PhenixFin Corp. 10-Q Summary: Quarter Ended December 31, 2020
Business Context and Reporting Period
PhenixFin Corp. (formerly Medley Capital Corporation) is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The company invests primarily in senior secured loans and equity of privately-held middle-market companies. This report covers the quarterly period ended December 31, 2020. During this period, the company transitioned from an externally managed structure (via MCC Advisors) to an internalized management structure effective January 1, 2021. Additionally, the company completed a 1-for-20 reverse stock split in July 2020 and transferred its listing from the NYSE to the NASDAQ Global Market.
Key Financial Metrics
| Metric | Q4 2020 | Q4 2019 |
|---|---|---|
| Total Investment Income | $12.8 million | $7.5 million |
| Net Investment Income | $8.3 million | $3.1 million |
| Net Realized Gains/(Losses) | $(46.7) million | $(1.7) million |
| Net Unrealized Appreciation/(Depreciation) | $32.1 million | $3.7 million |
| Net Increase/(Decrease) in Net Assets | $(6.4) million | $4.2 million |
| Net Asset Value (NAV) per Share | $52.94 | $81.00 |
| Total Investments (Fair Value) | $159.5 million | $246.7 million |
| Cash and Cash Equivalents | $62.4 million | $81.7 million |
| Total Debt Outstanding | $77.8 million | $151.9 million |
| Asset Coverage Ratio | 286.7% | 206.1% |
Material Changes vs. Prior Period
- Portfolio Reduction: Total investments at fair value decreased by approximately $87.2 million (35%) from $246.7 million to $159.5 million. This was primarily driven by the sale of the company's interest in the MCC Senior Loan Strategy JV I LLC (MCC JV) in October 2020, which generated net proceeds of $41.0 million.
- Debt Reduction: Total debt outstanding decreased by approximately $74.1 million. The company redeemed all $74.0 million of its 2021 Notes in November 2020 and had previously repaid all Israeli Notes in April 2020. Only the 2023 Notes remain outstanding.
- Realized Losses: The company recognized a net realized loss of $46.7 million, compared to $1.7 million in the prior year. This was largely due to the sale of the MCC JV investment and other portfolio exits.
- Unrealized Gains: Net unrealized appreciation of $32.1 million was recorded, largely offsetting realized losses. This included a reversal of previously recorded unrealized depreciation on investments that were realized or written off.
- Expense Support: The company utilized an Expense Support Agreement with MCC Advisors, capping operating expenses at $667,000 per month, resulting in expense reimbursements that reduced total reported expenses.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the successful transition to an internalized management structure and the deleveraging of the balance sheet. The company emphasized its strong liquidity position with $62.4 million in cash and an asset coverage ratio of 286.7%, well above the 200% regulatory minimum. No dividends were declared for the quarter.
Risks and Contingencies:
- COVID-19 Impact: The pandemic continues to create uncertainty regarding the economic outlook and the performance of portfolio companies. Management noted that while portfolio companies have taken steps to manage liquidity, the long-term impact remains difficult to predict.
- LIBOR Transition: The company faces risks associated with the phase-out of LIBOR, which is used as a benchmark for many of its floating-rate loans. Transitioning to alternative reference rates may involve operational challenges and potential valuation impacts.
- Legal Proceedings: The company is involved in various legal proceedings, including a putative class action lawsuit regarding payday lending activities (American Web Loan) where a settlement agreement is pending final court approval. The company also faces a recent Delaware lawsuit regarding its bylaws.
- Concentration Risk: The portfolio has significant exposure to the construction and building sector (28.7% of gross assets), which is cyclical and sensitive to economic conditions.
Key Facts for Investor Verification
- Management Transition: Verify the operational impact and cost structure changes resulting from the shift from external management (MCC Advisors) to internal management effective January 1, 2021.
- Portfolio Quality: Review the credit ratings of the remaining portfolio, noting that 8.3% of the portfolio fair value was on non-accrual status as of December 31, 2020.
- Debt Maturity: Confirm the terms and maturity of the remaining $77.8 million in 2023 Notes and the company's ability to refinance or repay this debt as it matures in March 2023.
- Legal Settlements: Monitor the status of the American Web Loan class action settlement and the Delaware bylaws litigation for potential financial liabilities or governance changes.
- Share Repurchase Program: Note the subsequent event where the Board approved a $15 million share repurchase program in January 2021.