MidCap Financial Investment Corp
NASDAQ:MFIC
Earnings Call Analysis
Q4-2023 Analysis
MidCap Financial Investment Corp
MFIC has displayed significant acquisition activity among existing borrowers, capitalizing on favorable market conditions characterized by lower leverage. The deployment of $175 million in new first lien commitments reflects a strategic emphasis on diversification, with an average new commitment size of $8.8 million across 20 different borrowers. During the quarter, 45% of new commitments were directed towards existing portfolio companies, highlighting the company's confidence in their performance and prospects.
The company's senior corporate lending portfolio remains robust, with a fair value of $2.33 billion distributed across 152 companies in 23 industries. The continued focus on true first lien, middle-market loans has led to what MFIC considers strong and resilient credit metrics with one of the industry's most senior corporate lending portfolios. Sound underwriting by MidCap Financial and a disciplined investment approach have resulted in an annualized net loss rate of around 1 basis point on loans sourced by MidCap Financial and a remarkably low nonaccrual rate of 0.2%. These numbers suggest a prudent portfolio construction and effective risk management.
The company is proactively reducing its investment in its aircraft leasing and servicing businesses, which should allow for the gradual paydown of associated third-party debt over time. Merx, MFIC's aircraft leasing entity, has been actively shrinking its fleet, selling 8 aircraft in the quarter and paying down a considerable portion of its debt. MFIC is currently in a favorable position when it comes to its exposure to this sector.
The net investment income per share for the December quarter was $0.46, driven by strong recurring interest and prepayment income. The company's Net Asset Value (NAV) per share increased modestly to $15.41, while the management fees have been adjusted to 1.75% on equity, a change that underlines the company's commitment to shareholder alignment. This fee structure is unique among listed Business Development Companies (BDCs) and could imply a focus on maintaining or enhancing NAV.
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Good morning, and welcome to the earnings conference call for the period ended December 31, 2023, for MidCap Financial Investment Corporation. [Operator Instructions] I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation. Please go ahead.
Thank you, operator, and thank you, everyone, for joining us today. Speaking on today's call are Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Greg Hunt, Chief Financial Officer; Howard Widra, Executive Chairman as well as additional members of the management team are 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 to 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 close 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 post 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 at the BDC, and we will use MidCap Financial to refer to the lender headquartered in Maryland. At this time, I'd like to turn the call over to Tanner Powell, MFIC's Chief Executive Officer.
Thank you, Elizabeth, and thank you, everyone, for joining today's call. I'll begin today's call with a summary of our results and will also provide our perspective on the current environment. Ted will then cover our investment activity and provide an update on the investment portfolio of credit quality. Lastly, Greg will review our financial results in greater detail, and we'll also discuss our recent financing transactions. We will then open the call to questions. Yesterday, after market close, we reported strong results for the December quarter to cap off a strong year, highlighted by an increase in net investment income, an increase in net asset value, stable credit performance and continued derisking of the portfolio. Net investment income per share for the December quarter was $0.46, up from $0.43 last quarter, which corresponds to an annualized return on equity or ROE of 11.9%. Results for the quarter reflect an increase in recurring interest income from our predominantly floating rate portfolio as well as strong prepayment income. GAAP EPS for the December quarter was $0.51, up from $0.46 last quarter, which includes a net gain on the portfolio of $0.05 per share, reflecting the stable credit quality of our portfolio. Our GAAP earnings for the quarter corresponded to an annualized ROE of 13.3%. We believe these results demonstrate the merits of our investment strategy and our fee structure, which aligns the incentives to our manager with the interest of our shareholders. We also continue to improve the risk profile of our portfolio by reducing our exposure in Merx, our aircraft leasing portfolio company, as well as our second lien exposure. At the end of December, corporate lending and other represented 92% of the total portfolio, of which 96% was first lien on a fair value basis. We believe MFIC has one of the most senior corporate lending portfolios among DDCs as evidenced by our low attachment point of 0.1x. 98% of our corporate lending portfolio has one or more financial covenants and 88% of our corporate lending portfolio is backed by financial sponsors who we know well and with whom MidCap Financial has long-standing relationships. We believe we have constructed a corporate lending portfolio that will perform well even during a potential economic slowdown. Overall, we feel good about the health and quality of our corporate lending portfolio as our underlying borrowers have largely been able to handle higher borrowing costs. All key credit metrics have either improved or were unchanged during the quarter. No investments were placed on nonaccrual status. We have not seen any significant signs of credit weakness. That said, we are closely monitoring our portfolio and mindful of the potential impacts of higher for longer rate environment. As of December 31, 2023, MFIC's net asset per share NAV per share was $15.41, an increase of $0.13 or 0.9% compared to the prior quarter, which reflects operating earnings above the dividend and a net gain on the portfolio. We also continue to focus on enhancing the right side of our balance sheet. During the quarter, we closed on MFIC's first CLO transaction and we also issued some unsecured debt, which Greg will discuss in greater detail. These transactions improved MFIC's debt maturity ladder. I would now like to provide a perspective on the current environment. The credit markets rallied during the December quarter, fueled by diminishing concerns about a recession, a slowdown in inflation and the Federal Reserve signaling rate hiking cycling had come to an end. As the quarter progressed, we saw an increase in sponsor activity, which combined with a rebound in the syndicated loan market contributed to a supply demand imbalance for private loans, resulting in spread compression. We saw borrowers taking advantage of this dynamic to refinance or reprice existing liabilities. That said, we continue to see private lenders fill the void left by banks.Looking ahead, we believe we will likely see a pickup in deal activity in 2024, given a more stable backdrop, better visibility into rates, significant private equity dry powder, which needs to be deployed and increasing pressure for sponsors to exit assets in order to make distribution and/or return of capital to investors. Sponsors focused on the middle market are primarily seeking financing solutions in the private credit market. Buyers and sellers are becoming more aligned on valuation. At Apollo and MidCap, we are seeing a noticeable pickup in pipeline activity in recent months. As you know, MFIC is squarely focused on the core middle market. MidCap Financial has a long track record, which spans 14 years of lending to middle market companies and includes closing on approximately $110 billion of lending commitments since 2013. This origination track record provides us with a very large data set 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. Apollo's affiliation with MidCap Financial is a significant competitive advantage. In short, we believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated market or the high-yield bucket. Next, let's turn to the dividend. Our approach to dividend seeks to provide shareholders with an attractive current yield while also retaining some earnings for NAV stability and growth. To that end, our Board of Directors declared a dividend of $0.38 per share, consistent with our prior quarter dividend to shareholders of record as of March 12, 2024, payable on March 28, 2024. A $0.38 dividend represents an annualized yield of approximately 9.9% based on NAV per share as of December 31. Our dividend continues to be well covered by net investment income. For the full year, net investment income outpaced dividend by nearly 17% as we chose to retain earnings, which contributed to the 2.1% increase in NAV per share for the year. At current base rates, we are well positioned to generate net investment income in excess of this dividend. We will continue to evaluate our dividend policy, given the prevailing interest rate environment. In summary, we generated solid returns for our shareholders in 2023, and we believe we are well positioned to continue to deliver attractive returns looking ahead. As we enter 2024, we are excited about the strategic transaction that we announced last quarter. As a reminder, in November, MFIC announced that it entered into merger agreements with Apollo Senior Floating Rate Fund Inc., or AST, and Apollo Tactical Income Fund, Inc. or AIF, pursuant to which AST and AIF will merge into MFIC, subject to shareholder approvals and other customary closing conditions. AFT and AIF are both listed closed-end funds registered under the Investment Company Act of 1940 and managed by an affiliate [indiscernible]. We have filed a registration statement and preliminary joint proxy statement in connection with the transaction. During this registration period, we are extremely limited in what we can discuss. Once declared effective, we will commence a proxy solicitation process to seek the requisite shareholder approvals for the mergers and we'll be happy to engage in a more detailed dialogue at that time. In the meantime, please understand that we will not be able to answer any questions related to the proposed merger on today's call. With that, I will turn the call over to Ted.
Thank you, Tanner. Good morning, everyone. Beginning with investment activity. As a reminder, MFIC is focused on investing in loans sourced by MidCap Financial, which provides MFIC with a large pipeline of investment opportunities. MidCap Financial is a leading middle market lender with one of the largest direct lending teams in the U.S. with close to 200 investment professionals. MidCap Financial was active during the December quarter, closing approximately $3.9 billion in new commitments or approximately $15 billion for the full year. Acquisition activity among existing borrowers was significant. During the quarter, MFIC deployed capital into what we believe is an attractive environment characterized by notably lower leverage. MFIC's new investment commitments during the quarter totaled $175 million of new first lien commitments across 20 different borrowers for an average new commitment of $8.8 million as we continue to focus on diversification by borrower. 45% of new commitments were made to existing portfolio companies. We continue to observe favorable pricing at lower leverage levels for newly originated loans. The weighted average spread on new commitments was 625 basis points with an average OID of approximately 234 basis points. This translates into a very attractive yield of over 12%. The weighted average net leverage of new commitments was 3.6x. We're currently seeing some pricing compression on new commitments as a result of the market dynamics previously discussed. We have a strong pipeline of investment opportunities. So far in the March quarter, MFIC has closed approximately $100 million of new commitments. In terms of funded investment activity, gross fundings, excluding revolvers for the corporate lending portfolio totaled $114 million. Sales and repayments totaled $152 million. Net corporate lending revolver paydowns were $1 million, and we received a $7 million pay down from Merx. In aggregate, net repayments for the quarter totaled $47 million. Our portfolio turnover continues to drive a positive shift in the composition of the portfolio. Sales and repayments included the repayment of one of the few remaining second lien positions in our portfolio, reducing our second lien exposure to less than 2% of the total corporate lending portfolio. This shift underscores the ongoing improvement in the risk profile of our portfolio. Turning to our investment portfolio. We have a well-diversified senior corporate lending book. At the end of December, our portfolio had a fair value of $2.33 billion and was invested in 152 companies across 23 different industries. Corporate lending and other represented approximately 92% of the portfolio and Merx accounted for 8% of the total portfolio on a fair value basis. The average funded corporate lending position was $14.7 million or approximately 0.7% of the total corporate and other lending portfolio. 96% of our corporate lending portfolio is first lien and 98% of our corporate lending debt portfolio on a cost basis had one or more financial covenants. The weighted average yield at cost of our corporate lending portfolio was 12.2% on average for the December quarter up from 12% in the September quarter. At the end of December, the weighted average spread on the corporate lending portfolio was 623 basis points, up 2 basis points compared to the prior quarter. Turning to credit quality. Our focus on true first lien, top of the capital structure, middle market loans, has resulted in what we consider to be strong and resilient credit metrics. We believe MFIC has one of the most senior corporate lending portfolios in the industry. Not all debt categorized as first lien has a similar risk profile. We know that some lenders categorize loans as first lien, even when there's leveraged senior thereto their positions, which is why we think it's important to look at both leverage and attachment point. At the end of December, MFIC's net leverage and attachment points on our corporate loans was 5.27x and 0.1x, respectively. This extremely low attachment demonstrates that we are invested in the most senior part of the capital structure. Moving to interest coverage. The weighted average interest coverage ratio was 1.9x, unchanged from last quarter, with 3 companies below 1x, 1 less than last quarter. We are closely monitoring these situations and believe they're manageable as these companies have strong current liquidity, given underlying business performances or have strong sponsor support. As of December 31, 2023, the median EBITDA of the MFIC's corporate lending portfolio companies was approximately $47 million. Our portfolio companies are generally maintaining solid fundamental performance with revenue and EBITDA continuing to grow. We've not seen a meaningful increase in covenant breaches or a pickup and amendment activity. We believe our credit quality has benefited from MidCap Financial's strong sourcing and underwriting capabilities. Our underwriting on mid-cap 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 around 1 basis point on loans sourced by MidCap Financial. We think this performance data shows how well the strategy has performed. Our nonaccrual rate remains very low. No investments were placed on nonaccrual status during the quarter. At the end of December, investments on nonaccrual status totaled $5.7 million or 0.2% of the total portfolio at fair value. We believe these strong credit metrics reflect the way in which we have prudently constructed our portfolio. MFIC is focused on lending to the core middle market where MidCap Financial has strong, long-standing relationships with sponsors and borrowers and a proven track record across cycles.Importantly, MFIC benefits from MidCap Financial's large dedicated portfolio management team with over 60 investment professionals, which helps identify and address issues early. It's also important to note that MidCap Financial leads and served as administrative agent on the vast majority of our deals, which provides meaningful downside protection. As agent, we are in active dialogue with the borrower and have enhanced information flow, which allows us to be proactive in resolving credit problems. Moving on to Merx. As discussed previously, we are focused on reducing our investment in our aircraft leasing and servicing businesses. While we don't expect paydowns to occur evenly, we believe aircraft sales and servicing income should allow for the paydown of third-party debt and MFIC's investment in Merx over time. As a reminder, Merx started the year with 57 planes and at the end of December, Merx's owned 31 aircraft, which reflects 8 aircraft that were sold during the December quarter. The 8 aircraft were sold for approximately our September 30 value and the cash proceeds were used to pay down debt, thus providing additional derisking to the remainder of our investment in Merx. As of December 31, 2023, our investment in Merx totaled $191 million, representing approximately 8% of the total portfolio at fair value, a decrease of over $70 million or 27% compared to the end of 2022. For the December quarter, Merx paid approximately $9 million, including $2 million of interest and a $7 million return of capital. For the full year, Merx paid MFIC approximately $84 million, including $8 million of interest and $76 million return of capital. With that, I will now turn the call over to Greg to discuss our financial results in detail.
Thank you, Ted, and good morning, everyone. Beginning with our financial results. Net investment income per share for the December quarter was $0.46, which reflects strong recurring interest income and strong prepayment income. For the quarter, prepayment income was $3.5 million, and dividend and fee income was approximately $1 million combined. PIK income remains very low, representing proximately 1.3% of total investment income for the quarter. GAAP net income per share for the quarter was $0.51, which includes a net gain in our investment portfolio. Results for the quarter correspond to an annual return on equity based on net investment income of 11.9% and in an annualized ROE based on net income of 13.3%. MFIC's NAV per share at the end of December was $15.41, an increase of approximately $0.13 or 1% from the end of September. The $0.13 increase reflects net investment income of $0.46, which is $0.08 above the $0.38 distribution and a $0.05 gain on the portfolio. Additional details on the net gain are shown on Slide 17 in the earnings supplement deck. Net expenses for the quarter were $42.2 million, up $1.9 million compared to the prior quarter, primarily due to an increase in interest expense. As discussed on last quarter's call, in early November, MFIC closed its first CLO transaction, issuing $230 million of notes at a cost over of 240 basis points. The CLO has a reinvestment period of 4 years. And in December, we priced $80 million of 5-year non-call 2 unsecured notes in the $25 par market with a fixed coupon of 8%. This unsecured issuance effectively prefunds a portion of our unsecured debt maturing in March of 2025. Proceeds from both transactions were used to pay down borrowings under our revolving credit facility. At the end of December, unsecured debt represented 38% of total principal debt outstanding compared to 33% at the end of September. As a result of these 2 transactions, the weighted average interest rate on our debt for the quarter was 6.94%, up from 6.76% from the prior quarter. We believe it was prudent to diversify and extend the maturity of our funding sources. We intend to continue to evaluate and monitor our capital raising transactions going forward. Management fees totaled $4.1 million for the December quarter, essentially flat to the prior quarter. As a reminder, MFIC's base management fee was reduced to 1.75% on equity beginning January 1, 2023 and is one of the only listed BDCs to charge management fees on equity, which we believe provides strong shareholder alignment with a focus on net asset value. Gross incentive fees totaled $6.3 million for the December quarter. As a reminder, our incentive fee on income is 17.5% and includes a total return hurdle with a rolling 12-quarter look back. In 2023, net investment income outpaced dividends as we chose to retain earnings and grow net. As a result, we accrued approximately $1.1 million of excise tax during the December quarter, which is included in our general and administrative expenses on our statement of operations. Our current estimate of [ undistributable] taxable income or spillover income at the end of 2023 was approximately $0.92 per share. We will continue to monitor our undistributed earnings as part of our capital management consideration. Moving to our balance sheet. MFIC net leverage at 1.34x as of December 31, 2023, compared to 1.4x at the end of September 2023, reflecting $47 million of net repayments during the quarter and the increase in net assets from retained earnings and the net gain on the portfolio. This concludes our remarks, operator, and please open the call to questions.
[Operator Instructions] Our first question comes from Mark Hughes with Truist.
You had suggested your position to generate NII ahead of the dividend like the foreseeable future. With the forward curve as it is now, have you modeled out kind of how durable that should be any time period you want to share in terms of your thinking about that ability to pay the dividend?
We've been very disciplined in keeping our dividend at the $0.38 as we look out to the forward curve. And we're confident at this point, given where we are that in the near future, which is, let's say, the next 4 to 8 quarters, we have coverage on that $0.38 dividend.
And then from a credit perspective, you all seem to be in very good shape. The interest coverage was steady sequentially. Do you think there will be more of a buildup of pressure kind of across the sector, given the higher for longer perhaps still choppy economy. Do you think it's going to get worse for the sector? Or do you think this is maybe a reasonably steady state?
I think we're seeing 2 things. On one side of the coin, we're still seeing revenue and EBITDA growing in our underlying portfolio of companies, which is helpful. And then if we do have higher for longer, that's going to put pressure on the company's ability to continue to invest in the business. Right now, it still feels like -- it still feels like a pretty good place. I think if you asked most investment folks a year ago or 2 years ago, everyone was thinking that there would be a harder landing than what we've had. And so we've all been pleasantly surprised by the rather benign credit environment. And I think as we mentioned on the call, we don't see anything that other than the pressure from high interest rates that would cause any concern.
And then anything in the health care, maybe some discussion of pressure on reimbursement, fee schedules, higher labor costs within your health care exposure, how are you positioned relative to some of these risk factors?
I think we've -- every quarter, we take a look at the portfolio in different sectors and what the themes are that we need to be concerned about either from a top-down perspective or that we see bubbling up from a bottoms-up perspective. And when we were going through the portfolio this past quarter, I think the answer is not 0, but it's very, very small in terms of exposure to, in particular, the labor issue. And then on reimbursement, I mean, this is certainly an item that is at the forefront of mind. And not surprisingly, we -- like other lenders do our best to not take outright stroke of pen reimbursement risk. And while it certainly is there to some extent, to date, as we look to Ted's point, when we look very critically at our exposures within health care seem to be managing those challenges that are kind of well publicized across the space [indiscernible].
Our next question comes from Casey Alexander with Compass Point.
If I was a better analyst, I probably know the answer to this question, but with Merx, is the remaining planes are they playing specific, some of the planes, if they're sold, have to go the securitization. Some of the planes if they're sold would result in a pay down of the revolver? Or is it a pool? And if it's a pool, then when does it turn more to the revolver as opposed to paying down the securitization?
So, we have on - about 22 of the planes remaining sit within two securitizations, called [ MAPS-18 and MAPS-19 ]. And the other claims, the other 8, or so are in a joint venture that we have, that we're 15% of. So the proceeds from the joint venture, in selling those assets would go to pay down, the capital you know, pay down our capital that we have invested, in the portfolio right away.Within the securitizations that capital -- the sale of those planes, will go to pay down debt. For example, during '23, we paid down approximately $240 million worth of debt inside of those securitizations with the sale of over 11 planes.
Secondly, Greg, with the 8% unsecured note, did you consider swapping that into a floater, given the fact that, the forward curve suggests that rates, could start to get easier, over the course of the next couple of years?
We did consider it, but we have a two-year call provision. And kind of looking at the curve, we decided at this point, and we can always change our decision, we have not swapped the 8% note.
And then my last question is, and you guys is, if everything goes as you expect, or suspect then it will in relation to the merger. Do you have, you know, sort of a guideline for when you think, assuming that the vote goes the right way, that that deal could close? When should we be thinking about it, actually consummating?
Yes, I think, you know, as Tanner mentioned in the opening comments, we're limited to what we can say. I can say that we continue to work on this standard review in the comments from the SEC, and we expect that to be completed in the near future. And then after that, once our N14 is effective, we can comment on the timing, more directly.
Our next question comes from Kenneth Lee with RBC Capital.
Wondering if you could just elaborate on the prepared remarks, around price and compression being seen on recent investments, and wondering, if you could also talk about, what you're seeing in terms of documentation, in terms of recent investments?
As we alluded to in the prepared remarks, we are seeing spread compression. When you step back, there's broadly been a rally in credit markets, and you've seen spreads compress, kind of across the spectrum, private and public. And we've seen that within the middle market as well. I think, as we think about spread compression, and we look at where we were able to deploy in 2023.We were very cognizant of the fact that if you look at the last couple quarters, the spread had been in the high sixes to seven, which we did not believe was sustainable, was actually against the backdrop of, 10-year low and private equity activity. As we look forward in what is often the case in the, sort of incipient rally of credit markets, the activity itself tends to concentrate in repricings and refinancing.And that was very true within Q4. As we look at the market environment now, with that decline in spread, as well as, broadly speaking, a more constructive view on one, the economy, as well as also that, while I guess not completely no chance for an increase in rates, but probably speaking market consensus that, rates will not go up further. You're starting to see the pipeline for M&A and LBO volume build.Typically, if we look back, as LBO volume -- builds, that typically helps to provide some stabilization in spreads. And that's what we would expect, as we've started to see, some of the pipeline activity. Your comment about, lender friendly, I think it's helpful to call to attention, our focus on the middle market. And broadly speaking, more frothy markets result in more borrower friendly terms. But I think the emphasis for us and what, kind of corroborates our focus on the middle market, it's partly documentation. And in particular, as we mentioned in our prepared remarks, over 98% of our corporate lending portfolio has covenants. And that's a dynamic that we see continuing in one kind of, ballast against frothy market conditions, and what that has a tendency to do.In markets in terms of reducing those lender friendly provisions that, have been more attendant over the last couple years. So our focus on the middle market and continued ability to get covenants is one aspect that we point to and helping to, continue to have a strong, lender friendly provisions in our documents.
And just one follow-up, if I may, the portfolio average interest coverage ratios, I think there were a close about 1.8, 1.9 times. I wanted to get your thoughts around where you think the ICR could trough over the near term? Thanks.
I mean, it's an interesting question and we've done a number of different modeling scenarios. But I think if you expect rates, to kind of stay where they are and you look at -- and you expect revenue and EBITDA to continue to grow, which is what we're seeing in our portfolio, that would suggest that perhaps, we're at a trough although there could be a bit of a lag, I think, we'll continue to watch and see where the SOFR curve goes. I think the underlying portfolio continues to perform and it just kind of depends on the timing of when the SOFR curve moves.
Yes, I would add to that, Kenneth, that certainly there's a lot of assumptions that go into trying to put, more specific estimation on where it goes. I think, when we look at the performance of our underlying borrowers as Ted alluded to. And we spoke to more broadly in the prepared remarks, there was resilient performance, economic performance in the portfolio.And in particular, which is a continuation of the kind of, like last two quarters, as we saw EBITDA growing more than revenue, after quite a few quarters, wherein that was not the case. And I think one of the reasons that we saw, stability in terms of that interest coverage, was that at this juncture, you can look at companies and whether through putting through price increases and/or, just lapping the most acute effects of inflation, again, we saw, you know, EBITDA growing faster than revenue.And I think notwithstanding as Ted alluded to, we could have different trajectories in terms of interest rates, which would affect that. One dynamic, which is helping that ratio in particular and by extension, the cash flow dynamics in our underlying companies, is that at this juncture, price increases have been put through, and we've lapped some of the worst, of the inflation and helping to provide, for some resilient performance in our underlying companies.
[Operator Instructions] Our next question comes from Paul Johnson with KBW.
I'm just curious, if there's any sort of material update in terms of kind of the pro forma leverage, for foreclosing the two mergers at the time it was expected to be a deleveraging event, close to like 1.2 times. So I'm wondering if there's any kind of, material update there, as well as kind of your outlook, just given the -- some of the spread compression that we've seen last year, and perhaps that could continue to occur, this year as activity comes back into the market. If you have any sort of thoughts around, the expected accretion from the merger, and whether that's changed at all, just simply from kind of, a spread compression standpoint?
I'd make a couple of comments to address your questions there. First of which we are not changing our leverage guidance. I think consistent with what we said, what we have said, is you saw pick up an activity and notably we saw a number of refinancings in Q4 that served to take us into the 1-3-4 range relative to the 1-4 that we operated at, on last quarter. So there's no update to our leverage guidance.The second point and consistent, with what we said last quarter and you alluded to there, Paul, is that should the mergers be successful, or should we be successful in executing, the mergers day one, you would see a decrease in leverage. And would guide people, to the statements that we made in connection with the last range earnings release and investor presentation there.And I think as it relates to, I think the heart of your question is, has our outlook changed based on the spread environment? And I would say no. I mean all things being equal, you'd rather the market be giving us the [ L635 to 700] that we saw early in the year, but there's going to be ebbs and flows in spread. And I would also call your attention, to the fact that part of this, spread compression is obviously linked to a more, healthy outlook for the economy itself. And so on this account, given those ebbs and flows and spreads, would not anticipate any different approach, in managing the mergers, should we be successful in consummating those acquisitions.
Our next question comes from Arren Cyganovich with Citi.
You mentioned that the amendment fee activity, or the amendment activity hasn't really picked up, but it was highlighted in some other than increase in your other income this quarter. You can touch on that, and then on the prepayment side it is still, I think you said between, dividend income and the other income. What will come is the geography of the change there, from including dividend income versus other income?
So, I'll talk to amendment activity and maybe Greg can jump in is. I think that, we have not seen a material uptick in amendment activity. I think as Ted alluded to, all things being equal, should this current rate environment continue. And given the coverage ratios, you would expect it to get tighter and would not be surprising to see an uptick in amendment activity.Where we are seeing activity, we are utilizing that seat at the table, if you will, to be risk. The emphasis kind of on the continuum, is to try to invite further capital. We are less concerned with repricing than we are our de-risking. And then in terms of other income, and I'll invite Greg to comment as well, that itself, is linked to prepayments where we get acceleration of OIDs as well as also in the instance wherein, we're doing add-ons.And this is another important point that, we alluded to in the prepare remarks. It's worth emphasizing. It's 45% of our deployment in the quarter, was related to existing commitments. Some of which is existing delay draws that, are drawn down on, but other of which is incremental commitments to existing borrowers. And that's important for two reasons. One of, which is that can come with incremental fees, which may explain the dynamic, you're looking at there too.But also importantly, I'll use the word ballast again. It's a ballast within the current market environment, because all things being equal, those existing commitments and the friction costs that, would be suffered to the extent that a sponsor, or borrower may look to refinance, the entire company enables us to get better on average pricing, and is one of the dynamics kind of, this benefit of incumbency that, we talk a lot about, and our peers talk a lot about as well.
Before we end, Greg, I'd just throw out. So, Arren, the actual number of amendments this quarter was one less than the prior quarter. And some of those were, as Tanner was alluding to, to do additional acquisitions, refinancing, et cetera. And so that's the activity level and some of, which generated some fees.
And I think Tanner answered the composition of our other income, it's based on same double quarter-over-quarter, and then our dividend income is primarily related to our investment in U.S. auto. And we take part of the proceeds we receive every quarter, to principal and then we take some of it to dividend income.
And then just lastly real quickly, the timing of the merger changed often [indiscernible]?
I think as we've - I said previously, we are in the final stages of our comments with the SEC on our N14, and we'll be making progress in the near future.
I see no further questions at this time. I will now turn the call back to management for any additional or closing remarks.
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.
This does conclude today's MidCap Financial Investment Corporation earnings conference call. You may disconnect your line at this time, and have a wonderful day.