MidCap Financial Investment Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

Key Takeaways

  • Strong Q4 results: Net investment income per share rose to $0.46 (11.9% annualized ROE) and GAAP EPS reached $0.51, supporting a 0.9% NAV increase to $15.41.
  • Portfolio de-risking: First-lien corporate loans now represent 96% of the portfolio, Merx aircraft exposure fell 27%, and no new non-accruals were recorded during the quarter.
  • Market dynamics: A late-quarter credit rally drove spread compression and borrower-led refinancings, though management highlights a robust pipeline for middle-market lending.
  • Funding diversification: Closed a $230 million CLO at SOFR+240bps and issued $80 million of 8% unsecured notes, extending debt maturities and reducing revolver reliance.
  • Pending merger: Entered agreements to merge with Apollo Senior Floating Rate Fund and Apollo Tactical Income Fund, expected to lower leverage and enhance scale once approved.
AI Generated. May Contain Errors.
Earnings Conference Call
MidCap Financial Investment Q4 2023
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Earnings Conference Call for the period ended December 30 1, 2023 for MidCap Financial Investment Corporation. At this time, all participants have been placed in listen only mode. The call will be open for a question and answer session following the speakers' prepared remarks. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Please go ahead.

Speaker 1

Thank you, operator, and thank you everyone for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer Ted McNulty, President and Greg Hunt, Chief Financial Officer Howard Woodrow, Executive Chairman as well as additional members of the management team are on the call and available for the Q and 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.

Speaker 1

I'd 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 the SEC's website at w www.sec.govorourwebsiteatwww.midcapfinancialic.com.

Speaker 1

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.

Speaker 2

Thank you, Elizabeth, and thank you everyone for joining today's call. I'll begin today's call with a summary of our results and will also provide our perspective on the current environment. Ted will then cover our investment activity and provide an update on the investment portfolio credit quality. Lastly, Greg will review our financial results in greater detail and will also discuss our recent financing transactions. We will then open the call to questions.

Speaker 2

Yesterday after market close, we reported strong results for the December quarter to cap off a strong year, highlighted by an increase in net investment income, an increase in net asset value, stable credit performance and continued derisking of the portfolio. Net investment income per share for

Speaker 3

the December quarter was $0.46 up

Speaker 2

from $0.43 last quarter, which corresponds to an annualized return on equity or ROE of 11.9%. Results for the quarter reflect an increase in recurring interest income from our predominantly floating rate portfolio as well as strong prepayment income. GAAP EPS for the December quarter was $0.51 up from $0.46 last quarter, which includes a net gain on the portfolio of $0.05 per share, reflecting the stable credit quality of our portfolio. Our GAAP earnings for the quarter corresponds to an annualized ROE of 13.3%. We believe these results demonstrate the merits of our investment strategy and our fee structure which aligns the incentives of our manager with interests of our shareholders.

Speaker 2

We also continue to improve the risk profile of our portfolio by reducing our exposure in Merx, our aircraft leasing portfolio company as well as our 2nd lien exposure. At the end of December, corporate lending and other represented 92% of the total portfolio, of which 96% was 1st lien on a fair value basis. We believe MFIC has one of the most senior corporate lending portfolios among DDCs as evidenced by our low attachment point of 0.1x. 98% of our corporate lending portfolio has 1 or more financial covenants and 88% of our corporate lending portfolio is backed by financial sponsors who we know well and with whom MidCap Financial has long standing relationships. We believe we have constructed a corporate lending portfolio that will perform well even during a potential economic slowdown.

Speaker 2

Overall, we feel good about the health and quality of our corporate lending portfolio as our underlying borrowers have largely been able to handle higher borrowing costs. All key credit metrics have either improved or were unchanged during the quarter. No investments were placed on non accrual status. We have not seen any significant signs of credit weakness. That said, we are closely monitoring our portfolio and mindful of the potential impacts of higher for longer rate environment.

Speaker 2

As of December 31, 2023, MFIC's net asset per share NAV per share was $15.41 an increase of $0.13 or 0.9% compared to the prior quarter, which reflects operating earnings above the dividend and a net gain on the portfolio. We also continue to focus on enhancing the right side of our balance sheet. During the quarter, we closed on MFIC's 1st CLO transaction and we were all and we also issued some unsecured debt, which Greg will discuss in greater detail. These transactions improved MFIC's debt maturity ladder. I would now like to provide a perspective on the current environment.

Speaker 2

The credit markets rallied during December quarter fueled by diminishing concerns about a recession, slowdown in inflation and the Federal Reserve signaling rate hiking cycling had come to an end. As the quarter progressed, we saw an increase in sponsor activity, which combined with a rebound in the syndicated loan market contributed to a supply demand imbalance for private loans, resulting in spread compression. We saw borrowers taking advantage of this dynamic to refinance or reprice existing liabilities. That said, we continue to see private lenders fill the void left by banks. Looking ahead, we believe we will likely see a pickup in deal activity in 2024 given a more stable backdrop, better visibility into rates, significant private equity drive powder which needs to be deployed and increasing pressure for sponsors to exit assets in order to make distribution and or return of capital to investors.

Speaker 2

Sponsors focused on the middle market are primarily seeking financing solutions in the private credit market. Buyers and sellers are becoming more aligned on valuation. At Apollo and MidCap, we are seeing a noticeable pickup in pipeline activity in recent months. As you know, MFIC is squarely focused on the core middle market. MidCap Financial has a long track record, which spans 14 years of lending to middle market companies and includes closing on approximately $110,000,000,000 of lending commitments since 2013.

Speaker 2

This origination track record provides us with a very large data set of middle market company financial information across all industries and we believe makes MidCap Financial one of the most informed and experienced middle market lenders in the market. Apollo's affiliation with MidCap Financial is a significant competitive advantage. In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated market or the high yield market. Next, let's turn to the dividend. Our approach to dividend seeks to provide shareholders with an attractive current yield while also retaining some earnings for NAV stability and growth.

Speaker 2

To that end, our Board of Directors declared a dividend of $0.38 per share consistent with our prior quarter dividend to shareholders of record as

Speaker 3

of March 12,

Speaker 2

2024 payable on March 28, 2024. A For the full year, net investment income outpaced dividends by nearly 17% as we chose to retain earnings, which contributed to the 2 0.1% increase in net per share for the year. At current base rates, we are well positioned to generate net investment income in excess of this dividend. We will continue to evaluate our dividend policy given the prevailing interest rate environment. In summary, we generated solid returns for our shareholders in 2023 and we believe we are well positioned to continue to deliver attractive returns looking ahead.

Speaker 2

As we enter 2024, we are excited about the strategic transaction that we announced last quarter. As a reminder, in November, MFIC announced that it had entered into merger agreements with Apollo Senior Floating Rate Fund Inc, or AFG, and Apollo Tactical Income Fund Inc, or AIF, pursuant to which AFT and AIF will merge into MFIC, subject to shareholder approvals and other customary closing conditions. AFT and AIF are both listed closed end funds registered under the Investment Company Act of 1940 and managed by an affiliate of Apollo. We have filed a registration statement and preliminary joint proxy statement in connection with the transaction. During this registration period, we are extremely limited in what we can discuss.

Speaker 2

Once declared effective, we will commence a proxy solicitation process to seek the requisite shareholder approvals for the mergers and we'll be happy to engage in a more detailed dialogue at that time. In the meantime, please understand that we will not be able to answer any questions related to the proposed merger on today's call. With that, I will turn the call over to Ted.

Speaker 4

Thank you, Tanner. Good morning, everyone. Beginning with investment activity, as a reminder, MFIC is focused on investing in loans sourced by MidCap Financial, which provides MFIC with a large pipeline of investment opportunities. MidCap Financial is a leading middle market lender with 1 of the largest direct lending teams in the U. S.

Speaker 4

With close to 200 investment professionals. MidCap Financial was active during the December quarter, closing approximately 3 approximately $15,000,000,000 for the full year. Acquisition activity among existing borrowers was significant. During the quarter, MFIC deployed capital into what we believe is an attractive environment characterized by notably lower leverage. MFIC's new investment commitments during the quarter totaled $175,000,000 of new 1st lien commitments across 20 different borrowers for an average new commitment of $8,800,000 as we continue to focus on diversification by borrower.

Speaker 4

45% of new commitments were made to existing portfolio companies. We continue to observe favorable pricing at lower leverage levels for newly originated loans. The weighted average spread on new commitments was 6 25 basis points with an average OID of approximately 2 34 basis points. This translates into a very attractive yield of over 12%. The weighted average net leverage of new commitments was 3.6 times.

Speaker 4

We're currently seeing some pricing compression on new commitments as a result of the market dynamics previously discussed. We have a strong pipeline of investment opportunities. So far in the March quarter, MFIC has closed approximately $100,000,000 of new commitments. In terms of funded investment activity, gross fundings, excluding revolvers for the corporate lending portfolio totaled $114,000,000 Sales and repayments totaled $152,000,000 Net corporate lending revolver pay downs were $1,000,000 and we received a $7,000,000 pay down from Merx. In aggregate, net repayments for the quarter totaled $47,000,000 Our portfolio turnover continues to drive a positive shift in the composition of the portfolio.

Speaker 4

Sales and repayments included the repayment of 1 of the few remaining second lien positions in our portfolio, reducing our second lien exposure to less than 2% of the total corporate lending portfolio. This shift underscores the ongoing improvement in the risk profile of our portfolio. Turning to our investment portfolio, we have a well diversified senior corporate lending book. At the end of December, our portfolio had a fair value of $2,330,000,000 and was invested in 152 companies across 23 different industries. Corporate lending and other represented approximately 92% of the portfolio and Merck's accounted for 8% of the total portfolio on a fair value basis.

Speaker 4

The average funded corporate lending position was 14,700,000 dollars or approximately 0.7 percent of the total corporate and other lending portfolio. 96% of our corporate lending portfolio was 1st lien and 98% of our corporate lending debt portfolio on a cost basis had 1 or more financial covenants. The weighted average yield at cost of our corporate corporate lending portfolio was 12.2% on average for the December quarter, up from 12% in the September quarter. At the end of December, the weighted average spread on the corporate lending portfolio was 623 basis points, up 2 basis points compared to the prior quarter. Turning to credit quality.

Speaker 4

Our focus on true first lien top of the capital structure, middle market loans has resulted in what we consider to be strong and resilient credit metrics. We believe MFIC has one of the most senior corporate lending portfolios in the industry. Not all debt categorized as 1st lien has a similar risk profile. We know that some lenders categorize loans as 1st lien even when there's leverage senior there to their positions, which is why we think it's important to look at both leverage and attachment point. At the end of December, MFIC's net leverage and attachment points on our corporate loans was 5.27x and 0.1x respectively.

Speaker 4

This extremely low attachment demonstrates that we are invested in the most senior part of the capital structure. Moving to interest coverage. The weighted average interest coverage ratio is 1.9x, unchanged from last quarter with 3 companies below 1 times, one less than last quarter. We are closely monitoring these situations and believe they're manageable as these companies have strong current liquidity, good underlying business performances or have strong sponsor support. As of December 31, 2023, the median EBITDA of MFIC's corporate lending portfolio companies was approximately 47,000,000 dollars Our portfolio companies are generally maintaining solid fundamental performance with revenue and EBITDA continuing to grow.

Speaker 4

We've not seen a meaningful increase in covenant breaches or pickup in amendment activity. We believe our credit quality has benefited from MidCap Financial's strong sourcing and underwriting capabilities. Our underwriting on MidCap source loans is proven to be sound. Based on data since mid-twenty 16, which is the approximate date upon which we began utilizing our co investment order, our annualized net realized and unrealized loss rate is around 1 basis point on loans sourced by Mid Cat Financial. We think this performance data shows how well the strategy has performed.

Speaker 4

Our non accrual rate remains very low. No investments were placed on non accrual status during the quarter. At the end of December, investments on non accrual status totaled $5,700,000 or 0.2 percent of the total portfolio at fair value. We believe these strong credit metrics reflect the way in which we have prudently constructed our portfolio. MFIC is focused on lending to the core middle market where MidCap Financial has strong longstanding relationships with sponsors and borrowers and a proven track record across cycles.

Speaker 4

Importantly, MFIC benefits from MidCap Financial's large dedicated portfolio management team with over 60 investment professionals, which helps identify and address issues early. It's also important to note that MidCap Financial leads and serves as administrative agent on the vast majority of our deals, which provides meaningful downside protection. As agent, we are in active dialogue with the borrower and have enhanced information flow, which allows us to be proactive in resolving credit problems. Moving on to Merx. As discussed previously, we are focused on reducing our investment in our aircraft leasing and servicing businesses.

Speaker 4

While we don't expect pay downs to occur evenly, we believe aircraft sales and servicing income should allow for the pay down of 3rd party debt and MFIC's investment in Merx over time. As a reminder, Merx started the year with 57 planes and at the end of December, Merch owned 31 aircraft, which reflects 8 aircraft that were sold during the December quarter. The 8 aircraft were sold for approximately our September 30th value and the cash proceeds were used to pay down debt, thus providing additional de risking to the remainder of our investment in Merx. As of December 31, 2023, our investment in Merx totaled $191,000,000 representing approximately 8% of the total portfolio at fair value, a decrease of over $70,000,000 or 27% compared to the end of 2022. For the December quarter, Merx paid approximately $9,000,000 including $2,000,000 of interest and a $7,000,000 return of For the full year, Merck's paid MFIC approximately $84,000,000 including $8,000,000 of interest and $76,000,000 return of capital.

Speaker 4

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

Speaker 3

Thank you, Ted, and good morning, everyone. Beginning with our financial results, net investment income per share for the December quarter was $0.46 which reflects strong recurring interest income and strong prepayment income. For the quarter, prepayment income was $3,500,000 and dividend and fee income was approximately $1,000,000 combined. PIK income remains very low, representing approximately 1.3% of total investment income for the quarter. GAAP net income per share for the quarter was $0.51 which includes the net gain in our investment portfolio.

Speaker 3

Results for the quarter correspond to an annual return on equity based on net investment income of 11.9 3%. MSIC's NAV per share at the end of December was 15.41 dollars an increase of approximately 0.13 0

Speaker 2

point

Speaker 3

distribution and a $0.05 gain on the portfolio. Additional details on the net gain are shown on Slide 17 in the earnings supplement deck. Net expenses for the quarter were 42.2 $1,000,000 up $1,900,000 compared to the prior quarter, primarily due to an increase in interest expense. As discussed on last quarter's call, in early November, MFIC closed its 1st CLO transaction issuing $230,000,000 of notes at a cost over SOFR, excuse me, of 240 basis points. The CLO has a reinvestment period of 4 years.

Speaker 3

And in December, we priced $80,000,000 of 5 year non called 2 unsecured notes in the $25 par market with a fixed coupon of 8%. This unsecured issuance effectively prefunds a portion of our unsecured debt maturing in March of 2025. Proceeds from both transactions were used to pay down borrowings under our revolving credit facility. At the end of December, unsecured debt represented 38% of total principal debt outstanding compared to 33% at the end of September. As a result of these two transactions, the weighted average interest rate on our debt for the quarter was 6.94%, up from 6.76% from the prior quarter.

Speaker 3

We believe

Speaker 5

it was prudent to diversify

Speaker 3

and extend the maturity of our funding sources. We intend to continue to evaluate and monitor our capital raising transactions going forward. Management fees totaled $4,100,000 for the December quarter, essentially flat to the prior quarter. As a reminder, MFIC's base management fee was reduced to 1.75% on equity beginning January 1, 2023, and is one of the only listed BDCs to charge management fees on equity, which we believe provides strong shareholder alignment with a focus on net asset value. Gross incentive fees totaled 6,300,000 dollars for the December quarter.

Speaker 3

As a reminder, our incentive fee on income is 17.5% and includes a total return hurdle with a rolling 12 quarter look back. In 2023, net investment income outpaced dividends as we chose to retain earnings and grow NAV. As a result, we accrued approximately $1,100,000 of excise tax during the December quarter, which is included in our general and administrative expenses on our statement of operations. Our current estimate is about distributable taxable income or spillover income at the end of 2023 was approximately $0.92 per share. We will continue to monitor our undistributed earnings as part of our capital management consideration.

Speaker 3

Moving to our balance sheet, MFIC's net leverage was 1.34 times as of December 31, 2023, compared to 1.4 times at the end of September 20 20 reflecting $47,000,000 of net repayments during the quarter and the increase in net assets from retained earnings and the net gain on

Operator

the call is now open for questions. Our first question comes from Mark Hughes with Truist. Please go ahead.

Speaker 6

Yes, thank you. Good morning. You had suggested your position to generate NII ahead of the dividend, something like the foreseeable future with the forward curve as it is now, have you modeled out kind of how durable that should be? Any time period you want to share in terms of your thinking about that ability to pay the dividend?

Speaker 4

Yes. I mean, I think we've been

Speaker 3

Mark, we've been very disciplined in keeping our dividend at the $0.38 as we look out to the forward curve. And we're confident at this point given where we are that in the near future, which is, let's say, the next 4 to 8 quarters, we have coverage on that $0.38 dividend.

Speaker 6

Understood. And then from a credit perspective, you all seem to be in very good shape. Interest coverage was steady sequentially. Do you think there will be more of a buildup of pressure kind of across the sector given the higher for longer perhaps and still choppy economy? Do you think it's going to get worse for the sector?

Speaker 6

Or do you think this is maybe a reasonably steady state?

Speaker 4

Hi, Mark. Yes, I mean, I think we're seeing 2 things. On one side of the coin, we're still seeing revenue and EBITDA growing in our underlying portfolio companies, which is helpful. And then if we do have higher for longer, that's going to put pressure on the company's ability to continue to invest in the business. Right now it still feels like a pretty good place.

Speaker 4

I think if you asked most investment folks a year ago or 2 years ago, everyone was thinking that there would be a harder landing than what we've had. And so we've all been pleasantly surprised by the rather benign credit environment. And I think as we mentioned on the call, we don't see anything that other than the pressure from high interest rates that would cause any concern. And then anything in

Speaker 6

the healthcare, maybe some discussion of pressure on reimbursements, fee schedules, higher labor costs within your healthcare exposure, how are you positioned relative to some of these risk

Speaker 4

factors? Yes, I think we've every quarter, we take a look at the portfolio in different sectors and what the themes are that we need to be concerned about either from a top down perspective or that we see bubbling up from a bottoms up perspective. And when we were going through the portfolio this past quarter, I think the answer is not 0, but it's very, very small in terms of exposure to, in particular, the labor issue.

Speaker 2

And then on reimbursement, I mean, this is certainly an item that is at the forefront of mines. And not surprisingly, we, like other lenders, do our best to not take outright stroke of pen reimbursement risk. And while it certainly is there to some extent to date, as we look to Ted's point, when we look very critically at our exposures within healthcare, seem to be managing those challenges that are kind of well publicized across the space.

Speaker 6

Appreciate it. Thank you.

Operator

Thank you. Our next question comes from Casey Alexander with Compass Point. Please go ahead.

Speaker 7

Yes, good morning. If I was a better analyst, I'd probably know the answer to this question. But with Merx, is the remaining planes, are they plane specific? Some of the planes, if they're sold, have to go to the securitization. Some of the planes, if they're sold, would result in a pay down of the revolver.

Speaker 7

Or is it a pool? And if it's a pool, then when does it turn more to the revolver as opposed to paying down the securitization?

Speaker 3

Thanks, Casey, for the question. So we have on about 20 2 of the planes remaining sit within 2 securitizations called MAAPS 18 and MAAPS 19. And the other claims on the other 8 or so are in a joint venture that we have that we're 15% of. So the proceeds from the joint venture in selling those assets would go to pay down the capital, the pay down our capital that we have invested in the portfolio right away. Within the securitizations, that capital on those the sale of those planes will go to pay down debt.

Speaker 3

For example, during 2023, we paid down approximately $240,000,000 worth of debt inside of those securitizations with the sale of over 11 planes.

Speaker 7

Okay. All right. Secondly, Greg, with the 8% unsecured note, did you consider swapping that into a floater given the fact that the forward curve suggests that rates could start to get easier over the course of the next couple of years?

Speaker 3

We did consider it, but we have a 2 year call provision. And kind of looking at the curve, we decided at this point and we can always change our decision, we have not swapped the 8% note. Okay. And then

Speaker 7

my last question is and you guys is if everything goes as you expect or suspect that it will in relation to the merger, do you have sort of a guideline for when you think, assuming that the vote goes the right way that that deal could close? When should we be thinking about it actually consummating?

Speaker 3

Yes. I think, as Tanner mentioned in the opening comments, we're limited to what we can say. I can say that we continue to work on the standard review in the comments from the SEC and we expect that to be completed in the near future. And then after that, once our N-fourteen is effective, we can comment on the timing more directly.

Speaker 7

All right. Thank you for taking my questions.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from Kenneth Lee with RBC Capital. Please go ahead.

Speaker 8

Hey, good morning. Thanks for taking my question. Wondering if you could just elaborate on the prepared remarks around pricing compression being seen on recent investments and wonder if you could also talk about what you're seeing in terms of documentation in terms of recent investments? Thanks.

Speaker 2

Yes, sure. Thanks, Kenneth. As we alluded to in the prepared remarks, we are seeing spread compression. When you step back, there's broadly been a rally in credit markets and you've seen spreads compress kind of across the spectrum, private and public. And we've seen that within the middle market as well.

Speaker 2

I think when we as we think about spread compression and we look at where we were able to deploy in 2023, we were very cognizant of the fact that if you look at the last couple of quarters, the spread had been in the high 6s to 7, which we did not believe was sustainable, was actually against the backdrop of 10 year low in private equity activity. As we look forward and what is often the case in the sort of incipient rally of credit markets, the activity itself tends to concentrate in repricings and refinancings and that was very true within in Q4. As we look at the market environment now, with that decline in spreads as well as broadly speaking a more constructive view on 1, the economy as well as also that while I guess not completely no chance for an increase in rates, but broadly speaking market consensus that rates will not go up further, you're starting to see the pipeline for M and A and LBO volume build. Typically, if we look back as LBO volume builds, that typically helps to provide some stabilization in spreads. And that's what

Speaker 3

we would expect as we've started to

Speaker 2

see some of the pipeline activity. Your comment about lender friendly, I think it's helpful to call to attention our focus on the middle market and broadly speaking more frothy markets result in more borrower friendly terms. But I think the emphasis for us and what kind of corroborates our focus on the middle market is partly it's partly documentation. And in particular, as we had mentioned in our prepared remarks, over about 98% of our corporate lending portfolio has covenants. And that's a dynamic that we see continuing in 1 kind of ballast against frothy market conditions and what that has a tendency to do in markets in terms of reducing those lender friendly provisions that have been more attendant over the last couple of years.

Speaker 2

Our focus on the middle market and continued ability to get covenants is one aspect that we point to and helping to continue to have a strong lender friendly provisions in our documents.

Speaker 8

Got you. Very helpful there. And just one follow-up, if I may. The portfolio average interest coverage ratios, I think they were close to about 1.8, 1.9 times. I want to get your thoughts around where you think the ICR could trough over the near

Speaker 4

term? Thanks. I mean, it's an interesting question and we've done a number of different modeling scenarios. But I think if you expect rates to kind of stay where they are and you look at and you expect revenue and EBITDA to continue to grow, which is what we're seeing in our portfolio, that would suggest that perhaps we're at a trough, although there could be a bit of a lag. I think we'll continue to watch and see where the SOFR curve goes.

Speaker 4

I think the underlying portfolio continues to perform. And it just kind of depends on the timing of when the SOFR curve moves.

Speaker 2

Yes. I would add to that, Kenneth, that certainly there's a lot of assumptions that go into trying to put more specific estimation on where it goes. I think when we look at the performance of our underlying borrowers, as Ted alluded to, and we spoke to more broadly in the prepared remarks, there was resilient performance, economic performance in the portfolio. And in particular, which is a continuation of the kind of like last two quarters, is we saw EBITDA growing more than revenue after quite a few quarters wherein that was not the case. And I think one of the reasons that we saw stability in terms of that interest coverage was that at this juncture, you can look at companies and whether through putting through price increases and or just lapping the most acute effects of inflation, again, we saw EBITDA growing faster than revenue.

Speaker 2

And I think notwithstanding, as Ted alluded to, we could have different trajectories in terms of interest rates, which would affect that. One dynamic, which is helping that ratio in particular and by extension, the cash flow dynamics in our underlying companies is that at this juncture price increases have been put through and we've lapped some of the worst of the inflation and helping to provide for some resilient performance in our underlying companies.

Speaker 8

Got you. Very helpful there. Thanks again.

Operator

Thank you. Our next question comes from Paul Johnson with KBW. Please go ahead.

Speaker 9

Yes, good morning. Thanks for taking my questions. I'm just curious if there's any

Speaker 4

sort of

Speaker 9

material update in terms of I think at the time it was expected to be a I think at the time it was expected to be a deleveraging event close to like 1.2x. So I'm wondering if there's any kind of material update there as well as kind of your outlook just given the some of the spread compression that we've seen last year and perhaps that could continue to occur this year as activity comes back into the market. If you have any sort of thoughts around the expected accretion from the merger and whether that's changed at all just simply from kind of a spread compression standpoint? Thanks.

Speaker 2

Yes. Thanks for the question, Paul. I'd make a couple of comments to address your questions there. First of which, we are not changing our leverage guidance. I think consistent with what we said which what we have said is you saw pickup of activity and notably we saw a number of refinancings in Q4 that served to take us into the $1.34 range relative to the $1.4 that we had operated at last quarter.

Speaker 2

So there's no update to our leverage guidance. The second point and consistent with what we said last quarter and you alluded to there, Paul, is that should the mergers be successful or should we be successful in executing the mergers day 1, you would see a decrease in leverage and would guide people to the statements that we made in connection with the last earnings release and investor presentation there. And I think as it relates to I think the heart of your question is, has our outlook changed based on the spread environment? And I would say no. I mean, all things being equal, you'd rather the market be giving us the L675 to 700 that we saw early in the year, But there's going to be ebbs and flows in spread.

Speaker 2

And I would also call your attention to the fact that part of this spread compression is obviously linked to a more healthy outlook for the economy itself. And so on this account, given those ebbs and flows and spreads, would not anticipate any different approach in managing the merger should we be successful in consummating those acquisitions.

Operator

Thank you. That's all for me. Thank you. Our next question comes from Arren Cyganovich with Citi. Please go ahead.

Speaker 5

Thanks. You mentioned that the amendment fee activity or the amendment activity hasn't really picked up, but it was highlighted as somewhat of an increase in your other income this quarter. Maybe you can touch on that. And then on the prepayment side, it was split, I think you said between dividend income and the other income. What kind of the geography to change there from including dividend income versus other income?

Speaker 2

So I'll talk to amendment activity and maybe Greg can jump in. I think that we have not seen a material uptick in amendment activity. I think as Ted alluded to, all things being equal should this current rate environment continue and given the those coverage ratios, you would expect it to get tighter and would not be surprising to see an uptick in amendment activity. Where we are seeing activity, we are utilizing that seat at the table, if you will, to derisk. The emphasis kind of on the continuum is to try to invite further capital.

Speaker 2

We are less concerned with repricing than we are derisking. And then in terms of other income and I'll invite Greg to comment as well. That itself is linked to prepayments where we

Speaker 3

get acceleration of OID as

Speaker 2

well as also in the instance where in we're doing add ons. And this is another important point that we alluded to in the prepared remarks, it's worth emphasizing is 45% of our deployment in the quarter was related to existing commitments, some of which is existing delay draws that are drawn down on, but other of which is incremental commitments to existing borrowers. And that's important for two reasons, One of which is that can come with incremental fees, which may explain the dynamic you're looking at there too. But also importantly, it's I'll use the ballast again, it's a ballast within the current market environment because all things being equal, those existing commitments and the friction cost that would be suffered to the extent that a sponsor or borrower may look to refinance the entire company enables us to get better on average pricing and is one of the dynamics kind of this benefit of incumbency that we talk a lot about and our peers talk a lot about as well.

Speaker 4

Before you enter it, Greg, I'd just throw out. So Aaron, the actual number of amendments this quarter was one less than the prior quarter. And some of those were, as Tanner was alluding to, to do additional acquisitions, refinancings, etcetera. And so that's the activity level and some of which generated some fees.

Speaker 3

And I think Tanner answered the composition of our other income, it's based on C, we did double quarter over quarter. And then our dividend income is primarily related to our investment in U. S. Auto. And we take part of the proceeds we receive every quarter to principal and then we take some of it to dividend income.

Speaker 5

Okay. Thank you. And then just lastly real quickly, has the timing of the merger changed

Speaker 6

at all in your menu when that's disclosed?

Speaker 3

I think as we've I said previously, we are in the final stages of our comments with the SEC on our N14 and we'll be making progress in the near future.

Operator

I show no further questions at this time. I

Speaker 2

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

Operator

good day. This does conclude today's MidCap Financial Investment Corporation earnings conference call. You may disconnect your line at this time and have a wonderful day.

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