Q3 2023 MidCap Financial Investment Corp Earnings Call

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Good morning, and welcome to city mid cap Financial Investment Corporation conference call to discuss the announcement of the mergers as well as the results for the period ended September 30th 2023.

At this time, all participants have been placed in listen only mode.

The call will be opened for a question and answer period. Following the speakers prepared remarks.

If you would like to ask a question at that time simply press star one on north telephone keypad.

She would like to withdraw your question press Star two.

I will now turn the call over to Eva Fitbit, Boston Investor Relations manager for mid cap 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.

Any unauthorized broadcast in any form is strictly prohibited information about the audio replay of this call is available in our press release 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 merger the expected synergies associated with the mergers the ability to realize the anticipated benefits of the merger and our future operating results and financial performance are actors are actual results could differ materially from those implied or expressed in 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 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 Dot Midcap financial IC Dot com.

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 a merger agreement with a policy on your floating rate Fund, Inc, and Apollo Tactical income funding throughout today's call mid cap financial investment Corporation will be referred to as M. F. I see our policy on your floating rate fund.

Inc will be referred to as a F T and Apollo Tactical income Fund, Inc will be referred to as a F.

F T. Andy I asked me collectively referred to as the closed end fund them, if I C. A F G and H I suppose at a joint presentation outlining these transactions I'll never such a website, which has also been filed with the SEC and what you were referring to on today's call. Please note that any additional information regarding the proposed mergers and the participants in the solicitation.

Proxy in connection with matters, requiring a shareholder approval will be available in the joint proxy statement that M. S. C. A F G and H I F intends to file with the SEC in the coming weeks alongside the prospectus of MFC stockholders are urged to read the joint proxy statement slash prospectus when available as well as other documents filed with the SEC.

We've also posted a separate supplemental financial information package on our website related to F. <unk> results for the quarter.

Speaking on today's call are Howard withdraw executive Chairman Tanner Powell, Chief Executive Officer, Ted Mcnulty, President and Greg Hunt Chief Financial Officer additional members of the N F. IC 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 <unk> Executive Chairman Howard would draw.

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 shipped 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 merger of the three public vehicles managed by affiliates of Apollo Midcap financial.

That's been Corp, or and if I see has entered into a merger agreement with Apollo senior floating rate fund or a S T and Apollo tactical income.

Pursuant to which I S T NII as well emerging to MFC subject to shareholder approval and other customary closing conditions.

We believe that these transactions Mark an important next step in MF Ics evolution to becoming a leading pure play middle market P. D. C emerges will create a larger BDC with approximate $3 4 billion of total investments and approximately 215 portfolio companies once fully rotated into deployed in over $1 4 billion of net assets to be clear.

Mfa's investment strategy will not change as we go into the mergers. The combined company will focus on first lien floating rate loans to middle market companies, primarily source like midcap financial a leading middle market lender managed REIT affiliate of Apollo.

We believe the combined company will create significant value for all shareholders, which we've 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 will be both aro <unk> and NII per share accretive to all shareholders as we rotate the closed end funds lower yielding investments in the ordinary course.

Into higher yielding directly originated loans that align with and that's why seize investment strategy.

Moving to slide five there are significant financial benefits to shareholders related to the transaction and consideration of the closing of beach transaction, an affiliate of Apollo will make a special cash payment of 25 cents per share to each a F T or a shareholder of record as of the quoting closing date of the applicable transaction to 25 cents per share.

There is approximately equal to 15, 4% and 16, 7% at the Ftes NII, yes respective annualized dividend of one 7% of both of their respective NAV per share.

Following the closing of the mergers.

We will pay a cash dividend of <unk> 20 per share the exact record date for the special dividend will be determined by the board of directors based upon the timing of the closings of the mergers the specific tax characteristics of both a 25% cash payment from an affiliate of Apollo and 20 cents dividends from MFC has not yet been determined.

<unk> is providing additional support by reimbursing transaction expenses all merger related expenses will be reimbursed by name so either Paolo for each successful transaction.

Before I discuss the merchant in greater detail I would like to provide some background information on a F. T. An eye out for those of you who may not be familiar with these costs. Please turn to slide six of the presentation.

F T N a S. R. Both listed closed end funds registered under the investment Company Act of 1940 and managed by an affiliate of Apollo.

Hey, F T N. A S commenced operations on February 26, 2011, and February 25, 2013, respectively. The closed end funds are subject to a 300% minimum asset coverage requirement on debt as of September 30th 2023, a F. T N. A S had net assets of approximately 234 million and two.

112 million, respectively, or $446 million on a combined basis, the fair value of F. T. N. A S portfolios were $3 $46 million, and 311 million, respectively or $656 million on a combined basis.

Directly originated loans make up about 23% and 33% of <unk> and I am quite bullish 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 day, I guess slides 33, and 34 in the presentation of additional information.

On the closed end funds for those of you on the call, but maybe new to MF I see them as I see it as a listed BDC focus on investing in first lien top of the capital structure loans to middle market companies sourced by Big Cats and agile.

Let me briefly describe some of the key terms of the transactions. If you are following along please refer to slide seven in the presentation.

F T N a I asked will merge with and into MFC into stock for stock transaction with shares to be exchanged on a NAV for NAV basis mergers will result in an ownership split up the combined company proportional each of M. S. Ics at Ts Eliot's respective net asset value.

A F T N a S shareholders will receive newly issued shares of common stock I don't know if I see based on the ratios of their respective net asset values per share divided by MSI sees net asset value per share determined shortly before the closing of beach merger as I mentioned in consideration of the closing of Beach transaction, an affiliate of Apollo will make a special cash payment.

<unk> 25 per share to each AFP or a I F shareholder of record as of the closing of each transaction and following the closing of the mergers the combined Oh, sorry, and following the closing the merger the combined company will pay a special cash dividend of <unk> 20 per share M.

I'm F C will be the surviving entity and will continue to trade under the ticker symbol <unk> on the NASDAQ Global select exchange all current MFC office indirectly going to remain in their current position.

Transactions are intended to be treated as attach rate reorganizations prior to the merger dates N. S. C. A F T NII, yes intend to operate in a normal course, including declaring regular distributions move.

Moving to slide eight for illustrative purposes based on net asset values for MFA C. A F T N Aif as of September 30.

2023, and as I see what issue approximately quite 9849 shares of its common stock for each a F. T sure and point 90 577 shares of its common stock for T. J I am sure.

Both transactions closed this would result in a pro forma ownership split at the combined company a 69% for current MFC shareholders, 16% for current F T shareholders and 15% for current Aif shareholders.

Slide nine of the presentation shows the total consideration to be paid to a S. A N. A S shareholders in respect to a S. T. A N a S shares in connection with the closing of the applicable transaction, which includes shares of common stock of M. S. ICD and the special tax payments somebody affiliate of Apollo.

Moving to slide 10, after both transaction close MFC will have greater scale and more earnings power not as that's what increased by approximately 43% in the investment portfolio will increase by a similar percentage, we expect to MFA sees our or we 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 companies can body Kurt the combined company's current G&A are approximately three cents per share annually based on pro forma.

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, I'll be in Pip the anticipated larger market capitalization to the combined company and they brought in the University of potential investors increased 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 deal just concerns typically associated with mergers about affiliate 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.

She'll help facilitate a seamless rotation in the ordinary course into directly originated assets that align with M. S. Ics investment strategy moving to slide 14 on a combined basis. The closed end funds have approximately $656 million of assets of which $183 million or in directly originated assets that the combined company and 10.

To hold until maturity or repayment, we intend to rotate the remaining 474 billion of liquid assets into higher yielding directly originated loans in the ordinary course.

In addition, the merger's unlock approximately $330 million of incremental asset capacity due to MFA sees lower minimum asset coverage requirement, which we intend to deploy into directly originated loans pro forma we expect MFA seeds portfolio will total approximately $3 $4 billion, an increase of approximately 1 billion with over.

94% invested in direct origination merck's 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 had sufficient capacity.

Before years before turning the call over to Tanner I would like to just stop 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. A M. S. N S. C will need to approve the issuance of <unk> and that's I see common stock in connection with the mergers no. The mergers of a F T with M F I see yeah.

M S I see well not be contingent on each other in other words, it's MFC shareholders approved the issuance of new shares in connection with both transactions, but shareholder approval from only one of the closed end funds is obtained M. S. I see well only merge with that closed end funds, but not the other we expect the merger to close in the first half of 'twenty 'twenty four sub.

Direct to shareholder approval and satisfactory 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 Mfa's. These results for the third quarter.

Thank you Howard and good morning to everyone first let me Echo Howard's comments, we're excited about the future of the combined company and we look forward to completing these mergers in a timely manner.

After our of your results for the quarter, Ted will cover our investment activity and portfolio and will also provide an update on credit quality. Greg will 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 32023, which we believe demonstrate the value of the MFA sees 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 multiyear focus on investing in 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 until sourced by Midcap financial our thesis was simple a well diversified portfolio of true first lien top of the capital structure loans to middle market companies would produce stable returns for our shareholders even in challenging operating environments.

Ted will discuss later, we continue to see our corporate lending portfolio company has demonstrated an ability to grow both revenue and earnings despite the more challenging operating environment, which we believe reflects midcap financials position as a leading middle market lender.

Results for the quarter ended September 30th reflect strong net investment income an increase in net asset value and stable credit quality. The net investment income per share for the quarter ended September 32023 was 43 cents well above the current 38 cent dividend as we continue to see the benefit.

Net of higher base rates on our floating rate assets. 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 three <unk> 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 amongst bdcs.

F. Six 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 30th Pik income represented less than 1% of total investment income. We believe cash revenue is an important data point for evaluating our bdcs quality of revenue and true dividend coverage.

As of September 30th 2023, and <unk> NAV per share was 15 28, an increase of eight cents from June 30th 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 lending portfolio as our underlying borrowers have largely been able to handle higher interest costs. As a reminder, our corporate lending and other portfolio, which makes up 92% of our total portfolio primarily.

Our first lien top of the capital structure loans is well diversified by borrower and the industry is largely sponsor backed and has what we considered a bleed considered to be lender friendly documentation and financial covenants as.

As of September 32023, nine.

96% of our corporate lending.

That portfolio on a cost basis had one or more financial covenants. We also continued to focus on improving the right side of our balance sheet post quarter end, we closed on M. S. Ics first CLO transaction to enhance our capital structure, which Greg will discuss in greater detail.

Turning now to the market environment, New new issue leverage loans continued to rebound driven by recent refinancings and repricing. Despite ongoing concerns about inflation higher interest rates and fears about recession general risk sentiment improved as evidenced by our sustained secondary market rally and higher investor demand, we still see sponsors, particularly.

Those focused on the middle market seeking financing.

<unk> 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 increases moderate we anticipate deal activity will pick up as markets begin to recover.

Moving to the dividend our approach to dividends seeks to provide shareholders with an attractive current yield while also retaining some earnings for NAV stability and growth Accordingly, our board of directors declared a dividend up <unk> 38 per share to shareholders of record as of December 12, 2023 payable on December 28, 2023 of 30.

Eight cent dividend represents an annualized dividend yield of approximately 10% on M. S. Six NAV per share.

As of September 30th at current base rates, we are well positioned to generate net investment income and access of this dividend M. F. Ice's Board and management team will continue to evaluate potential dividend increases versus retaining earnings with that I'll turn the call over to Ted.

Thank you Tara and good morning, everyone, beginning with investment activity as a reminder, M. F. I see is focused on investing in loans sourced by mid cap financial an affiliate of Apollo Global which provides M. S. C with a large pipeline of investment opportunities mid cap financial has a leading middle market lender with one of the largest direct lending teams in the U S with close to 200 <unk>.

My professionals mid cap financial was active during the quarter ended September 30th 20, twenty-three closing approximately $3 1 billion in new commitments.

During the quarter M F I see 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 8 million all first lien across nine different borrowers for an average new commitment of $2 2 million as we continue to.

Focus on diversification by borrower 60.

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 spread on new commitments was 672 basis points with an average of idea of approximately 218 basis points. This translates into a very attractive weighted average yield of approximately 12, 5%.

Assuming a 5% base rate.

The weighted average net leverage of new commitments was two seven times, we have a strong pipeline of investment opportunities in the month of October we closed approximately $38 million of new commitments.

In terms of funded investment activity gross fundings, excluding revolvers for the corporate lending portfolio totaled $16 million repayments totaled 58 million.

Never Boulder activity was de Minimis in aggregate net repayments for the quarter totaled $43 million.

Turning to our investment portfolio at the end of September our portfolio had a fair value of 2.37 billion and was invested in an up 149 companies across 25 industries corporate lending and other represented approximately 92% of the total portfolio and merck's accounted for 8% of the total portfolio on a fair value basis 90.

5% of our corporate lending portfolio is first lien.

The weighted average yield at cost of our corporate lending portfolio was 12% on average for the quarter ended September 30th 2023 up from 11, 7% last quarter driven by an increase in base rates and a slight increase in the average spread the weighted average spread on the corporate lending portfolio was 621 basis points up seven.

Basis points compared to the quarter ended June 30th 2023, we.

We continue to have conservative weighted average net leverage and attachment points on our corporate loans, a 5.44 times and 0.1 times respectively.

At September 30th 2023, the average funded corporate lending position was $15 2 million or approximately 0.7% of the total corporate and other lending portfolio M.

M. A C is focused on lending to the core middle market, where mid cap financial has strong long standing relationships with sponsors and borrowers and a proven track record across cycles as of September 30th 20, twenty-three. The median EBITDA of M. S. Icd's corporate lending portfolio of companies was approximately 54 million, we believe the core middle market offers attractive.

<unk> of investment opportunities across cycles, and does not compete directly with either the broadly syndicated loan market or the high yield market.

Yes.

As discussed previously we are focused on reducing our investment in merck's, while we don't expect paydowns to occur evenly we believe aircraft sales and servicing income should allow for the pay down of third party debt and M. S. Ics investment in Merck's overtime as of September 32023, our investment in merck's totaled $195 million representing a.

Approximately 8% of the total portfolio at fair value.

As a reminder, Merck started the year with 57 planes and as the as of the end of September Merck's own 39, aircrafts, which reflects three aircraft that were sold during the quarter.

Three planes were sold for approximately our June 30th value and the cash proceeds were used to pay down debt, thus, providing additional derisking to the remainder of our merck's investment.

Turning to credit quality, our portfolio of companies continue to have solid fundamental performance with positive revenue and EBITDA growth, we're 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 pick up and amendment activity.

We believe our credit quality has benefited from mid cap financial strong sourcing and underwriting capabilities based on data since 2016, which was the approximate date upon which we began utilizing our co investment order M. F. Ice's net realized and unrealized loss rate on loans sourced by mid cap financial has extremely low at approximately two basis points on an annualized.

Moving to interest coverage the weighted average interest coverage ratio was one nine times down from 2.1 last quarter with four companies below one.

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 pick income to create.

Interest coverage was 10 or discussed we continue to believe that our focus on cash pay is a key competitive advantage.

Accordingly M F I see benefits from Midcap financials 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're in active dialogue.

With the borrower and have enhanced the 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 as of September 30th investments on nonaccrual status totaled $11 6 million or 0.5% of the total portfolio at fair value. Looking ahead, we remain confident in the credit quality of our portfolio with that I'll now turn the call.

Over to Greg to discuss our financial results in detail. Thank.

Thank you Ted and good morning, everyone, beginning with our financial results net investment income per share for the quarter ended September 32023 was 43 C.

Fee and prepayment income were down compared to the prior quarter, given the muted prepayment activity as Tanner and Ted mentioned pick income remains very low representing approximately less than 1% of total investment income for the quarter, which is.

The lowest amongst the Bdcs GAAP net income per share for the quarter was 46 cents, which reflects a modest gain on the on our investment portfolio results for the quarter ended September 32023 correspond to an annual return on equity based on net investment income.

A 11, 3% and annualized ROE based on net income of 12, 2%.

M S Ics NAV per share.

Was $15 28, an increase of eight cents or a half a percent from the June quarter. The eight cents increase reflects net investment income of 43 cents, which is five cents above the 38 cents distribution and a three <unk> per share net gain on the portfolio.

Additional details on the net gain are shown on slide 16 in the earnings supplement deck.

<unk> expenses for the quarter were $40 3 million up slightly compared to last quarter due to higher interest expense and G&A.

Management fees totaled $4 4 million essentially flat compared to the prior quarter as a reminder, M. S. Ics base management fee was reduced to 1.75% on equity beginning January one 2023.

Among listed Bdcs M. S. Ice's management fee is the one 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 9 million for the quarter ended September 32023, as a reminder, our incentive fee is 17, 5% on NII and includes.

A total.

Return on a total return hurdle return with a 12 quarter look back.

From the balance from a balance sheet perspective, our net leverage ratio stood at 1.4 times as of September 32023, compared to 1.4 times as of June 32000, Twenty's range, reflecting the 43 million 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-K filed on November.

November 3rd M. F. I see closes first CLO transaction in early November enhancing our liquidity position with long term financing and diversifying our sources of funding at an attractive cost we price a 12 year 402 million CLO.

<unk> M F I see Bethesda, one CLO and sold the class a one notes, which represent 58% of the total capital structure raising $238 million at a cost of sofa, plus 240 basis points and then if I see retained the remaining notes for avoidance of doubt the cielo will be.

Consolidated on M. S. Icd's balance sheet CLO has a reinvestment period of four years. The net proceeds from the CLO transaction were used to prepay borrowings under our revolving credit facility M. F. I see benefited from benefited from Midcap financial and policy experience and expertise in Cielo man.

<unk> mint in structuring this transaction the CLO market may continue to be attractive source of future financing for them. If I see as Howard mentioned, we have sufficient capacity under our existing credit facility to execute the Americas. This concludes our prepared remarks and please open up the call to questions.

Thank you.

At this time, if you would like to ask a question. Please press the star and one Keith on your telephone keypad.

You may remove yourself from the queue at any time by pressing star Q.

Once again that is star one to ask a question.

Our first question will come from Maxwell Fritcher with truly securities.

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 New York for the cycle is this something you're seeing.

You mentioned a widening in through Q for you, but can you expand upon that thought.

Yeah sure. Thanks Max.

We would we would echo and <unk>, we're seeing something similar if you look at.

This spread at which we've been able to deploy over the last couple of quarters. Its been high sixes, which was a 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 we would observe that the market still remains broadly lender friendly while having you know.

Compressed slightly from that are you know higher six is <unk>.

And documentation.

It still remains a lender friendly and so it's still at an attractive environment for deployment.

Yeah.

Got it thanks and in regards to credit quality, you had mentioned cost cutting but are you seeing any portfolio companies for go.

Capex activity.

In order to keep a cushion there.

I think that you know it it it's hard to say specifically with respect to you know every every company, but if you just do simply the math and that the the level of wage base rates have increased.

It's it's it's it's quite obvious that the amount of excess cash flow above our interest expense is less and so we you know I think it's just math that there's there's less capital to.

To be be redeployed, notwithstanding you know with our covenant packages and our ability to.

And negotiate a we still see.

Credit quality is as remaining broadly stable and in the company's notwithstanding having less cash to invest in their business is still at a level that supports our debt content across our portfolio.

I'll just add to that that you know with the 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 are is it the underlying businesses are tight on cash and there are attractive investment opportunities the sponsors.

Have equity capital to support those types of investments.

That makes sense. Thank you all.

Thank you.

Our next question will come from Kenneth Lee with RBC capital markets.

Hey, good morning, and thanks for taking my question.

Just one in terms of the mergers and the outlook there I think in the prepared remarks, you said that it could be Ro <unk> and NII accretive just want to see longer term, what what's the outlook for ROE improvement there post mergers. Thanks.

Uh huh.

The.

Once we've done sort of a full rotation it sort of like the expected yield over a cycle.

The Roe.

Ah.

About.

Right.

Pentagon sort of like a seven to 10 cents a share accretive I think over that over you know annualized.

You know again, the reason why I'm sort of hesitate a little bit as rates drive a lot of it right sort of timing and obviously, it's at a time of deployment as well, but I you know the the you know the.

Just on sort of like apples to apples basis, you know a from a from a you know based on on just deploying this capital I had you know the same yields with.

The expected cost savings, it's a it's about 10 cents accretive.

Gotcha Gotcha very helpful. There very helpful. There and then in terms of the potential portfolio rotation out of the broadly syndicated loans.

What sort of time frames, Oh are you thinking about in terms of rotating in and it sounds as if it's being rotated out.

The normal course of business, but just wanted to see what kind of Timeframes that you were talking about and whether there's any potential factors that could either accelerate.

Or impact at the time there. Thanks.

Hi, Yeah, I mean, we we have sort of again like sort of our base case is that you know three to five quarters will be rotated out and we would expect to you know rotate out of those names obviously when they refi we will there'll be redeployed I, you know and that's and then separately.

Well.

As we said this transaction creates investment capacity you know just from the different leverage ratios. So we will be able to sort of immediately started investing in sort of if you will rotating and then we will sort of you know sell broadly syndicated loans, depending on sort of the obviously the market and also our need for.

Capitalized, we redeploy but if you talk sort of the redeployment of the.

The the non directly a direct originated loans in the in the closed end funds combined with the excess capacity, that's about seven or $800 million and so a couple of hundred million dollars a quarter of which the D. S. L would then be redeployed.

Hi.

Hi.

I read them redeployed.

In that three to five month time frame and then you know it's all you know, it's all subject to sort of the tax free nature of the transaction, which sort of drive some of the.

To try to drive some of the timing.

Yeah, and I think that we would also expect that between now and the closing of the merger that are given the F. T N a S.

Portfolio management strategy that there'll be more direct origination assets on their books at close.

Which will make the the timeframe of the rotation you know.

Slightly accelerated into 'twenty, four and 'twenty five yeah, just to be clear like that that's how they were operating so we would expect them to continue operating that way and that.

Yes.

Gotcha very helpful. There. Thanks again.

Thank you.

Our next question comes from Kyle Joseph with Jefferies.

Hey, good morning, guys. Thanks for taking my questions and apologies if any of this is kind of sad, but Canada and a bunch of earnings but yeah on the mergers just I'm honestly not that familiar with the other keys vehicles, but I guess why now why and then why why both or just one of those things where if you are remodeling your.

A house it makes sense to do both the top and bottom floor at the same time, rather than two separate projects and then post merger any comments on what pro forma leverage is going to look like if all of you then.

You can see that and then any change to your kind of your longer term targets on leverage once you got a combined entity.

Well I would say you know are.

The reason why it's both it's because like the industrial logic for wanted to fix it.

So the logic for the other you know so there is similarly, situated and sort of the opportunity is the same you know why now sort of broadly versus you know previously is that you know as as I think you know those of you who has covered us for a while you know that the stability in the profile of that.

And if I see has improved you know a quarter over quarter steadily and we're further along in our you know in our process. So that the you know the value. If you will of that franchise as you know.

<unk> reached a point, where we think it's you know it's it creates a pretty easy mathematical appeal for all shareholders and so you know that that's why I sort of the timing was right.

And so and you see that in sort of the relative you know stock prices, where they where they've been sort of in the most recent time periods.

So so yeah. So that's why everybody you know like like we said you know one is not contingent on the other you know because the industrial logic for each makes sense, but but but we as we stated you know for years now our investment opportunities well exceed you know the capital available to us our ability to deploy it into the strategy is.

Is it's robust.

We've had there were four of them, we would've done for it or we're doing it at four of them.

You know I. So 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 you know more liquidity, how do we think enhance its sort of the the and more scale.

Enhancing the overall value of the business and that you know could change sort of how rating agencies see us in that provider see us et cetera, and so we're always sort of aware of how we drive our strategy that way.

And Kyle initially out of the box on you know it will have a lower leverage and then build back up to you know our target that we've got.

Everyone.

Yeah.

Yep got it all makes sense and then probably a question for Tanner you know I think some time in the industry, we're getting optimistic for a kind of a post.

Post labor day pick up and in deal activity, obviously, a macro didn't necessarily cooperate but just give us your expectations for the remainder of the here and kind of your sense for deal flow into into 'twenty, four recognizing theres a lot of moving pieces with the economy right now.

Yeah, absolutely. Thanks, Kyle I think that we did see an increase in activity.

Activity, you know kind of post labor day as you know, there's a gestation period for the loans that we're making and so ultimate.

Executing on these transactions can can can be delayed and in certainly in the upper part of the middle market is also influenced by what you see in the syndicated markets. So notwithstanding I think overall you know the reasons for relatively muted deal activity are still there.

As sponsors are grappling with you know a different interest coverage ratios.

Ratios and how they lever business and what they're doing with those portfolio companies that had been sitting on their balance sheets for our sitting within their portfolio for a longer period of time, 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 at <unk>.

<unk> muted I think when you get more conviction around you know the volatility so higher interest rates are definitively and objectively more difficult, but I think when when when sponsors and other you know other owners are making those capital allocation decisions the volatility it also.

It 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 gonna be the type of thing that could catalyze more activity and then the final point I'd make there.

As you know we have and our peers have stated as one of the tremendous benefits that we have or that we believe over the next several years as there's still a tremendous amount of private equity dry powder.

Some estimates as much as two trillion and.

So even if you see you know kind of muted activity continuing through that the rest of this year, we do see a lot of opportunity as that capital will get utilized in the remainder of its investment period.

Very helpful. Thanks for answering my questions.

Thank you.

Our next question comes from Erin <unk> with Citi.

Thanks, I was just wondering if you could talk a little bit about the closed end funds management and 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.

It's a different subset of folks.

Any sort of like break that break that down like the broadly syndicated sort of you know CUSIP strategy is run by the performing credit team you know.

Which you know everybody sits at Houston, I Could've said before Covid sets together now they seem to get virtually but you know.

That's run by the performing credit team you know they are directly originated loans as part of its part there's no overlap with our loans because that's part of what we call. The large market direct lending strategy, but you know the origination of those loans or our go to market strategy is consolidated meeting.

We call them sponsors across the board and then we originate them. So it's sort of like that if you will like sort of the the the template of the type of transactions, we like to do their governance somebody sort of market forces for much larger car companies versus the middle market companies, but the approach to the market is very similar and so I you know the strategy with regard to those low.

Loans I would say is a very similar again, it's it's it's different people but.

Same process and you know so.

Do you work on this do you work on the same investment committee that you have separate investment community.

There are separate investment could have separate investment committees for the approval for one or the other but again like I remember when we fund. These loans. These loans are spread amongst a you know.

A lot of vehicles and in every case large market in the in the mid cap middle market loans and so there are often multiple investment committees for the same loan across Apollo anyway, right. So a win win win mid cap does a deal for example, like that's approved.

Separately are pretty good at math I see and then it's often separately approved in other places at Apollo, including some sing.

You know 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 in other words theres sort of seen everywhere, but they are approved differently.

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 with what would the strategy be for them from that perspective could you just hold them until the volatility subsides or.

I don't know if it necessarily that you'd want to sell them at losses to the extent that you were in that situation.

Right well, so so two things I always say volatility means that go down, but if there's volatility off that's different.

Utility down I I, yeah. So obviously you know the NAV will be struck the you know in a couple of days before closing. So obviously the day of close is they will be valued where the market is at that day in and can either move up or down and our intent is that we you know we follow these names me using sort of the Royal we Apollo.

All of 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 and I think the thought process would be consistent with how our power would do it is that the underlying credit is strong 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 at the markets.

Definitely.

So so the basic answer is if there's volatility we wont we wont have a need to liquidity. We can choose a good point that we would not expect to sell for less than value. Because it's you know training bakeries odd.

Okay.

For the frame for you know and in almost all cases.

Okay got it well congrats on the transaction.

Okay.

Yeah.

Thank you.

Our next question will come from Robert Dodd with Raymond James.

Oh, hi, Thanks for taking my questions on first of all on the on the asset side. So.

Of the 183.

Slide 14 of the presentation and one of the sweetest of dolecki originated stuff.

That's that's not originated by M. F. I see would we expect that to also be rotated out of.

Normal course of business as well I mean, it's not just the BSL it's Mike.

You know if it was sort of a change in a large market groups rather than a mess that they make.

We're also going to be part of the cycle.

No that will be those will be those will be part of sort of the core portfolio and and and again because they are directly originated as part of sort of a broad Apollo strategy in a direct origination so and obviously their private credit so they're not they're not liquid anyway, but we would not expect those to be.

Are they gonna be monitored by the mid cap team, even though we've kept it in the originated them.

Well, we'll be monitored by the large market.

Yeah monitor by the large part of it 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 company and MFC, but there is an oversight from M. S. I see for all of those assets are separate work being done and certainly much more involved in win win.

It's had sort of some changes either up sizes or credit issues watch list et cetera.

Led by Tanner and Ted's team that will be the same on these credits except instead of mid cap doing you know the initial monitoring Apollo will do the initial monitoring and then will flow through to our team, but we have the advantage. Obviously as you know knowing a lot of people in working next all those people and having all the history with those ones.

Got it thank you on the liability side of it too.

I think I'll ask the question about talking about the if I look on slide 14.

<unk> 15, it tends to imply target message about one one for Ken I think mentioned you know that's the that's the low end of the target range in the past you've said I'm talking about one four to one six.

That's why all played at the low end is the explicit target range going to change.

If if both of them are just you know OCA or at least the target range kind of a main that one four to one six with a preference a way you walk away, depending on where the market cycle.

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

Okay. Thank you.

Thank you.

As a reminder, that is star one to ask a question.

And our next question comes from Ryan Lynch with K E mailed to you.

Hey, good morning.

We've 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 and in both of the closed end funds I'm. Just wondering will do and they are pretty low cost like 90 basis points, plus sulfur well 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.

<unk> brought on and be you know to the.

The shares issued any and drawing down on our credit facility as you kind of mentioned in your slide deck.

Reduces your unsecured debt around 23% is that a level you guys are comfortable with a longer term or what else would be something you think changes to the structure or the unsecured debt portion of your liability structure kind of at some point post merger.

Yeah, I think as of the merger, we will be repaying those credit facilities of AI F and F T.

I think if you look at those facilities today are they you know pre.

Primarily support the prior strategy of the funds for D. S. L financings and as the fund has gone into more direct.

<unk> origination.

Cost of financing probably wasn't sustainable I think as you look at.

The combined entities and we do have plenty of capacity given the recent CLO issuance and we'll continue to evaluate.

Where markets you know as interest rates change.

Change them over the next 12 to 18 months, we'll look at the unsecured market I think you know we're very familiar with it given you know R.

Our non traded BDC, which you know we've put a number of an unsecured financings on and we'll watch that market and yeah, but we want to efficiently look at CLO market, which we think is very attractive for this asset class a and so I think we'll just continue to diversify our financing.

You know as we rotate the portfolio.

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.

No I think from from our point of view.

We look at it as part of it but I think we're looking at ROE.

And returned to shareholders and I think that that's our focus and you.

So I don't think we have a set target.

As of right now.

Okay.

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

Thank you.

Our next question comes from Melissa Wedel with JP Morgan.

Good morning.

Given the proposed.

Dividend special dividend and as part of the mergers that fair to think that there wouldn't likely be contemplation of any other special dividend and that might be shareholders. That's for clothing.

Right.

I think that's right I think that's where you know 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.

No this year, but the but the expectation is that the special dividend that's paid post the consummation of the mergers will be.

What will be the next special dividend beyond what our normal dividend policy is.

Okay I appreciate that clarification and then in terms of the anticipated a dampening effect on portfolio leverage post merger again understand nothing is approved yet a lot of things have to happen, but given the dampening effect on potential portfolio leverage does that give you any thought Houston.

Sort of taking leverage up.

On the lower end of your target range in the near term and does the sort of opportunities that support that.

That thought given you know what's out there can be deployed right now, but also what you're expecting in terms of repayments. Thank you.

That's a that's a really good question I mean, you know obviously you know our portfolio rotation.

Once the merger closes.

We have a certain time frame and if we could start that earlier by levering up our our BDC that it would accelerate bad. However, you know we don't know if things are going to close and you know so we're going to operate in the normal course, I think the opportunity set we.

We expect to be broadly similar to that.

Day versus six months from now you know as we said you know things compressed for two months ago, but they widened for two months before that so you know the answer is we expect to operate within a range and you know 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 will it's it's we our focus is putting aside.

You know obviously.

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

You know in the future.

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.

Yeah.

Thank you operator, and 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.

Yes.

Thank you everyone.

Concludes today's Midcap financial investment Corporation call you may disconnect your line at any time.

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Okay.

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