KBRA Places Ratings for MidCap Financial Investment Corporation on Watch Upgrade Following Merger Announcement

KBRA places the ratings for MidCap Financial Investment Corporation (NASDAQ: MFIC) (or "the company") on Watch Upgrade, including the senior unsecured debt rating of BBB- and the issuer rating of BBB-, following the announcement on October 27, 2026, that Ares Capital Corporation (NASDAQ: ARCC) has an agreement to acquire MFIC in a cash-and-stock transaction.

Key Credit Considerations

The Watch Upgrade status reflects ARCC's announced acquisition of MFIC, which KBRA views as a credit positive development for MFIC given ARCC's substantially stronger financial profile, greater scale and diversification, and considerable financial flexibility. The transaction, valued at approximately $2.6 billion, has been approved by both companies' boards and closing is expected in the first half of 2027, subject to shareholder and regulatory approvals and other customary conditions. As these conditions are satisfied, KBRA expects execution risk to diminish, increasing the likelihood that MFIC will become part of a substantially larger and financially stronger organization. Upon closing, MFIC will cease to exist as a standalone entity, and its assets and liabilities will become part of ARCC's consolidated operations.

ARCC is the largest publicly traded BDC and serves as a leading direct lending vehicle within Ares Management Corporation's (NYSE: ARES) approximately $691 billion investment platform. As of September 30, 2026, ARCC reported investments at fair value of approximately $29.2 billion, shareholders' equity of $13.9 billion, and debt-to-equity leverage of 1.11x. The company also benefits from a well-diversified investment portfolio, substantial liquidity, and comparatively favorable asset quality, with non-accrual investments representing 1.4% of the portfolio at fair value. These characteristics compare favorably with MFIC's existing credit profile, which has been constrained by elevated leverage, weakening asset quality, and a greater reliance on secured funding. KBRA believes the acquisition would meaningfully strengthen the overall financial profile supporting MFIC's operations and obligations following completion of the transaction.

The Watch Upgrade status for MFIC's senior unsecured debt rating also reflects the potential for improved repayment prospects in connection with the acquisition. MFIC currently has $80 million of senior unsecured notes outstanding, carrying an 8.00% fixed coupon and maturing in December 2028. The notes are callable at par, and ARCC's considerably lower cost of unsecured funding provides a strong economic incentive to redeem or refinance the notes in connection with the transaction. While the ultimate treatment of the notes has not been determined, the merger agreement specifically provides a mechanism for their potential redemption. KBRA will continue to monitor developments surrounding the acquisition, including the satisfaction of remaining closing conditions and the ultimate treatment of MFIC's outstanding senior unsecured debt.

Rating Sensitivities

KBRA expects to resolve the Watch Upgrade upon completion of the acquisition, currently anticipated in the first half of 2027, at which point the ratings are expected to be withdrawn. In the interim, KBRA will continue to monitor the satisfaction of the remaining closing conditions and the anticipated treatment of MFIC's outstanding senior unsecured debt. Should the transaction not proceed as expected, KBRA would reassess MFIC's standalone credit profile, including its asset quality, leverage, earnings, and liquidity, to determine the appropriate rating action.

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