KBRA Affirms Ratings for MidCap Financial Investment Corporation
30 Jun 2023 | New York
KBRA affirms the BBB- issuer and senior unsecured ratings for MidCap Financial Investment Corporation (NASDAQ: MFIC or “the company”). The ratings Outlook is Stable.
Key Credit Considerations
The company’s ratings reflect MFIC’s ties to Apollo Global Management, Inc., (AGM) a global investment firm with $598 billion of assets under management (AUM), including $438 billion in AUM dedicated to fixed income of which $46 billion comprised middle market direct lending AUM as of March 31, 2023. Also, the ratings reflect the company’s $2.4 billion diversified investment portfolio with 89% comprised of first lien senior secured debt, low non-accruals at 0.4% of fair value and 1.0% at cost, and the benefits derived from the company’s SEC co-exemptive relief which allows it 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 non-core assets over the past couple of years and continues to divest its investment in Merx Aviation, which comprised 8% of total investments as of March 31, 2023 compared to about 13% as of March 31, 2021.
Liquidity is solid with access to an approximately $1.7 billion committed senior secured bank facility with $705 million of availability and $70 million of cash as of March 31, 2023. The company has no near term unsecured debt maturities and $364 million of unfunded commitments (~$177 million of unfunded delayed draw) and the bank agreement was recently extended to 2028. While the company’s gross leverage of 1.48x is higher than peers, its net leverage of 1.41x is near the low end of its targeted net leverage range of 1.4x to 1.6x. The company has lowered its risk profile by aggressively reducing its non-core assets and increasing its percentage of first lien senior secured loans over the past several years which somewhat offsets the higher leverage. 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 a RIC. The company is externally managed by Apollo Investment Management Inc., an affiliate of Apollo Global Management. The company changed its name from Apollo Investment Corporation in 2022 to more closely align with its ties to MidCap Financial.
The ratings of MFIC are unlikely to be upgraded in the near term. A rating downgrade and/or Outlook change to Negative 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 actions.
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