MidCap Financial Investment Corp: Form 10-Q for the period ended Sep 30, 2023

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report. Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:

• our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the impact of investments that we expect to make;
• our contractual arrangements and relationships with third parties;
• the dependence of our future success on the general economy and its impact on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• our expected financings and investments;
• the adequacy of our cash resources and working capital;
• the ability of the parties to consummate the Mergers on the expected timeline, or at all;
• the ability to realize the anticipated benefits of the Mergers;
• the effects of disruption on our business from the proposed Mergers;
• the combined company’s plans, expectations, objectives and intentions as a result of the Mergers;
• any potential termination of either Merger Agreement;
• the actions of our stockholders or the stockholders of AFT and AIF with respect to the proposals submitted for their approval in connection with the Mergers;
• the effects of the COVID-19 pandemic on us and our portfolio companies; and
• the timing of cash flows, if any, from the operations of our portfolio companies.

We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in “Risk Factors” and elsewhere in this report.

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission (“SEC”), including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

MidCap Financial Investment Corporation (the “Company,” “MFIC,” “we,” “us,” or “our”) was incorporated under the Maryland General Corporation Law in February 2004. We have elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). As such, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, for federal income tax purposes we have elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Pursuant to this election and assuming we qualify as a RIC, we generally do not have to pay corporate-level federal income taxes on any income we distribute to our stockholders. We commenced operations on April 8, 2004 upon completion of our initial public offering that raised $870 million in net proceeds from selling 62 million shares of common stock at a price of $15.00 per share (20.7 million shares at a price of $45.00 per share adjusted for the one-for-three reverse stock split). Since then, and through September 30, 2023, we have raised approximately $2.24 billion in net proceeds from additional offerings of common stock and we have repurchased common stock for $248.1 million.

On August 1, 2022, the Company changed its name from "Apollo Investment Corporation" to "MidCap Financial Investment Corporation." Our common stock began to trade under the ticker “MFIC” on the NASDAQ Global Stock Market on August 12, 2022.

On November 7, 2023, the Company entered into (i) an Agreement and Plan of Merger (the “AFT Merger Agreement”) with Apollo Senior Floating Rate Fund Inc., a Maryland corporation (“AFT”), AFT Merger Sub, Inc., a Maryland corporation and a direct wholly-owned subsidiary of the Company (“AFT Merger Sub”), and, solely for the limited purposes set forth therein, the Adviser, and (ii) an Agreement and Plan of Merger (the “AIF Merger Agreement” and, together with the AFT Merger Agreement, the “Merger Agreements”) with Apollo Tactical Income Fund Inc., a Maryland corporation (“AIF”), AIF Merger Sub, Inc., a Maryland corporation and a direct wholly-owned subsidiary of the Company (“AIF Merger Sub”), and, solely for the limited purposes set forth therein, the Adviser. The Merger Agreements provide that, subject to the terms and conditions set forth in the applicable Merger Agreement, at the effective time of such merger, AFT and AIF will, through a two-step merger process, merge with and into the Company, with the Company continuing as the surviving company. Each of the Company’s Board of Directors, and AFT’s and AIF’s board of directors, including all of the respective independent directors, in each case, on the recommendation of special committees comprised solely of certain independent directors of the Company or AFT and AIF, as applicable, have approved the applicable Merger Agreement and the transactions contemplated thereby. Consummation of the Mergers, which is currently anticipated to occur in the first half of 2024, is subject to certain closing conditions, including requisite approvals of the Company’s, AFT’s and AIF’s stockholders and certain other closing conditions. See “—Recent Developments” for further information regarding the Merger Agreements and the Mergers.

Apollo Investment Management, L.P. (the “Investment Adviser” or “AIM”) is our investment adviser and an affiliate of Apollo Global Management, Inc. and its consolidated subsidiaries (“AGM”). The Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services to the Company. AGM and other affiliates manage other funds that may have investment mandates that are similar, in whole or in part, with ours. AIM and its affiliates may determine that an investment is appropriate both for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, AIM may determine that we should invest on a side-by-side basis with one or more other funds. We make all such investments subject to compliance with applicable regulations and interpretations, and our allocation procedures. Certain types of negotiated co-investments may be made only in accordance with the terms of the exemptive order (the “Order”) we received from the SEC permitting us to do so. Under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must be able to reach certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our Board of Directors’ approved criteria. In certain situations where co-investment with one or more funds managed by AIM or its affiliates is not covered by the Order, the personnel of AIM or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on allocation policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. The Order is subject to certain terms and conditions so there can be no assurance that we will be permitted to co-invest with certain of our affiliates other than in the circumstances currently permitted by regulatory guidance and the Order.

Apollo Investment Administration, LLC (the “Administrator” or “AIA”), an affiliate of AGM, provides, among other things, administrative services and facilities for the Company. In addition to furnishing us with office facilities, equipment, and clerical, bookkeeping and recordkeeping services, AIA also oversees our financial records as well as prepares our reports to stockholders and reports filed with the SEC. AIA also performs the calculation and publication of our net asset value, the payment of our expenses and oversees the performance of various third-party service providers and the preparation and filing of our tax returns. Furthermore, AIA provides on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance.

Investments

Our investment objective is to generate current income and, to a lesser extent, long-term capital appreciation. We primarily invest in directly originated and privately negotiated first lien senior secured loans to privately held U.S. middle-market companies, which the Company generally defines as companies with less than $75 million in EBITDA, as may be adjusted for market disruptions, mergers and acquisitions-related charges and synergies, and other items. To a lesser extent, we may invest in other types of securities including, first lien unitranche, second lien senior secured, unsecured, subordinated, and mezzanine loans, and equities in both private and public middle market companies.

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment, the competitive environment for the types of investments we make and market disruptions due to COVID-19. As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). As of September 30, 2023, non-qualifying assets represented approximately 7.2% of the total assets of the Company.

Revenue

We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may acquire in portfolio companies. Our debt investments, whether in the form of mezzanine or senior secured loans, generally have a stated term of five to ten years and bear interest at a fixed rate or a floating rate usually determined on the basis of a benchmark, such as the Secured Overnight Financing Rate ("SOFR"), London Interbank Offered Rate (“LIBOR”), the Euro Interbank Offered Rate (“EURIBOR”), the federal funds rate, or the prime rate. Interest on debt securities is generally payable quarterly or semiannually and while U.S. subordinated debt and corporate notes typically accrue interest at fixed rates, some of our investments may include zero coupon and/or step-up bonds that accrue income on a constant yield to call or maturity basis. In addition, some of our investments provide for payment-in-kind (“PIK”) interest or dividends. Such amounts of accrued PIK interest or dividends are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.

Expenses

For all investment professionals of AIM and their staff, when and to the extent engaged in providing investment advisory and management services to us, the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paid for by AIM. We bear all other costs and expenses of our operations and transactions, including those relating to:

• investment advisory and management fees;
• expenses incurred by AIM payable to third parties, including agents, consultants or other advisors, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;
• calculation of our net asset value (including the cost and expenses of any independent valuation firm);
• direct costs and expenses of administration, including independent registered public accounting and legal costs;
• costs of preparing and filing reports or other documents with the SEC;
• interest payable on debt, if any, incurred to finance our investments;
• offerings of our common stock and other securities;
• registration and listing fees;
• fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments;
• transfer agent and custodial fees;
• taxes;
• independent directors’ fees and expenses;
• marketing and distribution-related expenses;
• the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs;
• our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
• organizational costs; and
• all other expenses incurred by us or the Administrator in connection with administering our business, such as our allocable portion of overhead under the administration agreement, including rent and our allocable portion of the cost of our Chief Financial Officer, Chief Legal Officer and Chief Compliance Officer and their respective staffs.

We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors.

Portfolio and Investment Activity

Our portfolio and investment activity during the three and nine months ended September 30, 2023 and 2022, was as follows:

* Totals may not foot due to rounding.

Our portfolio composition and weighted average yields as of September 30, 2023 and December 31, 2022 were as follows:

96

(1) An investor’s yield may be lower than the portfolio yield due to sales loads and other expenses.

(2) Exclusive of investments on non-accrual status.

(3) Inclusive of all income generating investments, non-income generating investments and investments on non-accrual status.

(4) The interest rate type information is calculated using the Company’s corporate debt portfolio and excludes aviation, oil and gas, structured credit, renewables, shipping, commodities and investments on non-accrual status.

Since the initial public offering of MidCap Financial Investment Corporation in April 2004 and through September 30, 2023, invested capital totaled $23.8 billion in 617 portfolio companies. Over the same period, the Company completed transactions with more than 100 different financial sponsors.

Recent Developments

Pending Mergers with AFT and AIF

AFT Merger. On November 7, 2023, the Company entered into an Agreement and Plan of Merger (the “AFT Merger Agreement”) with Apollo Senior Floating Rate Fund Inc., a Maryland corporation (“AFT”), AFT Merger Sub, Inc., a Maryland corporation and a direct wholly-owned subsidiary of the Company (“AFT Merger Sub”), and, solely for the limited purposes set forth therein, the Adviser. The AFT Merger Agreement provides that, subject to the terms and conditions set forth in the AFT Merger Agreement, at the effective time of the merger (the “AFT Effective Time”), AFT Merger Sub will be merged with and into AFT (the “AFT First Merger”), with AFT continuing as the surviving company and as a wholly-owned subsidiary of the Company. Immediately after the effectiveness of the AFT First Merger, AFT will be merged with and into the Company, with the Company continuing as the surviving company (together with the AFT First Merger, the “AFT Merger”). Both the Company’s Board of Directors and AFT’s board of directors, including all of the respective independent directors, in each case, on the recommendation of special committees comprised solely of certain independent directors of the Company or AFT, as applicable, have approved the AFT Merger Agreement and the transactions contemplated thereby.

Subject to the terms and conditions of the AFT Merger Agreement, at the AFT Effective Time, each share of AFT Common Stock issued and outstanding immediately prior to the AFT Effective Time (other than shares owned by the Company or any of its consolidated subsidiaries, including AFT Merger Sub (the “AFT Cancelled Shares”)) will be converted into the right to receive a number of shares of the Company’s Common Stock equal to the AFT Exchange Ratio (as defined below) (cash will be paid in lieu of fractional shares). AFT has no preferred stock outstanding, and no preferred stock will be issued by the Company as a result of the AFT Merger.

Under the AFT Merger Agreement, as of a mutually agreed date no earlier than 48 hours (excluding Sundays and holidays) prior to the AFT Effective Time (such date, the “AFT Determination Date”), the Company and AFT will deliver to the other a calculation of its NAV as of such date (such calculation with respect to AFT, the “Closing AFT Net Asset Value” and such calculation with respect to the Company, the “Closing AFT Merger MFIC Net Asset Value”), in each case using the same set of assumptions, methodologies and adjustments as has been historically used in preparing such calculation. Based on such calculations, the parties will calculate: (1) the “AFT Per Share NAV,” which will be equal to (i) the Closing AFT Net Asset Value divided by (ii) the number of shares of AFT Common Stock issued and outstanding as of the AFT Determination Date (excluding any AFT Cancelled Shares) and (2) the “AFT Merger MFIC Per Share NAV,” which will be equal to (A) the Closing AFT Merger MFIC Net Asset Value divided by (B) the number of shares of the Company’s Common Stock issued and outstanding as of the AFT Determination Date. The “AFT Exchange Ratio” will be equal to the quotient (rounded to four decimal places) of (i) the AFT Per Share NAV divided by (ii) the AFT Merger MFIC Per Share NAV. Furthermore, promptly following closing of the AFT Merger, the Adviser or its affiliates will pay to holders of shares of AFT Common Stock that are issued and outstanding immediately prior to the AFT Effective Time a special payment equal to $0.25 per share of AFT Common Stock, subject to deduction for any applicable withholding tax.

The AFT Merger Agreement contains representations and warranties by the Company, AFT Merger Sub, the Adviser and AFT, subject to specified exceptions and qualifications.

Under the AFT Merger Agreement, immediately following the AFT Effective Time, the Company will repay or prepay any amounts outstanding under AFT’s existing credit facility as of the AFT Effective Time, subject to the conditions set forth in the Senior Secured Facility.

The AFT Merger Agreement also contains certain termination rights in favor of the Company and AFT, including if the AFT Merger is not completed on or before November 7, 2024, or if the requisite approvals of the Company’s and AFT’s stockholders are not obtained. The AFT Merger Agreement provides that, upon the termination of the AFT Merger Agreement under certain circumstances, a third party that enters into a definitive transaction with AFT may be required to pay the Company a termination fee of $7,029. The AFT Merger Agreement also provides that, upon the termination of the AFT Merger Agreement under certain circumstances, a third party that enters into a definitive agreement with the Company, the Company may be required to pay to AFT a termination fee of $29,905.

Consummation of the AFT Merger, which is currently anticipated to occur in the first half of 2024, is subject to certain closing conditions, including requisite approvals of the Company’s and AFT’s stockholders and certain other closing conditions. Neither the closing of the AFT Merger nor the closing of the AIF Merger is contingent on the closing of the other merger.

AIF Merger. On November 7, 2023, the Company entered into an Agreement and Plan of Merger (the “AIF Merger Agreement” and, together with the AFT Merger Agreement, the “Merger Agreements”) with Apollo Tactical Income Fund Inc., a Maryland corporation (“AIF”), AIF Merger Sub, Inc., a Maryland corporation and a direct wholly-owned subsidiary of the Company (“AIF Merger Sub”), and, solely for the limited purposes set forth therein, the Adviser. The AIF Merger Agreement provides that, subject to the terms and conditions set forth in the AIF Merger Agreement, at the effective time of the merger (the “AIF Effective Time”), AIF Merger Sub will be merged with and into AIF (the “AIF First Merger”), with AIF continuing as the surviving company and as a wholly-owned subsidiary of the Company. Immediately after the effectiveness of the AIF First Merger, AIF will be merged with and into the Company, with the Company continuing as the surviving company (together with the AIF First Merger, the “AIF Merger” and, together with the AIF Merger, the “Mergers”). Both the Company’s Board of Directors and AIF’s board of directors, including all of the respective independent directors, in each case, on the recommendation of special committees comprised solely of certain independent directors of the Company or AIF, as applicable, have approved the AIF Merger Agreement and the transactions contemplated thereby.

Subject to the terms and conditions of the AIF Merger Agreement, at the AIF Effective Time, each share of AIF Common Stock issued and outstanding immediately prior to the AIF Effective Time (other than shares owned by the Company or any of its consolidated subsidiaries, including AIF Merger Sub (the “AIF Cancelled Shares”) will be converted into the right to receive a number of shares of the Company’s Common Stock equal to the AIF Exchange Ratio (as defined below) (cash will be paid in lieu of fractional shares). AIF has no preferred stock outstanding, and no preferred stock will be issued by the Company as a result of the AIF Merger.

Under the AIF Merger Agreement, as of a mutually agreed date no earlier than 48 hours (excluding Sundays and holidays) prior to the AIF Effective Time (such date, the “AIF Determination Date”), each of the Company and AIF will deliver to the other a calculation of its NAV as of such date (such calculation with respect to AIF, the “Closing AIF Net Asset Value” and such calculation with respect to the Company, the “Closing AIF Merger MFIC Net Asset Value”), in each case using the same set of assumptions, methodologies and adjustments as has been historically used in preparing such calculation. Based on such calculations, the parties will calculate: (1) the “AIF Per Share NAV,” which will be equal to (i) the Closing AIF Net Asset Value divided by (ii) the number of shares of AIF Common Stock issued and outstanding as of the AIF Determination Date (excluding any AIF Cancelled Shares) and (2) the “AIF Merger MFIC Per Share NAV,” which will be equal to (A) the Closing AIF Merger MFIC Net Asset Value divided by (B) the number of shares of the Company’s Common Stock issued and outstanding as of the AIF Determination Date. The “AIF Exchange Ratio” will be equal to the quotient (rounded to four decimal places) of (i) the AIF

Per Share NAV divided by (ii) the AIF Merger MFIC Per Share NAV. Furthermore, promptly following the closing of the AIF Merger, the Adviser or its affiliates will pay to holders of shares of AIF Common Stock that are issued and outstanding immediately prior to the AIF Effective Time a special payment equal to $0.25 per share of AIF Common Stock, subject to deduction for any applicable withholding tax.

The AIF Merger Agreement contains representations and warranties by the Company, AIF Merger Sub, the Adviser and AIF, subject to specified exceptions and qualifications.

Under the AIF Merger Agreement, immediately following the AIF Effective Time, the Company will repay or prepay any amounts outstanding under AIF’s existing credit facility as of the AIF Effective Time, subject to the conditions set forth in the Company’s Senior Secured Credit Facility.

The AIF Merger Agreement also contains certain termination rights in favor of the Company and AIF, including if the AIF Merger is not completed on or before November 7, 2024, or if the requisite approvals of the Company’s and AIF’s stockholders are not obtained. The AIF Merger Agreement provides that, upon the termination of the AIF Merger Agreement under certain circumstances, a third party that enters into a definitive transaction with AIF may be required to pay the Company a termination fee of $6,348. The AIF Merger Agreement also provides that, upon the termination of the AIF Merger Agreement under certain circumstances, a third party that enters into a definitive agreement with the Company, the Company may be required to pay to AIF a termination fee of $29,905.

Consummation of the AIF Merger, which is currently anticipated to occur in the first half of 2024, is subject to certain closing conditions, including requisite approvals of the Company’s and AIF’s stockholders and certain other closing conditions. Neither the closing of the AIF Merger nor the closing of the AFT Merger (as defined below) is contingent on the closing of the other merger.

Distribution after the Consummation of the Mergers. Following the consummation of the Mergers and subject to applicable law, the Company will distribute to holders of shares of the Company’s Common Stock as of a record date to be determined by the Company’s Board of Directors an amount in cash equal to $0.20 per share of the Company’s Common Stock.

The foregoing descriptions of the Merger Agreements and the transactions contemplated thereby do not purport to be complete and are qualified in their entirety by reference to the full text of the Merger Agreements, which have been included as Exhibits 2.1 and 2.2 to this Quarterly Report on Form 10-Q. The representations, warranties, covenants and agreements contained in each Merger Agreement were made only for purposes of such Merger Agreement and as of specific dates; were solely for the benefit of the parties to such Merger Agreement (except as may be expressly set forth in such Merger Agreement); may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to such Merger Agreement instead of establishing these matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors and security holders should not rely on such representations, warranties, covenants or agreements, or any descriptions thereof, as characterizations of the actual state of facts or condition of any of the parties to the Merger Agreements or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties, covenants and agreements may change after the date of each Merger Agreement, which subsequent information may or may not be fully reflected in public disclosures by the parties to such Merger Agreement. For more information, see the Company’s current report on Form 8-K filed with the SEC on November 7, 2023.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, gains and losses. Changes in the economic environment, financial markets, credit worthiness of portfolio companies and any other parameters used in determining such estimates could cause actual results to differ materially. In addition to the discussion below, our significant accounting policies are further described in the notes to the financial statements.

Fair Value Measurements

The Company follows guidance in ASC 820, Fair Value Measurement (“ASC 820”), where fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are determined within a framework that establishes a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish a classification of fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the information available. The inputs or methodology used for valuing assets or liabilities may not be an indication of the risks associated with investing in those assets or liabilities.

ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The level assigned to the investment valuations may not be indicative of the risk or liquidity associated with investing in such investments. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may differ materially from the values that would be received upon an actual disposition of such investments.

As of September 30, 2023, $2.37 billion or 99.9% of the Company’s investments were classified as Level 3. The high proportion of Level 3 investments relative to our total investments is directly related to our investment philosophy and target portfolio, which consists primarily of long-term secured debt, as well as unsecured and mezzanine positions of private middle-market companies. A fundamental difference exists between our investments and those of comparable publicly traded fixed income investments, namely high-yield bonds, and this difference affects the valuation of our private investments relative to comparable publicly traded instruments.

Senior secured loans, or senior loans, are higher in the capital structure than high-yield bonds, and are typically secured by assets of the borrowing company. This improves their recovery prospects in the event of default and affords senior loans a structural advantage over high-yield bonds. Many of the Company’s investments are also privately negotiated and contain covenant protections that limit the issuer to take actions that could harm us as a creditor. High-yield bonds typically do not contain such covenants.

Given the structural advantages of capital seniority and covenant protection, the valuation of our private debt portfolio is driven more by investment specific credit factors than movements in the broader debt capital markets. Each security is evaluated individually and as indicated below, we value our private investments based upon a multi-step valuation process, including valuation recommendations from independent valuation firms.

Investment Valuation Process

Pursuant to Rule 2a-5 under the 1940 Act, the Company’s Board of Directors has designated the Investment Adviser as its "valuation designee” to perform the fair value determinations for all investments held by the Company. The Company's Board of Directors continues to be responsible for overseeing the processes for determining fair valuation.

Under the Company's valuation policies and procedures, the Investment Adviser values investments, including certain secured debt, unsecured debt, and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker, primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are unavailable or are deemed not to represent fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Accordingly, such investments go through our multi-step valuation process as described below. In each case, our independent third party valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations for such investments. Investments purchased within the quarter before the valuation date and debt investments with remaining maturities of 60 days or less may each be valued at cost with interest accrued or discount accreted/premium amortized to the date of maturity (although they are typically valued at available market quotations), unless such valuation, in the judgment of our Investment Adviser, does not represent fair value. In this case, such investments shall be valued at fair value as determined in good faith by or under the direction of the Investment Adviser, including using market quotations where available. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of the Investment Adviser. Such determination of fair values may involve subjective judgments and estimates.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Investment Adviser undertakes a multi-step valuation process each quarter, as described below:

1. Our quarterly valuation process begins with each portfolio company or investment being initially valued by using certain inputs provided, among others, by the investment professionals of our Investment Adviser who are responsible for the portfolio investment.

2. Preliminary valuation conclusions are then documented and discussed with senior management of our Investment Adviser.

3. The Investment Adviser discusses valuations and determines in good faith the fair value of each investment in our portfolio based on the input of the applicable independent valuation firm.

4. For Level 3 investments entered into within the current quarter, the cost (purchase price adjusted for accreted original issue discount/amortized premium) or any recent comparable trade activity on the security investment shall be considered to reasonably approximate the fair value of the investment, provided that no material change has since occurred in the issuer’s business, significant inputs or the relevant environment.

Investments determined by these valuation procedures which have a fair value of less than $1 million during the prior fiscal quarter may be valued based on inputs identified by the Investment Adviser without the necessity of obtaining valuation from an independent valuation firm, if once annually an independent valuation firm using the procedures described herein provides an independent assessment of value.

Investments in all asset classes are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, seniority of investment in the investee company’s capital structure, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors. When readily available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. During the six months ended September 30, 2023, there were no significant changes to the Company’s valuation techniques and related inputs considered in the valuation process.

Because there is not a readily available market value for most of the investments in our portfolio, substantially all of our portfolio investments are valued at fair value as determined in good faith by our investment adviser, as the valuation designee, as described herein. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had an active market existed for such investments and may differ materially from the values that we may ultimately realize.

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.

Results of Operations

Operating results for the three and nine months ended September 30, 2023 and 2022 were as follows:

* Totals may not foot due to rounding.

(1) Based on the weighted average number of shares outstanding for the period presented.

Total Investment Income

For the three months ended September 30, 2023 as compared to the three months ended September 30, 2022

The increase in total investment income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily driven by the increase in total interest income (including PIK interest income) of $10.0 million. The increase in total interest income was due to an increase in the average yield for the total debt portfolio, from 9.6% for the three months ended September 30, 2022 to 12.0% for the three months ended September 30, 2023. The increase was partially offset by a decrease in other income and prepayment fees and income recognized from the acceleration of discount, premium, or deferred fees on repaid investments. Prepayment fees and income recognized from acceleration of discount, premium, or deferred fees on repaid investments totaled $3.0 million for the three months ended September 30, 2022 and $0.6 million for the three months ended September 30, 2023. The decrease in other income of $1.2 million was primarily due to decrease in amendment fees and consent fees. Furthermore, the increase in dividend income of $0.5 million was primarily due to income generated from structured products.

For the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022

The increase in total investment income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by the increase in total interest income (including PIK interest income) of $37.4 million. The increase in total interest income was due to an increase in the average yield for the total debt portfolio, from 8.8% for the nine months ended September 30, 2022 to 11.4% for the nine months ended September 30, 2023. The increase was partially offset by a decrease in amortization and in prepayment fees and income recognized from the acceleration of discount, premium, or deferred fees on repaid investments, which totaled $8.6 million for the nine months ended September 30, 2022 and $3.8 million for the nine months ended September 30, 2023. Furthermore, the increase in other income of $0.2 million was primarily due to an increase in structuring and commitment fees received.

Net Expenses

For the three months ended September 30, 2023 as compared to the three months ended September 30, 2022

The increase in net expenses for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily driven by the increase in interest and other debt expenses of $5.9 million. The increase in interest and other debt expenses was attributed to an increase in the total annualized cost of debt, from 5.17% for the three months ended September 30, 2022 to 7.16% for the three months ended September 30, 2023. Further, the decrease of $2.6 million in management and performance-based incentive fees (net of amounts waived) was primarily driven by a decrease in gross management fee due to the change in fee structure effective January 1, 2023. This was partially offset by an increase in performance-based incentive fees.

For the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022

The increase in net expenses for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily driven by the increase in interest and other debt expenses of $25.7 million. The increase in interest and other debt expenses was attributed to an increase in the total annualized cost of debt, from 4.25% for the nine months ended September 30, 2022 to 7.02% for the nine months ended September 30, 2023. Further, the decrease of $2.1 million in management and performance-based incentive fees (net of amounts waived) was primarily driven by a decrease in gross management fee due to the change in fee structure effective January 1, 2023. This was partially offset by an increase in performance-based incentive fees.

Net Realized Gains (Losses)

For the three months ended September 30, 2023 as compared to the three months ended September 30, 2022

During the three months ended September 30, 2023, we recognized gross realized gains of $0.1 million and gross realized losses of $0.3 million, resulting in net realized losses of $0.2 million.

During the three months ended September 30, 2022, we recognized gross realized gains of $0.3 million and gross realized losses of $0.5 million, resulting in net realized losses of $0.2 million.

For the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022

During the nine months ended September 30, 2023, we recognized gross realized gains of $0.2 million and gross realized losses of $1.4 million, resulting in net realized losses of $1.2 million. There were no significant realized gains (losses) for the nine months ended September 30, 2023.

During the nine months ended September 30, 2022, we recognized gross realized gains of $0.0 million and gross realized losses of $1.9 million, resulting in net realized losses of $1.9 million. Net realized losses for the nine months ended September 30, 2022 was primarily driven by the write off of the Company’s investment in AVAD, LLC. Significant realized gains (losses) for the nine months ended September 30, 2022 are summarized below:

(in millions)

Net Change in Unrealized Gains (Losses)

For the three months ended September 30, 2023 as compared to the three months ended September 30, 2022

During the three months ended September 30, 2023, we recognized gross unrealized gains of $13.1 million and gross unrealized losses of $10.8 million, including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized gains of $2.3 million. Net change in unrealized gains (losses) for the three months ended September 30, 2023 was primarily driven by the increase in cashflows from Merx Aviation Finance, LLC, the financial under-performance of ViewRay and widening credit spreads. Significant changes in unrealized gains (losses) for the three months ended September 30, 2023 are summarized below:

(in millions)

105

During the three months ended September 30, 2022, we recognized gross unrealized gains of $25.4 million and gross unrealized losses of $31.9 million, including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of $6.5 million. Net change in unrealized gains (losses) for the three months ended September 30, 2022 was primarily driven by decrease in value of Spotted Hawk due to revised outlook on company's performance as well as decrease in value of K&N Parent, Inc. due to performance softness. Significant changes in unrealized gains (losses) for the three months ended September 30, 2022 are summarized below:

(in millions)

For the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022

During the nine months ended September 30, 2023, we recognized gross unrealized gains of $19.7 million and gross unrealized losses of $19.2 million, including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized gains of $0.5 million. Net change in unrealized gains (losses) for the nine months ended September 30, 2023 was primarily driven by the increase in cashflows from Merx Aviation Finance, LLC, the financial under-performance of ViewRay and widening credit spreads. Significant changes in unrealized gains (losses) for the nine months ended September 30, 2023 are summarized below:

(in millions)

106

During the nine months ended September 30, 2022, we recognized gross unrealized gains of $49.3 million and gross unrealized losses of $94.5 million, including the impact of transferring unrealized to realized gains (losses), resulting in net change in unrealized losses of $45.2 million. Net change in unrealized gains (losses) for the nine months ended September 30, 2022 was primarily driven by the decrease in value of Merx Aviation Finance LLC due to various lease restructuring, aircraft sales and impacts from the Russian/Ukraine conflict. Significant changes in unrealized gains (losses) for the nine months ended September 30, 2022 are summarized below:

(in millions)

107

Liquidity and Capital Resources

The Company’s liquidity and capital resources are generated and generally available through periodic follow-on equity and debt offerings, our Senior Secured Facility (as defined in Note 6 to the financial statements), our senior secured notes, our senior unsecured notes, investments in special purpose entities in which we hold and finance particular investments on a non-recourse basis, as well as from cash flows from operations, investment sales of liquid assets and repayments of senior and subordinated loans and income earned from investments.

We believe that our current cash and cash equivalents on hand, our short-term investments, proceeds from the sale of our 2025 Notes and 2026 Notes, our available borrowing capacity under our Senior Secured Facility and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months.

Cash Equivalents

The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less from the date of purchase would qualify, with limited exceptions. The Company deems that certain money market funds, U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents (See Note 2 to the financial statements) At the end of each fiscal quarter, we consider taking proactive steps utilizing cash equivalents with the objective of enhancing our investment flexibility during the following quarter, pursuant to Section 55 of the 1940 Act. More specifically, we may purchase U.S. Treasury bills from time-to-time on the last business day of the quarter and typically close out that position on the following business day, settling the sale transaction on a net cash basis with the purchase, subsequent to quarter end. The Company may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our Senior Secured Facility, as we deem appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined.

Debt

See Note 6 to the financial statements for information on the Company’s debt.

The following table shows the contractual maturities of our debt obligations as of September 30, 2023:

(in millions)

(1) As of September 30, 2023, aggregate lender commitments under the Senior Secured Facility totaled $1.71 billion and $681.5 million of unused capacity. As of September 30, 2023, there were $60.6 million of letters of credit issued under the Senior Secured Facility as shown as part of total commitments in Note 8 to the financial statements.

Stockholders’ Equity

See Note 7 to the financial statements for information on the Company’s public offerings and share repurchase plans.

Distributions

Distributions paid to stockholders during the three and nine months ended September 30, 2023 totaled $24.8 million ($0.38 per share) and $74.5 million ($1.14 per share), respectively. Distributions paid to stockholders during the three and nine months ended September 30, 2022 totaled $22.8 million ($0.36 per share) and $68.7 million ($1.08 per share), respectively. For income tax purposes, distributions made to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or a combination thereof. Although the tax character of distributions paid to stockholders through September 30, 2023 may include return of capital, the exact amount cannot be determined at this point. The final determination of the tax character of distributions will not be made until we file our tax return for the tax year ended December 31, 2023. Tax characteristics of all distributions will be reported to stockholders on Form 1099 after the end of the calendar year. Our quarterly distributions, if any, will be determined by our Board of Directors.

To maintain our RIC status, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. Currently, we have substantial net capital loss carryforwards and consequently do not expect to generate cumulative net capital gains in the foreseeable future.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, then stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a BDC, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare dividends if we default under certain provisions or fail to satisfy certain other conditions. If we do not distribute a certain percentage of our income annually, we may suffer adverse tax consequences, including possible loss of the tax benefits available to us as a RIC. In addition, in accordance with GAAP and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual PIK, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may not be able to meet the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC.

With respect to the distributions to stockholders, income from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income and accordingly, distributed to stockholders.

PIK Income

For the three and nine months ended September 30, 2023, PIK income totaled $0.5 million and $2.1 million on total investment income of $68.2 million and $204.6 million, respectively. For the three and nine months ended September 30, 2022, PIK income totaled $0.9 million and $2.4 million on total investment income of $58.9 million and $167.0 million, respectively. In order to maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders annually in the form of distributions, even though the Company has not yet collected the cash. See Note 5 to the financial statements for more information on the Company’s PIK income.

Related Party Transactions

See Note 3 to the financial statements for information on the Company’s related party transactions.

We are subject to financial market risks, including changes in interest rates and the valuations of our investment portfolio. Uncertainty with respect to the economic effects of rising interest rates in response to inflation, the war in Russia and Ukraine and the COVID-19 pandemic introduced significant volatility in the financial markets, and the effects of this volatility has materially impacted and could continue to materially impact our market risks, including those listed below. For additional information concerning these risks and their potential impact on our business and our operating results, see Part II - Other information, Item 1A. Risk Factors.

Investment valuation risk

Because there is not a readily available market value for most of the investments in our portfolio, we value all of our portfolio investments at fair value as determined in good faith by our board of directors based on, among other things, the input of our management and audit committee and independent valuation firms that have been engaged at the direction of our board of directors to assist in the valuation of each portfolio investment without a readily available market quotation (with certain de minimis exceptions). Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and “—Fair Value Measurements” as well as Notes 2 and 5 to our financial statements for the three and nine months ended September 30, 2023 for more information relating to our investment valuation.

Interest Rate Risk

Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

As of September 30, 2023, a majority of our debt portfolio investments bore interest at variable rates, which generally are SOFR-based (or based on an equivalent applicable currency rate such as SOFR) and typically have durations of one to six months after which they reset to current market interest rates, and many of which are subject to certain floors. Further, our Senior Secured Facility bears interest at SOFR rates with no interest rate floors, while our 2025 Notes and 2026 Notes bears interest at a fixed rate. Some of our investments are LIBOR-based. As of September 30, 2023, all non-U.S. dollar LIBOR publications have been phased out. The phase out of a majority of the U.S. dollar publications was delayed until June 30, 2023. Potential changes, or uncertainty related to such potential changes, may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities, or the cost of our borrowings. SOFR appears to be the preferred alternative replacement rate for U.S. dollar LIBOR, but there is no guarantee SOFR will become the dominant alternative. Please see Part 1 of our transition report on Form 10-KT for the nine months ended December 31, 2022, “Item 1A. Risk Factors—Risks Relating to the Current Environment — The interest rates of some of our floating-rate loans to our portfolio companies may be priced using a spread over LIBOR, which is being phased out."

We regularly measure our exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates.

The following table shows the estimated annual impact on net investment income of base rate changes in interest rates (considering interest rate flows for variable rate instruments) to our loan portfolio and outstanding debt as of September 30, 2023, assuming no changes in our investment and borrowing structure:

We may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2023 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

Changes in Internal Control Over Financial Reporting

Management has not identified any change in the Company’s internal control over financial reporting that occurred during the third quarter of 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In addition to the risk factor below and other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Transition Report on Form 10-KT for the nine months ended December 31, 2022, which could materially affect our business, financial condition and/or operating results. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.

Risks Relating to the Mergers

Because the market price of our common stock and the NAV per share of our common stock, AIF’s Common Stock and AFT’s Common Stock will fluctuate, AIF Stockholders and AFT Stockholders cannot be sure of the market value of the consideration they will receive in connection with the Mergers until the AIF Closing and AFT Closing.

At the AIF Effective Time and AFT Effective Time, each share of AIF Common Stock and AFT Common Stock issued and outstanding immediately prior to the AIF Effective Time and AFT Effective Time (other than AIF Cancelled Shares and AFT Cancelled Shares), respectively, will be converted into the right to receive a number of shares of our common stock, equal to the AIF Exchange Ratio and AFT Exchange Ratio (cash may be paid in lieu of fractional shares). The market value of such consideration to be received by AIF Stockholders upon completion of the AIF Merger (the “AIF Merger Consideration”) may vary from the closing price of AIF Common Stock and our common stock, respectively, on the date the AIF Merger was announced, on the date of the AIF Special Meeting to consider the AIF Merger Proposal and on the date the AIF Merger is completed. The market value of such consideration to be received by AFT Stockholders upon completion of the AFT Merger (the “AFT Merger Consideration”) may vary from the closing price of AFT Common Stock and our common stock, respectively, on the date the AFT Merger was announced, on the date of the AFT Special Meeting to consider the AFT Merger Proposal and on the date the AFT Merger is completed. Any change in the market price of our common stock prior to completion of the Mergers will affect the market value of the AIF Merger Consideration and AFT Merger Consideration that AIF Stockholders and AFT Stockholders, respectively, will receive upon completion of the Mergers. Additionally, the AIF Exchange Ratio and AFT Exchange Ratio will fluctuate as AIF’s, AFT’s and our respective NAVs change prior to the AIF Closing and AFT Closing.

Accordingly, at the time of the AIF Special Meeting and AFT Special Meeting, AIF Stockholders and AFT Stockholders, respectively, will not know or be able to calculate the market value of the AIF Merger Consideration and AFT Merger Consideration they would receive upon completion of the Mergers, and at the closing of the Mergers, our NAV and the NAV AIF and AFT may be lower than the respective market prices. Neither AIF, AFT nor the Company is permitted to terminate the Merger Agreements or resolicit the vote of their respective stockholders solely because of changes in the market price of shares of our common stock. There will be no adjustment to the AIF Merger Consideration or AFT Merger Consideration for changes in the market price of shares of our Common Stock.

Changes in the market price of our common stock may result from a variety of factors, including, among other things:

• significant volatility in the market price and trading volume of securities of Business Development Companies (“BDCs”) or other companies in our sector, which are not necessarily related to the operating performance of these companies;
• changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to RICs and BDCs;
• loss of our BDC or RIC status;
• changes in earnings or variations in operating results or distributions that exceed our net investment income;
• increases in expenses associated with defense of litigation and responding to SEC inquiries;
• changes in accounting guidelines governing valuation of our investments;
• changes in the value of our portfolio of investments, including as a result of general economic conditions, interest rate shifts and changes in the performance of our portfolio companies;
• any shortfall in investment income or net investment income or any increase in losses from levels expected by investors or securities analysts;
• departure of our Adviser’s key personnel; and
• general economic trends and other external factors, including those related to the COVID-19 pandemic.

These factors are generally beyond our control. The range of high and low sales prices per share of our common Stock as reported on the NASDAQ for the three-month period ended September 30, 2023 was a low of $12.35 and a high of $14.03. However, historical trading prices are not necessarily indicative of future performance. AIF Stockholders and AFT Stockholders should obtain current market quotations for shares of our common stock prior to the AIF Special Meeting and AFT Special Meeting, respectively.

Sales of shares of our common stock after the completion of the Mergers may cause the trading price of our common stock to decline.

For illustrative purposes, based on September 30, 2023 NAVs (and adjusted for estimated transaction costs), MFIC would issue approximately 13,852,198 and 15,338,414 shares of our common stock for each share of AIF Common Stock outstanding and AFT Common Stock outstanding, respectively, resulting in pro forma ownership of 69% for current our stockholders, 15% for current AIF Stockholders and 16% for current AFT Stockholders. Former AIF Stockholders and AFT Stockholders may be required to or decide to sell the shares of our common stock that they receive pursuant to the applicable Merger Agreement. In addition, our stockholders may decide not to hold their shares after completion of either or both Mergers. In each case, such sales of our common stock could have the effect of depressing the trading price for our common stock and may take place promptly following the completion of either or both Mergers. If this occurs, it could impair our ability to raise additional capital through the sale of equity securities should we desire to do so.

The market prices of our common stock, AIF Common Stock and AFT Common Stock after the Mergers may be affected by factors different from those affecting such common stock currently.

Our and AIF’s and AFT’s business differ in some respects. For example, our investment objective is to generate current income and, to a lesser extent, long-term capital appreciation, while AIF’s and AFT’s investment objective is to seek current income with a secondary objective of preservation of capital. Accordingly, the results of operations of the combined company and the market prices of our common stock after the Mergers may be affected by factors different from those currently affecting the independent results of operations and trading price of each of the Company, AIF and AFT, such as a larger stockholder base, a different portfolio composition and a different capital structure. Accordingly, our and AIF’s and AFT’s respective historical trading prices and financial results may not be indicative of these matters for the combined company following the Mergers.

Most of our stockholders, AIF Stockholders and AFT Stockholders will experience a reduction in percentage ownership and voting power in the combined company as a result of the Mergers.

Our stockholders will experience a substantial reduction in their percentage ownership interests and effective voting power in respect of the combined company relative to their percentage ownership interests in us prior to the Mergers unless they hold a comparable or greater percentage ownership in AIF or AFT. Consequently, our stockholders should generally expect to exercise less influence over the management and policies of the combined company following the Mergers than they currently exercise over the management and policies of the Company. Similarly, AIF Stockholders and AFT Stockholders will experience a substantial reduction in their percentage ownership interests and effective voting power in respect of the combined company relative to their percentage ownership interests in AIF and AFT, respectively, prior to the Mergers unless they hold a comparable or greater percentage ownership in us and AIF or AFT, as applicable. Consequently, AIF Stockholders and AFT Stockholders should generally expect to exercise less influence over the management and policies of the combined company following the Mergers than they currently exercise over the management and policies of AIF and AFT, respectively. In addition, prior to completion of the Mergers, subject to certain restrictions in the Merger Agreements and certain restrictions under the 1940 Act for issuances at prices below the then-current NAV per share of our common stock, AIF Common Stock and AFT Common Stock, we, AIF and AFT may issue additional shares of our common stock, AIF Common Stock and AFT Common Stock, respectively, which would further reduce the percentage ownership of the combined company to be held by our current stockholders or the current AIF Stockholders and AFT Stockholders.

We may be unable to realize the benefits anticipated by the Mergers, including estimated cost savings, or it may take longer than anticipated to achieve such benefits.

The realization of certain benefits anticipated as a result of the Mergers will depend in part on the integration of AIF’s and AFT’s investment portfolios with our investment portfolio and the integration of AIF’s and AFT’s businesses with our business. Though we believe that we can integrate AIF and AFT with us given the significant overlap in investment portfolios, operations and governance structure, there can be no assurance that AIF’s and AFT’s investment portfolios or businesses can be operated profitably or integrated successfully into our operations in a timely fashion or at all. The dedication of management resources to such integration may detract attention from the day-to-day business of the combined company and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be other material adverse effects as a result of these integration efforts. Such effects, including incurring unexpected costs or delays in connection with such integration and failure of AIF’s and AFT’s investment portfolios to perform as expected, could have a material adverse effect on the financial results of the combined company.

We also expect to achieve certain synergies and cost savings from the Mergers when the companies have fully integrated their portfolios. It is possible that the estimates of these synergies and potential cost savings could ultimately be incorrect. The cost savings estimates also assume that we will be able to combine its operations and AIF’s and AFT’s operations in a manner that permits those cost savings to be fully realized. If the estimates turn out to be incorrect or if we are not able to successfully combine AIF’s and AFT’s investment portfolios or businesses with our operations, the anticipated synergies and cost savings may not be fully realized or realized at all or may take longer to realize than expected.

The announcement and pendency of the proposed Mergers could adversely affect our, AIF’s and/or AFT’s business, financial results and operations.

The announcement and pendency of the proposed Mergers could cause disruptions in and create uncertainty surrounding our, AIF’s and/or AFT’s business, including affecting relationships with existing and future borrowers, which could have a significant negative impact on future revenues and results of operations, regardless of whether the Mergers are completed. In addition, we, AIF and AFT have diverted, and will continue to divert, management resources towards the completion of the Mergers, which could have a negative impact on each of their future revenues and results of operations.

We, AIF and AFT are also subject to restrictions on the conduct of each of their businesses prior to the completion of the Mergers as provided in the Merger Agreements, generally requiring us, AIF and AFT to conduct their businesses only in the ordinary course and subject to specific limitations, including, among other things, certain restrictions on their ability to make certain investments and acquisitions, sell, transfer or dispose of their assets, amend their organizational documents and enter into or modify certain material contracts. These restrictions could prevent us, AIF or AFT from pursuing otherwise attractive business opportunities, industry developments and future opportunities and may otherwise have a significant negative impact on their future investment income and results of operations.

If either or both of the Mergers does not close, we, AIF and/or AFT will not benefit from the expenses incurred in pursuit of the Mergers.

The Mergers may not be completed. If the Mergers are not completed, we, AIF and AFT will have incurred substantial expenses for which no ultimate benefit will have been received. We, AIF and AFT will be responsible for paying certain expenses in connection with the Mergers, and as a result our stockholders, AIF Stockholders and AFT Stockholders will bear those costs. Specifically, all fees and expenses incurred in connection with the Merger Agreements and the transactions contemplated thereby (including the AIF Merger and AFT Merger) will be paid by the party incurring such fees or expenses, whether or not the transactions contemplated by the Merger Agreements (including the AIF Merger and AFT Merger) are consummated; provided, however, notwithstanding the foregoing, upon the closing of each Merger, an affiliate of Apollo has agreed to reimburse us, AFT and AIF for all merger-related expenses incurred and payable in connection with the transactions. If a Merger does not close, a portion of the merger-related expenses of AFT or AIF, as applicable, will be reimbursed by an affiliate of Apollo (with the remainder to be borne by AFT or AIF, as applicable), and all of our expenses related to that merger will be borne by us. It is anticipated that our Adviser or its affiliate will bear expenses of approximately $7,234 in connection with the Mergers, if consummated. It is anticipated that we will bear expenses of approximately $0 if the AIF Merger is not consummated, and expenses of approximately $0 if the AFT Merger is not consummated. It is anticipated that AIF will bear expenses of approximately $420 if the AIF Merger is not consummated. It is anticipated that AFT will bear expenses of approximately $478 if the AFT Merger is not consummated.

The termination of either or both of the Merger Agreements could negatively impact us, AIF and/or AFT.

If either or both of the Merger Agreements is terminated, there may be various consequences, including:

• our business or the businesses of AIF and/or AFT may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Mergers, without realizing any of the anticipated benefits of completing the Mergers;
• AIF and/or AFT may not be able to find a party willing to pay an equivalent or more attractive price than the price we agreed to pay in the Mergers; and
• we, AIF and/or AFT will not realize the anticipated benefits of the Mergers.

Under certain circumstances, we, AIF or AFT would be obligated to pay a termination fee upon termination of the Merger Agreements.

The Mergers may not be completed. The Merger Agreements provides for the payment, subject to applicable law, by us, AIF or AFT of a termination fee under certain circumstances. The AFT Merger Agreement provides that, upon the termination of the AFT Merger Agreement under certain circumstances, a third party that enters into a definitive transaction with AFT may be required to pay us a termination fee of $7,029. The AFT Merger Agreement also provides that, upon the termination of the AFT Merger Agreement under certain circumstances, a third party that enters into a definitive agreement with us, we may be required to pay to AFT a termination fee of $29,905. The AIF Merger Agreement provides that, upon the termination of the AIF Merger Agreement under certain circumstances, a third party that enters into a definitive transaction with AIF may be required to pay us a termination fee of $6,348. The AIF Merger Agreement also provides that, upon the termination of the AIF Merger Agreement under certain circumstances, a third party that enters into a definitive agreement with us, we may be required to pay to AIF a termination fee of $29,905.

The Merger Agreements limit our ability and the ability of AIF and AFT to pursue alternatives to the Mergers.

The Merger Agreements include restrictions on our ability and the ability of AIF and AFT to solicit proposals for alternative transactions or engage in discussions regarding such proposals, subject to exceptions and termination provisions, which could have the effect of discouraging such proposals from being made or pursued. These provisions include a termination fee of $29,905, which is equal to 3.0% of our net asset value as of September 30, 2023, payable by third parties to us under certain circumstances; a termination fee of $6,348, which is equal to 3.0% of the net asset value of AIF as of September 30, 2023, payable by third parties to AIF under certain circumstances; and a termination fee of $7,029, which is equal to 3.0% of the net asset value of AFT as of September 30, 2023, payable by third parties to AFT under certain circumstances. These termination fees might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of us, AIF or AFT from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than that proposed in the Mergers or might result in a potential competing acquirer proposing to pay a lower per share price to acquire us, AIF or AFT than it might otherwise have proposed to pay.

The opinions delivered to our Special Committee, the AIF Special Committee and the AFT Special Committee from their respective financial advisors prior to the signing of the Merger Agreements will not reflect changes in circumstances since the date of the opinions.

The opinion of Lazard Ltd, the financial advisor to the our Special Committee, was delivered to our Special Committee and our Board of directors on, and was dated, November 6, 2023. The opinion of Keefe, Bruyette & Woods Inc., A Stifel Company, the financial advisor to the AIF Special Committee, was delivered to the AIF Special Committee and the AIF Board on, and was dated, November 6, 2023. The opinion of Keefe, Bruyette & Woods Inc., A Stifel Company, the financial advisor to the AFT Special Committee, was delivered to the AFT Special Committee and the AFT Board on, and was dated, November 6, 2023. Changes in our, AIF’s or AFT’s operations and prospects, general market and economic conditions and other factors that may be beyond the control of us, AIF or AFT may significantly alter our, AIF’s or AFT’s respective value or the respective price of shares of our common stock, AIF Common Stock or AFT Common Stock by the time the AIF Merger or AFT Merger, as applicable, is completed. The opinions do not speak as of the time the AIF Merger or the AFT Merger, as applicable, will be completed or as of any date other than the date of such opinions. For a description of the opinion that the MFIC Special Committee received from its financial advisor.

The Mergers are subject to closing conditions, including stockholder approvals, that, if not satisfied or (to the extent legally allowed) waived, will result in the Mergers not being completed, which may result in material adverse consequences to the business and operations of us, AIF and/or AFT.

The Mergers are subject to closing conditions, including certain approvals of our stockholders, AIF Stockholders and/or AFT Stockholders that, if not satisfied, will prevent the Mergers from being completed. The closing condition that AIF Stockholders and AFT Stockholders approve the applicable Merger Proposal may not be waived under applicable law and must be satisfied for each of the Mergers to be completed. If AIF Stockholders and/or AFT Stockholders do not approve the applicable Merger Proposal and either or both of the Mergers is not completed, the resulting failure could have a material adverse impact on us, AIF’s and/or AFT’s respective businesses and operations. The closing of the AIF Merger is not contingent on the closing of the AFT Merger, and vice versa. If our stockholders do not approve the issuance of shares in connection with the Mergers and the Mergers are not completed, the resulting failure of the Mergers could have a material adverse impact on us, AIF’s and AFT’s respective businesses and operations. In addition to the required approvals of our stockholders, AIF Stockholders and AFT Stockholders, the Mergers are subject to a number of other conditions beyond the control of us, AIF and AFT that may prevent, delay or otherwise materially adversely affect completion of the Mergers. We, AIF and AFT cannot predict whether and when these other conditions will be satisfied. The failure to complete the Mergers would result in us, AIF and AFT, and our stockholders, AIF Stockholders and AFT Stockholders, failing to realize the anticipated benefits of the Mergers.

We, AIF and/or AFT may, to the extent legally allowed, waive one or more conditions to the AIF Merger and/or the AFT Merger, as applicable, without resoliciting stockholder approval.

Certain conditions to our, AIF’s and AFT’s respective obligations to complete the AIF Merger and/or the AIF Merger, as applicable, may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by mutual agreement. In the event that any such waiver does not require resolicitation of stockholders, we, AIF and/or AFT will each have the discretion to complete the AIF Merger and/or the AFT Merger, as applicable, without seeking further stockholder approval. The conditions requiring the approval of our stockholders, AIF Stockholders and AFT Stockholders, as applicable, however, cannot be waived.

We, AIF and AFT will be subject to operational uncertainties and contractual restrictions while the Mergers are pending.

Uncertainty about the effect of the Mergers may have an adverse effect on us, AIF and/or AFT and, consequently, on the combined company following completion of the Mergers. These uncertainties may cause those that deal with us, AIF and/or AFT to seek to change their existing business relationships with them. In addition, the Merger Agreement restricts us, AIF and AFT from taking actions that each might otherwise consider to be in its best interests. These restrictions may prevent us, AIF and/or AFT from pursuing certain business opportunities that may arise prior to the completion of the Mergers.

Litigation filed against us, AIF and/or AFT in connection with the Mergers could result in substantial costs and could delay or prevent either or both of the Mergers from being completed.

From time to time, we, AIF and/or AFT may be subject to legal actions, including securities class action lawsuits and derivative lawsuits, as well as various regulatory, governmental and law enforcement inquiries, investigations and subpoenas in connection with the Mergers. These or any similar securities class action lawsuits and derivative lawsuits, regardless of their merits, may result in substantial costs and divert management time and resources. An adverse judgment in such cases could have a negative impact on the liquidity and financial condition of us, AIF, AFT and/or the combined company following the Mergers or could prevent either or both of the Mergers from being completed.

The Mergers may trigger certain “change of control” provisions and other restrictions in contracts of us, AIF and/or AFT or their affiliates and the failure to obtain any required consents or waivers could adversely impact the combined company.

Certain of our agreements and the agreements of AIF, AFT or their affiliates may require by their terms the consent or waiver of one or more counterparties in connection with the Mergers. The failure to obtain any such consent or waiver may permit such counterparties to terminate, or otherwise increase their rights or our, AIF’s or AFT’s obligations under, any such agreement because the Mergers or other transactions contemplated by the Merger Agreements may violate an anti-assignment, change of control or similar provision relating to any of such transactions. If this occurs, we may have to seek to replace that agreement with a new agreement or seek an amendment to such agreement. We, AIF and AFT cannot assure you that we will be able to replace or amend any such agreement on comparable terms or at all.

If any such agreement is material, the failure to obtain consents, amendments or waivers under, or to replace on similar terms or at all, any of these agreements could adversely affect the financial performance or results of operations of the combined company following the Mergers, including preventing us from operating a material part of AIF’s or AFT’s businesses.

In addition, the consummation of the Mergers may violate, conflict with, result in a breach of provisions of, or the loss of any benefit under, constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, or result in the termination, cancellation, acceleration or other change of any right or obligation (including any payment obligation) under, certain agreements of us, AIF and AFT. Any such violation, conflict, breach, loss, default or other effect could, either individually or in the aggregate, have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following completion of the Mergers.

The shares of our common stock to be received by AIF Stockholders and AFT Stockholders as a result of the Mergers will have different rights associated with them than shares of AIF Common Stock and AFT Common Stock currently held by them.

The rights associated with AIF Common Stock and AFT Common Stock are different from the rights associated with our common stock.