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).
Reporting Period: Three and six months ended March 31, 2011.
Business Overview: Medley Capital Corporation is a non-diversified, externally managed closed-end management investment company regulated as a Business Development Company (BDC). The Company commenced operations and completed its Initial Public Offering (IPO) on January 20, 2011. Its investment objective is to generate current income and capital appreciation by lending directly to privately-held small and middle-market companies, primarily through senior secured first and second lien term loans.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 | Six Months Ended Mar 31, 2011 |
|---|---|---|
| Total Investment Income | $2,779,131 | $2,779,131 |
| Total Expenses (Net of Waiver) | $1,035,993 | $1,132,855 |
| Net Investment Income | $1,743,138 | $1,646,276 |
| Earnings Per Share (Basic & Diluted) | $0.10 | $0.10 |
| Cash and Cash Equivalents | $112,019,181 (as of Mar 31, 2011) | |
| Total Investments at Fair Value | ||
| Total Assets | $218,216,208 | |
| Total Liabilities | $2,025,255 | |
| Net Assets | $216,190,953 | |
| Net Asset Value (NAV) Per Share | $12.48 |
Material Changes vs. Prior Period
The Company commenced principal operations on January 20, 2011. Consequently, there are no prior comparable periods for the three and six months ended March 31, 2011. The financial statements reflect the Company's formation, IPO, and initial investment activities.
- Capital Raise: The Company raised approximately $129.6 million in net proceeds from its IPO and the partial exercise of the underwriters' over-allotment option.
- Portfolio Formation: The portfolio was established through a formation transaction contributing approximately $84.95 million in loan assets and subsequent new investments totaling approximately $20 million during the quarter.
- Asset Growth: Total assets increased from $64,950 at September 30, 2010 (pre-IPO) to $218.2 million at March 31, 2011.
Guidance, Outlook, and Management Commentary
Outlook: Management anticipates that substantially all net proceeds from the IPO will be invested by the fourth quarter of 2011. The portfolio is expected to primarily consist of senior secured first and second lien term loans.
Management Fee Waiver: The investment adviser, MCC Advisors, agreed to waive the base management fee payable with respect to cash and cash equivalents held by the Company through June 30, 2011. This resulted in a waiver of $424,692 for the period.
Dividends: On May 11, 2011, the Board declared a quarterly dividend of $0.16 per share, payable June 15, 2011. The Company intends to qualify as a Regulated Investment Company (RIC) and distribute at least 90% of its taxable income to avoid federal income tax.
Risks and Contingencies:
- Valuation Risk: All portfolio investments are classified as Level 3 fair value measurements, relying on unobservable inputs and management judgment due to the lack of readily available market quotations.
- Concentration Risk: As of March 31, 2011, 81% of investments were held via participation agreements with affiliated entities, subjecting the Company to the credit risk of the affiliate in addition to the borrower.
- Liquidity: The portfolio consists of illiquid debt instruments. The Company currently holds significant cash ($112 million) pending deployment.
Subsequent Events:
- April 21, 2011: Closed a $15.0 million senior secured second lien term loan to United Road Towing, Inc.
- April 21, 2011: Closed a $7.0 million senior secured note investment in Sizzling Platter, LLC.
Investor Verification Checklist
- Capital Deployment Timeline: Verify the Company's ability to deploy the $112 million in cash reserves by the end of 2011 as anticipated by management.
- Fee Waiver Expiration: Monitor the impact on net investment income when the management fee waiver on cash expires on June 30, 2011.
- Valuation Methodology: Review the independent valuation reports for Level 3 assets, as fair value is determined by the Board based on management and third-party inputs rather than market prices.
- Related Party Exposure: Assess the credit risk associated with the 81% of the portfolio held through participation agreements with affiliated entities.
- Dividend Sustainability: Confirm that future distributions are supported by taxable income to maintain RIC status and avoid excise taxes.