MidCap Financial Investment - Earnings Call - Q4 2024

Executive Summary

• Q4 NII per share was $0.40 (vs $0.44 in Q3), GAAP EPS was $0.26, and NAV/share declined 0.8% to $14.98; total investment income was approximately flat sequentially at ~$82.2M, with the QoQ pressure driven by lower base rates and modest fee income.
• Capital structure strengthened post-quarter: MFIC closed a $529.6M second on-balance sheet CLO at among the tightest middle-market levels (AAA at SOFR+148 bps; blended ~SOFR+161 bps), using proceeds to repay 2025 notes and reduce revolver borrowings.
• Portfolio and credit: new commitments were $255M; nonaccruals fell to 1.3% of fair value (from 1.8% in Q3); weighted average interest coverage improved to 2.1x; spreads on new commitments modestly increased due to incumbency mix despite ongoing market compression.
• Outlook: management plans to re-lever to ~1.4x in the next couple of quarters; the quarterly dividend of $0.38 was declared and management expressed confidence in sustainability given leverage plans and origination pace.
• Catalysts: re-levering back to target, CLO-driven funding cost tailwinds, continued rotation out of CEF-acquired and Merx aviation assets with insurance recoveries underway, and improving coverage metrics could support NII stability and sentiment.

What Went Well and What Went Wrong

What Went Well

• Secured low-cost term financing: Closed a $529.6M CLO; CFO: “adds attractive term-based financing at what we believe to be among the tightest levels achieved for a middle market CLO”.
• Credit stabilization: Nonaccruals decreased to 1.3% of FV (from 1.8%); management: “We are not observing any signs of general credit weakness” and interest coverage improved to 2.1x from 1.9x.
• Portfolio rotation and deployment: Continued selling non-directly originated CEF assets and redeploying into first lien floating-rate core middle-market loans; new Q4 commitments of $255M.

What Went Wrong

• Earnings softness QoQ: NII/share declined to $0.40 (from $0.44) as fee income was modest and base rates fell, pressuring portfolio yield (direct origination yield at cost down to 11.0% from 11.6%).
• NAV dipped: NAV/share fell $0.12 (-0.8%) to $14.98; net losses of ~$13M (~$0.14/share), with ~60% from positions already on nonaccrual.
• Competitive spreads: Market-wide spread compression persists; Q4’s modest spread improvement was mix-driven (incumbency) rather than broad-based widening.

Transcript

Operator (participant)

Good morning and welcome to the earnings conference call for the period ended December 31st, 2024, for MidCap Financial Investment Corporation. At this time, all participants have been placed in a listen-only mode. The call will be open for a question-and-answer session following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star and one on your telephone keypad. If you would like to remove your question, you may press star and two. I'll now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Elizabeth Besen (Investor Relations Manager)

Thank you, Operator, and thank you, everyone, for joining us today. We appreciate your interest in MidCap Financial Investment Corporation. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Greg Hunt, Chief Financial Officer. Howard Widra, Executive Chairman, is on the call and available for the Q&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. I'd also 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 either the SEC's website at www.sec.gov or our website at www.midcapfinancialic.com. I'd also like to remind everyone that we've 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.

Tanner Powell (CEO)

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MFIC's fourth quarter earnings conference call. I'll begin today's call by providing an overview of MFIC's fourth quarter results and share our perspective on the current market environment. I will then turn the call over to Ted, who will discuss our investment activity and provide an update on the investment portfolio. Greg will then review our financial results and capital position in more detail. Beginning with our results, yesterday after market close, we reported net investment income, or NII per share, of $0.40 for the December quarter and $1.71 for the full year. These results correspond to annualized return on equity, or ROE, of 10.5% for the quarter and 11.2% for the year. GAAP net income per share was $0.26 for the December quarter and $1.27 for the full year.

The vast majority of our portfolio is performing well, and we are observing stability in certain credit metrics. NAV per share was $14.98 at the end of December, down $0.12, or approximately 0.8%. During the December quarter, we made $255 million of new commitments, and for the full year, we made $1.06 billion of new commitments. While our market remains competitive, we observed a modest increase in spreads on our new commitments compared to the previous quarter, driven by commitments to existing borrowers at what we believe to be attractive leverage entry points. Spread compression in the core middle market has been less intense than what we see in the upper middle market. We have a clear and straightforward plan to gradually grow the portfolio over the coming quarters, and we believe MFIC's future results are well-positioned to benefit as we re-lever back to our target level.

We expect to be able to reach our target leverage of approximately 1.4x in the next couple of quarters. Taking a step back, as a reminder, in July, MFIC completed its mergers with Apollo Senior Floating Rate Fund and Apollo Tactical Income Fund, or the CEFs. We took advantage of strength in the liquid credit markets during the quarter and continued to sell certain assets acquired through the mergers that do not align with our strategy and prudently deployed the proceeds along with the investment capacity generated from the mergers into first lien floating rate middle market loans originated by MidCap Financial. Our affiliation with MidCap, a leading lender in the middle market, provides a significant deal sourcing advantage. We are fortunate to have access to the necessary origination to deploy this capital, given the significant volume of commitments originated by MidCap Financial.

In 2024, MidCap closed over $21.3 billion of commitments, including $6.6 billion in the fourth quarter. MidCap's origination volumes for the quarter and the full year are particularly notable given the overall muted sponsor M&A activity in the market. MidCap has what we believe to be one of the largest direct lending teams in the U.S., with close to 200 investment professionals. MidCap Financial was founded in 2009, has a long track record, which includes closing on approximately $130 billion of lending commitments since 2013. This origination track record provides us with a vast dataset 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. We believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan or high-yield market.

As Greg will discuss in more detail, we continue to optimize MFIC's capital structure, including the closing of our second CLO post-quarter end, which we believe strengthens our balance sheet and aligns with our investment strategy. Moving to Merx, as discussed previously, we are focused on reducing our investment in our aircraft leasing and servicing business. I'd like to provide an update on Merx's Russia fleet insurance claims. As a reminder, at the time of Russia's invasion of Ukraine in February 2022 and the imposition of sanctions, Merx's own portfolio included four aircraft on lease to two Russian airlines. Those aircraft are held in aircraft securitization known as MAPS 2019-1. In compliance with the EU sanctions imposed on Russia due to the invasion, Merx terminated the leases of those aircraft, but three were not returned and have remained in Russia since then.

Merx has brought legal action in the English courts seeking payment for those aircraft under both the lessee reinsurance policies and its own contingent policy, and we are pleased to announce that during the first quarter, we settled a portion of our contingent insurance claims with certain insurers. As mentioned on last quarter's call, we believe the current environment for selling aircraft is very attractive. Merx has made substantial progress on multiple sales campaigns covering a majority of the remaining aircraft on its balance sheet. We look forward to providing further updates on the process as purchase agreements are finalized in the coming months. At the end of December, MFIC's investment in Merx totaled approximately $183 million, representing 6.1% of the total portfolio at fair value.

The blended yield across our total investment in Merx was approximately 3.2% at fair value, and the continued rotation of capital from Merx into directly originated corporate loans should have a beneficial impact on MFIC's income. Assuming we are successful with our sales campaign, we expect MFIC's exposure to Merx to decline in the coming quarters. Moving to the economic environment, we entered 2025 with a solid economic backdrop underpinned by strong consumer spending, strong capital goods spending on infrastructure and AI, and a significant run-up in stock prices. However, investors are increasingly focused on the near-term impact of tariffs and federal government layoffs. The Fed's decision to increase their long-term dot implies that they are coming around to the view that interest rates will be permanently higher. Credit spreads have remained tight despite economic policy uncertainty rising.

The probability of a recession has declined significantly over the past months and remains low for 2025. Specific to the direct lending market, we are seeing encouraging signs for an increase in sponsor-related M&A activity, including a strong economy, mounting pressure on financial sponsors to return capital, a potentially more favorable regulatory environment, and the stabilization of interest rates. As you know, private debt has become an increasingly important source of financing for sponsor transactions, especially in the middle market where we are focused. We are currently observing a notable increase in the number of deal screenings indicating a pickup in activity. Repricing activity has continued at record levels, with refinances and extensions continuing to increase as sponsors seek to address vintage investments and upcoming maturities.

According to our dividend on February 21st, 2025, our board declared a quarterly dividend of $0.38 per share for shareholders of record as of March 11th, 2025, payable March 27th, 2025. With that, I will now turn the call over to Ted.

Ted McNulty (President)

Thank you, Tanner. Good morning, everyone. I'm going to spend a few minutes reviewing our fourth quarter investment activity and then provide some details on our investment portfolio. In the December quarter, we continued to prudently deploy the capital acquired from the mergers. MFIC's new commitments in the December quarter totaled $255 million. As we've emphasized before, we intend to deploy this capital in a steady and measured manner, maintaining discipline in terms of obligor and vintage exposure. We are fortunate to have access to the necessary origination to deploy this capital, given the significant volume of commitments originated by MidCap Financial. As Tanner mentioned, MidCap Financial closed approximately $6.6 billion of new commitments during the December quarter. We believe it is prudent to gradually grow the portfolio in order to maintain our desired level of diversification.

Despite significant competition for new deals, we observed a modest increase in spreads on new commitments compared to the previous quarter, driven by commitments to existing borrowers at what we believe to be attractive leverage entry points. The weighted average spread on new commitments in the December quarter was 546 basis points, up 13 basis points compared to commitments made in the December quarter, while the net leverage on new commitments decreased to 4.3x in the December quarter, down from 4.7x in the September quarter. We believe this attractive risk-return profile reflects MidCap Financial's strong presence as a lender in the middle market and the power of incumbency. For the quarter, gross fundings totaled $248 million, excluding revolvers. Sales and repayments, excluding revolvers, totaled $254 million, including $96 million of assets acquired from the mergers. Net revolver repayments were less than $1 million.

In total, net repayments for the quarter were $6 million. In the current quarter, we have continued to make progress selling assets acquired from the mergers. Turning to our investment portfolio, at the end of December, our portfolio had a fair value of $3.01 billion, and it was invested in 233 companies across 25 different industries. Direct origination and other, including the directly originated loans acquired from the CEFs, represented 90% of the total portfolio, up from 88% last quarter. The non-directly originated loans acquired from the CEFs, which includes high-yield bonds, broadly syndicated loans, and structured credit positions, represented 4%, down from 6%. As you can see on page six of the earnings supplement, we break out the non-directly originated assets that we acquired from the mergers. Lastly, Merx accounted for approximately 6% of the total portfolio. All of these figures are on a fair value basis.

Specific to the direct origination portfolio, at the end of December, 98% was first lien and 91% was backed by financial sponsors, both on a fair value basis. Approximately 99% had one or more financial covenants on a cost basis. Covenant quality is another key point of differentiation from the upper middle market, as substantially all of our deals have at least one covenant compared to larger deals, which are generally without covenants. The average funded position was $13 million. It was approximately $48 million. The weighted average yield at cost of our direct origination portfolio was 11% on average for the December quarter, down from 11.6% for the September quarter. The decline in the yield was primarily due to the decline in base rates.

At the end of December, the weighted average spread on the directly originated corporate lending portfolio was 578 basis points, up 1 basis point compared to the end of September. Regarding credit quality, we believe the overall credit quality of MFIC's direct origination portfolio remains stable. We are not observing any signs of general credit weakness. Our portfolio companies continue to show good financial performance, as evidenced by continued positive revenue and EBITDA growth. The financial sponsors and management teams of our borrowers have been effectively managing growth and liquidity. In a handful of more challenged situations, we are seeing good financial sponsor support. We have seen a slight decrease in amendment requests related to covenants or liquidity. We saw an improvement in the weighted average interest coverage ratio, which is primarily attributable to the decline in base rates and the origination of new investments with higher interest coverage ratios.

At the end of December, the weighted average interest coverage ratio was 2.1x, up from 1.9x last quarter. At the end of December, the weighted average net leverage for the direct origination portfolio increased slightly to 5.0x, up from 5.43x last quarter. We believe the stable level of revolver utilization we are seeing from our portfolio companies is an additional sign of the health of our portfolio. At the end of December, the percentage of our leveraged lending revolver commitments that were drawn was essentially unchanged quarter-over-quarter. We believe a steady revolver utilization rate is an indicator of financial stability. Our underwriting on MidCap-sourced loans has proven to be sound.

Based on data since mid-2016, which is the approximate date upon which we began utilizing our co-investment order, our annualized net realized and unrealized loss rate is around five basis points on loans sourced by MidCap Financial. We think this performance data shows how well the strategy has performed. The amount of investments on non-accrual status decreased on both a cost and fair value basis compared to the prior quarter. At the end of December, investments on non-accrual were 1.3% of the portfolio at fair value, down from 1.8% last quarter. During the December quarter, we exited one position that was on non-accrual status, which we acquired from the CEFs, and we placed one legacy second lien position on non-accrual status. MFIC's PIK income remains relatively low, representing approximately 5.7% of total investment income for the quarter and 4% for the full year.

In addition, we are closely reviewing our portfolio for any potential impacts from tariffs or other changes to government policies. We're generally underweight businesses that rely on imports and exports to and from the targeted countries and thus believe the impact will be limited should tariffs be put in place. We supplement our underwriting process in response to the past and potential tariffs, as well as other new risks that may emerge. With that, I will now turn the call over to Greg to discuss our financial results in detail.

Greg Hunt (CFO)

Thank you, Ted, and good morning, everyone. Starting with our operating results, total investment income for December was approximately $82.2 million, flat compared to the prior quarter, as a sequential increase in interest income was offset by a decline in fee income. The sequential increase in interest income was driven by a full quarter impact from the mergers, an increase in prepayment income, higher average leverage, partially offset by the impact of declining rates. The weighted average yield at cost on our directly originated portfolio was 11% for December, down from 11.6% last quarter, due primarily to lower base rates. Dividend income was flat quarter-over-quarter. Net expenses for the quarter were $45.1 million, an increase of $1.1 million compared to the prior quarter, driven by higher management and incentive fees, partially offset by a decline in interest expense and other G&A.

MFIC management fee for the quarter was approximately $6.2 million compared to $4.4 million in the December quarter. As a reminder, our base fee is 1.75% on net assets calculated as of the beginning of the quarter. The increase in net assets from the merger did not impact the management fee in the September quarter but resulted in a higher management fee in the December quarter. MFIC's incentive fee is 17.5% and is subject to a total return hurdle with a rolling 12-quarter lookback. Given the total return feature and the net loss incurred during the lookback period, MFIC's incentive fee for the December quarter was $5.3 million, or 12.6% of pre-incentive fee income. Interest expense declined due to lower base rates, partially offset by higher leverage during the quarter.

For the December quarter, net investment income was $0.40 per share, resulting in a full-year net investment income per share of $1.71. For the December quarter, GAAP EPS, or net income per share, was $0.26, resulting in a full-year GAAP EPS per share of $1.27. For the December quarter and the full-year, annualized return on equity based on net investment income was 10.5% and 11.2%, respectively. For the December quarter and full-year, annualized return on equity based net income was 6.8% and 8.3%, respectively. Results for the quarter include a net loss of approximately $13 million, or $0.14 per share. Approximately 60% of that net loss was from positions that were on non-accrual at the beginning of the quarter. We ended the year with net leverage of 1.16x.

We are operating below our target of around 1.4x, given the deleveraging impact of the equity issued in July in connection with MFIC's mergers with the closed-end funds. As Tanner and Ted mentioned, we intend to prudently increase leverage over the coming quarters, and we see no impediment to do so. At the end of December, our portfolio had a fair value of $3 billion. We had approximately $1.75 billion in debt, and total assets were $1.4 billion, or $14.98 per share. Shifting to our capitalization, given the attractive nature of term-based financing in the CLO market, the composition of our corporate portfolio, and leveraging MidCap Financial's CLO success and expertise, we expect CLOs to be an important source of debt financing for MFIC going forward. In late December, MFIC priced a $529 million CLO, our second on-balance sheet CLO, which closed earlier this week.

We sold the single-A tranche, adding approximately $400 million of low-cost secured debt at a blended cost of 161 basis points spread. The spreads on middle-market CLOs tranches have tightened considerably over the past year due to strong investor interest. The spread on the senior AAA in the second CLO was 148 basis points compared to 248 basis points in our inaugural CLO, which we closed in November of 2023, a tightening of 92 basis points. We believe this was amongst one of the tightest levels achieved in the middle-market CLO, reflecting the high quality of the underlying loans. The CLO has a reinvestment period through April 2029 and does not mature until January 2037. The proceeds from this CLO are effectively being used to repay $359 million of unsecured notes, which come due next week, with the remaining balance used to pay down our revolving credit facility.

This concludes our remarks. Operator, please open the call for questions.

Operator (participant)

Absolutely. At this time, if you would like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind you may remove yourself from the question queue at any time by pressing star and two. We'll take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead. Your line is open.

Finian O'Shea (Director and Senior Equity Research Analyst)

Hi, everyone. Good morning. Tanner, I appreciate the comments. The post-quarter insurance recovery for Merx's, can you talk about any impact there or if that was a full recovery of what you have valued or if there's any earnings headwind if that came in short? Thanks.

Tanner Powell (CEO)

Yeah. Thanks. The recoveries are approximately at our mark, so we're very happy with the results.

Finian O'Shea (Director and Senior Equity Research Analyst)

Does that imply a more expedited wind down or return of capital there as well?

Ted McNulty (President)

Yes. I mean, if you think we do have three planes that we have insurance recoveries on. As Tanner mentioned, the court proceedings are done in London, and so we do expect resolution of those claims this year.

Finian O'Shea (Director and Senior Equity Research Analyst)

Okay. That's helpful. Then I guess Merx's franchise-wide, what are you feeling nowadays for the eventual exit, maybe this year or more likely next year thing?

Ted McNulty (President)

Yeah. I mean, I think, as Tanner mentioned, we have some good line of sight for the sale of a significant amount of the portfolio that Merx's has, and we'll be reporting when we are able to do so with signed contracts.

Finian O'Shea (Director and Senior Equity Research Analyst)

Okay. That's all for me. Thanks so much.

Operator (participant)

We'll take our next question from Mark Hughes with Truist. Please go ahead. Your line is open.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Yeah. Thanks. Good morning. If things calm down in Russia and the Ukraine, would that be an opportunity for better recoveries, or is that already locked in?

Tanner Powell (CEO)

No. The recoveries are locked in. I mean, they're somewhat. This is insurance-based, so it's essentially what the insurers are willing to resolve the claims for. It's been very positive because the claims that we settled were pre the finalization of the court hearing. So it was more the momentum trying some of the insurers to get out front of the ultimate conclusion by the courts, which we think will be positive from an insurance basis.

Ted McNulty (President)

Yeah. To emphasize the resolution of the claims are now inextricably linked to the insurance process unrelated to what's happening on the ground.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Yeah. Okay. Talked about an increase in spreads in the quarter, and then leverage was a little bit lower. How much of that was mixed, or was there some market movement that contributed to that?

Tanner Powell (CEO)

Yeah. Sure. Thanks, Mark, and we tried to capture the nuance in the prepared remarks. We are still seeing spread compression, as we noted, not as significant or as pronounced as maybe in other parts of the broadly syndicated market or upper middle market. But, notwithstanding, still some spread compression, and new deployments are at lower spreads than what our average book is running at right now. The relative increase quarter-over-quarter had more to do, as we tried to call out in our prepared remarks, with the overweighting to existing portfolio companies.

We did not intend for this to imply that spreads are widening, but rather just the power of incumbency and what we're able to drive with our existing borrowers, where the friction costs are such that we typically do better when we're redeploying into existing portfolio companies versus new kind of credit creation opportunities, which continue to be at tight spreads relative to the rest of our book.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Thanks for that detail. How much more in your book is there to refi, do you think, the kind of investment into existing borrowers, the current spreads? How much more do you anticipate might just be a natural consequence of this recent spread compression?

Tanner Powell (CEO)

Yeah. I think it's tough to estimate. You can look at what our average spread is at 578, and you can see where the market is deploying at 500 or so, or 525 on average. Obviously, in our particular quarter, as I already alluded to, we were a little bit higher than that on account of reinvesting into current portfolio companies. But notwithstanding, I would answer your question with that will have a lot to do with part of spreads going there is that M&A has been relatively muted. The bid-ask spread for financial sponsors on account of a higher cost of capital has made it harder to get deals done. And as a result, the level of repricing and the level of repayment is a function of that as well.

So tough to estimate, and would caveat that to the extent that we saw significant new credit creation opportunities, i.e., a pickup in M&A, you could see some stabilization in yields and even widening in certain cases because the market, on average, is still grappling with a little bit of a technical overhang where there's more capital than there are new credit creation opportunities. And that's one of the reasons you've seen spreads go as tight as they have. And that's true across all markets.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Yeah. And then PIK income up a little bit compared to earlier in the year. I assume maybe that's part of the merger. Where should that trend as we progress through 2025?

Greg Hunt (CFO)

Yeah. So thanks, Mark. In terms of PIK income, I think when you look at our overall portfolio, we continue to be comfortable with where the performance is by and large. We've seen interest rates come down over the last few quarters. That should help. I don't think anyone's forecasting kind of even lower interest rates going forward, but that'll be one component to it. And then, obviously, the performance of the underlying borrowers, which, as with everyone else in the street, we have a handful of names that we watch very closely. But as we said in the prepared remarks, overall, the credit quality does remain stable.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

We'll take our next question from Sean-Paul Adams with Raymond James. Please go ahead. Your line is open.

Sean-Paul Adams (Senior Research Associate)

Hey, guys. Good morning. I did see non-accruals did take a dip for the quarter. Is it correct there's only four non-accruals remaining from the legacy CEF portfolio on the books? And what's the status of the existing non-accrual prospective resolutions? Thank you.

Greg Hunt (CFO)

Yeah. Sure. I'll kind of hit that in reverse. So the positions on non-accrual, without going into too much detail, there were a number of restructuring transactions that occurred in the fourth quarter or into the current quarter, which have put those in a more stable place. And so we'll be watching those going forward. Obviously, we have, from a portfolio standpoint, a monitoring process around what's on non-accrual, what's on a watch list, etc. And in terms of the kind of details of non-accrual, page 11 in the earnings supplement lays out all of the names and where they came from. And so, yeah, there are four names on non-accrual from the mergers.

Sean-Paul Adams (Senior Research Associate)

Got it. Thank you. I appreciate it.

Operator (participant)

We'll take our next question from Matthew Howlett with Jefferies. Please go ahead. Your line is open.

Matthew Howlett (Analyst)

Morning, everyone. Hope you're well. Just following on the non-accrual conversation, can you give an update on Naviga and Renovo? Just what might be happening for those companies recently, and then what led to Securus being added to the list this quarter? Thanks.

Tanner Powell (CEO)

Yeah. So, I mean, both of the, or I guess all three of those names are going through processes where lenders are collaborating and working together to try to maximize the recoveries for where those ultimate recoveries do come out and what the right amount of debt is to be carried by the company going forward. And I think in terms of where we keep those on non-accrual in the addition of Securus, as well as the ultimate outcome there is going to be driven by these restructuring processes and kind of underlying performance of the companies going forward.

Ted McNulty (President)

Yeah. And I would just say also, we talk a lot about all of these are from the vintage kind of prior to COVID. And we talk a lot about what has the increase in interest rates. And each of these companies had issues that have been exacerbated by the increase in interest rates and less cash flow to reinvest in the business. And it would be those types of names that have been impacted in the current environment made worse by underlying idiosyncratic issues within the companies.

Matthew Howlett (Analyst)

Okay. Thanks. That's helpful. And then just on your current dividend, it's obviously well supported by earnings. But given interest rate headwinds and spread compression, how confident are you in the sustainability of the dividend going forward?

Tanner Powell (CEO)

Yeah. We're very comfortable with it, considering where our leverage profile is and our expected origination pace.

Matthew Howlett (Analyst)

Okay. Thanks very much.

Operator (participant)

We'll take our next question from Paul Johnson with KBW. Please go ahead. Your line is open.

Paul Johnson (Analyst)

Yeah. Thanks. Thanks. Good morning. Thanks for taking my questions. In terms of just the stability in the credit metrics, the certain credit metrics that you're seeing, I was just wondering if you could expand on that a little bit in terms of what you're observing?

Ted McNulty (President)

Yeah. Sure. So, one of the things that we've been pointing out for the last several quarters is revolver utilization, and that has been pretty stable quarter-over-quarter, which shows that the companies are able to grow without pulling on their working capital facilities and also just kind of manage overall working capital and produce positive cash flow, and then in terms of interest coverage ratio, we noted that that has improved. I think part of that is a combination of reduction in interest rates, but then also a part of it is what we're seeing in terms of new opportunities and the leverage that's there out of the box. Our overall portfolio leverage did tick up a little bit, but that's primarily a weighted average number that's based on a few positions, but if you look at it on an obligor basis, overall, it's steady to down.

Tanner Powell (CEO)

Yeah. Just to emphasize that last part of what Ted said is we report that on a—and to be consistent with how we reported historically, it's a composite and it's a weighted average. And so that dynamic there, it can be influenced by some underperformers. And so our commentary and the nuance in our commentary had to do with the fact that, yes, we have seen some improvement on interest coverage. And then also when we look overall to borrowers or we look in quartiles, consistent with the comments that we made in the prepared remarks, see a stability in underlying performance across the portfolio outside of some of the idiosyncratic names we've called out and mentioned in the supplement.

Paul Johnson (Analyst)

Thanks for that. That's helpful. And then just in terms of kind of the write-downs this quarter, I understand there were some restructurings. So there's a few things going on. But was there anything in particular that was kind of driving the net depreciation this quarter? Was it in legacy assets, or were there any particular investments that were kind of driving that?

Greg Hunt (CFO)

I think as we said in our remarks, if you looked at it, over 60% of the decline were in positions that were already in non-accrual. Those are companies that both Ted and Tanner have addressed and that we're working through with the sponsors, restructurings of those and/or sales to those businesses. The valuation is going to be more based upon enterprise value. Therefore, you have more fluctuation quarter to quarter.

Paul Johnson (Analyst)

Got it. Okay. I missed that comment and then last one for me in terms of the CLO financing, perhaps on that, that's pretty attractive pricing, so do you expect that to change the unsecured funding mix at all going forward with potentially more attractive spread pricing in the securitization market?

Greg Hunt (CFO)

Yes. Yes, we do. I think it's credit to the portfolio that we've been building over time and leveraging off of our relationship with MidCap Financial. They have 12 CLOs out there. Now we have two. And I think when you look at the BDC space, there's a convergence of not only unsecured kind of spreads and secured spreads. And so therefore, the secured spreads are inside the unsecured. And we believe it's very favorable use of or source of capital for us going forward. But it's a credit - if you look at the portfolio, it's a function of what we have, the type of borrowers we have, and the strength of that portfolio.

Paul Johnson (Analyst)

Thank you. That's all for me.

Operator (participant)

As a reminder, if you'd like to ask a question, please press the star and one keys on your telephone keypad. We'll take our next question from Melissa Wedel with JPMorgan. Please go ahead. Your line is open.

Melissa Wedel (VP in Equities Research)

Thank you. Good morning. Most of my questions have already been asked and answered, but I wanted to follow up a little bit on just the volume of repayment activity or exit activity in 4Q. Just by virtue of your talking about getting to target leverage in the next few quarters, it sounds like you're anticipating net deployments over the upcoming quarters. But I'm just curious, were you surprised at all by some of the repayment activity that you saw in 4Q? It seemed like it might have been a little bit elevated, even though you are doing a lot of sort of recycling of capital from the sort of post-merger period. Just like to understand how you think about that.

Ted McNulty (President)

Yeah. Sure. Thanks, Melissa, so I mean, first of all, on the deployment side, if we kind of target 10% ± of the portfolio of new commitments every quarter, we'll be back to target leverage in the next few quarters. The last third and fourth quarter of last year, as you point out, were dragged down by the sales of the CEF, so I think that was on target, so I'd say none of that was a surprise. We're almost done with the recycling of the capital from the CEF, and so going forward, it will be really re-levering will really be a function of the deployment, which we feel very comfortable with given MidCap's recent track record, well, long-term track record, recent deployment, and what our pipeline looks like. And then it'll be kind of back to what I would say normal course of repayments.

That should allow us to achieve our goals in terms of re-levering.

Melissa Wedel (VP in Equities Research)

Okay. Appreciate that. And then just one follow-up question. I want to make sure we're understanding the realized losses correctly. Just by going through some of the tables in the K, it looks like most of those realized losses were exited pretty close to where you had those investments marked. I'm referring more to the larger positions that drove that in 4Q.

Greg Hunt (CFO)

Yes. And it was also. Yes, it was. We did exit those. They were also. You were moving from unrealized to realized, right? We were cleaning up the SOI, cleaning up. You kind of come into the end of the year, and that's kind of what we typically do. So you're correct in that analysis.

Melissa Wedel (VP in Equities Research)

Okay. Great. Thank you.

Operator (participant)

We'll take our next question from Casey Alexander with Compass Point. Please go ahead. Your line is open.

Casey Alexander (SVP and Research Analyst)

Yeah. Good morning. I'm just curious because the originations in the quarter were actually lower than your quarterly average for the year, as well as repayments. And you've often talked about how MidCap has substantial origination capacity. And in the past, the reason that you didn't see more of it in the BDC was because the BDC was up against its leverage limits. So it seems to me that given those previous statements, that the decision not to take up the total value of the portfolio was a conscious decision. Can you speak to that? Is there? I mean, you talked about higher spreads. What was it that kept you from increasing the size of the portfolio and moving up the leverage ratio this quarter?

Greg Hunt (CFO)

Yeah. Sure. Thanks, Casey. I think there are a number of factors, but I think the most kind of tangible in our estimation and how we very deliberately try to run the book is when you look at that swath of origination, and we quoted the all-in numbers from MidCap. The emphasis for us as a management team has been to stay true to that requisite level of granularity within the portfolio. So you can see the number of names that we were deploying into was substantial, but the average deployment in a given name kind of lagged, and/or we chose not to run it up. As we've said in the past, yes, it was lower in this quarter versus last quarter. That does not reflect a decision not to.

There are some things that are won and lost and ebbs and flows and what happens and what doesn't happen. And we're very comfortable with the level of deployment, as Ted alluded to. We feel very comfortable about the ability to get back up to 1.4 and are cognizant of wanting to build in the granularity. The number of obligors actually went down quarter-over-quarter as a result of the names that we were selling out of the CEFs or, on average, lower position sizes. But we aspire, as a lot of the larger BDCs and a function of the fact that we had 500 obligors across its business, over time, we would like to get to that. Ideally, we're at 233 right now. Ideally, get to a 300 number and show a really, really diverse level.

And then finally, the decision or whatever part of this that was a deliberate decision goes to not wanting to over-index to any one quarter. So take your comment, Casey. Objectively, this was a lower commit than last quarter. Has a little bit to do with granularity, but overall, very comfortable about the access to the origination and this not representing a deliberate decision on the part of management not to deploy.

Casey Alexander (SVP and Research Analyst)

Also, if I can, go ahead.

Mark Hughes (Managing Director and Senior Equity Research Analyst)

Can I just, yeah, Casey, just to jump in because I think the general theme is we are obviously targeting, as interest rates have gone down and maybe stabilized now, continuing to not only cover the dividend but have cushion to cover the dividend. As you know, we have a few tailwinds to that, which is levering up and the redeployment of Merx's. And then we have, and we added another tailwind this quarter, which is we got cheaper financing, I think, than we projected. Obviously, we have some headwinds, which is the repricing, most notably. And so when we sort of target to make sure that we continue to have comfort level to cover the dividend and actually expand that, that's sort of our timeline.

So when Tanner's talking about the choices that we're making, levering up is an important part of our strategy, meaning at the end point, we want to be at the right leverage level. But we also have, I don't know if luxury is the right word, but we have some flexibility in terms of sort of choosing granularity, which loans we pick, how we carry things forward, when we exit and not. And so we're taking advantage of that. So I think Tanner's right. I don't think you should read into sort of exactly one quarter, but you hopefully will read into hopefully the consistency with which we can lay out a story that continues to have room to cover the dividend and have some cushion in different levers.

Casey Alexander (SVP and Research Analyst)

That's my only question. Thank you.

Operator (participant)

There are no further questions on the line at this time. I'll turn the program back to management for any closing comments.

Greg Hunt (CFO)

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 good day.

Operator (participant)

This does conclude today's program. Thank you for your participation, and you may now disconnect.