KBRA Assigns Rating to MidCap Financial Investment Corporation's $75 Million Senior Unsecured Notes
6 Dec 2023 | New York
KBRA assigns a BBB- rating to MidCap Financial Investment's ("MFIC" or "the company") $75 million 8.0% senior unsecured notes due December 15, 2028. The rating Outlook is Stable.
Key Credit Considerations
The rating reflects MFIC’s ties to Apollo Global Management, Inc., (AGM) a global investment firm with $631 billion of assets under management (AUM), including $481 billion in AUM dedicated to fixed income of which $48 billion comprised middle market direct lending AUM (MidCap commitments) as of September 30, 2023. Also, the rating reflects the company’s $2.4 billion at fair value (FV) diversified investment portfolio with 88% comprised of first lien senior secured debt to 149 portfolio companies across 25 industries, low non-accruals at 0.5% and 1.3% at FV and cost, respectively and the derived benefits from the company's SEC co-exemptive relief which allows the company to invest alongside AGM affiliates including MidCap Financial. MidCap Financial is a Bethesda, MD based middle market focused, specialty finance firm that was established in 2008 and has a long history of solid credit performance. In addition, MFIC has significantly reduced its noncore assets over the past couple of years and continues to divest its investment in Merx Aviation, which comprised 8% of total investments as of September 30, 2023. At 3Q23 the investment portfolio had a median borrower EBITDA of $54 million, interest coverage of 1.9x and 86% of its debt investments were sponsored. The top 3 sectors were mostly non-cyclical and include High Tech Industries (18.5%), Healthcare & Pharmaceuticals (17.7%), and Business Services (12.3%).
Liquidity is solid with approximately $1.7 billion of committed senior secured bank lines with $43 million of cash and $742 million of available credit lines at 3Q23. Post quarter-end the company further diversified its funding sources with a $402 million CLO issuance. The company had approximately $324 million of unfunded commitments with about 50% consisting of delayed draw loan commitments that are tied to transactions and performance thresholds that must be met. The company has $350 million of senior unsecured notes coming due in 2025. The proceeds from this offering will help offset the upcoming maturity.
The company's gross leverage of 1.4x is higher than peers but is adequate with its reduced risk profile as it has substantially increased it's percentage of first lien senior secured loans over the past several years. Similar to its peers, the company is also constrained by the illiquid nature of the assets and retained earnings constraints as a Regulated Investment Company (RIC).
Incorporated in 2004 as a Maryland corporation MFIC is a closed-end, externally managed, non-diversified investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of 1940 and an RIC. The company is external managed by Apollo Investment Management Inc., an affiliate of Apollo Global Management. The company changed its name from Apollo Investment Corporation in August 2022 to more closely align its strategy and ties with MidCap Financial.
A rating upgrade is not expected in the near future. The Stable Outlook could be revised to Negative or a rating downgrade could be considered if a prolonged downturn in the U.S. economy had a material impact on MFIC’s financial metrics including liquidity, leverage, and earnings. An increased focus on riskier investments or a significant change in senior management and/or risk management policies could also lead to negative rating action.
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