Business Context and Reporting Period
Company: Medley Capital Corporation (Note: Input metadata listed "Phenixfin Corp," but the filing text identifies the registrant as Medley Capital Corporation).
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2020
Business Overview: Medley Capital Corporation is an externally-managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. Its investment objective is to generate current income and capital appreciation by lending to privately-held middle market companies, primarily through senior secured first and second lien term loans.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2020 | Six Months Ended Mar 31, 2020 | As of Mar 31, 2020 |
|---|---|---|---|
| Total Investment Income | $5.3 million | $12.8 million | — |
| Total Expenses (Net of Waivers) | $9.5 million | $13.9 million | — |
| Net Investment Income/(Loss) | $(4.2) million | $(1.1) million | — |
| Net Realized Gain/(Loss) | $(0.1) million | $(1.8) million | — |
| Net Unrealized Appreciation/(Depreciation) | $(73.6) million | $(69.8) million | — |
| Net Increase/(Decrease) in Net Assets | $(78.9) million | $(74.7) million | — |
| Net Asset Value (NAV) per Share | — | — | $2.60 |
| Total Investments at Fair Value | — | — | $255.9 million |
| Cash and Cash Equivalents | — | — | $61.1 million |
| Total Debt Outstanding (Carrying Value) | — | — | $171.2 million |
| Asset Coverage Ratio | — | — | 181.9% |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased significantly from $396.9 million as of September 30, 2019, to $255.9 million as of March 31, 2020. This decline was driven primarily by $69.8 million in net unrealized depreciation over the six-month period.
- Net Assets: Total net assets declined from $216.4 million to $141.7 million, a decrease of approximately $74.7 million for the six months ended March 31, 2020.
- Debt Reduction: Total debt outstanding decreased from $251.7 million to $171.2 million. This reduction was largely due to the repayment of $64.2 million of Israeli Notes and the full repayment of $135.0 million in SBA Debentures (completed in May 2019, with impacts reflected in the period).
- Operating Expenses: Total operating expenses decreased by approximately 60.9% compared to the six months ended March 31, 2019, primarily due to insurance proceeds received related to legal expenses and a decrease in legal and valuation expenses.
- Dividends: The Company did not declare or pay any dividends during the six months ended March 31, 2020, whereas it paid $0.15 per share in the comparable prior period.
Guidance, Outlook, Risks, and Unusual Items
- Merger Termination: On May 1, 2020 (subsequent to the period end), Sierra Income Corporation terminated the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement. Consequently, no settlement fund will be established for stockholders, and the Investment Management Agreement is scheduled to terminate on May 31, 2020, unless renewed by the Board.
- Asset Coverage Restriction: As of March 31, 2020, the Company's asset coverage ratio was 181.9%, which is below the 200% minimum requirement under the 1940 Act. As a result, the Company is prohibited from making distributions to stockholders and cannot employ further leverage until the ratio improves.
- COVID-19 Impact: The filing highlights material uncertainty regarding the impact of the COVID-19 pandemic on the global economy and the Company's portfolio. While valuations as of March 31, 2020, were based on information available at that time, subsequent volatility may result in lower fair values for portfolio investments.
- Non-Accrual Status: As of March 31, 2020, investments in ten portfolio companies were on non-accrual status with a combined fair value of approximately $28.2 million (11.0% of the portfolio), and two companies were on partial non-accrual status ($13.3 million).
- Loss on Extinguishment of Debt: The Company recognized a net loss on extinguishment of debt of $1.8 million for the six months ended March 31, 2020, primarily due to the prepayment of Israeli Notes.
Investor Verification Checklist
- Dividend Suspension: Verify the implications of the asset coverage ratio falling below 200% on the Company's ability to resume dividend payments.
- Management Continuity: Confirm the status of the Investment Management Agreement following the termination of the merger and the potential termination date of May 31, 2020.
- Portfolio Valuation Sensitivity: Assess the potential for further unrealized depreciation in the portfolio due to ongoing economic disruptions from the COVID-19 pandemic.
- Debt Covenants: Review the specific covenants related to the remaining debt instruments (2021 Notes, 2023 Notes) to ensure compliance given the reduced asset base.
- Non-Accrual Concentration: Evaluate the specific portfolio companies on non-accrual status and the likelihood of recovery or further write-downs.