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: March 31, 2019
Business Overview: Medley Capital Corporation is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC). Its investment objective is to generate current income and capital appreciation by lending to privately-held middle market companies, primarily through senior secured first and second lien term loans.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2019 | Six Months Ended Mar 31, 2019 |
|---|---|---|
| Total Investment Income | $12.6 million | $26.8 million |
| Total Expenses (Net of Waivers) | $23.2 million | $35.6 million |
| Net Investment Income (Loss) | $(10.6) million | $(8.8) million |
| Net Realized Gain/(Loss) | $(10.6) million | $(67.3) million |
| Net Unrealized Appreciation/(Depreciation) | $(3.4) million | $41.6 million |
| Net Increase/(Decrease) in Net Assets | $(24.6) million | $(34.7) million |
| Net Asset Value (NAV) per Share | $5.11 | $5.11 |
| Cash and Cash Equivalents | $73.4 million | $73.4 million |
| Total Debt Outstanding | $407.0 million | $407.0 million |
Material Changes vs. Prior Period
- Operating Expenses: Total operating expenses increased significantly compared to the prior year periods. For the three months ended March 31, 2019, expenses rose by $9.4 million (67.8%) compared to the same period in 2018. This increase was primarily driven by a surge in professional fees (legal, proxy soliciting, and administrative expenses) related to the proposed merger with Sierra Income Corporation.
- Net Investment Income: The company reported a net investment loss of $10.6 million for the quarter, compared to a net investment income of $3.6 million in the prior year quarter. This decline was due to lower investment income and higher operating expenses.
- Realized Losses: The company recognized $10.6 million in realized losses for the quarter, primarily due to non-cash restructuring of a portfolio investment. For the six-month period, realized losses totaled $67.3 million, driven by restructurings and write-offs of certain investments.
- Unrealized Gains: For the six months ended March 31, 2019, the company recorded $41.6 million in net unrealized appreciation, largely due to the reversal of previously recorded unrealized depreciation on investments that were realized or written off during the period.
Guidance, Outlook, Risks, and Contingencies
- Merger with Sierra Income Corporation: The Company is pursuing a merger with Sierra Income Corporation. A stockholder class action lawsuit regarding the merger was settled in principle on April 15, 2019. The settlement includes a $17 million cash and $30 million stock fund for stockholders and extends the merger deadline to October 31, 2019. The merger is expected to cure potential covenant breaches.
- Debt Covenants (2024 Notes): The Company has a minimum net asset covenant of $275 million for its 2024 Notes. As of March 31, 2019, net assets were $278.3 million, leaving a cushion of approximately $3 million. Management stated it is "reasonably likely" that net assets could decline below this threshold by June 30, 2019, potentially triggering a default if not cured via waivers, amendments, or capital raises.
- SBA Debentures Wind-Down: The Company's subsidiary, SBIC LP, received a notice of alleged regulatory default from the SBA. An orderly wind-down plan was submitted and executed, with the full $135 million of SBA Debentures repaid by May 10, 2019, using available cash and asset sales.
- Non-Accrual Investments: As of March 31, 2019, investments in nine portfolio companies were on non-accrual status with a combined fair value of approximately $55.7 million (9.1% of the portfolio).
Investor Verification Checklist
- Covenant Compliance: Verify the Company's ability to maintain the $275 million minimum net asset covenant for the 2024 Notes in the upcoming quarter, given the narrow $3 million cushion.
- Merger Status: Monitor the progress of the merger with Sierra Income Corporation, specifically the approval of the amended merger agreement and the "go-shop" process.
- Portfolio Quality: Review the performance of the nine portfolio companies currently on non-accrual status and the impact of recent write-offs on future earnings.
- Expense Trajectory: Assess whether the elevated professional fees related to the merger litigation and transaction are one-time costs or indicative of a new baseline for operating expenses.
- Liquidity Position: Confirm the impact of the SBA debenture wind-down on the Company's overall liquidity and cash reserves.