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, 2015
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 2015 | Q4 2014 |
|---|---|---|
| Total Investment Income | $34.4 million | $39.8 million |
| Net Investment Income | $15.7 million | $20.4 million |
| Net Increase/(Decrease) in Net Assets from Operations | $(39.2) million | $(18.3) million |
| Net Asset Value (NAV) per Share | $10.01 | $11.74 |
| Weighted Average EPS (Basic & Diluted) | $(0.70) | $(0.31) |
| Total Assets | $1.167 billion | $1.257 billion (Sep 30, 2015) |
| Total Liabilities | $604.4 million | $637.3 million (Sep 30, 2015) |
| Cash and Cash Equivalents | $24.1 million | $15.7 million (Sep 30, 2015) |
| Dividends Declared per Share | $0.30 | $0.37 |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased to $1.115 billion from $1.216 billion at September 30, 2015. This decline was driven by net unrealized depreciation of $60.0 million for the quarter.
- Investment Income: Total investment income decreased by approximately $5.4 million (13.6%) compared to the prior year quarter, primarily due to a reduction in interest income from portfolio investments.
- Net Loss: The net decrease in net assets from operations widened to $39.2 million from $18.3 million in the prior year quarter, largely attributable to increased unrealized depreciation on investments.
- Debt Structure: The Company issued $70.8 million in aggregate principal amount of 6.50% unsecured notes due 2021 in December 2015. Outstanding debt under the Revolving Credit Facility decreased to $89.2 million from $192.7 million at the prior quarter-end.
- Non-Accrual Status: The number of investments on non-accrual status increased to seven (fair value of $46.6 million) from three (fair value of $25.5 million) at September 30, 2015.
Guidance, Outlook, and Management Commentary
- Fee Reduction Agreement: Effective January 1, 2016, the Company and its advisor, MCC Advisors, agreed to a reduced fee structure. The base management fee will be 1.75% on the first $1.0 billion of gross assets and 1.50% on amounts thereafter. The incentive fee structure was also modified to a trailing twelve-quarter calculation with a lower hurdle rate and a reduced percentage on excess income.
- Stock Repurchase Program: The Board extended the stock repurchase program through December 31, 2016, and increased the aggregate authorization to $50.0 million. During Q4 2015, the Company repurchased 143,349 shares at an average price of $7.68 per share.
- Dividend Policy: The Board declared a quarterly dividend of $0.30 per share on February 1, 2016, payable March 18, 2016.
- Market Risk: As of December 31, 2015, 79.3% of the income-bearing portfolio bore floating interest rates. The Company noted that a 100 basis point increase in interest rates would result in a net decrease in net assets of approximately $2.4 million due to higher interest expenses relative to income.
- Legal Proceedings: The Company is defending a lawsuit filed by Moshe Barkat and Modern VideoFilm Holdings, LLC seeking damages in excess of $100 million related to a loan to Modern VideoFilm, Inc. The Company disputes the claims and is prosecuting counterclaims.
Investor Verification Checklist
- Unrealized Depreciation: Verify the magnitude of the $60.0 million unrealized depreciation and the specific portfolio companies driving the valuation declines.
- Non-Accrual Loans: Review the details of the seven investments placed on non-accrual status and the Company's assessment of collectability.
- Fee Waiver Impact: Confirm the projected savings from the new fee structure effective January 1, 2016, and its impact on future Net Investment Income.
- Debt Maturities: Assess the liquidity position relative to the $587.5 million in total debt outstanding, including the new 2021 Notes.
- Legal Exposure: Monitor the status of the Modern VideoFilm litigation and potential financial impact.