MIDCAP FINANCIAL INVESTMENT CORPORATION The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report. Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:
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our future operating results;
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our business prospects and the prospects of our portfolio companies;
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the impact of investments that we expect to make;
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our contractual arrangements and relationships with third parties;
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the dependence of our future success on the general economy and its impact on the industries in which we invest;
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the ability of our portfolio companies to achieve their objectives;
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our expected financings and investments;
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the adequacy of our cash resources and working capital;
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the current and future effects of the COVID-19 pandemic on us and our portfolio companies; and
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the timing of cash flows, if any, from the operations of our portfolio companies.
We generally use words such as "anticipates," "believes," "expects," "intends" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in "Risk Factors" and elsewhere in this report. We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with theSecurities and Exchange Commission ("SEC"), including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
MidCap Financial Investment Corporation (the "Company," "MFIC," "we," "us," or "our") was incorporated under the Maryland General Corporation Law inFebruary 2004 . We have elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). As such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private or thinly traded publicU.S. companies, cash equivalents,U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we have elected to be treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Pursuant to this election and assuming we qualify as a RIC, we generally do not have to pay corporate-level federal income taxes on any income we distribute to our stockholders. We commenced operations onApril 8, 2004 upon completion of our initial public offering that raised$870 million in net proceeds from selling 62 million shares of common stock at a price of$15.00 per share (20.7 million shares at a price of$45.00 per share adjusted for the one-for-three reverse stock split). Since then, and throughMarch 31, 2023 , we have raised approximately$2.24 billion in net proceeds from additional offerings of common stock and we have repurchased common stock for$245.8 million . 90
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On
Apollo Investment Management, L.P. (the "Investment Adviser" or "AIM") is our investment adviser and an affiliate of Apollo Global Management, Inc. and its consolidated subsidiaries ("AGM"). The Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services to the Company. AGM and other affiliates manage other funds that may have investment mandates that are similar, in whole or in part, with ours. AIM and its affiliates may determine that an investment is appropriate both for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, AIM may determine that we should invest on a side-by-side basis with one or more other funds. We make all such investments subject to compliance with applicable regulations and interpretations, and our allocation procedures. Certain types of negotiated co-investments may be made only in accordance with the terms of the exemptive order (the "Order") we received from theSEC permitting us to do so. Under the terms of the Order, a "required majority" (as defined in Section 57(o) of the 1940 Act) of our independent directors must be able to reach certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our Board of Directors' approved criteria. In certain situations where co-investment with one or more funds managed by AIM or its affiliates is not covered by the Order, the personnel of AIM or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on allocation policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. The Order is subject to certain terms and conditions so there can be no assurance that we will be permitted to co-invest with certain of our affiliates other than in the circumstances currently permitted by regulatory guidance and the Order.Apollo Investment Administration, LLC (the "Administrator" or "AIA"), an affiliate of AGM, provides, among other things, administrative services and facilities for the Company. In addition to furnishing us with office facilities, equipment, and clerical, bookkeeping and recordkeeping services, AIA also oversees our financial records as well as prepares our reports to stockholders and reports filed with theSEC . AIA also performs the calculation and publication of our net asset value, the payment of our expenses and oversees the performance of various third-party service providers and the preparation and filing of our tax returns. Furthermore, AIA provides on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Investments Our investment objective is to generate current income and, to a lesser extent, long-term capital appreciation. We primarily invest in directly originated and privately negotiated first lien senior secured loans to privately heldU.S. middle-market companies, which the Company generally defines as companies with less than$75 million in EBITDA, as may be adjusted for market disruptions, mergers and acquisitions-related charges and synergies, and other items. To a lesser extent, we may invest in other types of securities including, first lien unitranche, second lien senior secured, unsecured, subordinated, and mezzanine loans, and equities in both private and public middle market companies. 91
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Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment, the competitive environment for the types of investments we make and, more recently, market disruptions due to COVID-19. As a BDC, we must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). As ofMarch 31, 2023 , non-qualifying assets represented approximately 7.6% of the total assets of the Company.
Revenue
We generate revenue primarily in the form of interest and dividend income from
the securities we hold and capital gains, if any, on investment securities that
we may acquire in portfolio companies. Our debt investments, whether in the form
of mezzanine or senior secured loans, generally have a stated term of five to
ten years and bear interest at a fixed rate or a floating rate usually
determined on the basis of a benchmark, such as the London Interbank Offered
Rate ("LIBOR"), the Euro Interbank Offered Rate ("EURIBOR"), the federal funds
rate, or the prime rate. Interest on debt securities is generally payable
quarterly or semiannually and while U.S. subordinated debt and corporate notes
typically accrue interest at fixed rates, some of our investments may include
zero coupon and/or step-up bonds that accrue income on a constant yield to call
or maturity basis. In addition, some of our investments provide for
payment-in-kind ("PIK") interest or dividends. Such amounts of accrued PIK
interest or dividends are added to the cost of the investment on the respective
capitalization dates and generally become due at maturity of the investment or
upon the investment being called by the issuer. We may also generate revenue in
the form of commitment, origination, structuring fees, fees for providing
managerial assistance and, if applicable, consulting fees, etc.
Expenses
For all investment professionals of AIM and their staff, when and to the extent engaged in providing investment advisory and management services to us, the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paid for by AIM. We bear all other costs and expenses of our operations and transactions, including those relating to:
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investment advisory and management fees;
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expenses incurred by AIM payable to third parties, including agents, consultants or other advisors, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;
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calculation of our net asset value (including the cost and expenses of any independent valuation firm);
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direct costs and expenses of administration, including independent registered public accounting and legal costs;
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costs of preparing and filing reports or other documents with the
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interest payable on debt, if any, incurred to finance our investments;
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offerings of our common stock and other securities;
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registration and listing fees;
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fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments;
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transfer agent and custodial fees;
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taxes;
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independent directors' fees and expenses;
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marketing and distribution-related expenses;
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the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs;
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our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
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organizational costs; and
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all other expenses incurred by us or the Administrator in connection with administering our business, such as our allocable portion of overhead under the administration agreement, including rent and our allocable portion of the cost of our Chief Financial Officer, Chief Legal Officer and Chief Compliance Officer and their respective staffs. We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors.
Portfolio and Investment Activity
Our portfolio and investment activity during the three months ended
Three Months Ended March 31 ,
(in millions)* 2023 2022
Investments made in portfolio companies $ 151.1 220.1 Investments sold - (9.7 ) Net activity before repaid investments 151.1 210.3 Investments repaid (171.5 ) (264.6 ) Net investment activity $ (20.5 ) (54.3 ) Portfolio companies, at beginning of period 135 139 Number of investments in new portfolio companies 8 6 Number of exited companies (2 ) (6 ) Portfolio companies at end of period 141 139 Number of investments in existing portfolio companies 45 53 ____________________
* Totals may not foot due to rounding.
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Our portfolio composition and weighted average yields as of
March 31, 2023 December 31, 2022
Portfolio composition, at fair value:
First lien secured debt 89 % 89 %
Second lien secured debt 3 % 3 %
Total secured debt 92 % 92 %
Unsecured debt 0 % 0 %
Structured products and other 0 % 0 %
Preferred equity 2 % 2 %
Common equity/interests and warrants 6 % 6 %
Weighted average yields, at amortized cost (1):
First lien secured debt (2) 11.4 % 10.8 %
Second lien secured debt (2) 13.7 % 13.2 %
Secured debt portfolio (2) 11.4 % 10.9 %
Unsecured debt portfolio (2) 10.0 % 10.0 %
Total debt portfolio (2) 11.4 % 10.9 %
Total portfolio (3) 9.7 % 9.3 %
Interest rate type, at fair value (4):
Fixed rate amount $ 0.0 billion $ 0.0 billion
Floating rate amount $ 2.1 billion $ 2.0 billion
Fixed rate, as percentage of total 0 % 0 %
Floating rate, as percentage of total 100 % 100 %
Interest rate type, at amortized cost (4):
Fixed rate amount $ 0.0 billion $ 0.0 billion
Floating rate amount $ 2.1 billion $ 2.0 billion
Fixed rate, as percentage of total 0 % 0 %
Floating rate, as percentage of total 100 % 100 %
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(1)An investor's yield may be lower than the portfolio yield due to sales loads and other expenses.
(2)
Exclusive of investments on non-accrual status.
(3)
Inclusive of all income generating investments, non-income generating investments and investments on non-accrual status.
(4)
The interest rate type information is calculated using the Company's corporate debt portfolio and excludes aviation, oil and gas, structured credit, renewables, shipping, commodities and investments on non-accrual status.
Since the initial public offering ofMidCap Financial Investment Corporation inApril 2004 and throughMarch 31, 2023 , invested capital totaled$23.6 billion in 603 portfolio companies. Over the same period, the Company completed transactions with more than 100 different financial sponsors.
Recent Developments
OnApril 28, 2023 ,Frank C. Puleo andJeanette W. Loeb , members of the Board of the Company, notified the Company that they would not stand for re-election at the Company's 2023 annual meeting of stockholders.Mr. Puleo andMs. Loeb's decision to not stand for re-election is not because of a disagreement with the Company or the Board on any matter relating to the Company's operations, policies or practices. 94
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, gains and losses. Changes in the economic environment, financial markets, credit worthiness of portfolio companies and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our significant accounting policies are further described in the notes to the financial statements.
Fair Value Measurements
The Company follows guidance in ASC 820, Fair Value Measurement ("ASC 820"),
where fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Fair value measurements are determined
within a framework that establishes a three-tier hierarchy which maximizes the
use of observable market data and minimizes the use of unobservable inputs to
establish a classification of fair value measurements for disclosure purposes.
Inputs refer broadly to the assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk, such as the
risk inherent in a particular valuation technique used to measure fair value
using a pricing model and/or the risk inherent in the inputs for the valuation
technique. Inputs may be observable or unobservable. Observable inputs reflect
the assumptions market participants would use in pricing the asset or liability
based on market data obtained from sources independent of the Company.
Unobservable inputs reflect the Company's own assumptions about the assumptions
market participants would use in pricing the asset or liability based on the
information available. The inputs or methodology used for valuing assets or
liabilities may not be an indication of the risks associated with investing in
those assets or liabilities.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The level assigned to the investment valuations may not be indicative of the risk or liquidity associated with investing in such investments. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may differ materially from the values that would be received upon an actual disposition of such investments. As ofMarch 31, 2023 , 2.38 billion or 99.9% of the Company's investments were classified as Level 3. The high proportion of Level 3 investments relative to our total investments is directly related to our investment philosophy and target portfolio, which consists primarily of long-term secured debt, as well as unsecured and mezzanine positions of private middle-market companies. A fundamental difference exists between our investments and those of comparable publicly traded fixed income investments, namely high-yield bonds, and this difference affects the valuation of our private investments relative to comparable publicly traded instruments. 95
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Senior secured loans, or senior loans, are higher in the capital structure than high-yield bonds, and are typically secured by assets of the borrowing company. This improves their recovery prospects in the event of default and affords senior loans a structural advantage over high-yield bonds. Many of the Company's investments are also privately negotiated and contain covenant protections that limit the issuer to take actions that could harm us as a creditor. High-yield bonds typically do not contain such covenants. Given the structural advantages of capital seniority and covenant protection, the valuation of our private debt portfolio is driven more by investment specific credit factors than movements in the broader debt capital markets. Each security is evaluated individually and as indicated below, we value our private investments based upon a multi-step valuation process, including valuation recommendations from independent valuation firms.
Investment Valuation Process
The Board has designated the Investment Adviser as its "valuation designee" pursuant to Rule 2a-5 under the 1940 Act, and in that role the Investment Adviser is responsible for performing fair value determinations relating to all of the Company's investments, including periodically assessing and managing any material valuation risks and establishing and applying fair value methodologies, in accordance with valuation policies and procedures that have been approved by the Company's Board of Directors. Even though the Company's Board of Directors designated the Company's Investment Adviser as "valuation designee," the Company's Board of Directors continues to be responsible for overseeing the process for determining fair valuation. Under the fund's valuation policies and procedures, the Investment Adviser values investments, including certain secured debt, unsecured debt, and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker, primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are unavailable or are deemed not to represent fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Accordingly, such investments go through our multi-step valuation process as described below. In each case, our independent third party valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations for such investments. Investments purchased within the quarter before the valuation date and debt investments with remaining maturities of 60 days or less may each be valued at cost with interest accrued or discount accreted/premium amortized to the date of maturity (although they are typically valued at available market quotations), unless such valuation, in the judgment of our Investment Adviser, does not represent fair value. In this case, such investments shall be valued at fair value as determined in good faith by or under the direction of the Investment Adviser, including using market quotations where available. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Investment Adviser. Such determination of fair values may involve subjective judgments and estimates. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Investment Adviser undertakes a multi-step valuation process each quarter, as described below:
1.
Our quarterly valuation process begins with each portfolio company or investment being initially valued by using certain inputs provided, among others, by the investment professionals of our Investment Adviser who are responsible for the portfolio investment.
2.
Preliminary valuation conclusions are then documented and discussed with senior management of our Investment Adviser.
3.
The Investment Adviser discusses valuations and determines in good faith the fair value of each investment in our portfolio based on the input of the applicable independent valuation firm.
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4.
For Level 3 investments entered into within the current quarter, the cost (purchase price adjusted for accreted original issue discount/amortized premium) or any recent comparable trade activity on the security investment shall be considered to reasonably approximate the fair value of the investment, provided that no material change has since occurred in the issuer's business, significant inputs or the relevant environment. Investments determined by these valuation procedures which have a fair value of less than$1 million during the prior fiscal quarter may be valued based on inputs identified by the Investment Adviser without the necessity of obtaining valuation from an independent valuation firm, if once annually an independent valuation firm using the procedures described herein provides an independent assessment of value. Investments in all asset classes are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, seniority of investment in the investee company's capital structure, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors. When readily available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. During the three months endedMarch 31, 2023 , there were no significant changes to the Company's valuation techniques and related inputs considered in the valuation process.
Investment Income Recognition
The Company records interest and dividend income, adjusted for amortization of
premium and accretion of discount, on an accrual basis. Some of our loans and
other investments, including certain preferred equity investments, may have
contractual PIK interest or dividends. PIK income computed at the contractual
rate is accrued into income and reflected as receivable up to the capitalization
date. Certain PIK investments offer issuers the option at each payment date of
making payments in cash or in additional securities. When additional securities
are received, they typically have the same terms, including maturity dates and
interest rates as the original securities issued. On these payment dates, the
Company capitalizes the accrued interest or dividends receivable (reflecting
such amounts as the basis in the additional securities received). PIK generally
becomes due at maturity of the investment or upon the investment being called by
the issuer. At the point the Company believes PIK is not expected to be
realized, the PIK investment will be placed on non-accrual status. When a PIK
investment is placed on non-accrual status, the accrued, uncapitalized interest
or dividends are reversed from the related receivable through interest or
dividend income, respectively. The Company does not reverse previously
capitalized PIK interest or dividends. Upon capitalization, PIK is subject to
the fair value estimates associated with their related investments. PIK
investments on non-accrual status are restored to accrual status if the Company
believes that PIK is expected to be realized.
Investments that are expected to pay regularly scheduled interest and/or
dividends in cash are generally placed on non-accrual status when principal or
interest/dividend cash payments are past due 30 days or more and/or when it is
no longer probable that principal or interest/dividend cash payments will be
collected. Such non-accrual investments are restored to accrual status if past
due principal and interest or dividends are paid in cash, and in management's
judgment, are likely to continue timely payment of their remaining interest or
dividend obligations. Interest or dividend cash payments received on non-accrual
designated investments may be recognized as income or applied to principal
depending upon management's judgment.
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Loan origination fees, original issue discount ("OID"), and market discounts are
capitalized and accreted into interest income over the respective terms of the
applicable loans using the effective interest method or straight-line, as
applicable. Upon the prepayment of a loan, prepayment premiums, any unamortized
loan origination fees, OID, or market discounts are recorded as interest income.
Other income generally includes amendment fees, administrative fees, management
fees, bridge fees, and structuring fees which are recorded when earned.
The Company records as dividend income the accretable yield from its beneficial
interests in structured products such as CLOs based upon a number of cash flow
assumptions that are subject to uncertainties and contingencies. Such
assumptions include the rate and timing of principal and interest receipts
(which may be subject to prepayments and defaults) of the underlying pools of
assets. These assumptions are updated on at least a quarterly basis to reflect
changes related to a particular security, actual historical data, and market
changes. A structured product investment typically has an underlying pool of
assets. Payments on structured product investments are payable solely from the
cash flows from such assets. As such any unforeseen event in these underlying
pools of assets might impact the expected recovery and future accrual of income.
Expenses
Expenses include management fees, performance-based incentive fees, interest expense, insurance expenses, administrative service fees, legal fees, directors' fees, audit and tax service expenses, third-party valuation fees and other general and administrative expenses. Expenses are recognized on an accrual basis.
Net Realized Gains (Losses) and Net Change in Unrealized Gains (Losses)
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized gains or losses previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized gain (loss) reflects the net change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gains or losses.
Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
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Results of Operations
Operating results for the three months endedMarch 31, 2023 and 2022 were as follows: Three Months Ended March 31, (in millions)* 2023 2022 Investment Income Interest income $ 64.8 $ 52.5 Dividend income 0.0 0.3 PIK interest income 0.8 0.6 Other income 2.2 1.3 Total investment income $ 67.8 $ 54.7 Expenses
Management and performance-based incentive fees, $ 10.46 $
10.0
net of amounts waived
Interest and other debt expenses, net of 24.4 14.2
reimbursements
Administrative services expense, net of 1.1 1.3
reimbursements
Other general and administrative expenses 2.3 2.4 Net Expenses $ 38.3 $ 27.9 Net Investment Income $ 29.5 $ 26.9 Net Realized and Change in Unrealized Gains (Losses) Net realized gains (losses) $ (0.8 ) $ (2.0 ) Net change in unrealized gains (losses) 1.5 (20.6 ) Net Realized and Change in Unrealized Gains $ 0.6 $ (22.6 )
(Losses)
Net Increase in Net Assets Resulting from $ 30.1 $ 4.2
Operations
Net Investment Income on Per Average Share Basis $ 0.45 $ 0.42
(1)
Earnings per share - basic (1) $ 0.46 $ 0.07
* Totals may not foot due to rounding.
(1) Based on the weighted average number of shares outstanding for the period presented.
Total Investment Income The increase in total investment income for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 was primarily driven by the increase in total interest income of$12.3 million . The increase in total interest income was due to an increase in the average yield for the total debt portfolio, from 8.1% for the three months endedMarch 31, 2022 to 11.4% for the three months endedMarch 31, 2023 . The increase was partially offset by a decrease in prepayment fees and income recognized from the acceleration of discount, premium, or deferred fees on repaid investments, which totaled$2.6 million for the three months endedMarch 31, 2022 and$3.7 million for the three months endedMarch 31, 2023 . Furthermore, the increase in other income of$0.9 million was primarily due to structuring and amendment fee received.
Net Expenses
The increase in net expenses for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 was primarily driven by the increase in interest and other debt expenses of$10.3 million . The increase in interest and other debt expenses was attributed to an increase in total annualized cost of debt, from 3.61% for the three months endedMarch 31, 2022 to 6.85% for the three months endedMarch 31, 2023 . Further, the increase of$0.4 million in management and performance-based incentive fees (net of amounts waived) was due to an increase in performance-based incentive fees. This was partially offset by a decrease in management fee due to the change in fee structure effectiveJanuary 1, 2023 . 99
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During the three months ended
During the three months endedMarch 31, 2022 , we recognized gross realized gains of$2.0 million and gross realized losses of$4.1 million , resulting in net realized losses of$2.02 million . Significant realized gains (losses) for the three months endedMarch 31, 2022 are summarized below: (in millions) Net Realized Gain (Loss) AVAD, LLC $ (1.0 )
Net Change in Unrealized Gains (Losses)
During the three months endedMarch 31, 2023 , we recognized gross unrealized gains of$9.5 million and gross unrealized losses of$8.0 million , including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of$1.5 million . Significant changes in unrealized gains (losses) for the three months endedMarch 31, 2023 are summarized below: (in millions) Net Change in Unrealized Gain (Loss) Golden Bear $ 1.4 Merx Aviation Finance, LLC 1.2 Berner Foods (1.4 ) 100
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During the three months endedMarch 31, 2022 , we recognized gross unrealized gains of$19.3 million and gross unrealized losses of$39.9 million , including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of$20.6 million . Significant changes in unrealized gains (losses) for the three months endedMarch 31, 2022 are summarized below: Net Change in Unrealized Gain (in millions) (Loss) Glacier Oil & Gas Corp. (f/k/a Miller Energy Resources, $ 3.6
Inc.)
ChyronHego Corporation 3.0Dynamic Product Tankers (Prime), LLC 2.7 Spotted Hawk 1.8MYCOM 1.2Merx Aviation Finance, LLC (19.7 )MSEA Tankers LLC (11.2 )Carbonfree Chemicals SPE I LLC (f/k/aMaxus Capital (2.9 )Carbon SPE I LLC )K&N Parent, Inc. (1.9 )NFA Group (1.4 ) CARE Fertility (1.1 )
Liquidity and Capital Resources
The Company's liquidity and capital resources are generated and generally available through periodic follow-on equity and debt offerings, our Senior Secured Facility (as defined in Note 6 to the financial statements), our senior secured notes, our senior unsecured notes, investments in special purpose entities in which we hold and finance particular investments on a non-recourse basis, as well as from cash flows from operations, investment sales of liquid assets and repayments of senior and subordinated loans and income earned from investments. We believe that our current cash and cash equivalents on hand, our short-term investments, proceeds from the sale of our 2025 Notes and 2026 Notes, our available borrowing capacity under our Senior Secured Facility and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months.
Cash Equivalents
The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less from the date of purchase would qualify, with limited exceptions. The Company deems that certain money market funds,U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents (See Note 2 to the financial statements) At the end of each fiscal quarter, we consider taking proactive steps utilizing cash equivalents with the objective of enhancing our investment flexibility during the following quarter, pursuant to Section 55 of the 1940 Act. More specifically, we may purchaseU.S. Treasury bills from time-to-time on the last business day of the quarter and typically close out that position on the following business day, settling the sale transaction on a net cash basis with the purchase, subsequent to quarter end. The Company may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our Senior Secured Facility, as we deem appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. 101
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Debt
See Note 6 to the financial statements for information on the Company's debt.
The following table shows the contractual maturities of our debt obligations as ofMarch 31, 2023 : Payments Due by Period (in millions) Total Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Senior Secured Facility (1)$ 999.7 $ -$ 999.7 $ - $ - 2025 Notes 350.0 - 350.0 - - 2026 Notes 125.0 - - 125.0 - Total Debt Obligations$ 1,474.7 $ -$ 1,349.7 $ 125.0 $ - ____________________ (1) As ofMarch 31, 2023 , aggregate lender commitments under the Senior Secured Facility totaled$1.71 billion and$655.4 million of unused capacity. As ofMarch 31, 2023 , there were$49.9 million of letters of credit issued under the Senior Secured Facility as shown as part of total commitments in Note 8 to the financial statements. Stockholders' Equity
See Note 7 to the financial statements for information on the Company's public offerings and share repurchase plans.
Distributions
Distributions paid to stockholders during the three months endedMarch 31, 2023 and 2022 totaled$49.1 million ($0.75 per share) and$22.9 million ($0.36 per share), respectively. For income tax purposes, distributions made to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or a combination thereof. Although the tax character of distributions paid to stockholders throughMarch 31, 2023 may include return of capital, the exact amount cannot be determined at this point. The final determination of the tax character of distributions will not be made until we file our tax return for the tax year endedDecember 31, 2023 . Tax characteristics of all distributions will be reported to stockholders on Form 1099 after the end of the calendar year. Our quarterly distributions, if any, will be determined by our Board of Directors. To maintain our RIC status, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. Currently, we have substantial net capital loss carryforwards and consequently do not expect to generate cumulative net capital gains in the foreseeable future. We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders' cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash dividends. 102
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We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a BDC, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare dividends if we default under certain provisions or fail to satisfy certain other conditions. If we do not distribute a certain percentage of our income annually, we may suffer adverse tax consequences, including possible loss of the tax benefits available to us as a RIC. In addition, in accordance with GAAP and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual PIK, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may not be able to meet the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC.
With respect to the distributions to stockholders, income from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income and accordingly, distributed to stockholders.
PIK Income For the three months endedMarch 31, 2023 and 2022, PIK income totaled$0.8 million and$0.6 million on total investment income of$67.8 million and$54.7 million , respectively. In order to maintain the Company's status as a RIC, this non-cash source of income must be paid out to stockholders annually in the form of distributions, even though the Company has not yet collected the cash. See Note 5 to the financial statements for more information on the Company's PIK income. Related Party Transactions
See Note 3 to the financial statements for information on the Company's related party transactions.
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