Middle market lender MidCap Financial Issuer Trust made its investment grade debut this week with a $3.1bn bond package sold to private credit investors that effectively lowers its leverage and allows it to operate as one of the highest rated companies among its peers.

Apollo led the deal and served as the largest anchor order on the bonds, which included $2.1bn of junior subordinated notes and a little over $1bn of senior unsecured notes.

MidCap already serves as an origination engine for Apollo, which owns around 50% of the company through its own private shares and those held by Apollo’s retirement services company Athene Holdings.

The private transaction should free up MidCap’s assets so it can jump on bigger opportunities in the middle markets space faster and serve as a more robust origination provider for Apollo.

MidCap accomplished that by receiving 50% equity credit from Moody’s and Kroll Bond Rating Agency on the junior sub notes, which are essentially preferred equity tranches with equity-like components such as its long 30-year tenor and interest payments that can be deferred. Since proceeds were used to repay secured bank facilities, the equity treatment effectively lowered leverage by two turns.

MidCap Financial is now targeting an adjusted net leverage ratio below 2.5x down from a range of 4x-4.5x. Net senior unsecured leverage is targeted below 1.5x while maintaining at least $2bn of liquidity, the company said in a press release.

Not only does the deal reduce leverage, but it also unencumbers assets that were previously tied up as collateral for the secured bank facilities. By refinancing with unsecured debt, MidCap is now targeting a percentage of net secured debt to total assets of below 30%, down from more than 60% prior to this deal.

"The upgrade came from deleveraging, the adoption of a more conservative financial posture, and a change in the capital structure mix, which enhances their liquidity and overall financial flexibility,” Clay Montgomery, vice president in Moody’s Ratings private credit team, told 9fin. “Overall, these actions together were significantly credit-positive for the company.”

Moody’s now rates MidCap Baa2 at the issuer and senior unsecured level while its junior sub notes are rated Baa3. That’s up from corporate family ratings of Ba3 on around $1.4bn of outstanding senior notes that were rated B1/B+/BB when they were first issued in 2021.

As part of this transaction, KBRA assigned a first-time issuer and senior unsecured rating of A- to MidCap, while its junior sub notes are rated BBB. S&P and Fitch withdrew their previous BB-/BB+ ratings.

MidCap’s outstanding notes have rallied significantly since the start of the year as they’re also expected to receive an upgrade to IG. For example, the $400m 5.625% 2030s traded at a price as high as 98.9 since the new notes priced. That’s up from around 93.8 at the end of 2025 and much improved from 2022 when the notes were trading in the low 70s.

Going private

The deal priced last week as a 4a2 private placement bond, but officially hit the secondary 15 January as a tradable 144a/Reg S note.

By tapping private markets, MidCap was able to utilize a unique bond structure, avoid some of the hurdles of issuing in public markets as a private company, and keep deal fees with Apollo.

It’s the latest example of private equity taking some of the business once reserved for bank syndicate desks and turning it into a private credit investment grade product.

“It caught my eye when it hit screens today and Apollo was the lead,” one banker said. “I was a bit dismayed because we would have liked to syndicate a deal like that.”

While some in the market might know the company best for its BDC arm, MidCap Financial Investment Corporation, these notes were issued at the parent level, where — unlike BDCs — MidCap Financial Issuer Trust is not a regulated investment company (RIC). Where BDCs are required to pay out their earnings on a normalized basis, issuers like MidCap Financial Issuer Trust can choose to retain its earnings, giving it more flexibility in periods of downturn, Moody’s explained.

Not only does MidCap do leveraged lending to private equity-backed borrowers, but it also does real estate lending, asset-based lending, venture lending, franchise finance and more. This more diversified portfolio allows it to run higher leverage levels than typical BDCs and Moody’s says it operates with higher asset quality than most BDCs.

For example, MidCap's loan book is nearly 100% first-lien debt compared with a median rate of 86% at BDCs, according to Moody’s. Likewise, MidCap’s top 10 loans make up around 8% of its total portfolio, compared with around 20% for Moody’s-rated BDCs.

Antares was identified as the closest competitor, but is rated one notch lower than MidCap. That’s in part because MidCap operates with lower leverage and also because Moody’s gives MidCap a one-notch uplift because of the company’s close ties to Apollo.

"We believe this transaction reflects Apollo's strong commitment to more conservative financial policies going forward,” Moody’s Montgomery said. “Apollo has significant skin in the game and MidCap also serves as a significant origination engine for the Apollo ecosystem. So it has a strategic benefit to Apollo as well."

MidCap Financial and Apollo declined to comment for this article.