MidCap Financial Investment Corporation

Good morning and welcome to the MidCap Financial Investment Corporation conference call to discuss the announcement of the mergers as well as results for the period ended September 30, 2023. At this time, all participants have been placed in listen-only mode. The call will be open for a question-and-answer period following the speaker's prepared remarks. If you would like to ask a question at that time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, press star 2. I will now turn the call over to Elizabeth Besson, Investor Relations Manager for MidCap Financial Investment Corporation.

Thank you, Operator, and thank you, everyone, for joining us today. I'd like to advise everyone that today's call and webcast are being recorded. Please note that they are the property of a mid-cap financial investment corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press releases. I'd also like to call your attention to the customary safe harbor disclosure in our press releases regarding forward-looking information. Today's conference call and webcast may include forward-looking statements reflecting our views with respect to, among other things, the timing or likelihood of the closing of the mergers, the expected synergies associated with the mergers, the ability to realize the anticipated benefits of the mergers, and our future operating results and financial performance. Our actual results could differ materially from those implied or expressed in the forward-looking statements. You should refer to our most recent filings with the SEC for risks that apply to our business and then may adversely affect any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit either the SEC's website at www.sec.gov or our website at www.midcapfinancialic.com. Yesterday, after market closed, in addition to our quarterly earnings press release, we issued a joint press release announcing that MidCap Financial Investment Corporation has entered into merger agreements with Apollo Senior Floating Rate Fund, Inc. and Apollo Tactical Income Fund, Inc. Throughout today's call, MidCap Financial Investment Corporation will be referred to as MFIC. Apollo Senior Floating Rate Fund, Inc. will be referred to as AFT. And Apollo Tactical Income Fund, Inc. will be referred to as AIF. AFT and AIF may collectively be referred to as the closed-end fund. MFIC, AFT, and AIF have posted a joint presentation outlining these transactions on their respective websites. which has also been filed with the SEC and which we will be referring to on today's call. Please note that any additional information regarding the proposed mergers and the participants in the solicitation of proxies in connection with matters requiring shareholder approval will be available in the joint proxy statement that MSIC, AFT, and AIF intend to file with the SEC in the coming weeks alongside the prospectus of MSIC. Stockholders are urged to read the joint proxy statement slash prospectus when available as well as other documents filed with the SEC. We have also posted a separate supplemental financial information package on our website related to MFIC's results for the quarter. Speaking on today's call are Howard Widra, Executive Chairman, Tanner Powell, Chief Executive Officer, Ted McNulty, President, and Greg Hunt, Chief Financial Officer. Additional members of the MFIC management team are on the call and available for the Q&A portion. At this time, I'd like to turn the call over to MFIC's Executive Chairman, Howard Widra.

thanks elizabeth and thank you everyone for joining today's call i'll begin with an overview of the mergers including the strategic rationale we then shift to a review of the results for the quarter before opening the call to questions throughout my comments i'm going to refer to the merger presentation which is posted on our website we're excited to announce the mergers of three public vehicles managed by affiliates of apollo mid cap financial investment corp or mfic has entered into merger agreements with apollo senior Floating Rate Fund, or AFT, and Apollo Tactical Income Fund, or AIF, pursuant to which AFT and AIF will merge into MFIC, subject to shareholder approval and other customary closing conditions. We believe that these transactions mark an important next step in MFIC's evolution to becoming a leading pure play middle market BDC. The mergers will create a larger BDC with approximately $3.4 billion of total investments in approximately 215 portfolio companies, and over $1.4 billion of net assets. To be clear, MSIC's investment strategy will not change as a result of the mergers. The combined company will focus on first-ling floating rate loans to middle market companies, primarily sourced by MidCap Financial, a leading middle market lender managed by an affiliate of Apollo. We believe the combined company will create significant value for all shareholders, which we have outlined on slide four in the presentation. I'll touch on each of these points throughout my remarks. First, we expect these transactions will be both ROE and NII per share accreted to all shareholders as we rotate the closed-end funds lower-yielding investment in the ordinary course into higher-yielding directly originated loans that align with MFIC's investment strategy. Moving to slide five, there are significant financial benefits to shareholders related to the transaction. In consideration of the closing of each transaction, an affiliate of Apollo will make a special cash payment of $0.25 per share to each AFT or AIS shareholder of record as of the closing date of the applicable transaction. The $0.25 per share is approximately equal to 15.4% and 16.7% of the AFT's and AIS respective annualized dividend, or 1.7% of both of their respective NAS per share. Following the closing of the mergers, MFIC will pay a cash dividend of 20 cents per share. The exact record date for the special dividend will be determined by the MFIC Board of Directors based upon the timing of the closings of the mergers. The specific tax characteristics of both the 25-cent cash payment from an affiliate of Apollo and the 20-cent dividend from MFIC have not yet been determined. Apollo is providing additional support by reimbursing transaction expenses. All merger-related expenses will be reimbursed by an affiliate of Apollo for each successful transaction. Before I discuss the merger in greater detail, I would like to provide some background information on AFT and AIF for those of you who may not be familiar with these funds. Please turn to slide six of the presentation. AFT and AIF are both listed closed-end funds registered under the Investment Company Act of 1940 and managed by an affiliate of Apollo. AFT and AIF commenced operations on February 23, 2011, and February 25, 2013, respectively. The closing terms are subject to a 300% minimum asset coverage requirement on debt. As of September 30, 2023, AFT and AIF had net assets of approximately $234 million and $212 million, respectively, or $446 million on a combined basis. The fair value of AFT and AIS portfolios were $346 million and $311 million, respectively, or $656 million on a combined basis. Directly originated loans make up about 23% and 33% of AFT and AIS portfolios, respectively, or 28% on a combined basis. The balance of the portfolio is primarily comprised of liquid assets, including broadly syndicated loans, high-yield bonds, and structured products in the case of AIF. Slides 33 and 34 in the presentation have additional information on the closed-end funds. For those of you on the call who may be new to MFIC, MFIC is a listed BDC focused on investing in first lien, top-of-the-capital structure loans to middle market companies sourced by MidCap Financial. Let me briefly describe some of the key terms of the transactions. If you're following along, please refer to slide seven in the presentation. AFT and AIF will merge with and into MFIC in two stock-for-stock transactions with shares to be exchanged on a NAV-for-NAV basis. The mergers will result in an ownership split of the combined company proportional to each of MFIC's, AFT's, and AIF's respective NFFs. AFT and AIF shareholders will receive newly issued shares of common stock of MFIC based on the ratios of their respective net asset values per share divided by MFIC's net asset value per share determined shortly before the closing of each merger. As I mentioned, in consideration of the closing of each transaction, an affiliate of Apollo will make a special cash payment of $0.25 per share to each AFP or AIF shareholder of record as of the closing of each transaction. And following the closing of the mergers, the combined company will pay a special cash dividend of $0.20 per share. MFIC will be the surviving entity and will continue to trade under the ticker symbol MFIC on the NASDAQ Global Select Exchange. All current MFIC officers and directors will remain in their current positions. The transactions are intended to be treated as a tax-free reorganization. Prior to the merger dates, MFIC, AFT, and AIS intend to operate in the normal course, including declaring regular distributions. Moving to slide 8, for illustrative purposes, based on net asset values for MFIC, AFT, and AIF, as of September 30, 2023, MFIC would issue approximately 0.9849 shares of its common stock for each AFT share and 0.9577 shares of its common stock for each AIF share. Assuming both transactions close, this would result in a pro forma ownership split of the combined company of 69% for current MFIC shareholders at 16% for current AFT shareholders and 15% for current AIF shareholders. Slide 9 of the presentation shows the total consideration to be paid to AFT and AIF shareholders in respect to their AFT and AIF shares in connection with the closing of the applicable transaction, which includes shares of common stock of MFIC and the special tax payment from the affiliate of Apollo. Moving to slide 10, after both transactions close, MFIC will have greater scale and more Net assets will increase by approximately 43% and the investment portfolio will increase by a similar percentage. We expect MFIC's ROE will increase given the increase in the portfolio yield and cost synergies among other drivers. Moving to slide 11, we expect the combined company to realize operational synergies by the elimination of certain duplicative expenses. We've estimated an annual savings of approximately $3.1 million per year, which is a decrease of approximately 16% from the combined company's current G&A, or approximately $0.03 per share annually based on the conformant number of shares. Additionally, we believe that our larger scale may enhance our access to capital on more favorable terms and pricing. Moving to slide 12, the anticipated larger market capitalization to the combined company may broaden the universe of potential investors, increase stock liquidity, and create the potential for additional equity research analyst coverage. Moving to slide 13, these transactions are mergers of three funds managed by affiliates of Apollo, which mitigates the diligence concerns typically associated with mergers of unaffiliated entities. As you can see, the closed-end portfolios are primarily comprised of broadly syndicated loans and high-yield bonds. These assets are owned through the Apollo platform, which will help facilitate a seamless rotation in the ordinary course into directly originated assets that align with MFIC's investment strategy. Moving to slide 14, on a combined basis, the closed-end funds have approximately $656 million of assets, of which $183 million are in directly originated assets. that the combined company intends to hold until maturity or repayment. We intend to rotate the remaining $474 million of liquid assets into higher yielding directly originated loans in the ordinary course. In addition, the mergers unlock approximately $330 million of incremental asset capacity due to MFIC's lower minimum asset coverage requirement, which we intend to deploy into directly originated loans. Pro forma, we expect MFIC's portfolio will total approximately $3.4 billion, an increase of approximately $1 billion, with over 94% investment in direct origination and MERCs decreasing to less than 6% of the total portfolio. Moving to slide 15, as you can see, we have sufficient debt financing in place to execute these transactions. We estimate that the transactions will require approximately $600 million of debt based on the expected increase in net assets, and our revolving credit facility has sufficient capacity. Before Chairman needs to call over to Tanner, I would like to discuss the expected timeline for the transactions. In order to consummate each merger, shareholders of each closed-end fund will need to approve the mergers, and shareholders of MFIC will need to approve the issuance of MFIC common stock in connection with the mergers. Note, the mergers of AFP with MFIC and AIF with MFIC will not be contingent on each other. In other words, if MFIC shareholders approve the issuance of new shares in connection with both transactions, but shareholder approval from only one of the closed-end funds is a pain. MSIC will only merge with that closed-end fund, but not the other. We expect the mergers to close in the first half of 2024, subject to shareholder approval and satisfaction of other customary closing conditions, as outlined in the merger agreement. In conclusion, we believe the proposed mergers are compelling opportunities for shareholders of all three funds, and we believe now is the opportune time to merge these three companies. I will now turn the call over to Tanner to review MFIC's results for the third quarter.