PhenixFIN Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter, three months ended December 31, 2022; comparative period is the three months ended December 31, 2021. PhenixFIN is an internally managed, non-diversified business development company (BDC) seeking current income and capital appreciation through debt and equity investments, primarily in privately held companies.
Financial and operating performance
| Metric | Quarter ended Dec. 31, 2022 | Prior-year quarter / comparison |
|---|---|---|
| Total investment income | $4.70 million | $3.13 million |
| Total expenses | $3.05 million | $2.93 million |
| Net investment income | $1.65 million; $0.78 per share | $0.20 million; $0.08 per share |
| Net increase in net assets from operations | $3.95 million; $1.88 per share | $4.80 million; $1.91 per share |
| Net realized investment gains | $0.01 million | $15.22 million |
| Net unrealized investment appreciation | $2.29 million | $10.32 million depreciation |
| Cash and cash equivalents at period end | $17.65 million | $22.77 million at Sept. 30, 2022 |
| Investments at fair value | $183.27 million | $192.96 million at Sept. 30, 2022 |
| Net assets / NAV per common share | $124.69 million / $59.38 | $120.85 million / $57.49 at Sept. 30, 2022 |
Investment income rose 50%, with higher interest, dividend and cash interest income. Expenses increased 4.2%; lower interest and financing expense was partly offset by higher salaries and benefits. Net investment income improved substantially, but total operating results were below the prior-year quarter, which included $15.2 million of realized gains, primarily from restructurings. Quarter-end NAV per share rose from $57.49 to $59.38; the reported quarterly total return based on NAV was 3.18%, while return based on market value was negative 10.98%.
Operating cash flow was negative $4.80 million, compared with negative $9.92 million in the prior-year quarter. Investment sales and settlements were $19.19 million and purchases/originations were $6.93 million. Cash declined by $5.11 million during the quarter.
Portfolio, debt and liquidity
- Portfolio fair value declined $9.69 million from September 30, 2022. The portfolio was approximately 48.4% first-lien loans and 50.7% equity and warrants at fair value. The largest industry exposures were business services (23.0%), banking/finance/real estate (19.1%) and hotel/gaming/leisure (17.5%).
- Portfolio investments had $251.47 million of amortized cost against $183.27 million fair value. Most investments were valued using Level 3 inputs: $135.34 million, or about 74% of portfolio fair value, involved significant unobservable inputs.
- Five portfolio companies were on non-accrual, with combined fair value of $5.4 million, or 2.9% of the portfolio, versus $5.2 million and 2.7% at September 30. Investments rated 4 or 5 increased to 9.4% of portfolio fair value from 5.9%.
- Outstanding principal debt was $80.02 million at quarter end: $22.52 million of 6.125% notes due 2023 and $57.50 million of 5.25% notes due 2028. Net carrying value of notes was $78.07 million. Asset coverage was 259.7%, above the applicable 200% minimum.
- A three-year, $50 million revolving credit facility was entered into in December; it was undrawn at December 31. It bears interest at Term SOFR plus 2.90%, with a 0.25% fee on unused capacity, and the company and subsidiaries pledged their assets as collateral. On January 17, 2023, PhenixFIN borrowed $23.2 million under the facility and used the proceeds to redeem all $22.52 million of the 2023 Notes.
- Unfunded investment commitments were $2.24 million at December 31, down from $6.03 million at September 30. No common-stock distributions were paid during either comparative quarter.
Management commentary, outlook and risks
- The company reported a weighted average yield of 11.3% on debt and other income-producing investments. Its market-risk disclosure states that 79.0% of the income-bearing portfolio by fair value bore floating rates; another disclosure measures floating-rate exposure at 81.6% based on cost.
- Management’s interest-rate sensitivity analysis estimates that, assuming no defaults or prepayments and no portfolio or capital-structure changes, a 100-basis-point rate increase would raise annual interest income and net assets by approximately $2.3 million; a 100-basis-point decrease would lower them by approximately the same amount. The company did not hedge interest-rate exposure during the quarter.
- The filing provides no specific earnings or investment guidance. Management says results for the quarter are not necessarily indicative of the fiscal year. It cites uncertainty from interest rates, market and credit conditions, COVID-19 and the war in Ukraine, and warns that these factors may affect portfolio-company performance, valuations, liquidity and financing access. The filing also refers to possible exploration of strategic alternatives but gives no assurance of a transaction or other outcome.
- Fair values for many private investments depend on management estimates and third-party valuation work; actual recoveries could differ materially. The portfolio includes below-investment-grade or unrated exposures, non-accrual investments, and substantial equity exposure. The filing identifies FlexFIN, an affiliate asset-based lending business, as a significant concentration and discusses risks in its gemstone and jewelry collateral market.
Most important facts for investors to verify
- Whether the January 2023 refinancing of the 2023 Notes with the secured revolver materially changed borrowing costs, covenants, collateral exposure and available liquidity.
- Subsequent performance, payment status and recovery prospects of the five non-accrual portfolio companies and the investments rated 4 or 5.
- The support for Level 3 valuations, particularly given the portfolio’s $68.2 million difference between amortized cost and fair value and the concentration in equity investments.
- Actual floating-rate exposure and realized sensitivity to benchmark-rate changes, including the difference between the filing’s fair-value and cost-based measures.
- Future distributions, share repurchases and the effect of the expanded repurchase authorization; the filing reports no distributions in the quarter and the board later increased the authorization to $35 million.