, the dynamic is the same as it was, wherein the origination is available more broadly. These rules just make -- just add to the flexibility.

And next, we'll go to Arren Cyganovich with Truist.

I was just hoping you could talk a little bit about investing expectations for the second half of the year, what you're seeing, how busy the pipeline is, et cetera.

Yes. Go ahead. Sorry.

Yes. Thanks for the question, Arren. Just taking it from the beginning of the year, there were high expectations for a pretty robust M&A market. And then, in the first half, what kind of played out was uncertainty around tariffs and what type of legislation was going to get passed. I would say, by the end of April, we started to see a little more clarity around all of those things, and kind of market sentiment started to get a little more bullish. If you look at most major markets, they're up for the year. And what we've seen over the last several months is that the M&A pipeline has continued to build.

It's not always one-to-one in terms of the deals that we're screening and taking to investment committee that actually get transacted, but just the number of deals that we're seeing. Sponsors are very active. If you -- there's been reports out there about how the sponsors have a longer duration of their portfolio. They've been holding on to companies longer. There's still a lot of dry powder that needs to go to work. There's a lot of liquidity in the private credit markets. And so, we see all of that coming together to be a pretty active second half. And to the extent that, that doesn't play out for whatever reason, with the power of incumbency that we have, we think there'll be plenty of activities to deploy. We've talked about in the past, MidCap has a very large origination business, and MFIC only needs a small percentage of that to meet its quarterly and annual origination needs. And so, within the broader market, but also within the mid-cap and Apollo ecosystem, we see plenty of activity and opportunities to deploy.

Great. I appreciate that. And then, the other question was around leverage. It ticked up this quarter to 1.44 net. And I just want to know where you're expecting that to trend? And is that a bit higher than what you like? Or is that in the same ballpark that you're okay with?

Yes. I mean, I think in terms -- let's start with new deployments, right? We're deploying at 4x to 4.5x. It was 4x this quarter. It was 4.2x last quarter. And so, in that range is where the market is and where we like to be deploying. Like we're very comfortable at that leverage level on new deployments. A lot of the deals that we do are kind of middle market strategies, and the borrowers are acquisitive. And so you'll see sponsors purchase something at 4x, and their intent and our expectation is that as they do these add-on transactions, there will be periods of time where these companies do lever up to make acquisitions and then will ultimately begin to delever again over time. So we do see that kind of dynamic profile. And in terms of the weighted average numbers that we cite on the overall portfolio, we were comfortable there. And then, at the fund level, the net leverage ratio at 1.43x, we knew that there was a Merx transaction coming. And so, we were deploying ahead of that so that we could take advantage of good opportunities in the market.

And I think to Ted's point, if I could add to that, Arren, quickly, we assigned a non-zero probability of getting the Merx transaction done, so we came in a little hot. For the avoidance of doubt, it is our intention to operate in and around the bottom end of our range. And you should expect us to be going -- you expect us to do that going forward. And then, importantly, as we weigh the back half of the year, we're very hopeful, as Ted alluded to, that we will see the pickup in M&A, and that will create some new credit creation opportunities and create a little bit more resiliency and stability to spreads. But we, as we always are, will be very deliberate and take account of the risk and what the market is showing us in terms of opportunities as we redeploy the Merx proceeds that we received.

Our next question will come from Kenneth Lee with RBC Capital Markets.

Just one on Merx. And to clarify, it sounds like after all the announced sales transactions, there's going to be 4 aircraft remaining in addition to the services platform. Is the 4 aircraft [ remaining ] to 1 of the 2 securitizations you had left? Or I just want to clarify how many of the securitizations will be left to wind down?

So thanks, Ken. At this juncture, the securitizations have been completely paid off. And so these are 4 planes that we own on balance sheet at Merx without any leverage.

Okay. Great. And then, just another point here. In terms of the insurer payments at this point, is there anything remaining there?

So thanks, Ken. Good question. And without going into excruciating detail, the dynamics of the court process in the U.K. are such that the court fines with respect to the insurance claims. And then, there's a subsequent trial that is needed to adjudicate the interest, the cost of carry, if you will, as well as the recovery of legal. And as is often the case in legal processes irrespective of whether you're in the U.S. or the U.K., there are settlements in advance of trials or one can settle at any given time. And so, we have conservatively estimated what those remaining proceeds will be. But at this juncture, given that we have settled on the primary claims and we've settled a portion of those auxiliary claims, if you will, forgive the term, it would only be expected to be relatively modest in total size. The vast majority of our claims and potential inflows from our Russia exposures are largely already received.

Got you. Great. And just one follow-up, if I may, just on the new nonaccruals in the quarter there. Any commonalities that you're seeing there? And how many were either indirectly or directly related to tariffs perhaps?

Yes. I think in terms of themes, there are different types of businesses. They've all seen some level of cost pressure across the board, whether that's interest rates, labor, et cetera. But as with most restructuring transactions, there's no one single factor. There's kind of a culmination of various levers that come together and result in restructuring. And I would say one thing that we're kind of watching are just balance sheets that were constructed in a lower interest rate environment and companies that -- where you have kind of good company, bad balance sheet situations. And that was a driver, in particular, of -- probably our biggest one.

Our next question comes from Robert Dodd with Raymond James.

Just on the spread environment and the opportunities going into the rest of the year, I think it was Ted said, right, the weighted average portfolio yield in this presentation was 5.68%. The new deployments, excluding a couple of outliers, were 5.26%. So there's about a 40 basis point gap between what's coming on versus what's in the portfolio. So should we continue to expect spread compression in the portfolio? Even if deployment spreads remain stable, should we expect spread compression? Or is that kind of a mix thing, right? Because it's not necessarily like-for-like on the type of assets that have a 5.75% spread versus the type of assets that are coming on a 5.25% spread. I mean, what's kind of the outlook there?

Yes, sure. Thanks, Robert. So part of the math is extraordinarily easy, right? If you look at our existing book, which itself was constructed over the last several years, and in particular, in rather attractive vintages from a spread perspective of '22 and '23, the existing portfolio is at 5.68%. The primary market is low-5s and, frankly, is dipping into the 4s in many cases. And if you were to get more granular with our spread for the risk that we put on the books in this particular quarter, we benefited from the fact that the power of incumbency, wherein we were -- and generally speaking, where we were deploying into existing portfolio companies, it was a little bit higher than where the primary market was. And so, very simply, if we're at 5.68% and the primary market is wrapped around 5% or even dipping into the 4s, that would be expected to come down.

What we have seen, Robert, is that the repricing activity has slowed down in part due to the fact that a lot of it has already been done. And then, when we look at the back half of the year to add some maybe dynamism to how we're thinking about it or how it could play out, I'll emphasize, and though we have -- the market has underperformed relative to expectations rather consistently in producing new M&A, new credit creation opportunities, but we're hopeful that, that will come to bear in the back half of the year and add some stability to the spread environment. I think the emphasis is, particularly as the liabilities have gotten to a better place -- I'll draw your attention to what we were able to do in CLO Bethesda 2 earlier this year and the prospects for looking at the spread that we have on Bethesda 1. L500 or S500 is still a level at which we can make good money, enhanced by the remarking of our liabilities to maintain NIM or otherwise to mitigate the effects of the spread environment. So we would expect it to come down. But generally speaking, and in part due to better execution on liabilities, better cost of capital, it's still a level at which we believe, particularly in light of where base rates are, where we can create good risk-adjusted return and ultimately, returns for our shareholders.

Got it. I mean, kind of tied to -- obviously, I mean, leverage drop for new deployments was down to 4 this quarter, which I think is more than 1 turn below your overall portfolio average. When you -- and I realize like you talked about the M&A pipeline is starting to rebound. But I mean, do you think the leverage ask is going to increase, call it, the second half of this year or into next year? Because obviously, 4 turns for what you're putting on is considerably lower than the portfolio average. Again, I mean, it's kind of the spread per unit of risk. I mean, yes, what are your thoughts there in terms of if the market activity is going to rebound, is it going to be at a higher leverage ask from sponsors? And what are your thoughts on like the pricing you do that for, so to speak?

Yes. So, as we -- and as we get more into the prognosticating, I'll make the necessary caveats that a lot of things could ultimately influence that. But notwithstanding, I think, Robert, I think particularly at this moment in time, where we've seen a little bit more clarity, where the tariff uncertainty has moderated, there's more clarity coming out of the legislation and the tax bill and then the need to deploy this M&A capital, it's generally been a borrower-friendly market, which itself is also influenced by the technical, which we're all very aware of, is in a muted M&A environment and significant supply of capital has resulted in tighter spreads and also generally borrower-friendly terms. And so, when we look at the back half of the year or -- and into '26, frankly, the balance there or how we're looking at it is, we likely will see borrower-friendly requests come in, and you could see that leverage level tick up, which, of course, will be balanced by the first -- my answer to your first question is, we're very hopeful that M&A volumes will go up, which will help to alleviate that technical to some extent.

And then, the final point I would make, Robert, is, generally speaking, when we look at our franchise relative to some of our peers, we generally will over-index into true first lien or stretch senior and are generally of the variety across the continuum of private credit players, one, to accept lower spreads, but for lower leverage. But that said, and to circle back to specific your question, I think 4 was maybe a little bit light in any event. And generally speaking, particularly if we don't see that M&A volumes materialize, and frankly, even if we do, given the supply of capital and what sponsors need to make the math work for their IRRs, it wouldn't be surprising to see a tick-up in leverage in the back half of the year.

Got it. And one just final sort of clarification. To the point on the net leverage at the end of the quarter, I mean, you basically already redeployed the capital you're getting back from Merx at the end of Q2, right? So there's not going to be a lag of you getting a chunk of cash coming in. It's already been redeployed into earning assets. Is that right?

Yes. And sorry, not to give you a longer answer here. That's generally correct. I would caution this is -- there's a lot of things that you're managing going into year-end and -- sorry, quarter-end, and coming out at 1.44 was a little hot, but not substantially so. And that number, particularly when things fund, can ebb and flow and is very much within the target. But yes, the math is, we would -- as our guidance that we've repeated in the past, and I repeated earlier in the call, generally want to be at the bottom end of the range. And so yes, part of the $90 million has already been deployed. But I would caution that in any given quarter, 1.44 is not -- it's not surprising to see that number sort of -- a little bit of volatility in that number quarter-end, given that we're managing very disparate processes and when things fund can vacillate a bit. And it's -- there's no reason to try to be too prescriptive or too specific in how we manage it.

Yes. And Robert, one just quick data point would be, if you include the $90 million net repayment from Merx, net leverage at the end of June would have been 1.37x. So to Tanner's point, kind of 1.4 plus or minus is where we're trying to be.

And we'll go next to Melissa Wedel with JPMorgan.

A lot of them have been asked already and answered. But I wanted to touch base quickly on repayment expectations, obviously, outside of Merx. You've done a great job detailing what you are expecting in the third quarter and then also later this year, into early '26. Beyond Merx, are you expecting -- if you do get that pickup in M&A activity, are you expecting something sort of commensurate in the repayment side? Or is there anything else you have visibility to in the near term elsewhere in the portfolio?

Yes. I wouldn't say that there are major specific deals that we have earmarked for repayment. We know that there are a handful of companies that are in processes via our dialogue with the sponsor. Most of our portfolio kind of falls below the threshold of term loan B. So getting taken out by that level of financing is quite episodic and it's pretty rare. And then, in terms of M&A, I mean, yes, if we're -- if M&A picks up, we're going to have opportunities to deploy, and there will be deals that go away from us. But on a net-net basis, we believe we can continue to stay deployed at our target leverage levels.

Okay. And then, as I think about the rough math you gave in terms of expectations around additional earnings potential as you rotate that Merx investment of about $0.06 a share annually in NII, are you thinking of that as being essentially an offset to any base rate pressure or declining base rates that we might see? And in terms of what that means for dividend coverage, are you feeling good about that $0.38 and fully covering that through NII, given these portfolio developments?

Yes, sure. I would modify what you said, Melissa, we don't think about it specifically, but you obviously identified really important drivers, right, all things being equal, base rates going down pressures dividends. And one of the things that we have in the toolbox, so to speak, or one of the dynamics, which we can point to is the redeployment of Merx. So it's not -- we don't -- again, there are a lot of factors there. And then, to answer your specific question, obviously, to -- and hopefully, this is apparent, a lot of it depends on how steep the base rate cuts are. We feel good given the given trajectory, particularly in light of the $0.06 that we calculate to be the accretion from the redeployment of Merx. But I think clearly, there's a level. And if cuts prove to be significantly higher, obviously, the calculus is different and the math is different. But given the current trajectory, yes, we do feel good about where we sit with respect to the dividend.

Okay. And I guess, a clarifying point, too, the $0.06 per share is just from this first [ broader ] repayment from Merx. Is that right?

That's correct.

[Operator Instructions] We'll go next to [ Chris Gastolou ] with CG Advisors.

Just a clarification on the impact of the Merx transactions. The 10-Q says they should result in a positive impact to NAV in the high-single digit per share range. By high-single digit per share, do you mean $0.06 to $0.09 or something else?

Yes, $0.06 to $0.09.

And that does conclude our question-and-answer session. I'd like to now turn the call back to management for any final or closing remarks.

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.

Thank you. And ladies and gentlemen, that does conclude today's conference. We appreciate your participation. Have a wonderful day.