425: MidCap, Apollo Funds Announce Merger Filings, Set Dates

MidCap Financial Investment Corporation, Apollo Senior Floating Rate Fund Inc., and Apollo Tactical Income Fund Inc. have filed definitive joint proxy statements/prospectuses for their proposed mergers, setting record and special meeting dates for stockholder votes.

Summary

• MidCap Financial Investment Corporation (MFIC), Apollo Senior Floating Rate Fund Inc. (AFT), and Apollo Tactical Income Fund Inc. (AIF) have filed a definitive joint proxy statement/prospectus regarding their previously announced proposed mergers.
• AFT and AIF will merge with and into MFIC, with MFIC being the surviving entity and continuing as a BDC trading under the ticker MFIC.
• Record dates for stockholder votes have been set for March 28, 2024, and special meetings are scheduled for May 28, 2024.
• MFIC stockholders will vote on the MFIC Share Issuance Proposal, AFT stockholders on the AFT Merger Proposal, and AIF stockholders on the AIF Merger Proposal.
• Upon closing, AFT and AIF stockholders will receive newly issued MFIC shares based on net asset value (NAV) ratios.
• AFT and AIF stockholders will receive a special cash payment of $0.25 per share, and MFIC will pay a $0.20 per share special cash dividend to its stockholders.
• Prior to closing, AFT and AIF will distribute their undistributed net investment income (UNII) and net realized capital gains.
• As of December 31, 2023, AFT had $0.14 per share of UNII and AIF had $0.17 per share of UNII, with no net realized capital gains for either.
• The mergers are expected to be accretive to net investment income per share due to operational synergies and portfolio growth opportunities.
• Pro forma post-merger ownership is estimated at 69% for MFIC stockholders, 16% for AFT stockholders, and 15% for AIF stockholders, assuming both mergers close.

Sentiment

Score: 7

Explanation: StockSavvy.ai views this as a moderately positive development, as the mergers are expected to create operational synergies and enhance investment income, though the exact benefits and tax implications are still subject to determination.

Positives

• The mergers are expected to be accretive to net investment income per share for all stockholders.
• Operational synergies are anticipated from the elimination of duplicative expenses.
• The combined entity will have the ability to grow portfolios through additional leverage.
• Existing CEFs' lower-yielding liquid assets will be rotated into first lien middle market loans sourced by MidCap Financial.
• All current MFIC officers and directors will remain in their positions, ensuring continuity.

Negatives

• The exact amount of the CEF Tax Dividends (UNII and net realized capital gain distributions) is not yet determined and cannot be assured.
• The specific tax characteristics of the special cash payments to AFT/AIF stockholders and the MFIC special cash dividend are not yet determined.
• Changes in NAV per share before closing could impact the exchange ratios and post-closing ownership percentages.
• Each merger is not contingent on the other, meaning MFIC could merge with only one of the CEFs if stockholder approval is not received from both.

Risks

• The ability of the parties to consummate one or both of the Mergers on the expected timeline, or at all.
• The expected synergies and savings associated with the Mergers may not be realized.
• The ability to realize the anticipated benefits of the Mergers, including the expected elimination of certain expenses and costs.
• The percentage of stockholders of MFIC, AFT, and AIF voting in favor of the applicable Proposals.
• The possibility that competing offers or acquisition proposals will be made.
• The possibility that any or all of the various conditions to the consummation of the Mergers may not be satisfied or waived.
• Risks related to diverting management's attention from ongoing business operations.
• Any potential termination of one or both merger agreements.
• Future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities).
• The risk that stockholder litigation in connection with one or both of the Mergers may result in significant costs of defense and liability.

Future Outlook

The mergers are expected to be accretive to net investment income per share for all stockholders, driven by operational synergies, the ability to grow portfolios through additional leverage, and the rotation of lower-yielding assets into first lien middle market loans. MFIC will continue to operate as a BDC with its current investment strategy.

Management Comments

• MFIC Board Unanimously Recommends That Stockholders Vote FOR the MFIC Share Issuance Proposal.
• AFT Board Unanimously Recommends That Stockholders Vote FOR the AFT Merger Proposal.
• AIF Board Unanimously Recommends That Stockholders Vote FOR the AIF Merger Proposal.

Industry Context

StockSavvy.ai notes that this filing represents a significant consolidation within the BDC and closed-end fund space, driven by Apollo's strategy to streamline operations and enhance portfolio yield through the integration of floating rate senior loan funds into a larger BDC platform focused on middle-market lending.

Legal Proceedings

• The risk of stockholder litigation in connection with one or both of the Mergers may result in significant costs of defense and liability.

Stakeholder Impact

• Shareholders of MFIC, AFT, and AIF will vote on the proposed mergers, with potential changes in ownership structure and future distributions.
• AFT and AIF stockholders will receive a special cash payment of $0.25 per share and newly issued MFIC shares.
• MFIC stockholders will see their ownership percentage diluted but are expected to benefit from accretive net investment income.
• Employees and officers of MFIC Adviser and Apollo Credit Management, LLC may be involved in the solicitation of proxies.

Next Steps

• Stockholders of MFIC, AFT, and AIF must vote on their respective merger proposals at the special meetings scheduled for May 28, 2024.
• The mergers are subject to the receipt of stockholder approvals and satisfaction of other closing conditions.
• MFIC, AFT, and AIF intend to operate in the normal course, including declaring regular distributions, prior to the closings.
• MFIC will repay the CEFs' existing indebtedness contemporaneously with the closings of the mergers.

Key Dates

Recommendation

The filing outlines the procedural steps for a merger, which is a significant event. While the stated benefits of accretion and synergies are positive, the ultimate success and value realization depend on closing conditions, stockholder approval, and future market performance. Investors should hold to await further developments and the finalization of the merger.

Keywords

merger, MidCap Financial Investment Corporation, Apollo Senior Floating Rate Fund Inc., Apollo Tactical Income Fund Inc., joint proxy statement, prospectus, SEC filing, stockholder vote, business development company, closed-end fund, NAV, dividend, synergies