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, a Business Development Company regulated under the Investment Company Act of 1940).
Reporting Period: Quarterly period ended December 31, 2018 (Form 10-Q).
Overview: The Company is an externally managed, non-diversified closed-end management investment company. Its investment objective is to generate current income and capital appreciation by lending to privately-held middle market companies. As of December 31, 2018, the Company had 54,474,211 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Total Investment Income | $14.2 million | $20.6 million |
| Net Investment Income | $1.8 million | $7.2 million |
| Net Realized Gain/(Loss) | ($56.7 million) | ($21,476) |
| Net Unrealized Appreciation/(Depreciation) | $45.0 million | ($39.2 million) |
| Net Increase/(Decrease) in Net Assets from Operations | ($10.1 million) | ($31.9 million) |
| Net Asset Value (NAV) per Share | $5.61 | $7.71 |
| Total Assets | $714.5 million | $741.6 million |
| Total Liabilities | $408.8 million | $420.4 million |
| Cash and Cash Equivalents | $62.7 million | $75.7 million |
| Total Debt Outstanding (Principal) | $407.0 million | $420.1 million |
| Dividends Declared per Share | $0.10 | $0.16 |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately 31% year-over-year, driven primarily by a reduction in interest income from non-controlled/non-affiliated investments ($8.1M vs $13.1M) and fee income ($0.5M vs $1.8M).
- Significant Realized Losses: The Company recognized a net realized loss of $56.7 million, a sharp increase from the prior year's negligible loss. This was primarily due to the write-off of certain investments in two portfolio companies.
- Unrealized Gains: Net unrealized appreciation of $45.0 million in Q4 2018 contrasts with $39.2 million of depreciation in Q4 2017, significantly mitigating the impact of realized losses on the net decrease in net assets.
- Debt Reduction: Total debt outstanding decreased by approximately $13 million. The Company terminated its Revolving Credit Facility and Term Loan Facility, redeemed $12 million of 2023 Notes, and repaid $15 million of SBA Debentures, partially offset by the issuance of $121.3 million in 2024 Notes earlier in the year.
- NAV Decline: NAV per share decreased from $5.90 at the beginning of the period to $5.61 at period end, compared to a decline from $8.45 to $7.71 in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Merger Activity: On August 9, 2018, the Company entered into a definitive agreement to merge with Sierra Income Corporation ("Sierra"). The merger is subject to stockholder approval, SEC exemptive orders, and SBA approval. Upon completion, the combined entity will be internally managed.
- Legal Proceedings: As of the filing date, two purported class actions were commenced in New York and one in Delaware challenging the proposed merger with Sierra. The Company intends to defend these lawsuits vigorously. Additionally, the Company is involved in various other legal proceedings related to portfolio companies and prior lending activities, which management does not expect to have a material effect on financial condition.
- Non-Accrual Status: As of December 31, 2018, investments in eight portfolio companies were on non-accrual status with a combined fair value of approximately $48.3 million (7.5% of the portfolio).
- Dividend Policy: The Company declared a quarterly dividend of $0.05 per share on February 10, 2019, payable March 12, 2019. The Company intends to distribute substantially all taxable income to maintain Regulated Investment Company (RIC) status.
- Unusual Items: The $56.7 million realized loss is an unusual item driven by specific portfolio write-offs. Additionally, the Company recognized a net loss of $0.1 million on the extinguishment of debt.
Key Facts for Investor Verification
- Merger Status: Verify the progress of the merger with Sierra Income Corporation, including the status of required SEC exemptive orders and SBA approvals, as this represents a fundamental change in the Company's structure and management.
- Portfolio Quality: Review the specific details of the two portfolio companies that resulted in the $56.7 million realized loss and the status of the eight companies currently on non-accrual status ($48.3 million fair value).
- Legal Challenges: Monitor the outcome of the class action lawsuits filed in New York and Delaware regarding the merger, as these could delay or prevent the transaction.
- Debt Structure: Confirm the terms and repayment schedule of the new 2024 Notes issued in Israel and the impact of the terminated credit facilities on future liquidity and leverage capacity.
- Dividend Sustainability: Assess whether the reduced Net Investment Income ($1.8M) is sufficient to support future dividend payments, noting the recent reduction in the declared dividend from $0.10 to $0.05 per share.