425: MidCap Financial Investment Corporation Proposes Mergers with Apollo Senior Floating Rate Fund and Apollo Tactical Income Fund

MidCap Financial Investment Corporation (MFIC) is set to merge with Apollo Senior Floating Rate Fund (AFT) and Apollo Tactical Income Fund (AIF) in a stock-for-stock transaction aimed at creating a larger, more scalable BDC focused on middle-market direct lending.

Summary

• MidCap Financial Investment Corporation (MFIC) is planning to merge with Apollo Senior Floating Rate Fund (AFT) and Apollo Tactical Income Fund (AIF) in a stock-for-stock transaction.
• The mergers are expected to be accretive to return on equity and net investment income per share for both MFIC and AFT/AIF shareholders.
• 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.
• MFIC will pay a special cash dividend of $0.20 per share following the closing of the mergers.
• The combined company is projected to have approximately $3.4 billion in investments and $1.4 billion in net assets.
• The mergers are not contingent on each other, allowing MFIC to acquire one fund even if approval isn't obtained for both.
• The mergers are expected to close in the first half of 2024, pending shareholder approvals and customary closing conditions.
• The mergers unlock approximately $386 million of incremental asset capacity due to MFIC's lower minimum asset coverage.
• The mergers are intended to be treated as tax-free reorganizations.

Sentiment

Score: 7

Explanation: The document presents a positive outlook on the proposed mergers, highlighting potential benefits such as increased scale, improved access to capital, and enhanced shareholder value. 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 return on equity and net investment income per share.
• AFT and AIF shareholders will receive a special cash payment of $0.25 per share.
• MFIC will pay a special cash dividend of $0.20 per share.
• The combined company will have increased scale and potentially greater stock liquidity.
• The mergers could lead to potential operational synergies and improved access to capital.
• MFIC's portfolio is primarily focused on senior secured middle market loans.
• MFIC has a shareholder-friendly fee structure compared to other listed BDCs.
• MFIC's corporate lending portfolio is 100% floating rate, mitigating interest rate risk.
• MFIC's recent accomplishments include delivering solid ROEs and demonstrating NAV growth.
• MFIC's corporate lending portfolio is diversified across various industries.

Negatives

• The mergers are subject to shareholder approvals and customary closing conditions, creating uncertainty.
• There is a risk that the expected synergies and savings associated with the mergers may not be fully realized.
• The integration of AFT and AIF's portfolios into MFIC's investment strategy may present challenges.
• The mergers could divert management's attention from ongoing business operations.
• There is a risk of potential termination of one or both merger agreements.
• MFIC has exposure to Merx Aviation, which may pose risks to the portfolio.
• The success of the mergers depends on the ability of MFIC Adviser and its affiliates to attract and retain highly talented professionals.
• The mergers are subject to the risk of stockholder litigation, which may result in significant costs of defense and liability.

Risks

• The ability of the parties to consummate the mergers on the expected timeline, or at all, is uncertain.
• The expected synergies and savings associated with the mergers may not be fully realized.
• Competing offers or acquisition proposals could emerge.
• Any or all of the various conditions to the consummation of the mergers may not be satisfied or waived.
• The combined company's plans, expectations, objectives, and intentions may change as a result of the mergers.
• Future changes in laws or regulations could impact the combined company.
• Stockholder litigation in connection with one or both of the mergers may result in significant costs of defense and liability.
• The ability of the portfolio companies of MFIC, AFT, AIF or, following the closing of one or both of the Mergers, the combined company to achieve their objectives is uncertain.
• The timing of cash flows, if any, from the operations of the portfolio companies of MFIC, AFT, AIF or, following the closing of one or both of the Mergers, the combined company is uncertain.

Future Outlook

The mergers are expected to create a larger, more scalable BDC focused on middle-market direct lending, with potential for increased shareholder value and earnings power.

Industry Context

The document highlights the secular tailwinds favoring non-bank lenders due to bank retrenchment from middle-market lending, creating an attractive environment for private credit origination.

Comparison to Industry Standards

• MFIC's fee structure is presented as industry-leading among listed BDCs, supporting its senior secured investment strategy.
• The document compares MFIC's key metrics, such as first lien exposure, PIK income, and floating rate exposure, favorably to BDC averages based on data from Raymond James and Wells Fargo.
• MidCap Financial is ranked as a leading middle market lender, based on KBRA DLD's rankings for full year 2023, serving as lead/co-lead in 159 deals.

Stakeholder Impact

• Shareholders of AFT and AIF will receive a special cash payment of $0.25 per share.
• Shareholders of MFIC will receive a special cash dividend of $0.20 per share.
• The mergers are expected to create a larger, more scalable BDC focused on middle-market direct lending, potentially benefiting all stakeholders.
• The mergers could lead to increased stock liquidity and market visibility, potentially enhancing shareholder value.

Next Steps

• Shareholders of MFIC, AFT, and AIF need to vote on the proposed mergers.
• The mergers are subject to customary closing conditions.
• The combined company will rotate AFT and AIF's liquid assets into first lien floating rate loans to middle market companies.

Key Dates