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: June 30, 2018
Business Overview: Medley Capital Corporation is an externally-managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The Company's 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 June 30, 2018 | Nine Months Ended June 30, 2018 | Nine Months Ended June 30, 2017 |
|---|---|---|---|
| Total Investment Income | $13.9 million | $51.6 million | $74.1 million |
| Net Investment Income | $0.9 million | $11.7 million | $27.7 million |
| Net Realized Gain/(Loss) | ($35.0 million) | ($58.4 million) | ($61.4 million) |
| Net Unrealized Appreciation/(Depreciation) | $7.2 million | ($40.0 million) | $30.4 million |
| Net Increase/(Decrease) in Net Assets | ($26.7 million) | ($87.4 million) | ($2.9 million) |
| Net Asset Value (NAV) per Share | $6.43 | $6.43 | $8.84 |
| Dividends Declared per Share | $0.10 | $0.42 | $0.60 |
| Cash and Cash Equivalents | $144.0 million | $144.0 million | $108.6 million |
| Total Debt Outstanding (Principal) | $436.6 million | $436.6 million | $496.9 million |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased to $634.9 million as of June 30, 2018, from $837.0 million as of September 30, 2017. This decline was driven by net unrealized depreciation of $40.0 million and net realized losses of $58.4 million over the nine-month period.
- Investment Income: Total investment income decreased significantly year-over-year (from $74.1 million to $51.6 million for the nine months ended June 30), primarily due to a smaller portfolio size and lower interest rates on new originations compared to the prior period.
- Debt Reduction: The Company voluntarily prepaid its $102.0 million Term Loan Facility in January 2018 and reduced its Revolving Credit Facility commitment from $200.0 million to $150.0 million in February 2018. Additionally, $13.0 million of 2023 Notes were redeemed in March 2018.
- Non-Accrual Status: Investments in 9 portfolio companies were on non-accrual status as of June 30, 2018, with a combined fair value of approximately $63.2 million (10.0% of the portfolio), up from 6 companies ($72.5 million) as of September 30, 2017.
Guidance, Outlook, and Risks
- Merger Agreement: On August 9, 2018, the Company entered into a definitive agreement to merge with Sierra Income Corporation ("Sierra"). Company stockholders will receive 0.805 shares of Sierra common stock for each share held. The merger is subject to shareholder and regulatory approval.
- Dividend Policy: The Board declared a quarterly dividend of $0.10 per share on August 2, 2018. The Company intends to distribute substantially all taxable income to maintain Regulated Investment Company (RIC) status.
- Key Risks:
- Credit Risk: The portfolio is concentrated in middle-market companies; defaults or restructuring can lead to significant realized losses (e.g., $58.4 million realized loss in the nine months ended June 30, 2018).
- Interest Rate Risk: 79.1% of the income-bearing portfolio bears floating interest rates. While rising rates increase income, they also increase borrowing costs.
- Liquidity: The Company relies on its Revolving Credit Facility and unsecured notes for liquidity. A failure to meet covenants could accelerate debt repayment.
Investor Verification Checklist
- Merger Status: Verify the progress of the merger with Sierra Income Corporation and the expected closing timeline.
- Non-Accrual Portfolio: Review the specific portfolio companies on non-accrual status (9 companies, $63.2 million) and the likelihood of recovery or further write-downs.
- Debt Covenants: Confirm compliance with asset coverage ratios (currently 200% required, though legislation allows for 150% with approval) and other debt covenants given the recent debt restructuring.
- Dividend Sustainability: Assess whether Net Investment Income ($11.7 million for nine months) is sufficient to cover the dividend payout ($22.9 million for nine months), noting the potential for return of capital distributions.
- Valuation Methodology: Note that the majority of the portfolio is Level 3 (unobservable inputs), requiring significant management judgment in fair value determination.