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).
Reporting Period: Fiscal year ended September 30, 2017.
Business Overview: Medley Capital 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. It is also taxed as a Regulated Investment Company (RIC). The company's objective is to generate current income and capital appreciation by lending directly to privately held middle-market companies, primarily through senior secured first and second lien term loans, unitranche loans, and occasionally equity participation features.
Key Financial Metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total Investment Income | $96.3 million | $120.7 million |
| Net Investment Income | $36.4 million | $53.6 million |
| Net Realized Gain/(Loss) | ($73.1 million) | ($39.4 million) |
| Net Unrealized Appreciation/(Depreciation) | $21.6 million | ($42.3 million) |
| Net Increase/(Decrease) in Net Assets from Operations | ($15.1 million) | ($28.0 million) |
| Total Assets | $959.6 million | $1,030.9 million |
| Total Liabilities | $499.1 million | $514.0 million |
| Total Net Assets | $460.4 million | $516.9 million |
| Net Asset Value (NAV) per Share | $8.45 | $9.49 |
| Weighted Average Yield on Debt Investments | 10.8% | 11.8% |
| Dividends Declared per Share | $0.76 | $1.12 |
Debt and Liquidity: As of September 30, 2017, the company had $102.0 million outstanding under its Term Loan Facility, $68.0 million under its Revolving Credit Facility, $176.9 million in unsecured Notes, and $150.0 million in SBA-guaranteed debentures. Cash and cash equivalents totaled $108.6 million.
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately 20.3% to $96.3 million, driven by a smaller portfolio size and lower interest rates on new originations compared to the prior year.
- Expense Reduction: Total operating expenses decreased by 11.1% to $59.6 million. This was primarily due to a significant reduction in incentive fees (down 92.2% to $0.9 million) resulting from lower pre-incentive fee net investment income and the impact of a fee waiver agreement.
- Realized Losses: Net realized losses increased significantly to $73.1 million (from $39.4 million in 2016). This was primarily due to non-cash restructuring transactions involving three investments, the liquidation of one investment, and write-offs, partially offset by a non-cash exchange of an equity investment.
- Unrealized Gains: The company recorded $21.6 million in net unrealized appreciation, a reversal from the $42.3 million depreciation recorded in 2016.
- Portfolio Composition: The portfolio fair value decreased from $914.2 million to $837.0 million. The number of portfolio companies increased from 58 to 64.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary: Management noted that the decrease in net investment income was due to the decline in the portfolio size and the effect of the fee waiver agreement. The company continues to focus on lending to middle-market companies to generate current income and capital appreciation.
Dividends: The board declared a quarterly dividend of $0.16 per share for the fourth quarter of 2017 (payable December 22, 2017), maintaining the rate from the third quarter but lower than the $0.22 per share paid in the first two quarters of the fiscal year.
Risks and Contingencies:
- Legal Proceedings: MCC Advisors is a defendant in a lawsuit filed by Moshe Barkat and Modern VideoFilm Holdings, LLC, seeking damages in excess of $100 million related to a defaulted loan. The company is vigorously defending the lawsuit.
- Non-Accrual Status: As of September 30, 2017, investments in six portfolio companies were on non-accrual status with a combined fair value of approximately $72.5 million (8.7% of the portfolio).
- Leverage: The company utilizes leverage to enhance returns, which magnifies the potential for loss. It is subject to asset coverage requirements under the 1940 Act (minimum 200%).
- Interest Rate Risk: Approximately 83.5% of the income-bearing portfolio bears interest based on floating rates (LIBOR). Rising rates could increase borrowing costs, though they may also increase income on floating-rate assets.
Key Facts for Investor Verification
- NAV Decline: Verify the reasons for the $1.04 per share decline in NAV from 2016 to 2017, specifically the impact of the $73.1 million in realized losses.
- Dividend Sustainability: Assess whether the reduced dividend rate ($0.16 per share in Q3/Q4) is sustainable given the decline in Net Investment Income to $36.4 million.
- Non-Accrual Exposure: Review the specific details of the six portfolio companies on non-accrual status ($72.5 million fair value) and the likelihood of recovery.
- Legal Exposure: Monitor the status of the Modern VideoFilm lawsuit against MCC Advisors and the potential financial impact on the company.
- Fee Structure: Confirm the ongoing impact of the Fee Waiver Agreement on future expense ratios and net investment income.