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, a Business Development Company (BDC) and Regulated Investment Company (RIC).)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2017
Overview: The Company invests in privately-held middle market companies, primarily through senior secured first and second lien term loans. It is externally managed by MCC Advisors LLC.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2017 | Six Months Ended Mar 31, 2017 | Six Months Ended Mar 31, 2016 |
|---|---|---|---|
| Total Investment Income | $24.36 million | $50.41 million | $65.14 million |
| Total Expenses (Net of Waivers) | $16.31 million | $31.97 million | $34.90 million |
| Net Investment Income | $8.04 million | $18.18 million | $30.24 million |
| Net Realized Gain/(Loss) | $0.01 million | ($6.29 million) | $5.48 million |
| Net Unrealized Appreciation/(Depreciation) | ($19.84 million) | ($17.35 million) | ($74.12 million) |
| Net Increase/(Decrease) in Net Assets | ($12.25 million) | ($5.92 million) | ($38.76 million) |
| Net Asset Value (NAV) per Share | $8.94 | $8.94 | $9.80 |
| Cash and Cash Equivalents | $83.52 million | $83.52 million | $12.71 million |
| Total Debt Outstanding (Principal) | $534.86 million | $534.86 million | $515.51 million |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately 20.7% for the six months ended March 31, 2017, compared to the same period in 2016. This was driven by a decrease in interest income from non-controlled/non-affiliated investments.
- Expense Reduction: Total expenses decreased by approximately 8.4% year-over-year for the six-month period, primarily due to lower base management fees (linked to lower gross assets) and reduced incentive fees.
- Unrealized Depreciation: The Company recorded $17.35 million in net unrealized depreciation for the six months ended March 31, 2017, a significant improvement compared to $74.12 million in depreciation recorded in the prior year period.
- Realized Losses: A net realized loss of $6.29 million was recorded for the six months ended March 31, 2017, primarily due to non-cash restructuring transactions, contrasting with a $5.48 million realized gain in the prior year.
- Debt Extinguishment: The Company recognized a $0.46 million loss on the extinguishment of debt following the redemption of its 2019 Notes in February 2017.
Guidance, Outlook, and Risks
- Dividend Declaration: On May 5, 2017, the Board declared a quarterly dividend of $0.16 per share, payable June 23, 2017. This represents a reduction from the $0.22 per share dividend paid in the previous two quarters.
- Portfolio Quality: As of March 31, 2017, 9.9% of the portfolio (approximately $91.5 million) was on non-accrual status, an increase from 6.1% at September 30, 2016. Investments rated "5" (substantially below expectations) increased to 7.4% of the portfolio.
- Liquidity: The Company maintains $83.5 million in cash and cash equivalents. It has $166.0 million of unused capacity on its Revolving Credit Facility and $10.3 million in unfunded commitments to portfolio companies.
- Interest Rate Risk: 83.4% of the income-bearing portfolio bears floating interest rates. A hypothetical 100 basis point increase in interest rates would result in a net increase in net assets of approximately $2.6 million.
- Legal Proceedings: The Company is defending against a lawsuit filed by MVF Holdings regarding a defaulted loan. The Company believes the claims are without merit.
Investor Verification Checklist
- Dividend Sustainability: Verify the impact of the dividend reduction to $0.16/share on future cash flow requirements and the Company's ability to maintain distributions given the decline in Net Investment Income.
- Non-Accrual Trends: Monitor the 9.9% non-accrual rate and the specific portfolio companies contributing to this increase to assess potential future credit losses.
- Debt Maturity Profile: Review the maturity schedule of the $534.86 million in outstanding debt, noting the redemption of the 2019 Notes and the upcoming maturities of the Term Loan Facility (2020) and Revolver (2019/2020).
- Fee Waiver Impact: Confirm the ongoing effect of the fee waiver agreement with MCC Advisors on the Company's expense ratio and Net Investment Income.
- NAV vs. Market Price: Compare the reported NAV of $8.94 per share against the market trading price to evaluate the discount/premium at which the stock is trading.