PhenixFIN Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2024; filed May 10, 2024. PhenixFIN is an internally managed business development company (BDC) and regulated investment company (RIC), investing mainly in private-company debt and equity. Dollar figures are U.S. dollars.
Financial performance and condition
| Metric | Three months ended Mar. 31, 2024 | Six months ended Mar. 31, 2024 | Comparable 2023 period |
|---|---|---|---|
| Investment income | $4.66 million | $10.38 million | $4.91 million; $9.62 million |
| Net expenses | $4.09 million | $8.10 million | $3.14 million; $6.19 million |
| Net investment income | $0.57 million | $2.28 million | $1.77 million; $3.42 million |
| Net realized investment loss | $1.79 million | $1.56 million | $0.81 million; $0.80 million |
| Net unrealized investment appreciation | $6.59 million | $9.19 million | $5.75 million; $8.04 million |
| Net increase in assets from operations | $5.37 million | $9.91 million | $6.71 million; $10.66 million |
| Basic and diluted earnings per share | $2.62 | $4.81 | $3.20; $5.08 |
Quarterly and six-month net investment income as a proportion of investment income was approximately 12% and 22%, respectively; these are calculated ratios, not company-reported margin measures.
- Portfolio and NAV: Investments at fair value were $220.0 million, down from $226.5 million at September 30, 2023. Net assets were $154.3 million, up from $146.7 million, and NAV per share rose to $76.35 from $70.75. Investment gains were substantially unrealized.
- Cash flow and liquidity: Cash and cash equivalents were $19.1 million, versus $6.0 million at fiscal year-end. Six-month operating cash flow was $15.7 million, compared with cash used of $11.4 million in 2023. Financing activities used $2.6 million, including $2.34 million of share repurchases.
- Debt and leverage: Principal debt outstanding was $85.9 million: $57.5 million of 5.25% notes due 2028 and $28.4 million drawn on the revolving facility. The facility was increased from $50.0 million to $62.5 million in February 2024; borrowings bear Term SOFR plus 2.90%. Asset coverage was 279.5%, above the 200% requirement, and the company reported compliance with facility terms.
- Portfolio credit: Three portfolio companies had investments on non-accrual with a combined fair value of approximately $21.1 million, or 9.6% of portfolio fair value, versus four companies and $6.5 million, or 2.9%, at September 30, 2023. Investments rated 5, where some principal loss is expected, increased to 8.3% of portfolio fair value from 2.9%.
- Valuation and mix: 68.4% of investments by fair value were Level 3 or measured using NAV, including $150.5 million of Level 3 assets. Debt and other income-producing investments had a reported weighted-average yield of 13.6%. Portfolio fair value included 45.6% equity and warrants and 48.4% first-lien term loans.
Material changes versus comparable periods
- Six-month investment income increased about 8%, but net investment income fell about 33% as expenses rose about 31%. Management attributed higher interest and financing costs primarily to increased credit-facility borrowings; salaries and benefits also rose substantially, partly reflecting cash incentive-plan expense.
- Despite higher unrealized appreciation, six-month net increase in assets from operations declined about 7%; EPS fell from $5.08 to $4.81. For the quarter, operations-generated net increase fell from $6.71 million to $5.37 million.
- Portfolio fair value declined by $6.4 million from September 30, 2023. Affiliated investments fell from $37.3 million to $14.3 million, including sales and settlements; controlled investments rose from $63.6 million to $73.3 million. The company recorded $7.0 million of realized gains on Maritime Wireless Holdings, alongside losses on other investments.
- Share repurchases totaled $2.34 million during the six months; 40,000 shares were repurchased in March at $45 per share. The program had approximately $6.9 million of remaining authorization at March 31.
Outlook, commentary, risks and unusual items
- The filing gives no numerical earnings or portfolio guidance. Management cautions that interim results may not indicate full-year results. The company did not declare regular distributions for the quarter or six-month period; on May 9, 2024, the board declared a subsequent special dividend of $1.31 per share, payable June 10 to holders of record May 27.
- Interest-rate sensitivity: management estimated that, assuming no defaults or prepayments, a 100-basis-point rate increase would raise annual net assets from operations by approximately $1.8 million; a 100-basis-point decrease would reduce them by approximately $1.8 million. The company reported no hedging activity for the periods disclosed.
- Key risks include borrower defaults and rising non-accruals, leverage and floating-rate funding costs, illiquid investments, reliance on Level 3 valuations, market and geopolitical volatility, and the possibility that higher rates strain portfolio borrowers. The company is non-diversified; FlexFIN, its asset-based-lending affiliate, represented 14.0% of total assets. The filing also describes gemstone-collateral and fraud risks associated with that business.
- Unusual and subsequent items: a realized loss of $1.56 million for the six months included a $6.9 million gain on Maritime Wireless, offset by other realized losses. On April 9, PhenixFIN entered a transaction under which ECC Capital acquired Kemmerer Holdings and PhenixFIN received 44% of ECC and a senior secured note; the note bears three-month Term SOFR plus 5.00% and matures in 2031. On May 2, the company issued an additional $1.66 million of 5.25% notes due 2028.
- A separate proposed insurance investment was expected to total approximately $49 million, subject to closing conditions and regulatory approvals. The filing does not establish that it had closed by the filing date.
- Management noted that subsequent market volatility could result in lower investment valuations. Investment fair values, especially Level 3 assets, depend on assumptions and may differ materially from realized values. The company reported no material legal proceedings and effective disclosure controls as of March 31.
Most important facts for investors to verify
- Whether the rise in non-accrual exposure and 8.3% allocation to rating-5 investments leads to further losses, restructurings, or reduced cash income.
- The assumptions and independent support for Level 3 valuations, including significant holdings and unrealized gains that contributed to NAV growth.
- Whether net investment income can cover operating costs and distributions, given expense growth, leverage costs, and the absence of regular distributions during the period.
- The final terms, funding, regulatory approvals, and financial effects of the ECC/Kemmerer transaction and the proposed insurance investment.
- Cash availability, credit-facility borrowing-base capacity and covenants, and asset-coverage headroom after subsequent transactions and distributions.