MSC Income Fund, Inc. (MSIF) Earnings Call Transcript

Greetings, and welcome to the MSC Income Fund Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Zach Vaughan. Go ahead.

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund's Third Quarter 2026 Earnings Conference Call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer; Nick Meserve, Managing Director and Head of the Private Credit Investment Group; David Magdol, President and Chief Investment Officer; and Cory Gilbert, Chief Financial Officer. Single fund issued a press release yesterday afternoon that details the fund's third quarter financial and operating results. document is available on the Investor Relations section of the fund's website at mscincomefund.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 13. Information on how to access the replay was included in yesterday's earnings release. We also advise you that the conference call is being broadcast live through the Internet and can be accessed on the funds homepage. Please note that information reported on this call speaks only as of today, November 6, 2026, and therefore, you are advised that any time sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call may contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may or similar expressions. These statements are based on management's estimates, assumptions and projections as of the date of this call, and there are no guarantees of future performance. Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the fund's filings with the Securities and Exchange Commission, which can be found on the fund's website or at sec.gov. Income Fund assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including adjusted net investment income, or NII, and ANII before taxes. ANII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles or GAAP, excluding the impact of capital gains incentive fee. NII before taxes is NII, as determined in accordance with GAAP, excluding the impact of the capital gains incentive fee and any tax expenses included in NII. Income Fund believes that presenting ANII and ANII before taxes and the related per share amounts is useful and appropriate supplemental disclosure for analyzing the fund's financial performance since the calculation of the capital gains incentive fee is based on realized gains and losses and unrealized fair value appreciation and depreciation, none of which are included in NII and tax expenses included in NII may include excise tax expense which is not solely attributable to NII and deferred taxes, which are not payable in the current period. Please refer to yesterday's press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are net asset or NAV and return on equity, or ROE. NAV is defined as total assets minus total liabilities and is also reported on a per share basis. MSC Income Fund defined ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. Please note that certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. Now I'll turn the call over to MSC Income Fun, CEO, Dwayne Hyzak.

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call, and we hope that everyone is doing well. On today's call, we will provide you with the fund's key quarterly updates, after which, we'll be happy to take your questions. Before we provide these updates, I want to start by congratulating Nick Mazor on his transition to Chief Executive Officer of the fund, effective on Monday, November 9, consistent with the Fund's previous announcement in June. Nick currently serves as a head of the private credit investment strategy for Main Street and has served as a Managing Director for Main Street since 2012 and has been executing investments for the funds since it was founded. Nick has been a key member of our team and has been instrumental as we've grown the fund and focus its investments on the private loan strategy, and we're excited about the fund's bright future under Nick's leadership. Now turning to the fund's most recent operating results. We are pleased with funds performance in the third quarter, which resulted in an annualized return on equity of 9.7% and another increase in NAV per share. Based upon the quality of the fund's existing investment portfolio, together with its favorable liquidity position and current investment pipeline, we remain excited about our future expectations for the fund. The fund generated adjusted net investment income or ANII of $0.34 per share in the quarter or $0.36 per share on a before taxes basis. These results, combined with our positive outlook for the future, resulted in the fund's most recent dividend announcements which I will discuss in more detail later. The fund finished the quarter with an NAV per share of $16.56, a $0.05 increase from prior quarter, and we continue to be pleased with the performance of the fund's investment portfolio. Cory will discuss the fund's financial results in more detail. Funds private loan investment activity in the third quarter was slower than our expected normal quarterly activity and resulted in a net decrease in private loan investments of $11 million. Despite the slower investment activity, the fund remains highly focused on executing new investment opportunities that are consistent with its historical private loan investments as we work to grow the funds investment portfolio, and we are excited about the current private loan investment opportunities we're seeing, which I will discuss in more detail later. Can also continues to focus on maximizing the benefits from its legacy lower middle market investment portfolio and eventually recycling this capital into private loan investments as investments are exited or repaid. As part of this focus, the fund continues to benefit from attractive follow-on investments in existing lower middle market portfolio companies, which we believe are beneficial to both current investment income and future value creation on these existing investments. Nick and David will cover the fund's investment activity in more detail. Based upon the fund's results for the third quarter, the fund's Board of Directors declared regular monthly dividends for the first quarter of 2027 and of $0.11 per share payable in each of January, February and March and a supplemental dividend of $0.03 per share payable in March 2027, resulting in total dividends paid in the first quarter of 2027 of $0.36 per share, consistent with the fund's total quarterly dividends for each quarter since the fund's listing in January 2025. Going forward, the fund expects to maintain a dividend policy that provides for total quarterly dividends, which are expected to include regular monthly dividends and a quarterly supplemental dividend to be set at a level generally consistent with the fund's ANII before taxes per share. Based upon the total dividends payable for the first quarter of 2027 and the current stock price, the fund is currently providing its shareholders a dividend yield of over 11.5%. As we look forward to the fund's near-term investment activities, as of today, I would characterize our private loan investment pipeline is well above average. We are excited about the current pipeline of new investment opportunities and follow-on investment opportunities in existing portfolio companies and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the fund's investment portfolio over the next several quarters. Now turning to other activities intended to create value for the fund shareholders. In August, the fund entered into an open market share repurchase plan to repurchase the shares beginning in September 2026 through February 2027 at times when the fund shares are trading at predetermined levels below the fund's NAV per share. To date, the fund has repurchased over $2.5 million of its shares under this plan. As I noted earlier, we have a high level of comfort about the quality of the fund's investment portfolio and as a result, we believe that this repurchase plan can be used to create additional value for the fund shareholders. I'll ask a few comments or reminders of the continued support the funds received from Main Street Capital Corporation. Since Main Street's wholly owned subsidiary was appointed the sole advisor to the fund in October 2020. Main Street has purchased over $32 million of the fund's common stock and now owns over 5% of the fund. Injunction with the funds repurchase plan, Main Street also entered into a share purchase plan to purchase the fund shares with the terms of such plan being identical to the fund's open market share repurchase plan, and with any open market share purchases being split by the fund and Main Street on a pro rata basis. To date, Main Street has purchased over $2.5 million of fund shares under this plan. As an additional show of support for the fund, Main Street through its wholly owned investment adviser voluntarily agreed to permanently waive approximately $600,000 of incentive fees on income earned for the third quarter to support the fund's resulting ANII before taxes per share resulting in total incentive fees on income waivers of $2 million since the third quarter of 2025. We believe these actions demonstrate the Main Street's commitment to the future success of the fund and reinforce Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy. With that, I will turn the call over to Nick.

Thanks, Dwayne, and good morning, everyone. We are pleased with the performance of the fund's private loan investment portfolio in the third quarter, which represents the largest portion of the fund's investment portfolio. And as a reminder, is the fund's sole focus with respect to new portfolio company investments. The overall operating performance for most of the fund's private loan portfolio companies continue to be positive, which contributed the fund's third quarter financial results. Fund also benefited in the quarter from a meaningful net fair value appreciation based upon the positive performance and outlook for certain private loan portfolio companies where the fund has an equity investment. A recent example of the benefits these portfolio companies can provide is the recent exit of the fund's equity investment in core transformers in the third quarter, which resulted in a realized gain of $11 million. At quarter end, 91% of the private loan portfolio was composed of secured debt investments, over 99% of which were first lien and 95% of which were floating rate loans. Portfolio had an attractive weighted average yield of 10.5% relatively consistent with prior quarter end. During the third quarter, the fund invested $61 million in the private loan portfolio, which after aggregate investment activity resulted in a net decrease of $11 million. Funds ended the third quarter with investments in 81 private loan portfolio companies totaling $844 million of fair value and representing 61% of the fund's total investment portfolio at fair value. As Dwayne mentioned, our current private loan pipeline has continued to improve, both in terms of quality of the opportunities and the overall volume and is now well above average. Since the end of the third quarter, we have closed 1 new private loan portfolio company and are optimistic we will close several more transactions before year-end. With that, I'll turn the call over to David.

Thanks, Nick, and good morning, everyone. In addition to the private loan portfolio that Nick covered, the fund also maintains a portfolio of legacy lower middle market investments. As a reminder, these are combined debt and equity investments in smaller privately held companies, whereby the fund partnered directly with the company's existing business owners and management team through co-investments with Main Street Capital Corporation utilizing the customized one-stop debt and equity financing solutions provided in Main Street's lower middle market investment strategy. After the listing of the fund shares on the New York Stock Exchange in January 2025, the fund no longer makes investments in new lower middle market portfolio companies, but continues to participate in follow-on investments in its existing lower middle market portfolio companies. We are pleased to report that the overall operating performance for most of the funds lower middle market portfolio companies continues to be positive, which contributed to the fund's third quarter results. Despite the continued heightened level of uncertainty in the overall economy, we remain confident in the ability of these lower middle market portfolio companies to continue to successfully navigate the current environment. During the third quarter, the fund completed $4 million in total new lower middle market portfolio follow-on investments, which after aggregate investment activity resulted in a net decrease in the Lower Middle Market portfolio of $10 million. At quarter end, the Lower Middle Market portfolio had investments in 53 portfolio companies totaling $503 million of fair value and representing 37% of the fund's total investment portfolio. Lower middle market portfolio at fair value is comprised of 54% debt investments and 46% equity investments. 99% of those debt investments were first lien loans, and they had an attractive weighted average yield of 12.7%. The Fund had equity ownership positions in all of its lower middle market portfolio companies, representing an average 8% ownership position. We expect these lower middle market investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation and eventually meaningful realized gains upon the future exit of these lower middle market investments. Finally, and consistent with prior quarters, we continue to see interest from potential buyers in several of the funds, lower middle market portfolio companies, which we expect will lead to favorable outcomes over the next few quarters. Turning to the fund's total investment portfolio as of September 30, the fund continued to maintain a highly diversified portfolio with investments in 141 portfolio companies spanning across numerous industries and end markets. Fund's largest portfolio companies represented less than 4% of the total investment portfolio at fair value at quarter end and less than 4% of the total investment income for the trailing 12-month period with most portfolio investments representing less than 1% of the fund's income and assets. With that, I will turn the call over to Cory.

Thank you, David, and thank you to everyone who has joined us today. Funds total investment income for the third quarter was $35.5 million, relatively unchanged from the third quarter of 2025 and the second quarter of 2026. Interest income for the third quarter was also relatively unchanged from these prior periods. Interest income in the third quarter compared to the prior year was positively impacted by higher average levels of income-producing investment portfolio debt investments partially offset by the negative impact from debt investments on nonaccrual status and a decrease in interest rates. Interest income in the third quarter compared to the second quarter was positively impacted by 1 additional day of interest income in the quarter and higher average levels of income-producing investment portfolio of debt investments, partially offset by the negative impact from debt investments on nonaccrual status. Dividend income for the third quarter increased slightly from a year ago and was consistent with the second quarter. The increase in dividend income from the prior year was primarily due to an increase in dividends from private loan portfolio companies partially offset by a decrease in dividends from lower middle market portfolio companies. In the third quarter of 2026, dividend income included $0.7 million of nonrecurring items. As we previously discussed, dividend income will fluctuate quarter-to-quarter based on the underlying performance and capital allocation activities of the fund's portfolio companies and certain nonrecurring items. Fee income for the third quarter was relatively unchanged from a year ago and decreased by $0.4 million from the second quarter. The changes in fee income from both the prior year and the second quarter were primarily due to a decrease in fees related to decreased investment activity. The third quarter included income considered less consistent or nonrecurring in nature of $2.3 million, primarily related to interest and dividend income items. These items were $0.9 million higher than the third quarter of 2025 and $0.1 million higher than the second quarter and $0.7 million higher than the average of the prior 4 quarters. As we've previously discussed these nonrecurring items vary quarter-to-quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment repricing and other activity related to debt investments. The fund's expenses, net of waivers for the third quarter increased by $1.8 million from the third quarter of 2025 and decreased by $2.2 million from the second quarter. The increase from the prior year was principally attributable to a $1.3 million increase in interest expense, a $0.9 million increase in the capital gains in Sanofi accrual and a $0.5 million increase in base management fee, partially offset by a $0.8 million decrease in incentive fee on income net of waivers. The $2.2 million decrease from the second quarter in the funds expenses, net waivers was primarily driven by decreases of $2.1 million in the capital gains incentive accrual and $0.4 million in incentive fee on income net of waivers. The increase in interest expense from a year ago was largely driven by an increase in average borrowings outstanding used to fund the growth of the fund's investment portfolio and an increased weighted average interest rate on the funds unsecured debt obligations as a result of the issuance of the May 2029 notes and the issuance of the September 2029 notes, partially offset by a decreased weighted average interest rate on the credit facilities due to decreases in benchmark index rates. The capital gains incentive fee accrual for the quarter was $0.9 million compared to no accrual a year ago and $2.9 million in the second quarter with the variances due to the changes in the net fair value appreciation of the fund's investments in the third quarter of 2026 relative to the prior periods. The increase in base management fees from a year ago is the result of the fund's increased average total assets. The decreases in incentive fee on income net of waivers of $0.8 million from a year ago and $0.4 million from the second quarter is a result of a $0.5 million and a $0.4 million increase in the voluntary waiver of incentive fee on income by the fund's investment adviser, respectively and a $0.4 million decrease in the gross calculated incentive fee on income compared to the prior year, primarily driven by a decrease in pre-incentive fee NII . The Fund's expense ratio calculated as the ratio of total noninterest operating expenses, excluding incentive fees, net of waivers as a percentage of the fund's average total assets was 1.9% on an annualized basis for the third quarter, a decrease from 2% in the prior year and consistent with the second quarter. The fund's adjusted NII before taxes in the third quarter was $16.3 million or $0.36 per share, slightly decreasing from $17 million or $0.36 per share from the prior year. During the quarter, the fund recorded a net increase in the fair value of its investments of $5.2 million, representing the impact of $9 million of net unrealized appreciation partially offset by $3.9 million of net realized losses. The net fair value increase was primarily attributable to an increase of $3.8 million in the private loan portfolio and $2.2 million in the lower middle market portfolio, partially offset by a decrease of $0.6 million in the residual middle market portfolio. Overall, the fund's operating results for the third quarter resulted in a net increase in net assets of $18.1 million or $0.40 per share -- the fund's NAV per share was $16.56, a $0.05 increase from the second quarter and $1.03 above the fund's public offering price per share in its public offering and listing on the New York Stock Exchange in January of 2025. As of quarter end, the fund had investments on nonaccrual status, comprising 1.4% of the total investment portfolio at fair value and 5.2% at cost. As of quarter end, the fund's regulatory asset coverage ratio was 2.16 and its net debt to NAV ratio was 0.83. Over the last few months, we have completed the actions we discussed last quarter to address the maturity of the fund's $150 million of October 2026 notes. The fund issued $75 million in September and $75 million in October for a total of $150 million issued under the September 2029 notes. In October, Kroll Bond Rating Agency also reaffirmed the fund's investment-grade issuer and senior unsecured debt rating of BBB- with a stable outlook. We remain confident in our ability to support the fund's growth in a way that reflects our conservative approach to the fund's capital structure. With that, I will now turn the call back over to the operator so we can take any questions.

[Operator Instructions] Our first question is from Kenneth Lee with RBC Capital Markets.

Just 1 around the pipeline there, the private loan pipeline and the color of being well above average there. And once again, I apologize if this was covered in the other call, just been hopping around. Do you attribute the outlook there more to the network that you're seeing, the relationships? Or is this just a signal of just broader market kind of activity there?

Sure, Ken. And we did cover it on the via Main Street call. So you can give some additional details there, but I'll give you a couple of thoughts, and then Nick can add on. I would say that when we look at the the pipeline. There's nothing specific we attribute it to. It's really the right place, right time and seeing a number of transactions that fit us well and that we also feel like we're a really good fit for. I don't know if I'd add anything different than that, Nick.

Yes, I'd say the volume does feel like it's picked up in the third, fourth quarter and does that continue into '27? I think we're hopeful. But I think we're seeing signs that M&A activity has picked up drastically from earlier in the year or anything yet.

Got you. That's great. And just one quick follow-up somewhat relatedly in terms of the time frames roughly for ramping up the portfolio more towards an optimal leverage level. And once again, I realize it can be a little difficult to predict, but just any updated thoughts around that?

We haven't given specific time frames on that, Ken. I do think if the pipeline that Nick and his team are executing to and working on, that actually gets to closing, we'll make a significant move in Q4. And obviously, beyond that, it really is going to be dependent upon the overall market and the transactions we see fitting us. So I think we don't really have a change in terms of guidance or timing, but the pipeline right now will definitely be helpful in moving the fund closer to that target leverage profile.

Our next question is from Arren Cyganovich with Truist Securities.

Yes. Maybe within the pipeline itself, are there any particular industries or themes that you could talk about in some of the aspects of spreads and documentation, everything, anything notable in terms of on within that pipeline?

I wouldn't say there's anything from my perspective that's notable. It's just like our portfolio, it's diversified in terms of industry, geography and types of companies, terms conditions kind of spread. They're all in line with what we've seen historically. Maybe some of the transactions are a little bit bigger than what we've had success with historically, but not out of line with what we've executed. So I don't really see anything that's really different than historical. But Nick, if you want to give some additional color.

I'd say spreads and terms are probably flattish since kind of the March-April time frame. Before that, we widened out a little bit, but we're kind of the same ballpark as we have been most of the year at this point.

Great. And are these financing M&A? Are they refi dividend recap, what's the bulk of those within the pipeline?

I'd say most of our pipeline in most of our transaction all the time are going to be fresh LBOs, a combination of sponsor sponsor or founder to sponsor.

The only thing I might add, and if you can add any additional color, we are seeing a healthy amount of follow-ons as well with our high-performing, well-performing portfolio companies that have the desire to go through acquisitions. We're seeing a number of opportunities there as well. That's probably a smaller part of the pipeline, but we are seeing that, which we view as a big positive.

Our next question is from Chris Muller with Citizens Capital Markets.

Can you just remind me on the 2029 notes, will both those tranches price the same? Or is it dependent on where the market is when those get issued?

They're both priced at the same rate. It's just a kind of a delayed draw, delayed funding.

Got it. Got it. And then I guess on the share buybacks, it sounds like that's a formulaic buyback. I guess, one, is that correct? And then two, how do you guys think about balancing buybacks with the above-average pipeline that you guys mentioned?

Sure. I think, Chris, it's a 10b5 plan. So it is kind of a grid that gets set. It doesn't move, and it's not executed by us. It's executed by a third party subject to that that grid. So it is what you described there on the buyback, and that applies both to what MSC Income Fund is doing and what Main Street is doing through its pro rata share of purchasing shares of MSC Income Fund. I think when you look at the second part, I think we're balanced between the 2. We think both new investments, particularly given the attractive nature of the investments that we're seeing through the private loan pipeline. We think that is a great way to create value. We also think we can do the same thing through the repurchase plan. So we think both of them are good value creation opportunities or activities. So we're looking to deploy both of those as we execute over the next couple of months.

Our next question is from Paul Johnson with KBW.