MidCap Financial Investment Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

Key Takeaways

  • MFIC announced merger agreements with Apollo Senior Floating Rate Fund (AFT) and Apollo Tactical Income Fund (AIF), creating a larger BDC with approximately $3.4 billion in total investments and over $1.4 billion in net assets.
  • Transactions are expected to be both ROE and NII per share accretive, including a $0.25 special cash payment to AFT/AIF shareholders and a $0.20 dividend to MFIC shareholders upon closing.
  • The combined company plans to rotate about $474 million of liquid assets into higher-yielding directly originated loans and unlock roughly $330 million of incremental capacity under MFIC’s lower asset coverage requirement.
  • Strong Q3 results featured $0.43 net investment income per share (above the $0.38 dividend), NAV of $15.28, minimal PIK income (<1%), stable credit metrics, and the closing of MFIC’s first CLO issuance.
  • Each merger requires shareholder approvals for MFIC, AFT, and AIF and is targeted to close in the first half of 2024, subject to customary conditions and vote outcomes.
AI Generated. May Contain Errors.
Earnings Conference Call
MidCap Financial Investment Q3 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

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 speakers' prepared remarks. I will now turn the call over to Elizabeth Besson, Investor Relations Manager for MidCap Financial Investment Corporation.

Speaker 1

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 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.

Speaker 1

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 that may adversely affect and 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.govorourwebsite@www.midcapfinancialic.com.

Speaker 1

Yesterday, after market close, in addition to our quarterly earnings press release, we issued a joint press release announcing that Mid Cap 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, Mid Cap 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.

Speaker 1

AFT and AIF may collectively be referred to as the closed end funds. MFIC, AFT and AIF has 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 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 stockholders are urged to read the joint proxy statementperspectives 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 call unavailable for the Q and A portion.

Speaker 1

At this time, I'd like to turn the call over to MFIC's Executive Chairman, Howard Widra.

Speaker 2

Thanks, Elizabeth, and thank you, everyone, for joining today's I'll begin with an overview of the mergers, including the strategic rationale. We'll then shift to a review of the results for the quarter before opening the call 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 3 public vehicles managed by affiliates of Hello. MidCap Financial Investment Corp or MFIC has entered into merger agreements with Apollo Senior Floating Rate 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 $3,400,000,000 of total investments in approximately 215 portfolio companies once fully rotated and deployed and over $1,400,000,000 of net assets.

Speaker 2

To be clear, MFIC's investment strategy will not change as a result of The combined company will focus on 1st lien 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 4 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 accretive 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 5, there are significant financial benefits to shareholders related to the transaction.

Speaker 2

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 15.4% 16.7% of the AFP's and AIS respective annualized dividend or 1.7% of both of their respective NAVs per share. Following the closing of the mergers, MFIC will pay a cash dividend of $0.20 per share. The exact record date for the special dividend will be determined by the NSIC Board of Directors based upon the timing of the closings of the mergers. The specific tax characteristics of both the $0.25 cash payment from an affiliate of Apollo and the $0.20 dividend from MFIC have not yet been determined.

Speaker 2

Apollo is providing additional support by reimbursing transaction All merger related expenses will be reimbursed by an affiliate Apollo for each successful transaction. Before I discuss the merger in greater detail, I would like to provide and background information on AFT and AIF for those of you who may not be familiar with these funds. Please turn to Slide 6 of the presentation. AFT and AIF are both listed closed end funds registered on the Investment Company Act of 1940 and managed by an affiliate of Apollo. AFT and AIF Commenced operations on February 23, 2011 February 25, 2013, respectively.

Speaker 2

The closed intents are subject to a 300% minimum asset coverage requirement on debt. As of September 30, 2023, AFT and AIF had net assets of approximately 234,000,000 and $212,000,000 respectively or $446,000,000 on a combined basis. The fair value of AFT and AIS Portfolios were $346,000,000 $311,000,000 respectively or $656,000,000 on a combined basis. Directly originated loans make up about 23% 33% of ASTs 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 Slides 3334 in the presentation have additional information on the closed end funds.

Speaker 2

For those of you on the call who may be new to MFIC, MFIC is a listed BDC focused on investing in 1st 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 transaction. If you're following along, please refer to Slide 7 in the presentation. AFT and AIF will merge with and into The combined sorry, and following the close of the merger, the combined company will pay a special cash dividend of $0.20 per share. MFIC

Speaker 3

will be

Speaker 2

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 position. 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.

Speaker 2

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 AIFT share and 0.9577 shares of its common stock for each AIS share. Assuming both transactions close, this would result in a pro form a ownership split of the combined company of 69% for current MFIC shareholders, 16% for current AFT shareholders and 15% for current AIF shareholders. Slide 9 of the presentation shows the total consideration to be paid to AFP and AIF shareholders in respect to their AFP 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 transaction close, MFIC will have greater scale and more earnings power. Net assets will increase by 43% and the investment portfolio will increase by a similar percentage.

Speaker 2

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 We've estimated an annual savings of approximately $3,100,000 per year, which is a decrease of approximately 16% from the company's combined the Combined company's current G and A are approximately $0.03 per share annually based on the pro form a 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 Moving to Slide 13, these transactions are mergers of 3 funds managed by affiliates of Apollo, which mitigates the diligence 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.

Speaker 2

These assets are owned through the Apollo platform, which will help facilitate a seamless rotation in the ordinary course and to directly originate assets that align with MFIC's investment strategy. Moving to Slide 14, on a combined basis, the closed end funds have Approximately $656,000,000 of assets, of which $183,000,000 are indirectly originated assets that the combined company intends to hold until maturity or repayment. We intend to rotate the remaining $474,000,000 of liquid assets into higher yielding directly originated loans in the ordinary course. In addition, the mergers unlock approximately $330,000,000 of incremental asset capacity due to MFIC's lower minimum assets coverage requirement, which which we intend to deploy into directly originated loans. Pro form a, we expect MFIC's portfolio will total approximately $3,400,000,000 an an increase of approximately $1,000,000,000 with over 94% invested in direct origination and merch decreasing to less than 6 of the total portfolio.

Speaker 2

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 Before turning the call over to Tanner, I would like to discuss the expected timeline for the transaction. 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. No, the mergers of AFP with MFIC and AIF with MFIC will not be contingent on each other. In other words, if MFIC shareholders With the issuance of new shares in connection with both transactions, but shareholder approval from only one of the closed end funds is obtained, MSIC will only merge with that closed end fund, but not the other.

Speaker 2

We expect the mergers to close in the first half of twenty twenty four subject to shareholder approval and satisfaction of other customary closing conditions as outlined in the merger agreement. In conclusion, we believe 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 Q3.

Speaker 4

Thank you, Howard, and good morning, everyone. First, let me echo Howard's comments. We are excited about the future of the combined company and we look forward to completing these mergers in a timely manner. After our review Results for the quarter, Ted will cover our investment activity and portfolio and will also provide an update on credit quality.

Speaker 5

Greg will

Speaker 4

then review our financial results in detail before we open the call to questions. Yesterday after market close, we reported strong results for the quarter ended September 30, 2023, which we believe demonstrate the value of MFIC's investment strategy and best in class fee structure among listed BDCs. We believe it is clear from these results that we are reaping the rewards of our multi year focus on investing True first lien middle market loans sourced by MidCap Financial, a leading middle market lender managed by Apollo. In 2016, we began to reposition the portfolio into Our thesis was simple, a well diversified portfolio of true first lien top of the capital structure loans to middle demonstrate an ability to grow both revenue and earnings despite the more challenging operating environment, which we believe reflects MidCap Financial's position as a leading and middle market lending. Results for the quarter ended September 30 reflect strong net Investment income, an increase in net asset value and stable credit quality.

Speaker 4

The net investment income per share for the quarter ended September 30, 2020 was $0.43 well above the current $0.38 dividend as we continue to see the benefit of higher base rates on our floating rate We are particularly pleased with these results when considering the modest amount of fee and prepayment income. We had a modest net gain on the portfolio of approximately $0.03 per share reflecting the stable credit quality of our portfolio. We also want to highlight what we believe is an important and less examined point of differentiation among BDCs. MFIC's PIK income as a percentage of total investment income remains extremely low and well below that of most other BDCs. For the quarter ended September 30, TIC income represented less than 1% of total investment income.

Speaker 4

We believe cash revenue is an important data point for evaluating of BDC's quality of revenue and true dividend coverage. As of September 30, 2023, MFIC's NAV per share was $15.28 an Increase of $0.08 from June 30, 2023, which reflects operating earnings above the dividend and a modest net gain on the portfolio. We are pleased to report that we continue to observe relatively stable credit quality in our portfolio. Overall, we feel good about the health and quality of our corporate Which makes up 92% of our total portfolio primarily consists of 1st lien top of the capital structure loans is well diversified by borrower and September 30, 2023, 96 percent of our corporate lending debt portfolio on a cost basis had 1 or more financial covenants. We also continue to focus on improving the right side of our balance sheet post quarter end and we closed on MFIC's first CLO transaction to enhance our capital structure, which Greg will discuss in greater detail.

Speaker 4

Turning now to the market environment, new issue leverage loans continue to rebound driven by refinancings and repricing Despite ongoing concerns about inflation, higher interest rates and fears about recession, general risk sentiment improved as evidenced by a sustained secondary mark rally and higher investor demand. We still see sponsors, particularly those focused on the middle market seeking financing solutions in the private credit market. We continue to observe more lender friendly pricing and terms on new commitments compared to prior vintages, although we are seeing the pace of price We anticipate deal activity will pick up as markets begin to recover. Moving to the dividend. Our approach to dividend seeks to provide shareholders with an attractive current yield while also retaining some earnings for NAV stability and growth.

Speaker 4

Accordingly, our Board of Directors declared a dividend $0.38 per share to shareholders of record as of December 12, 2023, payable on December 28, 20 A $0.38 dividend represents an annualized dividend yield of approximately 10% on MFSC's NAV per as of September 30. At current base rates, we are well positioned to generate net investment income in excess of this dividend. MFIC's Board and management team will and to evaluate potential dividend increases versus retaining earnings. With that, I will turn the call over to Ted.

Speaker 6

Thank you, Tanner, and good morning, everyone. Beginning with investment activity, as a reminder, MFIC is focused on investing in loans sourced by MidCap Financial, an affiliate of Apollo Global, which provides MFIC with a large pipeline of investment opportunities. MidCap Financial is a leading middle market lender with 1 of the largest direct lending teams in the U. S. With close to 200 investment professionals.

Speaker 6

MidCap Financial was active during the quarter ended September 30, 2023, closing approximately $3,100,000,000 in new During the quarter, MFIC deployed capital into what we believe is an attractive vintage as broader market activity picked up, while remaining focused on operating near the low end of our target leverage range. New investment commitments during the quarter totaled $19,800,000 all first lien across 9 different borrowers for an average new commitment of $2,200,000 as we continue to focus on diversification by borrower. 63% of new commitments were made to existing portfolio companies. We continue to observe favorable pricing at lower leverage levels for newly originated loans. The weighted average Our new commitments was 6 72 basis points with an average OID of approximately 2 18 basis points.

Speaker 6

This translates into a very attractive weighted average yield of The weighted average net leverage of new commitments was 2.7 times. We have a strong pipeline of investment opportunities. In the month of October, we closed approximately $38,000,000

Speaker 2

of new commitments. In terms

Speaker 6

of funded investment activity and gross fundings, excluding revolvers for the corporate lending portfolio totaled $16,000,000 repayments totaled $58,000,000 Net revolver activity was de minimis. In aggregate, net repayments for the quarter totaled $43,000,000 Turning to our investment portfolio. At At the end of September, our portfolio had a fair value of $2,370,000,000 and was invested in 149 companies across 25 industries. Corporate lending and other 95% of our corporate lending portfolio was 1st lien. The weighted average yield at cost of our corporate lending portfolio was 12% on average for the quarter ended September 30, 2023, up from 11.7% last quarter, driven by an increase in base rates and a slight increase in the average spread.

Speaker 6

The weighted average spread on the corporate lending portfolio was 6 21 basis points, up 7 basis points compared to the quarter ended June 30, 2023. We continue to have conservative weighted average net leverage and attachment points on our corporate loans of 5.44 times and 0.1 times respectively. As of September 30, 2023, the average funded corporate lending position was $15,200,000 or approximately 0.7% of the total corporate and other lending portfolio. MFIC is focused on lending to the core middle market where MidCap Financial has strong long standing relationships with sponsors and borrowers and a proven track record across cycles. As of September 30, 2023, The median EBITDA of MFIC's corporate lending portfolio companies was approximately $54,000,000 We believe the core middle market offers attractive investment opportunities across cycles and does not compete directly with either the broadly syndicated loan market or the high yield market.

Speaker 6

As discussed previously, We are focused on reducing our investment in Merx. While we don't expect pay downs to occur evenly, we believe aircraft sales and servicing income should allow for the pay down of third party debt and MFIC's investment in Merx over time. As of September 30, 2023, our investment in Merx totaled 195,000,000 representing approximately 8% of the total portfolio at fair value. As a reminder, Merck started the year with 57 planes. And as of the end of September, Merx owned 39 aircraft, which reflects 3 aircraft that were sold during the quarter.

Speaker 6

Three planes were sold for approximately our June 30th and the cash proceeds were used to pay down debt, thus providing additional de risking to the remainder of our Merx investment. Turning to credit quality, our portfolio companies continue to have solid fundamental performance with positive revenue and EBITDA growth. We are not seeing any signs of overall credit weakness, Although we continue to observe a deceleration in top line growth, while EBITDA margins have begun to improve as companies are seeing the benefits of their cost cutting efforts. We have not seen a meaningful increase in covenant breaches or a pickup in amendment activity. We believe our credit quality has benefited MidCap Financial's strong sourcing and underwriting capabilities.

Speaker 6

Based on data since 2016, which is the approximate date upon which we began utilizing our co investment order, MFIC's net realized and unrealized loss rate on loans sourced by MidCap Financial is extremely low at approximately 2 basis points on an annualized basis. Moving to interest coverage, the weighted average interest coverage ratio was 1.9 times, down from 2.1 last quarter with 4 companies below 1. If rates continue to increase or there is a material slowdown in economic activity, more companies could fall into this category. We're closely monitoring these situations and believe they are manageable as these companies either have strong current liquidity, good underlying business performance or have strong financial sponsor support. We want to underscore that we have not increased PIK income to create interest coverage.

Speaker 6

As Tanner discussed, we We continue to believe that our focus on cash pay is a key competitive advantage. Importantly, MFIC benefits from MidCap Financial's large dedicated portfolio management team of nearly 60 investment professionals, which helps identify and address issues early. It is also important to note that MidCap Financial leads and serves as administrative agent on the vast majority of our deals, which provides meaningful downside protection. As agent, we are in active dialogue with the borrower and have enhanced information flow, which has allowed us to be proactive in resolving problem credits. Our non accrual rate remains low, although one investment was placed on non accrual status during the quarter.

Speaker 6

As of September 30, Investments on non accrual status totaled $11,600,000 or 0.5 percent of the total portfolio at fair value. Looking ahead, we remain confident in credit quality of our portfolio. With that, I will now turn the call over to Greg to discuss our financial results in detail.

Speaker 5

Thank you, Ted, and good morning, everyone. Beginning with our financial results, net investment income per share for the quarter ended September 30, 2023 was 0.43 C and prepayment income were down compared to the prior quarter given the muted prepayment activity. As Tanner and Ted mentioned, PIK income remains very low, representing approximately less than 1% of total investment income for quarter, which is among the lowest amongst the BDCs. GAAP net income per share for the quarter was $0.46 which reflects a modest gain on our investment portfolio. Results for the quarter ended September 30, 2023 correspond to an annual return on equity based on net investment income of 11.3% and annualized ROE based on net income of 12.2%.

Speaker 5

MFIC's NAV per share was $15.28 an increase of $0.08 or 0.5 percent from the June quarter.

Speaker 2

The $0.08

Speaker 5

increase reflects net investment income of $0.43 which is 0.05 Details on the net gain are shown on Slide 16 in the earnings supplement deck. Total expenses for the quarter were 40,300,000 up slightly compared to last quarter due to higher interest expense and G and A. Management fees totaled Was reduced to 1.75 percent on equity beginning January 1, 2023. Among listed BDCs, MFIC's management fee is the only we are the only listed BDC to charge management fees on equity, which we believe provides a better alignment and focus on net asset value. Gross incentive fees totaled $5,900,000 for the quarter ended September 30, 2023.

Speaker 5

As a reminder, our incentive fee is 17.5% on NII and includes a total return hurdle return with a 12 quarter look back. From the balance sheet perspective, our net leverage ratio stood at 1.4 times as of September 30, 2023 compared to 1.4 times as of June 30, 2023 reflecting the $43,000,000 of net repayments during the quarter and the increase in net assets from retained earnings and a modest gain in the portfolio. As you may have seen in the 8 ks filed on November 3, MFIC closed its 1st CLO transaction in early November, enhancing our liquidity position, long term financing and diversifying our sources of funding at an attractive cost. We priced a 12 year $402,000,000 CLO called MFIC Bethesda 1 CLO and sold the Class A. One notes, which represent 58 percent of the total capital structure, raising $238,000,000 at a cost of So for plus 2.40 basis points.

Speaker 5

MFIC retained the remaining notes. For avoidance of doubt, the CLO will be consolidated on MFIC's balance sheet. The CLO has a reinvestment period of 4 years. The net proceeds from the CLO transaction were used Prepaid borrowings under our revolving credit facility. MFIC benefited from MidCap Financial and Apollo's experience and expertise in CLO management and structuring this transaction.

Speaker 5

The CLO market may continue to be attractive source of to execute the mergers. This concludes our prepared remarks, and please open up the call to questions.

Operator

Thank And our first question will come from Maxwell Frikshire with Truist Securities.

Speaker 7

Good morning. I'm calling in for Mark Hughes today. One of your competitors mentioned a compression in spreads in the quarter And this coupled with rates kind of staying where they are, might point to a peak in yields for the cycle. Is this something you're seeing? I I know you mentioned a widening in 3Q for you, but can you expand upon that thought?

Speaker 4

Yes, sure. Thanks, Max. We would echo and or we're seeing something similar. If you look at the spread at which we've been able to deploy over the last Couple of quarters, it's been high 6s, which was likely not sustainable and has in the current market environment and What we are screening deals at right now has come in a bit from that depending on obviously situation specific. But notwithstanding, we would observe that the market still remains broadly lender friendly, while having compressed slightly from that higher 6s and documentation still remains Lender friendly, and so still an attractive environment for deployment.

Speaker 7

Got it. Thanks. And in regards to credit quality, you had mentioned Cost cutting, but are you seeing any portfolio companies forgo, a CapEx activity In order to keep the cushion there.

Speaker 4

I think that it's hard to Say specifically with respect to every company, but if you just do simply the math and the level at which base rates have increased, It's quite obvious that the amount of excess cash flow above interest expense is less. And so We I think it's just math that there's less capital to be redeployed. Notwithstanding with With our covenant packages and our ability to negotiate, we Still see credit quality as remaining broadly stable and the companies notwithstanding Having less cash to invest in their businesses still at a level that supports our debt consumptions across our portfolio.

Speaker 6

Yes. And I would just add to that, that With higher base rates, as Tanner mentioned, companies and their sponsors are having to make capital allocation decisions. And So one of the benefits of having a largely sponsor backed portfolio is that the underlying businesses are tight on cash and there are attractive investment The sponsors have equity capital to support those types of investments.

Speaker 7

That makes sense. Thank you all.

Operator

Thank you. Our next question will come from Kenneth Lee with RBC Capital Markets.

Speaker 3

Hey, good morning and thanks for taking the question. Just one in terms of the mergers and the outlook there. I think in the prepared remarks, you said that it could be ROE and NII accretive. Just want to see longer term, what's the outlook for ROE improvement there post mergers? Thanks.

Speaker 2

Once we've done sort of the full rotation, it's sort of like the expected yield over a cycle. The ROE is About depending on sort of like $0.07 to $0.10 a share accretive, I think over annualized. Again, the reason why I'm sort of hesitating a little bit is that things rates drive a lot of it, right, sort of timing and obviously sort of time and deployment as well. But the just on sort of like apples to apples basis from a based on just deploying this capital at the same yields With the expected sort of cost savings, it's about $0.10 accretive.

Speaker 3

Got you. Got you. Very helpful there. Very helpful there. And then in terms of the potential portfolio rotation out of the broadly syndicated loans, What sort of timeframes are you thinking about in terms of rotating?

Speaker 3

And it sounds as if it's being rotated during the normal course of business, but just want to see what kind of time frames you're talking about and whether there's any potential factors that could either accelerate Or impact the time there? Thanks.

Speaker 2

Yes. I mean, we have sort of again like sort of our base case is 3 to 5 quarters will be rotated out and we would expect to rotate out of those names. Obviously, when they refi, they'll be redeployed. And then separately, we And then separately, we'll as we said, this transaction Creates investment capacity, just from the different leverage ratios. So we will be able to sort of immediately start investing and sort of, If you will, rotating and then we will sort of sell broadly syndicated loans depending on sort of obviously the market and also our need for But if you talk sort of the redeployment of the non directly or direct originated In the closed end funds combined with the excess capacity, that's about $700,000,000 or $800,000,000 And so a couple of $100,000,000 a quarter of which the BSL would then be redeployed in that 3 to 5 month timeframe and It's all subject to sort of the tax free nature of the transaction, which sort of drives some of the timing.

Speaker 5

And I think that we would also expect that between now and the closing of the merger that Given the AFT and AIF portfolio management strategy that there will be more direct origination assets on their books Close, which will make the timeframe of the rotation slightly accelerated into 2020

Speaker 2

And just to be clear, like that's how they were operating. So we expect them to continue operating that way.

Speaker 3

Got you. Very helpful there. Thanks again.

Operator

Thank you. Our next question comes from Kyle Joseph with Jefferies.

Speaker 8

Hey, good morning, guys. Thanks for Apologies if any of this is covered. Sorry, I've been juggling a bunch of earnings. But yes, on the mergers, just Obviously not that familiar with the other two vehicles, but I guess why now and then why both? Is it just one of those things where if you're remodeling your house, it make And then post merger, any comments on What pro form a leverage is going to look like?

Speaker 8

Apologies, I didn't see that. And then any change to kind of your longer term targets on leverage once you guys are a

Speaker 2

Well, I would say the reason why it's both is because like the industrial logic for 1 So they're similarly situated and sort of the opportunity is the same. Why now sort of broadly versus Previously is that as I think those of you who have sort of covered us for a while, The stability and the profile of MFIC has improved quarter over quarter steadily and we're further along In our process, so the value, if you will, of that franchise has reached a point where we think it's it creates a pretty easy mathematical appeal for all shareholders. And so that's why sort of the time That's right. And so and you see that in sort of the relative stock prices where they've been sort of in the most recent Time periods. So, yes, so that's why.

Speaker 2

But like we said, one is not contingent on the other because the industrial logic for each Makes sense. But we as we stated for years now, our investment opportunities well exceed the capital available to us. Our ability to deploy it into the strategy is robust. And if we've had said there were 4 of

Speaker 7

them, we would have done 4, we do have 4 of

Speaker 2

So that answers that part. In terms of sort of leverage, I mean, we don't think there's a meaningful change to our strategy. Obviously, More liquidity, we think enhances sort of the and more scale, It enhances sort of the overall value of the business and that could change sort of how rating agencies see us and debt providers see us, etcetera. And so we're always sort of aware of how we drive our

Speaker 5

Yes. And then Kyle, initially out of the box, we'll have a lower leverage and then build back up to our target That we've given everyone.

Speaker 8

Yes, got it. That all makes sense. And then probably Question for Tanner, I think some in the industry were doing optimistic for kind of a post Labor Day pickup in deal Obviously, macro didn't necessarily cooperate, but just give us your expectations for the remainder of the year And kind of what your sense for deal flow into 2024 recognizing there's a lot of moving pieces with the economy right now.

Speaker 4

Yes, absolutely. Thanks, Kyle. I think that we did see an increase in activity kind of post Labor Day. As you know, there's a gestation period for the loans that we're And so ultimate, you're executing on those transactions can be delayed. And certainly, in the upper part of the middle market, it's also influenced by what you see in So notwithstanding, I think overall, the reasons for relatively muted deal activity are still there Doing with those portfolio companies that have been sitting on their balance sheets for or sitting within their portfolio for a longer period of time.

Speaker 4

But we do believe that the back half of the year will reflect an increase relative to what we saw earlier in the year, but still at a relatively muted. I think when you get more conviction around, I think when you get more conviction around the volatility, so higher interest rates are definitively and objectively more difficult. But I think when sponsors and other owners are making those capital allocation decisions, The volatility also is just as painful. And so even if we do sort of get more conviction that We're at these higher rates. I think that's going to be the type of thing that could catalyze more activity.

Speaker 4

And then the final point I'd make there, as We have and our peers have stated is one of the tremendous benefits that we have that we believe over the next several years is there's still A tremendous amount of private equity dry powder, in some estimates as much as $2,000,000,000,000 And so even if you see kind of muted activity continuing through the rest

Speaker 5

of this year, we do see a

Speaker 4

lot of opportunity as that capital will get utilized in the remainder of its investment period.

Speaker 8

Very helpful. Thanks for answering my questions.

Operator

Thank you. Our next question comes from Arren Cyganovich with Citi.

Speaker 2

Thanks. I was just wondering if you could talk a little

Speaker 5

bit about the closed end funds management in the assets or how familiar you are With them, was your team responsible for managing those assets or is it a different subset of folks at Apollo?

Speaker 2

It's a different subset of folks, but let me sort of like break that down. Like the broadly syndicated sort of CUSIP strategy is run by the performing credit team, which everybody sits it used to I could have said Of course, COVID sets together, now they sit together virtually, but that's run by the performing credit They're directly originated loans is part there's no overlap with our loans because that's part of what we call the large market direct lending strategy, but the origination of those loans or our go to market strategy is consolidated, We call in sponsors across the board and then we originate them. So it's sort of like the if you will like the sort of The template of the type of transactions we like to do, they're governed some by sort of market forces for much larger companies versus middle market company, but the approach to the market is very similar. And so the strategy with regard to those loans, I would say, Is very similar. Again, it's different people, but same process.

Speaker 2

And

Speaker 4

so

Speaker 5

Do you work on the same investment committee or do you have separate investment committees?

Speaker 2

There are separate investment committees for the approval for 1 or the other. But again, like remember when we fund these loans, These loans are spread amongst a lot of vehicles in every case, large market and the mid capital market loans. And so there are often multiple investment committees for the same loan across Apollo anyway, right? So when MidCap does a deal, for example, Like that's approved at Navy Cap, it's separately approved at MMIC and then it's often separately approved in other places including some individually managed accounts that have their own approval process outside of Apollo. And so There is overlap amongst people, amongst many of those funds and many of these deals.

Speaker 2

In other words, they're sort of seen everywhere, but they are proved to be.

Speaker 5

Okay. And then from the rotation perspective, The broadly syndicated market tends to be early valuations tend to be a lot more volatile on a quarter to quarter basis. If you get into a period of volatility, what would the strategy be from that perspective? Would you just hold them until that volatility subsides? Or I don't know if necessarily if you'd want to sell them at losses to the extent that you were in that situation.

Speaker 2

Right. Well, so two things. I always say volatility means they go down. But if there's volatility up, that's different. Volatility down.

Speaker 2

Yes, so obviously, the NAV will be struck in the couple of days before closing. So obviously the day it closes, they will be valued where the market is on that day and it can either move up or down. And our intent is that We follow these names using sort of the Royal Wing. Apollo follows these names and we'll continue to own and follow these names broadly across the platform. So we will have a view on the underlying credit.

Speaker 2

And I think the thought process would be consistent with how Apollo would do it is that if the underlying credit is And there's volatility because of market changes we would not expect in the normal course to want to sell things for under the value we receive if the market's pricing So the basic answer is if there's volatility, we won't have a need for We can choose our deployment. We would not expect to sell for less than value because of trading vagaries. For in almost all cases.

Speaker 5

Okay, Got it. Well, congrats on the transactions. Thanks.

Operator

Thank you. Our next Question will come from Robert Dodd with Raymond James.

Speaker 9

Hi. Thanks for taking the questions. First of all, on the asset side. So Of the 183 on Slide 14 of the merger presentation, the 183 that's the DIRECTV originated stuff, That's not originated by MFIC. Would we expect that to also be rotated out Over again, normal course of business as well.

Speaker 9

I mean, it's not just the BSLs, right? If it was in the large market groups rather than in The MidPath, is that also going to be part of the cycle?

Speaker 2

No. Those will be part of sort of the core portfolio and Again, because they're directly originated as part of sort of the broad Apollo strategy and direct origination. So and obviously they're private credit, So they're not liquid anyway, but we would not expect those to be

Speaker 9

Are they going to be monitored By the MidCap team even though MidCap didn't originate them? Is that still monitored by the large market group?

Speaker 2

Yes, Monitored by the large market group, but just to be clear so you get a sense of how it works. MidCap manages the assets that are jointly held by both the MidCap, the private but there is oversight from MFIC for all of those assets. There's separate work being done and certainly much more involved than when Credit has sort of some changes, either upsizes or credit issues, watchlist, etcetera, led by Tanner and Ted's team. That will be the same on these credits except instead of MidCap doing the initial monitoring, Paolo will do the initial monitoring and then will flow through to our team. But we have the advantage obviously of knowing all the people and working next to all those people and having all the

Speaker 9

Got it. Thank you. On the liability side, if I can, I think Kyle asked the question about target leverage? If I look on Slides 14 And 15 tends to imply target leverage about 1.4. And I think mentioned that's the low end of Target range in the past, you said target range of 1.4% to 1.6%, but you prefer right now to our operator at the low end.

Speaker 9

Is the Explicit target range going to change if both the mergers occur? Or is the target range going to remain that $1.4 to $1.6 with a preference of where you operate depending on where The market cycle is.

Speaker 5

Yes, I think we're going to keep the leverage targets the same.

Speaker 2

Thank you.

Operator

Thank you. And our next question comes from Ryan Lynch with KBW.

Speaker 10

Hey, good morning. I think we touched a lot on the asset side this morning. My question revolves around the liability side. I see there are a couple of credit facilities in both of the I'm just wondering will though and they're pretty low cost, I think like 90 basis points plus over. Will those credit facilities Be brought over as part of the merger and how will this and how do you expect the liability structure to kind of look post merger Because if it's all drawn or if it's all kind of brought on via the shares And the drawing down the credit facility as you kind of mentioned in your slide deck, it reduces your unsecured debt to around 23%.

Speaker 10

Is that a level you guys are comfortable with longer term? Or will there also be something you think changes to the unstructured That portion of your liability structure kind of at some point post merger.

Speaker 5

Yes, I think as of the merger, we will be repaying those Credit facilities of AIF and AFT. I think if you look at those facilities today, they Primarily support the prior strategy of the funds for BSL Financings. And as the fund has gone into more direct origination, that cost of financing probably wasn't sustainable. I I think as you look at the combined entities, we do have plenty of capacity given the recent CLO issuance And we'll continue to evaluate where markets as interest rates change over the next 12 to 18 months. We'll look at the unsecured market.

Speaker 5

I think we're very familiar with it given Our non traded BDC, which we put a number of unsecured financings on and we'll watch that market. And Yes, but we want to efficiently look at the CLO market, which we think is very attractive for this asset class. And so I think we'll just continue to diversify our financing as we rotate the portfolio.

Speaker 10

Is there a minimum level of like as a percentage of your liability structure where you guys want to have unsecured liabilities at or is that not a consideration?

Speaker 5

I think from our point of view, We look at it as part of it, but I think we're looking at ROE and return to shareholders. And I think that that's our focus. And So I don't think we have a set target as of right now.

Speaker 10

Okay. That's all for me. I appreciate the time today and congrats on the merger.

Operator

Thank you. Our next question comes from Melissa Wedel with JPMorgan.

Speaker 11

Good morning. Given the proposed dividend, special dividend, as part of the mergers, Is it fair to think that there wouldn't likely be contemplation of any other special dividends to MFIC shareholders before closing.

Speaker 2

Right. I think that's right. I think that's it. We're going to operate in the normal course. I mean your question is in the normal course we may have paid a special dividend this year, but the expectation is that the special dividend that's Paid post consummation of the mergers will be the next special dividend beyond what our normal dividend policy is.

Speaker 11

Okay. Appreciate that clarification. And then in terms of the anticipated dampening effect On portfolio leverage post merger, again, understood nothing's approved yet. A lot of things have to happen, but given the effect on potential portfolio leverage. Does that give you any thought to sort of taking leverage above the lower end of your target range in the near term?

Speaker 11

And does the sort of opportunity set support That thought given what's out there to be deployed right now, but also what you're expecting in terms of repayment? Thank you.

Speaker 2

That's a really good question. I mean, obviously, our portfolio rotation, Once the merger closes, we have a certain timeframe. And if we could start that earlier by levering up our BDC, That it would accelerate that. However, we don't know if things are going to close. And so we're going to operate in the normal course.

Speaker 2

I think the opportunity We said we expect to be broadly similar today versus 6 months from now. As we said, things compress 2 months ago, but they widened to 2 months before that. So the answer is we expect to Within our range at all times except the day after the merger closes when we will be pushed down well below that range. And so there is some room in that range to lever up a little bit, but it's we are focused putting aside obviously So you

Speaker 4

know the

Speaker 2

legal requirement to operate in the ordinary course, but we also need to operate in the ordinary course because we don't nothing is guaranteed in the

Operator

Thank you. Thank you. At this time, we have no further questions in the queue. So I'd like to turn the floor back over to management for closing remarks.

Speaker 4

Thank you, operator. Thank you, everyone, for listening to today's call. On behalf of the entire team, we thank you for your time today. Please feel free to reach out to us if you have any other questions. Have a good day.

Operator

Thank you, everyone. This concludes today's Medcap Financial Investment Corporation call. You may disconnect your line at any time.

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