PhenixFIN Corporation — Form 10-Q Summary
Reporting period: Three and six months ended March 31, 2023, the company’s fiscal second quarter. PhenixFIN is an internally managed business development company (BDC) investing primarily in debt and equity of private companies. Figures below are unaudited.
Financial performance and position
| Metric | Quarter ended March 31, 2023 | Six months ended March 31, 2023 |
|---|---|---|
| Total investment income | $4.91 million | $9.62 million |
| Total expenses | $3.14 million | $6.19 million |
| Net investment income (NII) | $1.77 million; $0.85 per share | $3.42 million; $1.63 per share |
| Net realized investment gains (losses) | $(0.81) million | $(0.80) million |
| Net unrealized investment gains | $5.75 million | $8.04 million |
| Increase in net assets from operations | $6.71 million; $3.20 per share | $10.66 million; $5.08 per share |
- At March 31, 2023, net assets were $131.2 million and NAV was $62.70 per share, versus $120.8 million and $57.49 at September 30, 2022. The six-month increase in NAV primarily reflected operating gains, including unrealized appreciation.
- Investments had a fair value of $200.1 million, compared with $193.0 million at September 30, 2022. Investment cost was $262.5 million, substantially above fair value.
- Cash and cash equivalents were $10.8 million, down from $22.8 million. Operating activities used $11.4 million of cash in the six-month period; financing activities used $0.6 million. Ending cash was $10.8 million.
- Debt principal outstanding was $80.7 million: $57.5 million of 5.25% notes due 2028 and $23.2 million drawn under a $50 million revolving facility. Debt carrying value, net of issuance costs, was $78.9 million. The reported asset coverage ratio was 266.3%, above the 200% requirement.
- There were no dividend distributions during the quarter or six-month period. The company repurchased 10,191 shares during the six months and had approximately $10 million remaining under its $35 million repurchase authorization.
Material changes versus comparable periods
- Quarterly investment income rose approximately 34% from $3.66 million; six-month income rose approximately 42% from $6.79 million. Quarterly and six-month NII increased from $1.15 million and $1.35 million, respectively.
- Six-month operating results rose to $10.66 million from $7.78 million. The 2023 result included $8.04 million of unrealized appreciation but a realized investment loss of $0.80 million; 2022 included $15.68 million of realized gains and $8.96 million of unrealized depreciation.
- Six-month expenses increased 13.8% to $6.19 million, including higher salaries and professional fees. Interest and financing expense declined 3.5% to $2.61 million, partly reflecting redemption of all $22.5 million of 2023 notes in January 2023, funded with the new revolving facility.
- Fair value of investments on non-accrual increased to approximately $9.5 million across six portfolio companies, or 4.7% of portfolio fair value, from $5.2 million across five companies, or 2.7%, at September 30, 2022.
- The portfolio’s investment ratings show 10.9% at ratings 4 or 5, compared with 5.9% at September 30, 2022. Rating 5 investments represented 2.9% of fair value.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or investment guidance. Management’s stated objective remains generating current income and capital appreciation; results for the interim period are not necessarily indicative of the full fiscal year.
- Interest-rate sensitivity is material: the filing estimates that a 100-basis-point increase in benchmark rates would increase net assets from operations by about $1.7 million over the next 12 months, while a 100-basis-point decrease would reduce them by about $1.7 million, assuming no defaults or prepayments. Floating-rate loans may raise income as rates rise, but also raise borrower stress and default risk.
- Valuation and liquidity deserve attention: $151.3 million, about 76% of investments, was classified as Level 3, using significant unobservable inputs. Management cautions that market volatility after March 31 could lead to lower valuations. Portfolio investments are generally illiquid and may be difficult to sell at recorded values.
- Concentration includes FlexFIN, the company’s controlled asset-based lending investment, valued at $38.1 million, and exposure to its affiliate’s asset-based lending business, reported as 17.8% of total assets. The filing identifies risks in the gemstone and jewelry collateral market.
- The company pledged its and its wholly owned subsidiaries’ assets, including portfolio securities and cash, as collateral for the revolving facility. Borrowing availability is subject to covenants and a borrowing base. The company reported material compliance at March 31, 2023.
- Other risks include below-investment-grade borrowers, non-accrual investments, PIK income that may not be received in cash, possible market and geopolitical disruption, and the requirement to maintain BDC asset coverage and RIC distribution qualifications. No material legal proceedings were reported; management said disclosure controls were effective.
Important facts for investors to verify
- Whether the $9.5 million of non-accrual investments and the rising share of weaker-rated holdings lead to further losses or reduced cash interest.
- The assumptions behind Level 3 valuations and the drivers of the $8.0 million six-month unrealized appreciation, particularly the large controlled and affiliated positions.
- Actual borrowing-base availability, facility covenants, interest costs, and asset-coverage headroom following the refinancing of the 2023 notes.
- FlexFIN and other portfolio-company concentration, including risks associated with asset-based lending and gemstone and jewelry collateral.
- Whether operating cash generation supports future investment activity, expenses, and any distributions; no distributions were declared for the periods reported.