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: December 31, 2017
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. The Company invests primarily in senior secured first and second lien term loans to privately-held middle market companies in the United States.
Key Financial Metrics
| Metric | Q4 2017 | Q4 2016 |
|---|---|---|
| Total Investment Income | $20.63 million | $26.06 million |
| Net Investment Income | $7.18 million | $10.13 million |
| Net Increase/(Decrease) in Net Assets from Operations | $(31.94) million | $6.33 million |
| Net Asset Value (NAV) per Share | $7.71 | $9.39 |
| Weighted Average EPS (Basic & Diluted) | $(0.59) | $0.12 |
| Cash and Cash Equivalents | $50.01 million | $108.57 million (Sep 30, 2017) |
| Total Debt Outstanding (Principal) | $475.86 million | $496.86 million (Sep 30, 2017) |
| Dividends Declared per Share | $0.16 | $0.22 |
Material Changes vs. Prior Period
- Operating Results: The Company recorded a net decrease in net assets of $31.94 million for the quarter, compared to a net increase of $6.33 million in the prior year. This decline was primarily driven by $39.19 million in net unrealized depreciation on investments.
- Investment Income: Total investment income decreased by approximately $5.4 million (20.8%) year-over-year, largely due to a reduction in interest income from non-controlled/non-affiliated investments.
- Expenses: Total expenses decreased by $2.34 million (15.0%) compared to the prior year. This was driven by a decrease in interest and financing expenses (due to debt repayments and facility reductions) and the elimination of incentive fees for the current quarter.
- Portfolio Valuation: Total investments at fair value decreased slightly from $837.0 million at September 30, 2017, to $835.9 million at December 31, 2017.
- Liquidity: Cash and cash equivalents decreased by approximately $58.6 million during the quarter, primarily due to net cash used in operating activities ($28.8 million) and financing activities ($29.7 million), which included debt paydowns and dividend payments.
Guidance, Outlook, and Risks
- Subsequent Events: On January 26, 2018, the Company priced a debt offering in Israel of $121.1 million of 5.05% Series A Notes. Proceeds were used to repay the Term Loan Facility, effectively terminating it. A quarterly dividend of $0.16 per share was declared on January 30, 2018.
- Non-Accrual Status: As of December 31, 2017, investments in eight portfolio companies were on non-accrual status with a combined fair value of approximately $65.2 million (7.8% of the portfolio).
- Legal Proceedings: The Company is involved in a putative class action lawsuit filed in January 2018 regarding alleged payday lending activities of a former portfolio company (American Web Loan). The Company believes the claims are without merit.
- Tax Reform: The Company noted uncertainty regarding the impact of the Tax Cuts and Jobs Act enacted in December 2017 on its taxable subsidiaries and overall tax position.
- Unfunded Commitments: The Company had commitments to fund up to $34.0 million to 17 portfolio companies as of December 31, 2017.
Key Facts for Investor Verification
- Significant Unrealized Losses: Verify the drivers of the $39.2 million net unrealized depreciation, specifically the impact of credit rating downgrades or market yield changes on Level 3 assets.
- Debt Structure Changes: Confirm the impact of the January 2018 termination of the Term Loan Facility and the issuance of the new 2024 Notes on future interest expense and liquidity.
- Non-Accrual Portfolio: Review the specific portfolio companies on non-accrual status and the Company's recovery expectations for the $65.2 million in affected assets.
- Dividend Coverage: Assess the sustainability of the $0.16 quarterly dividend given the net decrease in net assets and the reliance on PIK (Payment-in-Kind) interest to meet distribution requirements.
- Legal Exposure: Monitor the status of the Solomon v. American Web Loan class action lawsuit and potential indemnification claims.