MidCap Financial Investment Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 12, 2025

Key Takeaways

  • Positive Sentiment: Management expects to reduce its Merx exposure by ~50%, receiving ~$90 million net repayment in Q3 plus an additional ~$30 million by year-end, which should boost NAV by high single-digit cents and free up capital for higher-return middle-market loans.
  • Positive Sentiment: MFIC deployed $262 million across 29 new commitments in Q2, with incumbency driving over half of this to existing portfolio companies and a modest uptick in new commitment spreads.
  • Positive Sentiment: The Board declared a quarterly dividend of $0.38 per share, and the redeployment of capital from Merx repayments is expected to be accretive to net investment income and strengthen dividend coverage.
  • Neutral Sentiment: In Q2, net investment income per share was $0.39 (10.5% annualized ROE), GAAP net income per share was $0.19 (5.2% annualized ROE), and NAV per share fell 1.2% to $14.75.
  • Positive Sentiment: After early-quarter tariff-related volatility, market sentiment and issuance activity improved, and sponsors are increasing M&A and add-on financing, supporting a healthy deployment pipeline.
AI Generated. May Contain Errors.
Earnings Conference Call
MidCap Financial Investment Q2 2025
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning, and welcome to the Earnings Conference Call for the period ending 06/30/2025 for MidCap Financial Investment Corporation.

Speaker 1

Remarks.

Operator

I will now turn the call over to Elizabeth Besson, Investor Relations Manager for MidCap Financial Investment Corp.

Speaker 2

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 Kenny Seifert, our newly appointed Chief Financial Officer. Howard Widra, Executive Chairman and Greg Hunt, our former CFO, who now serves as an advisor is on the call and available for the Q and A

Operator

portion of today's call. I'd like

Speaker 2

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 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.

Speaker 2

You should refer to our most recent filings with the SEC for risks that apply to our business as they 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 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.

Speaker 2

At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.

Speaker 3

Thank you, Elizabeth. Good morning, everyone, and thank you for joining us for MidCap Financial Investment Corporation's second quarter earnings conference call. In case you missed our mid June filing, we're pleased to share that Kenny Seifers has been appointed as MFIC's new Chief Financial Officer, which took effect as of the close of business on June 30. Kenny has been a key leader within Apollo's finance and accounting team since 2015. Kenny previously served as the CFO of both AFT and AIF, the two funds that MFIC merged with last year.

Speaker 3

Greg Hunt, MFIC's former CFO, will continue to support the company as an advisor through the December to ensure transition. Additionally, Howard Widra, MFIC's Executive Chairman, informed our Board of his intention to retire from Apollo at the 2026. We are thankful to both Greg and Howard for their many contributions to MFIC. For today's call, I will begin by providing an overview of MFIC's second quarter results along with an update on the meaningful progress we've made reducing our investment in Merx. I will then turn the call over to Ted, who will share our views on the current market environment, walk through our investment activity for the period and provide an update on the portfolio.

Speaker 3

Kenny will then review our financial results and capital position. Yesterday, after market closed, we reported results for the second quarter. Net investment income or NII per share was $0.39 for the June, which corresponds to an annualized return on equity or ROE of 10.5%. GAAP net income per share was $0.19 for the quarter, which corresponds to an annualized ROE of 5.2%. NAV per share was $14.75 at the June, down 1.2% compared to the prior quarter.

Speaker 3

The decline in NAV per share was primarily due to a handful of positions that are experiencing company specific company partially offset by a gain on Merx, which we will touch on shortly and NII slightly exceeding the dividend. During the June, MFIC made $262,000,000 of new commitments across 29 transactions. MidCap's strong incumbent position continues to be a competitive advantage as evidenced by the fact that slightly more than half of the 29 commitments were made to existing portfolio companies. This underscores the power of incumbency particularly in a muted M and A environment. We also observed a slight increase in the spread per unit of leverage on new commitments compared to the prior quarter, which Ted will discuss later.

Speaker 3

Moving on to Merx, our aircraft leasing portfolio company, which as you know, we have been actively working to reduce. During the June, Merx sold one aircraft, which resulted in an $8,500,000 pay down to MFIC. We are very pleased to share several recent positive developments related to our investment in Merck's that occurred subsequent to quarter end. As mentioned on last quarter's call, we were working on multiple sales campaigns and anticipated MFIC's exposure to Merx to decline in the coming quarters. We are happy to report that we've made significant progress toward this objective.

Speaker 3

Post quarter end, Merx successfully completed a sales transaction covering the majority aircraft. Given the strong market environment, we were able to sell these aircraft at the above the value embedded in Merck's valuation, which resulted in a modest write up on our investment during the June. In addition, in July, Merck's received payments from insurers related to the three aircraft detained in Russia in the amount of $30,900,000 which brings Merx total recoveries to date to approximately $47,400,000 on those three aircraft. Similar to the sales transaction, the insurance proceeds were slightly above the amounts assumed in Merck's valuation. Following the sales transaction and the insurance recoveries, Merck's will be repaying approximately $90,000,000 to MFIC on a net basis in the September, reducing MFIC's investment by nearly half.

Speaker 3

As part of the sale transaction, Merx is also expected to receive additional consideration of approximately $30,000,000 anticipated by year end twenty twenty five or early twenty twenty six. Both the insurance recoveries and the sales transaction combined are expected to result in a positive impact to NAV in the high single digit per share range relative to its 06/30/2025 carrying value. To facilitate the Merx sales transaction, MFIC temporarily provided additional capital to Merx. As a result, MFIC has incurred incremental interest expense associated with this temporary capital infusion in the September of approximately $1,000,000 or $01 per share. On a pro form a basis adjusting Merck's $185,000,000 fair value as of the June for this $90,000,000 net pay down.

Speaker 3

MFIC's investment in Merck's will total approximately $95,000,000 representing approximately 2.8% of the total portfolio, down from 5.6% at the June. Of the $90,000,000 net repayment, approximately $25,000,000 will be used to reduce the Merx revolver and the remaining $65,000,000 applied to our equity investment in Merx. As mentioned, MFIC will be receiving additional consideration totaling approximately $30,000,000 by the 2025 or in early twenty twenty six, which will further reduce MFIC's exposure to Merx. Let me now walk you through what remains at Merx. MFIC's MFIC remaining investment in in Merx consists of four aircraft plus the value associated with Merx servicing platform.

Speaker 3

As a reminder, Merx earns income through its servicing activities for Navigator, Apollo's dedicated aircraft leasing fund. Navigator is actively pursuing the sale of its fleet. Merx received a servicing fee Merx received a servicing fee on each aircraft sale. Pro form a for the sale transaction, the servicing business represents approximately 40% of the total value. Taking a step back, this reduction in our exposure to Merks lowers MFIC's exposure to an under yielding asset and provides us with capital to deploy into first lien middle market loans sourced by MidCap Financial, which we believe will deliver a higher and more attractive risk adjusted return.

Speaker 3

At the current base rates, we estimate that reinvesting $90,000,000 comprising of $25,000,000 from Merck's revolver and $65,000,000 from equity is expected to generate approximately zero six dollars per share in additional annual net investment income, enhancing long term value for our shareholders. The remaining value of Merx once realized and reinvested will generate another approximate $06 per share in additional net investment income at current base rates. Turning to our dividend on 08/05/2025, our Board of Directors declared a quarterly dividend of $0.38 per share for shareholders of record as of 09/09/2025 payable on 09/25/2025. As mentioned, we intend to redeploy the capital repaid from Merx, which should be accretive to MFIC's earnings power and strengthen our dividend coverage going forward. With that, I will now turn the call over to Ted.

Speaker 4

Thank you, Tanner. Good morning, everyone. Beginning with the market environment, the quarter began with heightened volatility driven by the U. S. Presidential administration's announcement of aggressive tariffs.

Speaker 4

This announcement temporarily disrupted activity leading to a pause in new issuance. However, as the quarter progressed, we observed a significant improvement in market sentiment and issuance activity picked up, particularly after a pause on tariffs was announced and several trade deals were struck. Despite the turbulent start to the quarter, most major asset classes delivered positive returns. Importantly, we are beginning to see signs of a pickup in sponsor M and A activity. Economy has continued to show stability, characterized by high but gradually moderating inflation despite the pressure from tariffs.

Speaker 4

The labor market has shown resilience with unemployment holding steady. In response, the Federal Reserve has kept its policy rate unchanged, opting to wait for greater clarity on the economic impact of evolving trade and fiscal policies. We believe the core middle market where we are focused does not compete directly with either the broadly syndicated loan market or the high yield bond market. Regardless of muted M and A activity, we see that many of our borrowers continue to have add on financing needs, which is an important source of deal flow. Next, I'm going to spend a few minutes reviewing our second quarter investment activity and then provide some detail on our investment portfolio.

Speaker 4

As a reminder, MFIC is focused on lending to the core middle market on a first lien senior secured basis. We believe this segment of the direct lending market offers attractive risk adjusted returns to segments of the direct lending market. MidCap Financial's longstanding presence in the middle market and its deep network of sponsor relationships enables us to continue to see a wide range of attractive investment opportunities. As a result, we believe the risk adjusted returns available to firms like MidCap Financial and MFIC are among the most attractive in the direct lending market across cycles. In the June, we continued to deploy capital into assets with what we believe to be strong credit attributes.

Speaker 4

As mentioned, MFIC's new commitments in the June totaled $262,000,000 with a weighted average spread of five thirty eight basis points across 29 different companies. Excluding two outliers, the weighted average spread on new commitments was five twenty six basis points. We also observed a slight decline in the net leverage on new commitments. The weighted average net leverage on new commitments was four times in the June, down from 4.2 times in the prior quarter. Our fee structure, which is one of the lowest among listed BDCs, allows us to produce attractive ROEs at current spreads.

Speaker 4

Gross fundings excluding revolvers totaled $254,000,000 Sales and repayments excluding revolvers and Merx totaled $108,000,000 Net revolver fundings were approximately $7,000,000 And as mentioned, we received an $8,500,000 pay down for Merx. In aggregate, net fundings were 144,000,000 Moving to our investment portfolio. At the June, our portfolio had a fair value of $3,330,000,000 and was invested in two forty nine companies across 51 industries. As a reminder, in the March, transitioned our industry classification from the Moody's Industry System to Global Industry Classification System or GICS. Direct origination and other represented 92% of the total portfolio.

Speaker 4

We expect this percentage to increase next quarter given the Merx pay down. At the June, the non directly originated loans acquired from the closed end funds represented just 2% of the portfolio. Merx accounted for 5.6% of the total portfolio at the June, but today is closer to 2.8%, given the post quarter end pay down. All of the figures above are on a fair value basis. Specific to the direct origination portfolio, at the June, 99% was first lien and 90% was backed by financial sponsors, both on a fair value basis.

Speaker 4

The average funded position was $13,100,000 The median EBITDA was approximately $50,000,000 Approximately 96% had one or more financial covenants on a cost basis. Covenant quality is a key point of differentiation for the core middle market as substantially all of our deals have at least one covenant compared to larger deals, which are generally without covenants. The weighted average yield at cost of our direct origination portfolio was 10.5% on average for the June, down from 10.7% for the March. At the June, the weighted average spread on the directly originated corporate lending portfolio was five sixty basis points, down one basis point compared to the March. Since the initial tariff announcements earlier this year, MidCap has been analyzing the potential impacts across the entire portfolio on a company by company basis.

Speaker 4

This review has been refined and is ongoing. As a reminder, we primarily lend U. S. Service oriented businesses, and we are underweight businesses that are heavily dependent on imports and exports. Our underwriting process always includes scenario and we have supplemented our underwriting process in response to the tariffs.

Speaker 4

MidCap Financial leads and serves as administrative agent on the vast majority of MFIC's direct lending deals. At the June, MidCap Financial or Apollo was the agent on 72% of MFIC's direct lending portfolio at fair value. This leadership position allows us to be in active dialogue with our borrowers and have enhanced information flow, which is particularly valuable during volatile periods. Being agent allows us to detect and address any issues early. Our underwriting on MidCap Financial Source loans proven to be sound.

Speaker 4

Based on data since mid-twenty sixteen, which is the approximate date upon which we began utilizing our co investment order, our annualized net realized and unrealized loss rate is approximately six basis points on loans sourced by MidCap Financial. We think this performance data shows how well the strategy performed. We observed a slight increase in net leverage or debt to EBITDA of our borrowers. The weighted average net leverage was 5.32 times at

Speaker 5

the June,

Speaker 4

up from 5.25 times at the March. The increase was small was due to a small number of existing positions, partially offset by new investments. As mentioned, new commitments made during the quarter had a net leverage of four point zero times. At the June, the weighted average interest coverage ratio was 2.1 times, flat compared to last quarter. These metrics are generally based on financial information as of the March 2025.

Speaker 4

We believe the stable level of revolver utilization is an additional sign of the health of our portfolio companies. At the June, the percentage of our leveraged lending revolver commitments that were drawn was roughly unchanged from the prior quarter. We believe a steady revolver utilization rate is an indicator of financial stability. During the quarter, we restored three positions to accrual status following the successful restructuring in two of these cases, highlighting our ability to navigate credit issues. We also placed three first lien positions on non accrual status due to company specific challenges, New Era, Amplity and Compass Health.

Speaker 4

Investments on non accrual status represented 2% of the portfolio at fair value, up from 0.9 last quarter and the number of companies on non accrual decreased by one. SIC income represented 6.4% of total investment income for the June. With that, I will now turn the call over to Kenny to discuss our financial results in detail.

Speaker 6

Thank you, Ted, and good morning, everyone. I'm honored to join MFIC as Chief Financial Officer and excited to be part of the team and look forward to connecting with each of you soon. Since stepping into the role a little over a month ago, I've been working closely with Greg to ensure a seamless transition. I will now review our second quarter results in greater detail. Total investment income for the June was approximately $81,300,000 up $2,600,000 or 3.2% compared to the prior quarter.

Speaker 6

The increase was primarily attributable to higher interest income due to growth in the portfolio as well as higher prepayment income, partially offset by a decline in fee income and the impact from an increase in investments on nonaccrual status. Prepayment income was approximately $1,200,000 up from $600,000 last quarter. Fee income was approximately $220,000 down from approximately $330,000 last quarter. Dividend income was approximately $200,000 essentially flat quarter over quarter. The weighted average yield at cost of our directly originated lending portfolio was 10.5% on average for the June, down from 10.7% last quarter.

Speaker 6

Net expenses for the quarter were $44,900,000 up from $44,400,000 last quarter. This increase was driven by higher interest expenses and G and A expenses, partially offset by a lower incentive fee. Interest expense rose due to a higher amount of debt outstanding due to growth in the portfolio. Other G and A expenses totaled $1,600,000 for the quarter, up from $1,200,000 in the March. As discussed on the last quarter's call, during the March, we received a reimbursement from Merx for certain expenses previously incurred by MYC on Merx behalf.

Speaker 6

This was recorded as a contra expense. As mentioned on last quarter's call, we expect other G and A to average around $1,600,000 per quarter. This amount is in addition to administrative service expenses, which are around $1,000,000 per quarter. MFIC stated incentive fee rate is 17.5% and is subject to a total return hurdle with a rolling twelve quarter look back. Given the total return hurdle feature and the net loss incurred during the look back period, MFIC's incentive fee for the June was $3,900,000 or 9.6% of pre incentive fee NII.

Speaker 6

For the June, net investment income per share was $0.39 and GAAP earnings per share or net income per share was $0.19 These results correspond to an annualized ROE based on net investment income of 10.5% and an annualized ROE based on net income of 5.2%. Results for the quarter include a net loss of approximately $18,300,000 or $0.20 per share, primarily due to losses on a handful of investments as previously mentioned. Turning to the balance sheet. At the June, the portfolio had a fair value of $3,330,000,000 Total principal debt outstanding of $2,050,000,000 and total net assets stood at $1,300,000,000 or $14.75 per share. Net leverage at the end of the quarter was 1.44 times.

Speaker 6

Average net leverage for the June was 1.35 times, reflecting the timing of investment activity. This compares to average net leverage of 1.21 times for the March. Given our visibility to the anticipated Merx pay down, we adjusted our pace of deployment in the June accordingly. On a pro form a basis, including the approximate $90,000,000 net repayment from Merck's, net leverage at the June would have been around 1.37 times. Gross fundings for the quarter, excluding revolvers totaled $254,000,000 Net fundings for the quarter were $144,000,000 Turning to our capital base, we currently intend to reprice and upsize our first CLO, MFIC Bethesda CLO1 in the fall.

Speaker 6

CLO spreads have tightened considerably since our first CLO price in September 2023. Of course, the timing and pricing of any future CLO transaction is subject to prevailing market conditions. Lastly, we were pleased that in June, Pearl affirm MFIC's investment grade rating of BBB minus with a positive outlook. This concludes our prepared remarks. Operator, please open the call to questions.

Speaker 7

Thank you.

Operator

We'll take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Speaker 8

Hey, everyone. Good morning. Congrats on Merx and all the new appointments. Actually, I wanted to hit on Merx again. There was a lot there.

Speaker 8

Is the pro form a going to be part, I think you said 40% servicing business and the remaining equity, does that mean the remaining kind of looks like what it does now, a levered aircraft business and then part of servicing business and that will stay in place as a strategic, I guess, portfolio position?

Speaker 3

So thanks, Fin. So the so that's generally correct. Let modify how you described it. The 40% is correct. Is that of the remaining roughly $95,000,000 of exposure, 40% is in the servicing business.

Speaker 3

The slight modification I would make to how you described it, it is not a strategic investment. We are not taking on any more servicing contracts there. And the 40% represents previously signed contracts and in particular servicing of our drawdown commingled fund navigator. And that is those are revenues that will come in over time. And so it's not a strategic business, but is related to the servicing of planes.

Speaker 3

So there's no balance sheet risk for Merx. Merx will be paid a portion of the rent that is paid to Navigator. And then when we sell transactions, Merx will benefit from a payment with regards to the amount of the planes that are sold. So not strategic, but it is related to the servicing.

Speaker 8

And again, does that run off with the current Navigator Fund family? Or is that complex growing? And is that service business expected to grow?

Speaker 3

No. So that so good question and helpful clarification. That will run off over time as we sell the remaining planes that are in Navigator. That is not expected to grow.

Speaker 8

Okay. Thanks. Just a follow-up on co investment. It looks like you did sort of back to back orders here. I know there were some there's some regulatory relief, but seeing what that sort of plain English means for mid cap and if more Apollo funds are straightforwardly entitled to mid cap origination?

Speaker 3

So generally speaking, the movement in order has been positive. There were COVID related modifications that were enhanced, some of which became permanent. And generally speaking, the direction has been one where it has allowed for greater flexibility. In terms of the mid cap origination, that is the availability of the origination is the same as it always was. And but the modification in the rules and the clarification, frankly, of some of the rules has generally meant a greater flexibility for balance sheets across Apollo to participate in transactions.

Speaker 3

For instance, to get a little bit more granular, some of the new rulemaking has enabled funds to come in even if they didn't participate in the original transaction. And so generally speaking, given more flexibility. But in principle, the dynamic is the same as it was wherein the origination is available more broadly. These rules just make just add to the flexibility.

Speaker 8

Okay. All for me. Thanks so much.

Operator

Thank you. And next we'll go to Aaron Cypokrzywinski with Truist. Please go ahead.

Speaker 8

Thanks. I was just hoping you could talk a little bit about investing expectations for second half of the year, what you're seeing, how busy the pipeline is, etcetera?

Speaker 3

Yes. Go ahead, sir.

Speaker 4

Yes. Thanks for the question, Aaron. Just taking it from the beginning of the year, there were high expectations for a pretty robust M and A market. And then in the first half, what kind of played out was uncertainty around tariffs and what type of legislation was going to get passed. I would say by the April, we started to see a little more clarity around all of those things and kind of market sentiment started to get a little more bullish.

Speaker 4

If you look at most major markets, they're up for the year. And what we've seen over the last several months is that the M and A pipeline has continued to build. It's not always one to one in terms of the deals that we're screening and taking to investment committee that actually get transacted, but just the number of deals that we're seeing. Sponsors are very active. If you there's been reports out there about how the sponsors have a longer duration of their portfolio.

Speaker 4

They've been holding on to companies longer. There's still a lot of dry powder that needs to go to work. There's a lot of liquidity in the private credit markets. And so we see all of that coming together to be a pretty active second half. And to the extent that, that doesn't play out for whatever reason, with the power of incumbency that we have, we think there'll be plenty of activities to deploy.

Speaker 4

We've talked about in the past, MidCap has a very large origination business and MFIC only needs a small percentage of that to meet its quarterly and annual origination needs. And so within the broader market, but also within the MidCap and Apollo ecosystem, we see plenty of activity and opportunities to deploy.

Speaker 8

Great. I appreciate that. And then the other question was around leverage. It ticked up this quarter to 1.44 net. And I just want to know where you're expecting that to trend?

Speaker 8

And is that a bit higher than what you like? Or is that in the same ballpark that you're okay with?

Speaker 4

Yes. I mean, I think in terms let's start with new deployments, right? We're deploying at four times four to 4.5 times. It was four times this quarter, was 4.2 times last quarter. And so in that range is where the market is and where we like to be deploying, like we're very comfortable at that leverage level on new deployments.

Speaker 4

A lot of the deals that we do are kind of middle market strategies and the borrowers are acquisitive. And so you'll see sponsors purchase something at four times and their intent and our expectation is that as they do these add on transactions, there will be periods of time where these companies do lever up to make acquisitions. And ultimately begin to delever again over time. So we do see that kind of dynamic profile. And in terms of the weighted average numbers that we cite on the overall portfolio, we were comfortable there.

Speaker 4

And then at the fund level, the net leverage ratio at 1.43 times, knew that there was a Merx transaction coming. And so we were deploying ahead of that so that we could take advantage of good opportunities in the market.

Speaker 3

I think to Jeff's point, if I could add to that, Aaron, quickly, we assigned a non zero probability of getting the Merx transaction done. So we came in a little hot for the avoidance of doubt. It is our intention to operate in and around the bottom end of our range. And you should expect us to

Speaker 1

be going do you expect us to do

Speaker 3

that going forward? And then importantly, as we weigh the back half of the year, we're very hopeful, as Ted alluded to, that we will see the pickup in M and A and that will create some new credit creation opportunities and create a little bit more resiliency and stability to spreads. But we, as we always are, will be very deliberate and take account of the risk and what the market is showing us in terms of opportunities as we redeploy the Merx proceeds that we received.

Speaker 8

Got it. Okay. Thanks very much. Appreciate it.

Operator

Thank you. Our next question will come from Kenneth Lee with RBC Capital Markets. Please go ahead.

Speaker 5

Hey, good morning and thanks for taking my question. Just one on Merx. And to clarify, it sounds like after all the announced sales transactions, there's going to be four aircraft remaining in addition to the services platform. Is the four aircraft remaining to one of the two securitizations you have left? Or just want to clarify, how many of the securitizations will be left to wind down?

Speaker 5

Thanks.

Speaker 3

Thanks, Ken. At this juncture, the securitizations have been completely paid off. And so these are four planes that we own on balance sheet at Merx without any leverage.

Speaker 5

Okay, great. And then just another point here in terms of the insurer payments at this point, is there anything remaining there?

Speaker 3

Thanks, Ken. Good question. And without going into excruciating detail, the dynamics of the court process in The UK are such that the court fines with respect to the insurance claims. And then there's a subsequent trial that is needed to adjudicate the interest, the cost of carry, if you will, as well as the recovery of legal. And as is often the case in legal processes, irrespective of whether you're in The U.

Speaker 3

S. Or The U. K, there are settlements in advance of trials or one can settle at any given time. And so we have conservatively estimated what those remaining proceeds will be. But at this juncture, given that we have settled on the primary claims and we've settled a portion of those auxiliary claims, if you will, forgive the term, it would only be expected to be relatively modest in total size.

Speaker 3

Vast majority of our claims and potential inflows from our Russia exposures are largely already received.

Speaker 5

Got you. Got you. Great. And just one follow-up, I may, just on the new nonaccruals in the quarter there. Any commonalities that you're seeing there?

Speaker 5

And how many were either indirectly or directly related to tariffs perhaps? Yes.

Speaker 4

I think in terms of themes, there are different types of businesses. They've all seen some level of cost pressure across the board, whether that's interest rates, labor, etcetera. But as with most restructuring transactions, there's no one single factor. There's kind of a culmination of various levers that come together and result in restructuring. And I would say one thing that we're kind of watching are just balance sheets that were constructed in a lower interest rate environment and companies that where you have kind of good company, bad balance sheet situations.

Speaker 4

And that was a driver in particular of probably our biggest one.

Speaker 5

Got you. Very helpful there. Thanks again.

Operator

Our next question comes from Robert Dodd with Raymond James. Please go ahead.

Speaker 1

Guys. On just on the spread environment and the opportunities going into the I think it was Ted said, right, the weighted average portfolio yield on his presentation, was five sixty eight. The new deployments, excluding a couple of outliers, were five twenty six. So it's about a 40 basis point gap between what's coming on versus what's in the portfolio.

Speaker 1

So should we continue to expect spread compression in the portfolio? Even if deployment spreads remain stable, should we expect spread compression? Or is that kind of a mixed thing, right? Because it's not necessarily like for like on the type of assets that have a five seventy five spread versus the type of assets that are coming on a 5.25% spread. I mean, what's kind of the outlook there?

Speaker 3

Yes, sure. Thanks, Robert. So part of the math is extraordinarily easy, right? If you look at our existing book, which itself was constructed over the last several years and in particular and rather attractive vintages from a spreads perspective of 2022 and 2023, the existing portfolio is at $5.68. The primary market is low 5s and frankly is dipping into the 4s in many cases.

Speaker 3

And if you were to get more granular with our spread for the risks that we put on the books in this particular quarter, we benefited from the fact that the power of incumbency wherein we were generally speaking where we were deploying into existing portfolio companies, it was a little bit higher than where the primary market was. And so very simply, if we're at 5.68% and the primary market is wrapped around 5% or even dipping into the fours that would be expected to come down. What we have seen Robert is that their pricing activity has slowed down in part due to the fact that a lot of it has already been done. And then when we look at the back half of the year to add some maybe dynamism to how we're thinking about it or how it could play out, I'll emphasize and though we have the market has underperformed relative to expectations rather consistently in producing new M and A, new credit creation opportunities. But we're hopeful that that will come to bear in the back half of the year and add some stability to the spread environment.

Speaker 3

I think the emphasis is particularly as

Speaker 5

the

Speaker 3

liabilities have gotten to a better place. I'll draw your attention to what we were able to

Speaker 1

do in

Speaker 3

CLO Bethesda II earlier this year and the prospects for spread that we have on Bethesda L500 or S500 is still a level at which we can make good money enhanced by the remarking of our liabilities to maintain NIM or otherwise to mitigate the effects of the spread environment. So we would expect it to come down, but generally speaking and in part due execution on liabilities, better cost of capital, it's still a level at which we believe particularly in light of where base rates are where we can create good risk adjusted return and ultimately turns for our shareholders.

Speaker 1

Got it. Got it. Thank you. I mean kind of tied to obviously, mean leverage dropped for new deployments was down to four this quarter, which I think is more than a turn below your overall portfolio average. When you and I realized, like, you talked about the M and A pipeline is starting to rebound.

Speaker 1

But I mean, do you think the leverage ask is going to increase, know, call it, the the second half of this year or into next year? Because, obviously, four turns for for for what you're putting on is is considerably lower than the portfolio average. Again, mean, it's kind of the spread per unit of risk. I mean, what are your thoughts there in terms of if the market activity is going to rebound, is it going to be at a higher leverage ask from sponsors? And what are your thoughts on like the pricing you do that for, so to speak?

Speaker 3

Yes. So as we and as we get more into the prognostic prognosticating, I'll make the necessary caveats that a lot of things could ultimately influence. But notwithstanding, I think, Robert, I think particularly at this moment in time where we've seen a little bit more clarity, where tariff uncertainty has moderated, there's more clarity coming out of the legislation and tax bill. And then the need to deploy this M and A capital, it's generally been a borrower friendly market, which itself is also influenced by the technical, which we're all very aware of is in a muted M and A environment and significant supply of capital has resulted in tighter spreads and also generally borrower friendly terms. And so when we look at the back half of the year or and into 2026 frankly, the balance there or how we're looking at it is we likely will see borrower friendly requests come in.

Speaker 3

And you could see that leverage level tick up, which of course will be balanced by the first my answer to your first question is we're very hopeful that M and A volumes will go up, which will help to alleviate technical to some extent. And then the final point I would make Robert is generally speaking when we look at our franchise relative to some of our peers, we generally will over index into true first lien or stretch senior and are generally of the variety across the continuum of private credit players, one to accept lower spreads but for lower leverage. But that said and to circle back to specific your question, I think four was maybe a little bit light in any event. And generally speaking, particularly if we don't see that M and A volumes materially and frankly even if we do given the supply of capital and what sponsors need to make the math work for their IRRs, it wouldn't be surprising to see a tick up in leverage in the back half of the year.

Speaker 1

Got it. Got it. Thank you for that. And one final sort of clarification. To the point on the net leverage at the end of the quarter, I mean, is it you basically the capital you're getting back from Merck at the end of Q2, right?

Speaker 1

So there's not going to be a lag of you getting a chunk of cash coming in. It's already been redeployed into earning assets. Is that right?

Speaker 3

Yes. And sorry, not to give you a longer answer here. That's generally correct. I would caution, this is there's a lot of things that you're managing going into year end and sorry, quarter end. And coming out at 1.44% was a little hot, but not substantially so.

Speaker 3

And that number particularly when things fund can ebb and flow and is very much within the target. But yes, the math is we would

Speaker 6

as our

Speaker 3

guidance that we've repeated in the past and I repeated earlier in the call, generally want to be at the bottom end of the range. And so yes, part of the $90,000,000 has already been deployed. But would caution that in any given quarter, dollars 144,000,000 is not surprising to see that number sort of the little bit of volatility in that number at quarter end given that we're managing very disparate processes and when things fund can vacillate a bit and there's no reason to try to be too prescriptive or too specific in how we manage it.

Speaker 4

And Robert, one just quick data point would be if you include the $90,000,000 net repayment from Merck's net leverage at the June would have been 1.37x. So to Tanner's point, kind of 1.4 plus or minus is where we're trying to be.

Speaker 1

Yes. Got it. Thank you.

Operator

Thank you. And we'll go next to Melissa Wedel with JPMorgan. Please go ahead.

Speaker 7

Good morning. Thanks for taking my questions. A lot of them have been asked already and answered. But wanted to touch base quickly on repayment expectations. Obviously, outside of Merck, you've done a great job detailing what you are expecting in the third quarter and then also later this year into early twenty twenty six.

Speaker 7

Beyond Merck, are you expecting if you do get that pickup in M and A activity, are you expecting something sort of commensurate in the repayment side? Or is there anything else you have visibility to in the near term elsewhere in the portfolio?

Speaker 4

Yes. I wouldn't say that there are major specific deals that we have earmarked for repayment. We know that there are a handful of companies that are in processes via our dialogue with the sponsor. Most of our portfolio kind of falls below the threshold of term loan B. So getting taken out by that level of financing is quite episodic and it's pretty rare.

Speaker 4

Mean, yes, if we're if M and A picks up, we're going have opportunities to deploy, and there will be deals that go away from us. But on a net net basis, we believe we can continue to stay deployed at our target leverage levels.

Speaker 7

Okay. Thanks for that. And then as I think about the rough math you gave in terms of expectations around additional earnings potential as you rotate that Merx investment of about $06 a share annually in NII. Are you thinking of that as being essentially an offset to any base rate pressure or declining base rates that we might see? And in terms of what that means for dividend coverage, are you feeling good about that $0.38 and fully covering that through NII given these portfolio developments?

Speaker 7

Thanks.

Speaker 3

Yes, sure. I would modify what you said, Melissa. We don't think about it specifically, but you obviously identified really important drivers, right? All things being equal, base rates going down, pressures dividends. And one of the things that we have in the toolbox, so to speak, or one of the dynamics, which we can point to is the redeployment of Merck.

Speaker 3

So it's not we don't again, are a lot of factors there. And then to answer your specific question, obviously, to and hopefully this is apparent, a lot of it depends on how steep the base rate cuts are. We feel good given given trajectory, particularly in light of the $06 that we calculate to be the accretion from the redeployment of Merx. But I think clearly there's a level and if cuts prove to be significantly higher, obviously the calculus is different and the math is different. But given the current trajectory, yes, we do feel good about where we sit with respect to the dividend.

Speaker 7

Okay. Thanks for that. And I guess a clarifying point too, the $06 per share is just from this first block of repayment from Merck. Is that right?

Speaker 3

That's correct.

Speaker 7

Okay. Thank you very much. Thank you.

Operator

We'll go next to Chris Castellou with CJS Advisors. Please go ahead.

Speaker 9

Yes, hi. Just a clarification on the impact of the Merx transactions. The 10 Q says they should result in a positive impact to NAV in the high single digit per share range. By high single digit per share, do you mean $06 to $09 or something else?

Speaker 3

Yes, $0.06 to $09

Speaker 1

That's it. Thank you.

Operator

Thank you. And that does conclude our question and answer session. I'd like to now turn the call back to management for any final or closing remarks.

Speaker 3

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

Thank you. And ladies and gentlemen, that does conclude today's conference. We appreciate your participation. Have a wonderful day.

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