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).
Reporting Period: Quarterly period ended June 30, 2019 (Form 10-Q).
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 invests primarily in senior secured first and second lien term loans to privately-held middle market companies. It is externally managed by MCC Advisors LLC.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Nine Months Ended June 30, 2019 | Nine Months Ended June 30, 2018 |
|---|---|---|---|
| Total Investment Income | $11.4 million | $38.2 million | $51.6 million |
| Total Expenses (Net of Waivers) | $15.2 million | $50.8 million | $39.8 million |
| Net Investment Income/(Loss) | $(3.8) million | $(12.7) million | $11.7 million |
| Net Realized Gain/(Loss) | $(9.0) million | $(76.3) million | $(58.4) million |
| Net Unrealized Appreciation/(Depreciation) | $(15.6) million | $26.0 million | $(40.0) million |
| Net Increase/(Decrease) in Net Assets | $(30.2) million | $(64.9) million | $(87.4) million |
| Net Asset Value (NAV) per Share | $4.55 | $4.55 | $6.43 |
| Cash and Cash Equivalents | $49.4 million | $49.4 million | $144.0 million |
| Total Debt Outstanding (Principal) | $272.0 million | $272.0 million | $420.1 million |
Material Changes vs. Prior Period
- Portfolio Contraction: Total investments at fair value decreased from $655.4 million at September 30, 2018, to $475.8 million at June 30, 2019. This decline was driven by exits, repayments, and write-downs.
- Net Investment Loss: The Company reported a net investment loss of $12.7 million for the nine months ended June 30, 2019, compared to net investment income of $11.7 million in the prior year period. This reversal was primarily due to a decline in the portfolio size and increased expenses.
- Expense Increase: Total operating expenses increased by $11.0 million (27.6%) year-over-year for the nine-month period. This was largely attributable to a $12.8 million increase in professional fees and general/administrative expenses related to the proposed merger with Sierra Income Corporation and associated legal proceedings.
- Debt Reduction: Total debt outstanding decreased significantly from $420.1 million to $272.0 million. This reduction resulted from the full repayment of $135.0 million in SBA Debentures (in connection with the surrender of the SBIC license) and the termination of the Revolving Credit Facility.
- Realized Losses: Net realized losses increased to $76.3 million for the nine months ended June 30, 2019, compared to $58.4 million in the prior year. Losses were primarily due to non-cash restructuring transactions and write-offs of certain investments.
Guidance, Outlook, Risks, and Unusual Items
- Merger with Sierra Income Corporation: The Company is in the process of merging with Sierra Income Corporation. On July 29, 2019, an amended merger agreement was entered into following a settlement of a stockholder class action. The settlement includes a $17 million cash and $30 million stock fund for stockholders. A 60-day "go-shop" period was initiated to solicit superior proposals.
- Asset Coverage Covenant Breach: As of June 30, 2019, the Company's asset coverage ratio was 191%, falling below the 200% minimum required under the 1940 Act. Consequently, the Company is prohibited from making distributions to stockholders or employing further leverage until the ratio is restored.
- 2024 Notes Covenant Amendment: The Company was not in compliance with the minimum net asset covenant ($275 million) for its 2024 Notes. An amendment was approved by noteholders to lower the covenant to $215 million and restructure the repayment schedule. This amendment was expected to become effective in August 2019.
- SBIC Wind-Down: The Company's subsidiary, Medley SBIC LP, surrendered its SBIC license effective July 1, 2019, following the full repayment of $135.0 million in SBA Debentures. This resulted in a $1.8 million loss on extinguishment of debt.
- Non-Accrual Investments: As of June 30, 2019, investments in eight portfolio companies were on non-accrual status with a combined fair value of approximately $33.7 million (7.1% of the portfolio).
Investor Verification Checklist
- Merger Status: Verify the current status of the merger with Sierra Income Corporation, including the outcome of the "go-shop" period and regulatory approvals.
- Asset Coverage Ratio: Monitor the Company's ability to restore its asset coverage ratio to 200% to lift the prohibition on dividends and new borrowing.
- 2024 Notes Compliance: Confirm the effective date and terms of the amendment to the 2024 Notes indenture regarding the net asset covenant.
- Portfolio Quality: Review the performance of the eight portfolio companies currently on non-accrual status and the potential for further write-downs.
- Legal Proceedings: Track the resolution of the stockholder class action settlement and any other pending litigation related to the merger or portfolio investments.