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, 2017
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, often accompanied by equity participation features.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Nine Months Ended June 30, 2017 | Nine Months Ended June 30, 2016 |
|---|---|---|---|
| Total Investment Income | $23.7 million | $74.1 million | $93.6 million |
| Net Investment Income | $9.6 million | $27.7 million | $41.2 million |
| Net Realized Gain/(Loss) | ($55.1 million) | ($61.4 million) | ($23.7 million) |
| Net Unrealized Appreciation/(Depreciation) | $47.7 million | $30.4 million | ($41.8 million) |
| Net Increase/(Decrease) in Net Assets from Operations | $3.0 million | ($2.9 million) | ($24.7 million) |
| Net Asset Value (NAV) per Share | $8.84 (Ending) | $8.84 (Ending) | $9.76 (Ending) |
| Total Investments at Fair Value | $880.6 million | $880.6 million | $914.2 million |
| Cash and Cash Equivalents | $118.2 million | $118.2 million | $104.5 million |
| Total Debt Outstanding (Principal) | $526.9 million | $526.9 million | $515.5 million |
| Asset Coverage Ratio | 2.28x | 2.28x | 2.45x |
Material Changes vs. Prior Comparable Period
- Investment Income Decline: Total investment income decreased by 16.6% for the nine months ended June 30, 2017, compared to the prior year period. This was primarily driven by a reduction in the portfolio size and lower interest rates on new originations.
- Realized Losses: The Company recognized a net realized loss of $61.4 million for the nine months ended June 30, 2017, compared to $23.7 million in the prior year. The increase in losses was primarily due to the liquidation of one investment, non-cash restructuring transactions, and write-offs of certain investments.
- Unrealized Gains: Unlike the prior year period which saw unrealized depreciation, the Company recorded net unrealized appreciation of $30.4 million for the nine months ended June 30, 2017, driven by improvements in the valuation of certain portfolio companies.
- Expense Reduction: Total operating expenses decreased by 12.0% year-over-year for the nine-month period, largely due to a 90.9% reduction in incentive fees resulting from lower pre-incentive fee net investment income and the Fee Waiver Agreement.
- Debt Structure Changes: The Company redeemed its $40.0 million 2019 Notes in February 2017 and issued an additional $38.6 million of 2023 Notes via an At-The-Market (ATM) program. The Revolving Credit Facility commitment was reduced from $343.5 million to $200.0 million.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: The Board declared a quarterly dividend of $0.16 per share on August 3, 2017, payable September 22, 2017. For the nine months ended June 30, 2017, total distributions were $0.60 per share.
- Stock Repurchase Program: The Company did not repurchase any shares during the nine months ended June 30, 2017. As of the period end, $15.9 million remained available under the repurchase program.
- Non-Accrual Status: As of June 30, 2017, investments in six portfolio companies were on non-accrual status with a combined fair value of approximately $67.6 million (7.7% of the portfolio).
- Legal Proceedings: The Company's advisor, MCC Advisors LLC, is named as a defendant in a lawsuit filed by Moshe Barkat and Modern VideoFilm Holdings, LLC. The Company believes the claims are without merit and is vigorously defending the lawsuit.
- Fee Waiver Agreement: A permanent fee waiver agreement effective January 1, 2016, continues to reduce base management and incentive fees payable to the advisor, impacting expense ratios.
- Market Risk: Approximately 83.4% of the income-bearing portfolio bears floating interest rates. A hypothetical 100 basis point increase in interest rates would result in a net increase in net assets of approximately $3.3 million.
Key Facts for Investor Verification
- Portfolio Concentration: Verify the impact of the top 10 portfolio companies, which represent a significant portion of the fair value, including Harrison Gypsum, LLC (10.4%) and Nation Safe Drivers Holdings, Inc. (7.4%).
- Realized Loss Drivers: Investigate the specific details of the non-cash restructuring transactions and write-offs that contributed to the $61.4 million realized loss.
- Debt Covenants: Confirm compliance with the 200% asset coverage ratio requirement under the 1940 Act, which currently stands at 2.28x.
- Non-Accrual Trends: Monitor the status of the six portfolio companies on non-accrual status to assess potential future credit losses.
- Fee Structure Impact: Review the ongoing effect of the Fee Waiver Agreement on future expense ratios and net investment income.