425: MidCap Financial Investment Corporation Explores Merger Opportunities to Enhance Shareholder Value

MidCap Financial Investment Corporation (MFIC) is considering merging with Apollo Senior Floating Rate Fund Inc. (AFT) and Apollo Tactical Income Fund Inc. (AIF) to create a larger, more scalable BDC focused on middle market direct lending.

Summary

• MidCap Financial Investment Corporation (MFIC) is evaluating potential mergers with Apollo Senior Floating Rate Fund Inc. (AFT) and Apollo Tactical Income Fund Inc. (AIF).
• The proposed mergers aim to create a larger business development company (BDC) focused on direct lending to middle market companies.
• The mergers are expected to be accretive to return on equity (ROE) and net investment income (NII) per share.
• AFT and AIF shareholders will receive a special cash payment of $0.25 per share from an Apollo affiliate upon closing of the applicable merger.
• Following the closing of the merger(s), MFIC will pay a cash dividend of $0.20 per share.
• The combined company is projected to have approximately $3.4 billion in investments and $1.4 billion in net assets.
• MFIC's investment strategy will remain focused on first lien floating rate loans to middle market companies, primarily sourced by MidCap Financial.
• The mergers are anticipated to close in the first half of 2024, pending shareholder approvals and customary closing conditions.

Sentiment

Score: 7

Explanation: The document presents a positive outlook on the proposed mergers, highlighting potential benefits for shareholders and the combined company. However, it also acknowledges certain risks and uncertainties associated with the transactions, resulting in a moderately positive sentiment score.

Positives

• The mergers are expected to be accretive to ROE and NII per share.
• AFT and AIF shareholders will receive a $0.25 per share special cash payment from an Apollo affiliate upon closing.
• MFIC will pay a $0.20 per share special cash dividend following the closing of the merger(s).
• The combined company is projected to have $3.4 billion in investments and $1.4 billion in net assets.
• The mergers unlock approximately $330 million of incremental asset capacity due to MFIC's lower minimum asset coverage.
• All merger-related expenses will be reimbursed by an affiliate of Apollo for each successful transaction.

Negatives

• The mergers are subject to shareholder approvals and customary closing conditions, which may not be met.
• There is a risk that the anticipated benefits and synergies of the mergers may not be fully realized.
• The integration of AFT and AIF into MFIC could present operational challenges.

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 percentage of the 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.
• The combined company's plans, expectations, objectives and intentions, as a result of the Mergers.
• Any potential termination of one or both merger agreements.
• The future operating results and net investment income projections of MFIC, AIF, AFT or, following the closing of one or both of the Mergers, the combined company.
• The ability of Apollo Investment Management L.P. (MFIC Adviser) to implement MFIC Adviser's future plans with respect to the combined company.
• The ability of MFIC Adviser and its affiliates to attract and retain highly talented professionals.
• The business prospects of MFIC, AIF, AFT or, following the closing of one or both of the Mergers, the combined company and the prospects of their portfolio companies.
• The impact of the investments that MFIC, AIF, AFT or, following the closing of one or both of the Mergers, the combined company expect to make.
• The ability of the portfolio companies of MFIC, AIF, AFT or, following the closing of one or both of the Mergers, the combined company to achieve their objectives.
• The expected financings and investments and additional leverage that MFIC, AIF, AFT or, following the closing of one or both of the Mergers, the combined company may seek to incur in the future.
• The adequacy of the cash resources and working capital of MFIC, AIF, AFT or, following the closing of one or both of the Mergers, the combined company.
• The timing of cash flows, if any, from the operations of the portfolio companies of MFIC, AIF, AFT or, following the closing of one or both of the Mergers, the combined company.
• 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 anticipated to close in the first half of 2024, subject to shareholder approvals and other customary closing conditions. The combined company expects to generate significant value for all shareholders through increased scale, diversification, and earnings power.

Industry Context

The document highlights the trend of bank retrenchment from middle market lending, creating opportunities for non-bank lenders like MFIC. The proposed mergers reflect a broader industry trend of consolidation among BDCs to achieve greater scale and efficiency.

Comparison to Industry Standards

• MFIC's fee structure is described as industry-leading and shareholder-friendly compared to other listed BDCs.
• The document compares MFIC's key metrics, such as first lien exposure, PIK income, and floating rate exposure, favorably to BDC averages.
• MidCap Financial is ranked among the top middle market lenders, competing with firms like Antares Capital and TPG Twin Brook.

Stakeholder Impact

• Shareholders of AFT and AIF will receive a special cash payment of $0.25 per share from an Apollo affiliate upon closing.
• MFIC will pay a $0.20 per share special cash dividend following the closing of the merger(s).
• The combined company expects to generate significant value for all shareholders through increased scale, diversification, and earnings power.

Next Steps

• MFIC, AFT, and AIF will file with the SEC and mail to their respective stockholders a joint proxy statement.
• MFIC will file with the SEC a registration statement that includes the Joint Proxy Statement and a prospectus of MFIC.
• Shareholder votes will be conducted to approve the mergers.
• The mergers are expected to close in the first half of 2024, subject to shareholder approvals and other customary closing conditions.

Key Dates