MSC Income Fund Third Quarter 2026 Earnings Conference Call - MSC INCOME FUND INC

Financial Performance:

• Announced Adjusted Net Investment Income (ANII) of $0.34 per share and ANII before taxes of $0.36 per share for Q3 2026.
• Net Asset Value (NAV) per share increased to $16.56, a 5-cent gain from the prior quarter.
• Achieved an annualized return on equity (ROE) of 9.7%.
• Record a net increase in fair value of $5.2 million, driven by $9 million in unrealized appreciation offset by $3.9 million in realized losses.
• Declared total Q1 2027 dividends of $0.36 per share ($0.11 monthly + $0.03 supplemental), implying a dividend yield over 11.5% at current prices.
• Net investment income for the quarter was $35.5 million, consistent with recent periods.
• Expense ratio (excluding interest and incentive fees) was 1.9% annualized, down from 2.0% in the prior year.

Guidance and Future Outlook:

• Management characterizes the private loan investment pipeline as "well above average" in both quality and volume.
• Expects significant portfolio growth in Q4 2026 as the current pipeline transitions to closings, moving the fund closer to its optimal leverage profile.
• Long-term strategy focuses on growing the private loan portfolio while recycling capital from legacy lower middle-market investments.
• Confident in sustaining dividend levels consistent with ANII before taxes, supported by future deployment and dividend income from equity positions.
• Anticipates favorable outcomes from potential exits of lower middle-market companies in the coming quarters.

Business Segments and Product Lines:

• Private Loan Portfolio: Represents 61% of total fair value ($844 million) across 81 companies; 91% is secured debt (99% first lien) with 95% floating rate and a weighted average yield of 10.5%.
• Legacy Lower Middle Market: Comprises 37% of fair value ($503 million) across 53 companies; 99% of debt is first lien with a 12.7% weighted average yield.
• Investment Activity: Net decrease of $11 million in private loan investments ($61 million invested vs. repayments); net decrease of $10 million in lower middle market portfolio.
• Realizations: Recorded an $11 million realized gain from the equity exit of Core Transformers; realized losses included a $6 million lower middle market exit and restructuring-related losses.
• Strategy Shift: No new investments in lower middle market companies since Jan 2025; new investments are exclusively in private loans, with lower middle market activity limited to follow-on investments.

Market and Competitive Landscape:

• Pipeline growth attributed to a favorable alignment of opportunities ("right place, right time") rather than a drastic macro M&A surge.
• Deal terms and spreads in the pipeline remain flat and consistent with historical levels since mid-2026.
• Primary transaction types in the pipeline are fresh LBOs, including sponsor-to-sponsor and founder-to-sponsor deals, alongside healthy follow-on opportunities.
• Portfolio is highly diversified across industries, with the largest position under 4% of total fair value.

Risks and Challenges:

• Investment activity slowed due to a generally subdued private equity environment and specific deal misorigination risks (deals failing to close).
• Realized losses of $3.9 million highlight risks associated with restructurings and exits of underperforming legacy assets.
• Interest expense increased $1.3 million year-over-year due to higher borrowings and new debt issuances (2029 notes), partially offset by benchmark rate declines.
• Portfolio companies on non-accrual status comprise 1.4% of fair value and 5.2% at cost.

Management Commentary and Tone:

• Transitioned CEO from Dwayne Hijak (acting) to Nick Mazur, effective Nov 9, 2026; management tone is confident and optimistic about the pipeline.
• Highlighted strong support from parent company Main Street Capital, including $32M in stock purchases and a $600k fee waiver for Q3.
• Executed a $2.5M share repurchase under a 10b5-1 plan to create value when shares trade below NAV.
• Management expressed comfort with the asset quality and liquidity position despite slower Q3 origination volume.
• Reaffirmed BBB- credit rating with a stable outlook from Kroll Bond Rating Agency.

Analyst Questions and Answers:

• Pipeline Drivers: Clarified pipeline growth is organic and opportunity-specific rather than driven by broad M&A volume spikes.
• Leverage Timeline: No specific target date provided, but significant leverage increases expected in Q4 if pipeline executes.
• Investment Themes: Pipeline remains diversified; terms are standard; no significant shift into high-risk sectors like software or high-leverage tech.
• Buyback vs. Deployment: Viewed as complementary value-creation strategies; capital allocation balanced between new investments and share repurchases.
• Q3 Decline Context: Net portfolio decline attributed to general market subdued activity and occasional deal attrition rather than sector-specific distress.
• BSL Market Impact: Direct lenders' spreads remain stable/tightening, but MSC Income Fund's borrower profile ($10-$30M EBITDA) does not compete directly with broad syndicated loan markets.

Other Key Points:

• Main Street Capital waived $2 million in total incentive fees since Q3 2025, including $600k specifically for Q3 to support ANII per share.
• Fund issued $150 million in new notes (Sept/Oct 2029) to refinance maturing October 2026 notes, maintaining investment-grade status.
• Dividend income included $0.7 million in non-recurring items; fee income decreased slightly due to lower investment activity.
• 100% portfolio overlap exists with Main Street's lower middle market funds regarding existing holdings, though MSC Income Fund does not participate in new lower middle market originates.