MFIC - NASDAQ

Good morning, and welcome to the earnings conference call for the period ending June 30, 2025 for MidCap Financial Investment Corporation. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corp.

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 adviser, 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 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.

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 Seifert 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 2 funds that MFIC merged with last year. Greg Hunt, MFIC's former CFO, will continue to support the company as an adviser through the end of December to ensure a smooth and effective transition. Additionally, Howard Widra, MFIC's Executive Chairman, informed our Board of his intention to retire from Apollo at the end of 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. 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 quarter, 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 end of June, down 1.2% compared to the prior quarter. The decline in NAV per share was primarily due to a handful of positions that are experiencing company-specific challenges, partially offset by a gain on Merx, which we will touch on shortly, and NII slightly exceeding the dividend. During the June quarter, MFIC made $262 million 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&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. Moving on to Merx, our aircraft leasing portfolio company, which, as you know, we have been actively working to reduce. During the June quarter, Merx sold 1 aircraft, which resulted in an $8.5 million paydown to MFIC. We are very pleased to share several recent positive developments related to our investment in Merx 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. Post quarter-end, Merx successfully completed a sales transaction covering the majority of its aircraft. Given the strong market environment, we were able to sell these aircraft at above the value embedded in Merx's valuation, which resulted in a modest write-up on our investment during the June quarter. In addition, in July, Merx received payments from insurers related to the 3 aircraft detained in Russia in the amount of $30.9 million, which brings Merx's total recoveries to date to approximately $47.4 million on those 3 aircraft. Similar to the sales transaction, the insurance proceeds were slightly above the amount assumed in Merx's valuation. Following the sales transaction and the insurance recoveries, Merx will be repaying approximately $90 million to MFIC on a net basis in the September quarter, reducing MFIC's investment by nearly half. As part of the sale transaction, Merx is also expected to receive additional consideration of approximately $30 million anticipated by year-end 2025 or early 2026. 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 June 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 quarter of approximately $1 million or $0.01 per share. On a pro forma basis, adjusting Merx's $185 million fair value as of the end of June for this $90 million net paydown, MFIC's investment in Merx will total approximately $95 million, representing approximately 2.8% of the total portfolio, down from 5.6% at the end of June. Of the $90 million net repayment, approximately $25 million will be used to reduce the Merx' revolver and the remaining $65 million applied to our equity investment in Merx. As mentioned, MFIC will be receiving additional consideration totaling approximately $30 million by the end of 2025 or in early 2026, which will further reduce MFIC's exposure to Merx. Let me now walk you through what remains at Merx. MFIC's remaining investment in Merx consists of 4 aircraft, plus the value associated with Merx's servicing platform. 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 receives a servicing fee on each aircraft sale. Pro forma for the sale transaction, the servicing business represents approximately 40% of the total value. Taking a step back, this reduction in our exposure to Merx 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. At the current base rates, we estimate that reinvesting $90 million, comprising of $25 million from Merx's revolver and $65 million from equity, is expected to generate approximately $0.06 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 $0.06 per share in additional net investment income at current base rates. Turning to our dividend. On August 5, 2025, our Board of Directors declared a quarterly dividend of $0.38 per share for shareholders of record as of September 9, 2025, payable on September 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.

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. 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&A activity. The U.S. economy has continued to show stability, characterized by high but gradually moderating inflation despite the pressure from tariffs. 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&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. 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 yields and is less competitive compared to other segments of the direct lending market. MidCap Financial's long-standing 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 quarter, we continued to deploy capital into assets with what we believe to be strong credit attributes. As mentioned, MFIC's new commitments in the June quarter totaled $262 million with a weighted average spread of 538 basis points across 29 different companies. Excluding 2 outliers, the weighted average spread on new commitments was 526 basis points. We also observed a slight decline in the net leverage on new commitments. The weighted average net leverage on new commitments was 4x in the June quarter, down from 4.2x 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. Gross fundings, excluding revolvers, totaled $254 million. Sales and repayments, excluding revolvers and Merx, totaled $108 million. Net revolver fundings were approximately $7 million. And as mentioned, we received an $8.5 million paydown for Merx. In aggregate, net fundings were $144 million. Moving to our investment portfolio. At the end of June, our portfolio had a fair value of $3.33 billion and was invested in 249 companies across 51 industries. As a reminder, in the March quarter, we 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. We expect this percentage to increase next quarter, given the Merx paydown. At the end of 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 end of June, but today, it's closer to 2.8%, given the post quarter-end paydown. All of the figures above are on a fair value basis. Specific to the direct origination portfolio, at the end of June, 99% was first lien and 90% was backed by financial sponsors, both on a fair value basis. The average funded position was $13.1 million. The median EBITDA was approximately $50 million. 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 quarter, down from 10.7% for the March quarter. At the end of June, the weighted average spread on the directly originated corporate lending portfolio was 568 basis points, down 1 basis point compared to the end of 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. This review has been refined and is ongoing. As a reminder, we primarily lend to U.S. service- oriented businesses, and we are underweight businesses that are heavily dependent on imports and exports. Our underwriting process always includes a downside scenario, and we have supplemented our underwriting process in response to the tariffs. MidCap Financial leads and serves as administrative agent on the vast majority of MFIC's direct lending deals. At the end of 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 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 approximately 6 basis points on loans sourced by MidCap Financial. We think this performance data shows how well the strategy has performed. We observed a slight increase in net leverage or debt-to-EBITDA of our borrowers. The weighted average net leverage was 5.32x at the end of June, up from 5.25x at the end of 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 4.0x. At the end of June, the weighted average interest coverage ratio was 2.1x, flat compared to last quarter. These metrics are generally based on financial information as of the end of March 2025. We believe the stable level of revolver utilization is an additional sign of the health of our portfolio companies. At the end of 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 3 positions to accrual status, following the successful restructuring in 2 of these cases, highlighting our ability to navigate credit issues. We also placed 3 first lien positions on nonaccrual status due to company-specific challenges, New Era, Amplity and Compass Health. Investments on nonaccrual status represented 2% of the portfolio at fair value, up from 0.9% last quarter, and the number of companies on nonaccrual decreased by 1. PIK income represented 6.4% of total investment income for the June quarter. With that, I will now turn the call over to Kenny to discuss our financial results in detail.

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 quarter was approximately $81.3 million, up $2.6 million or 3.2% compared to the prior quarter. 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 $1.2 million, up from $0.6 million 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 quarter, down from 10.7% last quarter. Net expenses for the quarter were $44.9 million, up from $44.4 million last quarter. This increase was driven by higher interest expenses and G&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&A expenses totaled $1.6 million for the quarter, up from $1.2 million in the March quarter. As discussed on the last quarter's call, during the March quarter, we received a reimbursement from Merx for certain expenses previously incurred by MFIC on Merx's behalf. This was recorded as a contra expense. As mentioned on last quarter's call, we expect other G&A to average around $1.6 million per quarter. This amount is in addition to administrative service expenses, which are around $1 million per quarter. MFIC's stated incentive fee rate is 17.5% and is subject to a total return hurdle with a rolling 12-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 quarter was $3.9 million or 9.6% of pre-incentive fee NII. For the June quarter, 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 $18.3 million or $0.20 per share, primarily due to losses on a handful of investments as previously mentioned. Turning to the balance sheet. At the end of June, the portfolio had a fair value of $3.33 billion, total principal debt outstanding of $2.05 billion, and total net assets stood at $1.3 billion or $0.1475 per share. Net leverage at the end of the quarter was 1.44x. Average net leverage for the June quarter was 1.35x, reflecting the timing of investment activity. This compares to average net leverage of 1.21x for the March quarter. Given our visibility to the anticipated Merx paydown, we adjusted our pace of deployment in the June quarter accordingly. On a pro forma basis, including the approximate $90 million net repayment from Merx, net leverage at the end of June would have been around 1.37x. Gross fundings for the quarter, excluding revolvers, totaled $254 million. Net fundings for the quarter were $144 million. Turning to our capital base. We currently intend to reprice and upsize our first CLO, MFIC Bethesda CLO 1, in the fall. CLO spreads have tightened considerably since our first CLO priced 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, Kroll affirmed MFIC's investment-grade rating of BBB- with a positive outlook. This concludes our prepared remarks. Operator, please open the call to questions.

[Operator Instructions] We'll take our first question from Finian O'Shea with Wells Fargo Securities.

Congrats on Merx and all the new appointments. I actually wanted to hit on Merx again. There was a lot there. Is the pro forma going to be part -- I think you said, 40% of 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, that will stay in place as a strategic, I guess, portfolio position?

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

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? [p id="59671385" name="Tanner Powell" type="E" /> 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.

Okay. 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 MidCap and if more Apollo funds are straightforwardly entitled to MidCap origination? [p id="59671385" name="Tanner Powell" type="E" /> So generally speaking, the movement in the 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 MidCap 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. 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.

And next, we'll go to Arren Cyganovich with Truist.

I was just hoping you could talk a little bit about investing expectations for the second half of the year, what you're seeing, how busy the pipeline is, et cetera. [p id="59671385" name="Tanner Powell" type="E" /> Yes. Go ahead. Sorry.

Yes. Thanks for the question, Arren. Just taking it from the beginning of the year, there were high expectations for a pretty robust M&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 end of 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. 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&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. 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. 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 mid-cap and Apollo ecosystem, we see plenty of activity and opportunities to deploy.

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

Yes. I mean, I think in terms -- let's start with new deployments, right? We're deploying at 4x to 4.5x. It was 4x this quarter. It was 4.2x 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. 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 4x, 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 then will 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. And then, at the fund level, the net leverage ratio at 1.43x, we 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. [p id="59671385" name="Tanner Powell" type="E" /> And I think to Ted's point, if I could add to that, Arren, 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 be going -- you expect us to do 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&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.

Our next question will come from Kenneth Lee with RBC Capital Markets.

Just one on Merx. And to clarify, it sounds like after all the announced sales transactions, there's going to be 4 aircraft remaining in addition to the services platform. Is the 4 aircraft [ remaining ] to 1 of the 2 securitizations you had left? Or I just want to clarify how many of the securitizations will be left to wind down? [p id="59671385" name="Tanner Powell" type="E" /> So thanks, Ken. At this juncture, the securitizations have been completely paid off. And so these are 4 planes that we own on balance sheet at Merx without any leverage.

Okay. Great. And then, just another point here. In terms of the insurer payments at this point, is there anything remaining there? [p id="59671385" name="Tanner Powell" type="E" /> So thanks, Ken. Good question. And without going into excruciating detail, the dynamics of the court process in the U.K. 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.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. The vast majority of our claims and potential inflows from our Russia exposures are largely already received.

Got you. Great. And just one follow-up, if I may, just on the new nonaccruals in the quarter there. Any commonalities that you're seeing there? And how many were either indirectly or directly related to tariffs perhaps?

Yes. 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, et cetera. 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. And that was a driver, in particular, of -- probably our biggest one.

Our next question comes from Robert Dodd with Raymond James.

Just on the spread environment and the opportunities going into the rest of the year, I think it was Ted said, right, the weighted average portfolio yield in this presentation was 5.68%. The new deployments, excluding a couple of outliers, were 5.26%. So there's about a 40 basis point gap between what's coming on versus what's in the portfolio. 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 mix thing, right? Because it's not necessarily like-for-like on the type of assets that have a 5.75% spread versus the type of assets that are coming on a 5.25% spread. I mean, what's kind of the outlook there? [p id="59671385" name="Tanner Powell" type="E" /> 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, in rather attractive vintages from a spread perspective of '22 and '23, the existing portfolio is at 5.68%. The primary market is low-5s and, frankly, is dipping into the 4s in many cases. And if you were to get more granular with our spread for the risk that we put on the books in this particular quarter, we benefited from the fact that the power of incumbency, wherein we were -- and 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 4s, that would be expected to come down. What we have seen, Robert, is that the repricing 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&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. I think the emphasis is, particularly as the liabilities have gotten to a better place -- I'll draw your attention to what we were able to do in CLO Bethesda 2 earlier this year and the prospects for looking at the spread that we have on Bethesda 1. 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 to better 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, returns for our shareholders.

Got it. I mean, kind of tied to -- obviously, I mean, leverage drop for new deployments was down to 4 this quarter, which I think is more than 1 turn below your overall portfolio average. When you -- and I realize like you talked about the M&A pipeline is starting to rebound. But I mean, do you think the leverage ask is going to increase, call it, the second half of this year or into next year? Because obviously, 4 turns for what you're putting on is considerably lower than the portfolio average. Again, I mean, it's kind of the spread per unit of risk. I mean, yes, 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? [p id="59671385" name="Tanner Powell" type="E" /> Yes. So, as we -- and as we get more into the prognosticating, I'll make the necessary caveats that a lot of things could ultimately influence that. But notwithstanding, I think, Robert, I think particularly at this moment in time, where we've seen a little bit more clarity, where the tariff uncertainty has moderated, there's more clarity coming out of the legislation and the tax bill and then the need to deploy this M&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&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 '26, frankly, the balance there or how we're looking at it is, we likely will see borrower-friendly requests come in, 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&A volumes will go up, which will help to alleviate that 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 4 was maybe a little bit light in any event. And generally speaking, particularly if we don't see that M&A volumes materialize, 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.

Got it. And one just final sort of clarification. To the point on the net leverage at the end of the quarter, I mean, you basically already redeployed the capital you're getting back from Merx at the end of Q2, right? 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? [p id="59671385" name="Tanner Powell" type="E" /> 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. 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 -- as our 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 million has already been deployed. But I would caution that in any given quarter, 1.44 is not -- it's not surprising to see that number sort of -- a little bit of volatility in that number quarter-end, given that we're managing very disparate processes and when things fund can vacillate a bit. And it's -- there's no reason to try to be too prescriptive or too specific in how we manage it.

Yes. And Robert, one just quick data point would be, if you include the $90 million net repayment from Merx, net leverage at the end of 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.

And we'll go next to Melissa Wedel with JPMorgan.

A lot of them have been asked already and answered. But I wanted to touch base quickly on repayment expectations, obviously, outside of Merx. You've done a great job detailing what you are expecting in the third quarter and then also later this year, into early '26. Beyond Merx, are you expecting -- if you do get that pickup in M&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?

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. And then, in terms of M&A, I mean, yes, if we're -- if M&A picks up, we're going to 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.

Okay. 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 $0.06 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? [p id="59671385" name="Tanner Powell" type="E" /> 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 Merx. So it's not -- we don't -- again, there 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 the given trajectory, particularly in light of the $0.06 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.

Okay. And I guess, a clarifying point, too, the $0.06 per share is just from this first [ broader ] repayment from Merx. Is that right? [p id="59671385" name="Tanner Powell" type="E" /> That's correct.

[Operator Instructions] We'll go next to [ Chris Gastolou ] with CG Advisors.

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 $0.06 to $0.09 or something else? [p id="59671385" name="Tanner Powell" type="E" /> Yes, $0.06 to $0.09.

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. [p id="59671385" name="Tanner Powell" type="E" /> 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.