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: March 31, 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 Mar 31, 2018 | Six Months Ended Mar 31, 2018 | Six Months Ended Mar 31, 2017 |
|---|---|---|---|
| Total Investment Income | $17.0 million | $37.7 million | $50.4 million |
| Net Investment Income | $3.6 million | $10.8 million | $18.2 million |
| Net Realized Gain/(Loss) | ($23.3 million) | ($23.4 million) | ($6.3 million) |
| Net Unrealized Appreciation/(Depreciation) | ($8.1 million) | ($47.3 million) | ($17.4 million) |
| Net Increase/(Decrease) in Net Assets | ($28.8 million) | ($60.7 million) | ($5.9 million) |
| Net Asset Value (NAV) per Share | $7.02 | $7.02 | $8.94 |
| Cash and Cash Equivalents | $65.4 million | $65.4 million | $108.6 million (Sep 30, 2017) |
| Total Debt Outstanding (Principal) | $447.1 million | $447.1 million | $496.9 million (Sep 30, 2017) |
Material Changes vs. Prior Period
- Decline in Net Assets: Net assets decreased by approximately $78.2 million (17%) from September 30, 2017, to March 31, 2018, driven primarily by significant unrealized depreciation and realized losses.
- Investment Income Decline: Total investment income for the six months ended March 31, 2018, decreased by 25% compared to the same period in 2017, largely due to a reduction in the portfolio size and lower interest rates on new originations.
- Realized Losses: The Company recognized a net realized loss of $23.4 million for the six months ended March 31, 2018, compared to $6.3 million in the prior year. This was primarily due to non-cash restructuring transactions.
- 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. Additionally, $13.0 million of 2023 Notes were redeemed.
- New Debt Issuance: In January 2018, the Company priced a debt offering in Israel of $121.1 million in 5.05% Series A Notes (2024 Notes).
Guidance, Outlook, and Risks
- Dividend Reduction: On May 4, 2018, the Board declared a quarterly dividend of $0.10 per share, a reduction from the $0.16 per share paid in the previous two quarters. This reflects the Company's need to manage cash flow given the decline in net investment income.
- Non-Accrual Status: As of March 31, 2018, 11 portfolio companies were on non-accrual status with a combined fair value of approximately $82.5 million (11.0% of the portfolio), up from 6 companies ($72.5 million) at September 30, 2017.
- Legal Proceedings: The Company is involved in litigation regarding a loan to Modern VideoFilm Holdings, LLC. The court has ruled in favor of the Company on the plaintiff's claims, and the Company is pursuing counterclaims. Additionally, the Company is named in putative class action lawsuits related to American Web Loan, which the Company intends to defend vigorously.
- Tax Reform: The Company is evaluating the impact of the Tax Cuts and Jobs Act of 2017, which reduced the corporate tax rate. This affects the provisional tax calculations for the Company's taxable subsidiaries.
Investor Verification Checklist
- Dividend Sustainability: Verify the Company's ability to maintain dividend payments given the reduction to $0.10 per share and the decline in Net Investment Income.
- Portfolio Quality: Review the specific details of the 11 portfolio companies on non-accrual status and the potential for further credit deterioration.
- Realized Loss Drivers: Confirm the nature of the $23.4 million realized loss, specifically the portion attributed to non-cash restructuring transactions versus cash sales.
- Liquidity Position: Assess the impact of the $43.1 million decrease in cash and cash equivalents over the six-month period on the Company's ability to fund new investments or meet debt obligations.
- Debt Structure: Analyze the terms of the new $121.1 million 2024 Notes issued in Israel and the implications of the reduced Revolving Credit Facility.