Q4 2023 MidCap Financial Investment Corp Earnings Call
Participants
Elizabeth Besen; Investor Relations; MidCap Financial Investment Corp
Tanner Powell; CEO; MidCap Financial Investment Corp
Ted McNulty; Chief Investment Officer, President; MidCap Financial Investment Corp
Greg Hunt; CFO; MidCap Financial Investment Corp
Mark Hughes; Analyst; Truist Securities Inc.
Casey Alexander; Analyst; Compass Point, LLC
Kenneth Lee; Analyst; RBC Capital Markets
Paul Johnson; Analyst; Keefe Bruyette & Woods Limited
Aaren Cyganovich; Analyst; Citi Global Markets Inc.
Presentation
Operator
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.
Elizabeth Besen
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 and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press release and 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 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 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 the financial investment corporation as either an ASIC or the BDC, and we will use MidCap Financial to refer to the lender headquartered in Bethesda, Maryland.
At this time, I'd like to turn the call over to Tanner Powell MFIC's Chief Executive Officer.
Tanner Powell
Thank you, Liz, 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 will 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 de-risking 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 corresponds to an annualized ROE of 13.3%. We believe these results demonstrate the merits of our investment strategy and our fee structure, which aligns incentives, our manager with the interests of our shareholders. We also continued 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 BDCs, as evidenced by our low attachment point of 0.1 times.
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. Our key met 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 in FIC.'s net at net asset per share, now 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 continued to focus on enhancing the right side of our balance sheet. During the quarter, we closed on MFIC.'s first CLO transaction, and we were all and we also issued some unsecured debt, which Greg will discuss in greater detail these transactions improved in MIC's debt maturity.
I would now like to provide a perspective on the current environment. The credit markets rallied during December during the December quarter fueled by diminishing concerns about a recession slowdown in inflation and the Federal Reserve signaling rate hiking CyClean 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, continued contributed to a supply and demand imbalance for private loans resulting in spread compression. We saw borrowers taking advantage of this dynamic to refinance, 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 and 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 notable 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 dataset of middle market company financial information across all industries, and we believe makes MidCap Financial one of the most informed and experienced middle market lenders in the market.
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 market.
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 from that 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.
$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 investments for the full year. Net investment income outpaced dividend by nearly 17% as we chose retained earnings, which contributed to the 2.1% increase in net 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 entered 2024. We are excited about the strategic transaction that we announced last quarter. As a reminder, and in November in FIC. announced that it entered into a merger agreement with Apollo senior floating rate fund Inc. or AFT. and Apollo tactical Income Fund Inc. or AIF., pursuant to which a ST. and AIF. will merge into MFIC., subject to shareholder approvals and other customary closing conditions. AST. and AIS. are both listed closed-end funds registered under the Investment Company Act of 1940 and managed by an affiliate.
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. In the meantime, in the meantime, please understand that we will not be able to answer any questions related to the proposed merger and on today's call, with that, I will turn the call over to Ted.
Thank you, Tanner.
Ted McNulty
Good morning, everyone. Beginning with investment activity. As a reminder, MFIC. is focused on investing in loans sourced by MidCap Financial, which provides in FIC with a large pipeline of investment opportunities, MidCap financials, 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 for approximately $15 billion for the full year acquisition activity among existing borrowers was six during the quarter, MFIC. deployed capital into what we believe is an attractive environment characterized by notably lower leverage and FIC.'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 LTV of approximately 234 basis points. This translates into a very attractive yield of over 12%. The weighted average net leverage of new commitments was 3.6 times. 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 in FIC. has closed approximately $100 million of new business 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 paydown 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 was first lien and 98% of our corporate lending debt portfolio on a cost basis had one or more financial comments. The weighted average yield at cost of our corporate lending portfolio was 12.2% on average for the December quarter up for 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 two 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 that all debt as first lien has a similar risk profile.
We know that some lenders categorize loans as first lien, even when there's levered senior there to 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 5.27 times and 0.1 times, respectively, was extremely low. Attachment demonstrates that we are interested in the most senior part of the capital structure.
Moving to interest coverage. The weighted average interest coverage ratio was 1.9 times, unchanged from last quarter, with three companies below one times one less than last quarter. We are closely monitoring the situations and believe they're manageable as these companies have strong current liquidity, good underlying business performances or have strong sponsor support. As of December 31, 2023, the median EBITDA of MFAMFIC.'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 in amendment activity. We believe our credit quality has benefited from MidCap Financial, 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 one basis point on loans sourced by MidCap Financial. We think this performance data shows how well the strategies perform. 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 in FIC 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 for MidCap Financial's large dedicated portfolio management team for over 60 investment professionals, which helps identify and address issues early. It's also important to note that MidCap Financial leads and serves 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 Mark's 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 NFIC.'s investment in Merx over time.
As a reminder, Merck started the year with 57 planes and at the end of December, Merx owned 31 aircraft, which reflects aircraft that were sold during the December quarter to eight aircraft were sold for approximately our September 30 value and the cash proceeds were used to pay down debt, thus providing additional de-risking 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 and FIC 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.
Greg Hunt
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.
Picking times remains very low, representing approximately 1.3% of total investment income for the quarter. GAAP net income per share for the quarter was $0.51 which includes the 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%, an annualized ROE based on net income of 13.3%.
MFICs 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, a $0.05 gain on the portfolio. Additional details on the net gain are shown on slide 17. In the earnings supplement.
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, MEMSIC closed its first CLO transaction issuing $230 million of notes at a cost oversight for so for Sealy on of 240 basis points the CLO has a reinvestment period of four years.
And in December, we priced $80 million of 5-year non-call two unsecured notes in the $25 par market with a fixed coupon of 8%. This unsecured issuance effectively pre-fund a portion of our unsecured debt maturing in March of 2025. The 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 two 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 it's 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 retained earnings to grow.
Now 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 on distributable taxable income or spillover income at the end of 2023 was approximately $0.92 per share, and we will continue to monitor undistributed earnings as part of our capital management considerations.
Moving to our balance sheet. MFIC. net leverage was 1.34 times as of December 31, 2023, compared to 1.4 times at the end of September in 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 on open the call at this time.
Question and Answer Session
Operator
(Operator Instructions) Mark Hughes, Truist.
Mark Hughes
Yes, thank you. Good morning. You guys suggested you're positioned to generate either the dividend for the foreseeable future with the forward curve as it is now, have you modeled out kind of how durable that should be same period we want to share and in terms of your thinking about that, the ability to pay the dividend?
Greg Hunt
Yes. I mean, I think we've been smart. We've been very disciplined in keeping our dividend at the $0.38 as we look out on to the current forward curve and on, we're confident at this point on given where we are that on, you know, near future, which is, let's say, the next four to eight quarters on we have coverage on and that's $0.38 dividend.
Mark Hughes
Understood. And then from a credit perspective, and you all seem to be in very good shape but interest coverage was steady sequentially. We think there will be a more of a buildup of pressure kind of across the sector on given the higher for longer. Perhaps I mean, still choppy economy, do you think it's going to get worse for the sector? Or do you think this is the a reasonably steady state?
Ted McNulty
Yes, Hi Mark. I mean, I think we're seeing two things on one side of the coin, we're still seeing revenue and EBITDA growing in our underlying portfolio companies, which is helpful. And then look, 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 two 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've mentioned on the call, we don't see anything that other than the pressure from high interest rates that would cause any concern.
Mark Hughes
And then anything in health care from maybe some discussion of pressure on reimbursement fee schedule, higher labor costs within your health care exposure? How are you positioned relative to some of these risk factors?
Tanner Powell
Yes, I think we've come every quarter. We take a look at the portfolio and 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, yes, I think the the answer is not zero, 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 Tom is at the forefront of minds. 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.
Mark Hughes
Appreciate it. Thank you.
Operator
Casey Alexander, Compass Point.
Casey Alexander
Yes, good morning. If I was a better analyst. I'd probably know the answer to this question, but on with Merx, is it the remaining planes? Are they playing specific some of the planes if they're sold have to go to the securitization, some of the planes, if they're sold, would result in a pay down of the revolver? Or is it a pool on an if it's a pooled? And then when does it turn more to the revolver as opposed to paying down in securitization?
Greg Hunt
And Thanks, KC, for the question two, we have on to about 22 of the planes remaining on sit within two securitizations on called maps 18 and maps 19 on. And the other planes on the other eight or so are in a joint venture that we have on that were 15% up. So the proceeds from the joint venture on and selling those assets would go to pay down on the capital, the down our capital that we have invested on in the portfolio right away.
The within the securitizations that capital on does the sale of those plants, we'll go to pay down debt on For example, during on '23, we've played paid down approximately $240 million with a debt inside of those on, yes, securitizations with the sale of over 11 clients.
Casey Alexander
Okay. All right. Secondly, Greg, with the 8% unsecured notes, you consider swapping that into a floater, and, you know, given the fact that the forward curve suggests that rates didn't start to get easier over the course of the next couple of years?
Greg Hunt
We did consider it. But we have a on a two year call provision and kind of looking at the curve we decided on at this point and we can always change our decision on. We have not swapped the 8% notes.
Casey Alexander
Okay. And then my last question is and you guys is if everything goes as you expect or suspect that 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?
Greg Hunt
Yes. I think 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 and the comments from the SEC, and we expect that to be on completed on in the near future. And then after that, once we are in 14 is effective, we can comment on the timing on, you know, more directly.
Casey Alexander
Thank you for taking my questions. Thank you.
Operator
Kenneth Lee, RBC Capital.
Kenneth Lee
Good morning. Thanks for taking my question. I'm wondering if you could just elaborate on the prepared remarks around pricing compression being seen on our recent investments. And wonder if you could also talk about what you're seeing in terms of documentation in terms of recent investments banks?
Tanner Powell
Yes, sure. Thanks, Ken. It 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 within the middle market as well. I think we as we think about spread compression.
When 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 is actually against the backdrop of a 10-year low and private equity activity as we look forward and what is often the case in the sort of incipient rally of credit markets, you see activity itself tends to concentrate in repricings and refinancings, and that was very true with in Q4 as we look at the market environment.
Now with that decline in spreads as well as still broadly speaking, a more constructive view on one, the economy as well as also that well, I guess not completely and no chance for an increase in rates. But broadly speaking, market consensus, that rates rates will not go up further, you're starting to see the pipeline for M&A and LBO volume on our build. Typically, if we look back as an LBO volume for us, it 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's kind of corroborates our focus on the middle market, it's partly documentation.
And in particular, as we mentioned in our prepared remarks, over 90 -- about 98% of our corporate lending portfolio has covenants. And that's a dynamic that we see continuing in one kind of balanced agenda, frothy market conditions and what that has a tendency to do and markets in terms of reducing those lender friendly provisions that had been more attendant over the last couple of 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 and provisions in that document.
Kenneth Lee
Got you. Very helpful there. And just one follow-up, if I may. The portfolio average interest coverage ratios were close about 1.8 times, 1.9 times. Wanted to get your thoughts around where you think the ICR could trough over. Thanks.
Ted McNulty
I mean it's an interesting question, and we've done a number of different modeling scenarios. But I think we 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. Will I think all can continue to watch and see where the sulfur curve goes and the underlying portfolio continues to perform. And on yield, it just kind of depends on the timing of when the sulfur curve curve moves.
Tanner Powell
Yes, I would add to that, Kenneth, that certainly there's there's a lot of assumptions that go into trying to put more and 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 a resilient performance, economic performance in the portfolio.
In particular, which is a continuation of the kind of like last two quarters, we saw EBITDA growing more than revenue after quite a few quarters where and 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.
We generally saw 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.
Yes, the cash flow dynamics in our underlying companies is that at this juncture, some price increases have been put through and we've lapped some of the worst of the inflation and helping to to provide for some resilient performance in our underlying companies.
Kenneth Lee
Very helpful there. Again, thank you.
Operator
Paul Johnson, KBW.
Paul Johnson
Yes, good morning. Thanks for taking my questions. I'm just curious if there's any sort of material up the arm in terms of kind of the pro forma leverage for for closing the from the two mergers at the time it was expected to be I'm 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 on kind of your outlook, just given the 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 from the merger and whether that's changed at all just simply from kind of a spread compression standpoint? Yes.
Tanner Powell
Thanks for that. Thanks for the question, Paul. I'd make a couple of comments to address your questions there and you first of which we are not changing our leverage guidance. And I think consistent with what we said, what we have said as you saw a pickup of activity. And notably, we saw a number of refinancings in Q4 that served to take us into the one three four range. And relative to the one four that we had operated at 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 merger's be successful or should we be successful in executing the mergers at day one, you would see a decrease in leverage and would guide people add to the statements that we made in connection with the last earnings release and an investor presentation there.
And you know, I think as it relates to, I think the heart of your question is as our outlook changed based on the spread environment and I would say, no, I mean, all things being equal, you'd rather the market, the giving us the [L625] 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 you're part of this spread compression is obviously linked to on a more healthy outlook for the economy itself. And so on this account, given those ebbs and flows and spreads would not anticipate any any different approach in managing the merger. Should we should we be successful in consummating those those acquisitions?
Yes.
Paul Johnson
Thank you. That's well for me. Thank you.
Operator
Aaren Cyganovich, Citi.
Aaren Cyganovich
Thanks. You mentioned that the amendment fee activity or the amendment activity hasn't really picked up, but it was highlighted as somewhat of an increase in your other income this quarter on the touch on that and on the prepayment side is still I think you said between dividend income in the other income column, the geography, the change there from including dividends, income versus other income.
Tanner Powell
So I'll talk to some of our amendment activity and maybe Greg can 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 add to risk the emphasis kind of on the continuum as to trying to invite further capital, we are less concerned with repricing than we are 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 our ideas as well as also in the instance where in we're doing add-ons.
And this is this is another important point that we alluded to in the prepared remarks. It's worth emphasizing it's 45% of our deployment in the quarter was related to existing commitments, some of which is EXISTING delayed 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 and which may explain the dynamic you're looking at there, too. But also importantly, it's I'll use the word balanced again, it's a ballast within the current market environment because all things being equal from 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 is this benefit of incumbency that we talk a lot about and our peers talk a lot about as well.
Ted McNulty
Before you're going to grow, you just threw out. So we earn 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, refinancings, et cetera. And so that's the activity level and some of which generated some fees.
Greg Hunt
And I think on your Tanner answered the composition of on our other income already on it based on sales, it doubled 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 on take some of it to dividend.
Aaren Cyganovich
Okay, thank you. And then just lastly, real quickly, which is the timing of the merger, it changed off in your new scores.
Greg Hunt
I think I think we've on I said previously, we are in the final stages of our comments with the SEC on our end [14] and on will be making progress on in the near future.
Aaren Cyganovich
Thank you.
Operator
No further questions and I will now turn the call back to management for any additional or closing remarks.
Tanner Powell
Thank you, operator, and 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
This does conclude today's MidCap Financial Investment Corp. earnings conference call. You may disconnect your line at this time and have a wonderful day, and we'll do that yes, some will come in.
