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: Nine months ended June 30, 2020 (unaudited).
Business Overview: Medley Capital Corporation is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC). Its 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.
Corporate Action: On July 24, 2020, the Company effected a one-for-twenty reverse stock split to regain compliance with NYSE listing standards. All per-share data in this filing has been retroactively adjusted to reflect this split.
Key Financial Metrics
| Metric | June 30, 2020 | Sept 30, 2019 |
|---|---|---|
| Total Assets | $306.9 million | $486.3 million |
| Total Investments (Fair Value) | $250.6 million | $396.9 million |
| Cash and Cash Equivalents | $52.2 million | $68.2 million |
| Total Liabilities | $157.6 million | $269.8 million |
| Notes Payable (Carrying Value) | $150.7 million | $251.7 million |
| Total Net Assets | $149.3 million | $216.4 million |
| Net Asset Value (NAV) per Share | $54.83 | $79.46 |
Operating Results (Nine Months Ended June 30)
| Metric | 2020 | 2019 |
|---|---|---|
| Total Investment Income | $17.1 million | $38.2 million |
| Total Expenses (Net) | $19.0 million | $50.8 million |
| Net Investment Income/(Loss) | $(1.9) million | $(12.7) million |
| Net Realized Gain/(Loss) | $(39.8) million | $(76.3) million |
| Net Unrealized Appreciation/(Depreciation) | $(22.9) million | $26.0 million |
| Net Increase/(Decrease) in Net Assets | $(67.1) million | $(64.9) million |
| Earnings Per Share (Basic & Diluted) | $(24.63) | $(23.84) |
Material Changes vs. Prior Period
- Portfolio Contraction: Total investments at fair value decreased by approximately $146.3 million (37%) from September 30, 2019, to June 30, 2020. This was driven by significant repayments and exits, with net investment activity showing a reduction of $86.5 million for the nine-month period.
- Debt Reduction: Total notes payable decreased by approximately $101 million. The Company fully repaid its $120.2 million Series A Israeli Notes by April 14, 2020, and had previously repaid $135.0 million in SBA Debentures in 2019.
- Expense Reduction: Total operating expenses decreased by $31.9 million (62.7%) compared to the prior year period. This was primarily due to insurance proceeds received related to legal expenses (offsetting professional fees) and a reduction in interest expenses following debt repayments.
- Realized Losses: The Company recognized $39.8 million in net realized losses for the nine months ended June 30, 2020, primarily due to the sale of three investments. This compares to $76.3 million in realized losses in the prior year period.
- Unrealized Depreciation: The portfolio experienced $22.9 million in net unrealized depreciation for the nine months ended June 30, 2020, contrasting with $26.0 million in appreciation in the prior year period.
Guidance, Outlook, Risks, and Unusual Items
- Asset Coverage and Dividends: As of June 30, 2020, the Company's asset coverage ratio was 198.3%, which is below the 200% minimum requirement under the Investment Company Act of 1940. Consequently, the Company is prohibited from making distributions (dividends) to stockholders and cannot employ further leverage until the ratio improves.
- Expense Support Agreement: On June 12, 2020, the Company entered into an agreement with its advisor to cap management fees and operating expenses at $667,000 per month through September 30, 2020. This resulted in $0.3 million of expense support reimbursement for the quarter.
- COVID-19 Impact: Management notes that the pandemic has caused significant volatility and economic disruption. While the Company has not yet recognized a reportable subsequent event impacting the June 30 financials, the long-term impact on portfolio company performance and investment valuations remains uncertain.
- Legal Proceedings: The Company reached a settlement in a putative class action lawsuit (Class Action 1) regarding American Web Loan, Inc., where the Company and its affiliates were released from claims. A hearing for final approval is scheduled for October 21, 2020. Other litigation, including the MVF Holdings derivative action, remains pending.
- Non-Accrual Status: As of June 30, 2020, investments in nine portfolio companies were on non-accrual status with a combined fair value of approximately $16.4 million (6.6% of the portfolio).
Investor Verification Checklist
- Dividend Eligibility: Verify the current asset coverage ratio to confirm if the Company remains prohibited from paying dividends.
- Portfolio Valuation: Review the fair value hierarchy (Level 3 assets) and the specific valuation methodologies used for the $188 million in Level 3 investments, given the market volatility.
- Debt Maturities: Confirm the repayment schedule for the remaining $151.9 million in outstanding notes (2021 Notes and 2023 Notes) and the Company's ability to refinance or repay them.
- Expense Cap Expiration: Monitor the expiration of the Expense Support Agreement on September 30, 2020, and the potential impact on future operating expenses.
- Legal Settlement Finality: Track the final court approval of the American Web Loan class action settlement to ensure no further financial liability exists.