KBRA Affirms Ratings for MidCap Financial Investment Corporation

KBRA affirms the issuer and senior unsecured debt ratings of BBB- for MidCap Financial Investment Corporation (NYSE: MFIC) (“the company"). The rating Outlook is revised to Positive from Stable.

Key Credit Considerations

The ratings and Positive Outlook are supported by MFIC’s ties to Apollo Global Management, Inc.'s ("AGM") $671 billion AUM investment platform, including a $476 billion credit platform, of which $50 billion via MidCap Financial is in private middle market direct lending. 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. MFIC maintains SEC exemptive relief to co-invest among certain AGM affiliates and funds which is supportive of the ratings. Also supporting the ratings and Outlook is MFIC’s near completion of its rotation into first lien senior secured loans over the past three years. The diversified $2.4 billion investment portfolio at fair value was comprised of 154 portfolio companies across 24 sectors with a high percentage (89.7%) of first lien senior secured loans, up from 77.9% as of March 31, 2021. MFIC's portfolio company median EBITDA was $47 million, a comparatively less competitive segment than the upper middle market. The top four portfolio sectors are High Tech Industries (19.3%), Healthcare & Pharmaceuticals (17.5%), Business Services (10.1%), and Consumer Services (9.7%). Further supporting the ratings and Outlook are MFIC’s sound asset quality with relatively low non-accruals at 0.6% of the investment portfolio at FV and 0.9% at cost and the improved financial metrics of its aviation investment in Merx which comprised about 8% of the portfolio at 1Q24. While non-accruals could increase in the near-term, we believe that MFIC has the capacity to manage and absorb a moderate increase should one occur.

The company has solid access to the capital markets with a diversified funding mix of a secured bank revolving facility, unsecured senior debt, and a CLO. At 1Q24, the ratio of secured debt to gross assets was 35%; while declining, this is somewhat above higher rated peers, and MFIC expects to increase the percentage as markets allow to provide additional financial flexibility and increased unencumbered collateral for the benefit of the unsecured noteholders. As of March 31, 2024, the company’s gross leverage was 1.40x, which is within the company's target leverage range of 1.4x-1.6x. The company expects to maintain leverage at the lower range, closer to 1.4x, which KBRA believes is adequate given the high percentage of first lien senior secured loans. Asset coverage is adequate at 171% when considering its 150% regulatory asset coverage, providing the company a 14% cushion, somewhat lower than peers but partially offset with the higher concentration of investments in first lien secured secured loans which should allow the company to withstand some additional market volatility in a less favorable economic environment.

Counterbalancing the strengths are the potential risks related to MFIC’s illiquid assets, retained earnings constraints as an RIC, and uncertain economic environment with high base rates, inflation, and geopolitical risks.

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 regulated investment company, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company is external managed by Apollo Investment Management Inc., an affiliate of AGM. The company changed its name from Apollo Investment Corporation in August 2022 to more closely align its strategy and ties with MidCap Financial. MFIC is in the process of closing its merger with two Apollo managed closed-end funds (Apollo Senior Floating Rate Fund Inc. (NYSE: AFT) and Apollo Tactical Income Fund Inc. (NYSE: AIF)). The mergers have been approved by stockholders and are expected to close in late July.

Rating Sensitivities

Given the Positive Outlook, the ratings are likely to be upgraded in the near to medium term if there is no or little credit deterioration in the company's investment portfolio, leverage remains near the low end of the company's target range, senior secured loans remain a high proportion of the company's total investments, and if additional unsecured debt is added. Rating pressure is possible if a prolonged downturn in the U.S. economy has material impacts on performance and nonaccruals that significantly affect capital, leverage, and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring, and/or originations could also precipitate negative rating action.

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