MidCap Financial Investment Corporation (NASDAQ:MFIC) Q2 2024 Earnings Call Transcript

MidCap Financial Investment Corporation (NASDAQ:MFIC) Q2 2024 Earnings Call Transcript November 8, 2023

Operator: Good morning, and welcome to the MidCap Financial Investment Corporation’s conference call to discuss the announcement of the mergers as well as results for the period ended September 30, 2023. [Operator Instructions]. I will now turn the call over to Elizabeth Besen, Investor Relations Manager for MidCap Financial Investment Corporation.

Elizabeth Besen: 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 MidCap Financial Investment Corporation and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our press 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 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.

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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 any forward-looking statements we make. We do not undertake to update our forward-looking statements or projections unless required by law. To obtain copies of our SEC filings, please visit either the SEC’s website at www.sec.gov or our website at www.midcapfinancialic.com. Yesterday, after market close, in addition to our quarterly earnings press release, we issued a joint press release announcing that MidCap Financial Investment Corporation has entered into merger agreement with Apollo Senior Floating Rate Fund Inc.

and Apollo Tactical Income Fund Inc. Throughout today’s call, MidCap Financial Investment Corporation will be referred to as MFIC. Apollo Senior Floating Rate Fund Inc. will be referred to as AFT and Apollo Tactical Income Fund Inc. will be referred to as AIF. AFT and AIF may collectively be referred to as closed-end fund. MFIC, AFT and AIF have posted a joint presentation outlining these transactions on their respective website, which has also been filed with the SEC, and which we will be referring to on today’s call. Please note that any additional information regarding the proposed mergers and the participants in the solicitation of proxies in connection with matters requiring shareholder approval will be available in the joint proxy statement that MFIC, AFT and AIF intend to file with the SEC in the coming weeks, alongside the prospectus of MFIC.

Stockholders are urged to read the joint proxy statement/prospectus when available as well as other documents filed with the SEC. We have also posted a separate supplemental financial information package on our website related to MFIC’s results for the quarter. Speaking on today’s call are Howard Widra, Executive Chairman; Tanner Powell, Chief Executive Officer; Ted McNulty, President; and Greg Hunt, Chief Financial Officer. Additional members of the MFIC management team are on the call and available for the Q&A portion. At this time, I’d like to turn the call over to MFIC’s Executive Chairman, Howard Widra.

Howard Widra: Thanks, Elizabeth, and thank you, everyone, for joining today’s call. I’ll begin with an overview of the mergers, including the strategic rationale. We will then shift to review the results for the quarter before opening the call to questions. Throughout my comments, I’m going to refer to the merger presentation, which is posted on our website. We’re excited to announce the mergers of 3 public vehicles managed by affiliates of Apollo. MidCap Financial Investment Corp., or MFIC, has entered into merger agreements with Apollo Senior Floating Rate Fund or AFT and Apollo Tactical Income Fund or AIF, pursuant to which AFT and AIF will merge into MFIC, subject to shareholder approval and other customary closing conditions.

We believe that these transactions mark an important next step in MFIC’s evolution to becoming a leading pure-play middle market BDC. The merger will create a larger BDC with approximately $3.4 billion of total investments in approximately 215 portfolio companies once fully rotated and deployed, and over $1.4 billion of net assets. To be clear, MFIC’s investment strategy will not change as a result of the mergers. The combined company will focus on first 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 fund’s 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. 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 AIF shareholder of record as of the closing date of the applicable transaction. The $0.25 per share is approximately equal to 15.4% and 16.7% of the AFT’s and AIF’s 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 MFIC 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 has not yet been determined. Apollo is providing additional support by reimbursing transaction expenses. All merger-related expenses will be reimbursed by an affiliate of Apollo for each successful transaction. Before I discuss the merger in greater detail, I would like to provide some background information on AFT and AIF for those of you who may not be familiar with these funds. Please turn to Slide 6 of the presentation.

AFT and AIF are both listed closed-end funds registered under the Investment Company Act of 1940 and managed by an affiliate of Apollo. AFT and AIF commenced operations on February 23, 2011, and February 25, 2013, respectively. The closed-end funds are subject to a 300% minimum asset coverage requirement on debt. As of September 30, 2023, AFT and AIF had net assets of approximately $234 million and $212 million, respectively, or $446 million on a combined basis. The fair value of AFT’s and AIF’s portfolios were $346 million and $311 million, respectively, or $656 million on a combined basis. Directly originated loans make up about 23% and 33% of AFT’s and AIF’s portfolios, respectively, or 28% on a combined basis. The balance of the portfolio primarily comprised of liquid assets, including broadly syndicated loans, high-yield bonds and structured products in the case of AIF.

Slides 33 and 34 in the presentation have additional information on the closed-end funds. For those of you on the call who may be new to MFIC, MFIC is a list of BDC focused on investing in first lien, top of the capital structure loans to middle-market companies sourced by MidCap Financial. Let me briefly describe some of the key terms of the transactions. As you are following along, please refer to Slide 7 in the presentation. AFT and AIF will merge with and into MFIC in 2 stock-for-stock transactions, with shares to be exchanged on a NAV-for-NAV basis. The mergers will result in an ownership split of the combined company proportional to each of MFIC’s, AFT’s and AIF’s respective net asset values. AFT and AIF shareholders will receive newly issued shares of common stock of MFIC based on the ratios of their respective net asset values per share divided by MFIC’s net asset value per share determined shortly before the closing of each merger.

As I mentioned, in consideration of the closing of each transaction, an affiliate of Apollo will make a special cash payment of $0.25 per share to each AFT or AIF shareholder of record as of the closing of each transaction and following the closing of the mergers. The combined — sorry, and following the close of the mergers, the combined company will pay a special cash dividend of $0.20 per share. MFIC will be the surviving entity and will continue to trade under the ticker symbol MFIC on the NASDAQ Global Select Exchange. All current MFIC officers and directors will remain in their current position. The transactions are intended to be treated as tax-free reorganizations. Prior to the merger dates, MFIC, AFT and AIF intend to operate in a normal course, including declaring regular distributions.

Moving to Slide 8, for illustrative purposes, based on net asset values for MFIC, AFT and AIF as of September 30, 2023, MFIC would issue approximately 0.9849 shares of its common stock for each AFT share, and 0.9577 shares of its common stock for each AIF share. Assuming both transactions close, this would result in a pro forma ownership split of the combined company of 69% for current MFIC shareholders, 16% for current AFT shareholders, and 15% for current AIF shareholders. Slide 9 of the presentation shows the total consideration to be paid to AFT and AIF shareholders in respect to their AFT and AIF shares in connection with the closing of the applicable transaction, which includes shares of common stock of MFIC and the special cash payment from the affiliate of Apollo.

Moving to Slide 10. After both transactions close, MFIC will have greater scale and more earnings power. Net assets will increase by approximately 43% and the investment portfolio will increase by a similar percentage. We expect MFICs ROE will increase given the increase in the portfolio yield and cost synergies, among other drivers. Moving to Slide 11. We expect the combined company to realize operational synergies by the elimination of certain duplicative expenses. We have estimated annual savings of approximately $3.1 million per year, which is a decrease of approximately 16% from the combined company’s current G&A or approximately $0.03 per share annually based on 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, the anticipated larger market capitalization to the combined company may broaden the universe of potential investors, increase stock liquidity, and create the potential for additional equity research analyst coverage. Moving to Slide 13. These transactions are mergers of 3 funds managed by affiliates of Apollo, which mitigates the diligence concerns typically associated with mergers of unaffiliated entities. As you can see, the closed-end portfolios are primarily comprised of broadly syndicated loans and high-yield bonds. These assets are owned through the Apollo platform, which will help facilitate a seamless rotation in the ordinary course into directly originated assets that align with MFIC’s investment strategy. Moving to Slide 14.

On a combined basis, the closed-end funds have approximately $656 million of assets, of which $183 million are in directly originated assets that the combined company intends to hold until maturity or repayment. We intend to rotate the remaining $474 million of liquid assets into higher-yielding directly originated loans in the ordinary course. In addition, the mergers unlock approximately $330 million of incremental asset capacity due to MFIC’s lower minimum asset coverage requirement, which we intend to deploy into directly originated loans. Pro forma, we expect MFIC’s portfolio will total approximately $3.4 billion, an increase of approximately $1 billion. With over 94% invested in direct origination and Merx decreasing to less than 6% of the total portfolio.

Moving to Slide 15. As you can see, we have sufficient debt financing in place to execute these transactions. We estimate that the transactions will require approximately $600 million of debt based on the expected increase in net assets, and our revolving credit facility has sufficient capacity. Before turning the call over to Tanner, I would like to discuss the expected time line for the transactions. In order to consummate each merger, shareholders of each closed-end fund will need to approve the mergers and shareholders of MFIC will need to approve the issuance of MFIC common stock in connection with the mergers. Note, the mergers of AFT with MFIC and AIF with MFIC will not be contingent on each other. In other words, if MFIC shareholders approved the issuance of new shares in connection with both transactions, but shareholder approval from only one of the closed-end funds was obtained, MFIC will only merge with that closed-end fund, but not the other.

We expect the mergers to close in the first half of 2024, subject to shareholder approval and satisfaction of other customary closing conditions as outlined in the merger agreement. In conclusion, we believe the proposed mergers are compelling opportunities for shareholders of all 3 funds. And we believe now is the opportune time to merge these 3 companies. I will now turn the call over to Tanner to review MFIC’s results for the third quarter.

Tanner Powell: 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 of the 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 closed, 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 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 into loans 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. As Ted will discuss later, we continue to see our corporate lending portfolio companies 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 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. The net investment income per share for the quarter ended September 30, 2023 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 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 $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, PIK income represented less than 1% of total investment income. We believe cash revenue is an important data point for evaluating 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 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 consists of first lien, top of the capital structure loans is well diversified by borrowers in the industry, is largely sponsor-backed, and has what we consider to be lender-friendly documentation and financial covenants. As of September 30, 2023, 96% of our corporate lending debt portfolio on a cost basis had one or more financial covenants. We also continue to focus on improving the right side of our balance sheet.

Post quarter end, we closed on MFIC’s first CLO transaction to enhance our capital structure, which Greg will discuss in greater detail. Turning now to the market environment. New issue leveraged loans continue to rebound, driven by refinancings and repricings despite ongoing concerns about inflation, higher interest rates, and peers of that recession. General risk sentiment improved as evidenced by a sustained secondary market 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 increases moderate.

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. Accordingly, our Board of Directors declared a dividend of $0.38 per share to shareholders of record as of December 12, 2023, payable on December 28, 2023. A $0.38 dividend represents an annualized dividend yield of approximately 10% on MFIC’s NAV per share 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 continue to evaluate potential dividend increases versus retaining earnings. With that, I will turn the call over to Ted.

Ted McNulty: 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 one of the largest direct lending teams in the U.S. with close to 200 investment professionals. MidCap Financial was active during the quarter ended September 30, 2023, closing approximately $3.1 billion in new commitments. 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 $19.8 million, all first lien, across 9 different borrowers for an average new commitment of $2.2 million, 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 spread on new commitments was 672 basis points with an average OID 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 2.7x. 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, and our revolver 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 149 companies across 25 industries. Corporate Lending and other represented approximately 92% of the total portfolio, and Merx accounted for 8% of the total portfolio on a fair value basis. 95% of our corporate lending portfolio was first 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.

The weighted average spread on the corporate lending portfolio was 621 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 in our corporate loans of 5.44x and 0.1x, respectively. As of September 30, 2023, the average funded corporate lending position was $15.2 million 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 million.

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

Three planes were sold for approximately our June 30 value, and the cash proceeds were used to pay down debt, thus providing additional derisking to the remainder of our Merx investment. Turning to credit quality. Our portfolio of 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 from MidCap Financial’s strong sourcing and underwriting capabilities.

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 mid-cap financial is extremely low at approximately 2 basis points on an annualized basis. Moving to interest coverage. The weighted average interest coverage ratio was 1.9x, down from 2.1x last quarter with 4 companies below 1x. 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.

As Tanner discussed, 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 nonaccrual rate remains low, although one investment was placed on nonaccrual status during the quarter. As of September 30, 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 will now turn the call over to Greg to discuss our financial results in detail.

Gregory Hunt: 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. Fee 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 the 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%, an annualized ROE based on net income of 12.2%.

MFIC’s NAV per share was $15.28, an increase of $0.08 or 0.5% from the June quarter. The $0.08 increase reflects net investment income of $0.43, which is $0.05 above the $0.38 distribution and a $0.03 per share net gain on the portfolio. Additional details on the net gain are shown on Slide 16 in the earnings supplement deck. Total 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, MFIC’s base management fee was reduced to 1.75% on equity beginning January 1, 2023. Among listed BDCs, MFIC’s management fee is the — 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 30, 2023. As a reminder, our incentive fee is 17.5% on NII and includes a total hurdle return with a 12-quarter look back. From a balance sheet perspective, our net leverage ratio stood at 1.4x as of September 30, 2023, compared to 1.4x as of June 30, 2023, reflecting the $43 million 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 3, MFIC closed its first 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 million CLO called MFIC Bethesda 1 CLO and sold the Class A-1 notes, which represent 58% of the total capital structure, raising $238 million at a cost of SOFR plus 240 basis points.

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 to prepay borrowings under our revolving credit facility. MFIC benefited from MidCap Financial and Apollo’s experience and expertise in CLO management and structuring of this transaction. The CLO market may continue to be attractive source of future financing for MFIC. As Howard mentioned, we have sufficient capacity under our existing credit facility to execute the mergers. This concludes our prepared remarks, and please open up the call to questions.

Operator: [Operator Instructions]. And our first question will come from Maxwell Fritscher with Truist Securities.

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Q&A Session

Maxwell Fritscher: 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 know you mentioned a widening in 3Q for you, but can you expand upon that thought?

Tanner Powell: 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.

Maxwell Fritscher: Got it. And in regards to credit quality, you’d mentioned cost cutting. But are you seeing any portfolio companies forgo CapEx activity or to keep a cushion there?

Tanner Powell: 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 I think it’s just math that there’s less capital to be redeployed. Notwithstanding, 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 quantums across our portfolio.

Ted McNulty: And I would just add to that, that 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 is if the underlying businesses are tight on cash and there are attractive investment opportunities, the sponsors have equity capital to support those types of investments.

Operator: Our next question will come from Kenneth Lee with RBC Capital Markets.

Kenneth Lee: 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?

Howard Widra: Once we’ve done sort of the full rotation and sort of like the expected yield over a cycle, the ROE is about anywhere 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 base rates drive a lot of it, right, so the timing, and obviously, sort of time of deployment as well. But just on sort of like apples-to-apples basis, based on just deploying this capital at the same yields with the expected sort of cost savings, it’s about $0.10 accretive.

Kenneth Lee: Got you. Got you. Very helpful there. And then in terms of the potential portfolio rotation out of the broadly syndicated loans, what sort of time frames are you thinking about in terms of rotating? And it sounds like it’s being rotated up during the normal course of business, but I just want to see what kind of time frames are you talking about? And whether there’s any potential factors that could either accelerate or impact the time there?

Howard Widra: 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 re-fi, they will be redeployed. And then separately, 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 in sort of, if you will, rotating. And then we will sort of sell probably syndicated loans, depending on sort of obviously the market and also our need for capital as we redeploy. But if you talk sort of the redeployment of the non-direct lead of direct originated loans in the closed-end funds, combined with the excess capacity, that’s about $700 million or $800 million.

And so a couple hundred million dollars a quarter, of which BFL will then be redeployed in that 3- to 5-month time frame. And then it’s all subject to sort of the tax-free nature of the transaction, which sort of drives some of the timing.

Gregory Hunt: Yes. 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 at close, which will make the time frame of the rotation slightly accelerated into ’24 and ’25.

Howard Widra: Yes. And just to be clear, like that’s how they were operating. So we would expect them to continue operating that way.

Operator: Our next question comes from Kyle Joseph with Jefferies.

Kyle Joseph: Apologies if any of this is covered, going on a bunch of earnings. But yes, on the mergers, just obviously not that familiar with the other 2 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 makes sense to do both the top and bottom floor at the same time rather than 2 separate projects? And then post merger, any comments on what pro forma leverage is going to look like? Apologies I didn’t see that. And then any change to kind of your longer-term targets on leverage once you guys are a combined entity?

Howard Widra: Well, I would say, the reason why it’s both is because like the industrial logic for one is the industrial logic for the other. 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. And our process of the value, if you will, of that franchise has reached a point where we think it creates a pretty easy mathematical appeal for all shareholders. And so that’s why sort of the timing was right. And you see that in sort of the relative stock prices where they’ve been sort of in the most recent time periods.