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)
Reporting Period: Nine months ended June 30, 2014 (unaudited).
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. It is also treated as a Regulated Investment Company (RIC) for U.S. federal income tax purposes. The company's 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 | Nine Months Ended June 30, 2014 | Nine Months Ended June 30, 2013 |
|---|---|---|
| Total Investment Income | $101.1 million | $61.5 million |
| Net Investment Income | $54.3 million | $32.0 million |
| Net Increase in Net Assets from Operations | $43.3 million | $24.3 million |
| Net Realized Gain/(Loss) | $0.9 million | $0.2 million |
| Net Unrealized Appreciation/(Depreciation) | $(11.6) million | $(8.0) million |
| Total Assets | $1.10 billion | $776.4 million |
| Total Liabilities | $439.4 million | $266.6 million |
| Total Net Assets | $661.2 million | $509.8 million |
| Net Asset Value (NAV) per Share | $12.65 | $12.70 |
| Dividends Declared per Share | $1.11 | $1.08 |
| Weighted Average Shares Outstanding | 44.8 million | 28.7 million |
Debt and Liquidity: As of June 30, 2014, total debt outstanding was approximately $408.6 million, comprising a Revolving Credit Facility ($85.6 million), Term Loan Facility ($171.5 million), Unsecured Notes ($103.5 million), and SBA Debentures ($48.0 million). Cash and cash equivalents totaled $17.1 million.
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $749.2 million (Sept 30, 2013) to $1.043 billion (June 30, 2014). The portfolio expanded to 74 portfolio companies from 56 in the prior year.
- Revenue Increase: Total investment income rose 64% year-over-year, driven by a larger portfolio and increased fee income ($20.6 million vs. $10.0 million).
- Expense Increase: Total expenses increased 59% to $46.9 million, primarily due to higher interest and financing expenses ($14.5 million vs. $9.3 million) and increased management/incentive fees resulting from asset growth.
- Capital Raising: The company completed two public offerings in the period (Feb 2014 and April 2014), raising approximately $158 million in net proceeds, increasing shares outstanding from 40.2 million to 52.3 million.
- Unrealized Losses: Net unrealized depreciation on investments increased to $11.6 million for the nine-month period compared to $8.0 million in the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management noted that the increase in net assets from operations was attributable to higher investment income offset by increased operating expenses and unrealized depreciation. The weighted average yield on the income-bearing portfolio was approximately 13.4%.
- Dividends: The board declared a quarterly dividend of $0.37 per share on July 30, 2014, payable September 12, 2014. The company maintains an "opt-out" dividend reinvestment plan.
- Unusual Items: Two portfolio companies were on non-accrual status as of June 30, 2014, with a combined fair value of approximately $9.8 million (0.9% of the portfolio). Additionally, the company recognized a provision for deferred taxes on unrealized gains of $0.4 million for the nine-month period.
- Risks: Key risks include interest rate fluctuations (65.9% of the portfolio is floating rate), credit risk of portfolio companies, and the potential for unrealized valuation adjustments to differ materially from actual realized values. The company is also subject to regulatory requirements as a BDC and RIC.
Investor Verification Checklist
- NAV vs. Market Price: Verify the current market price of the stock relative to the reported NAV of $12.65 per share.
- Debt Covenants: Review the asset coverage ratio (reported as 2,834 per unit) to ensure compliance with the 200% requirement under the 1940 Act.
- Non-Accrual Status: Monitor the performance of the two portfolio companies on non-accrual status ($9.8 million exposure) for potential future write-downs.
- Interest Rate Sensitivity: Assess the impact of rising interest rates on the company's net income, given that 65.9% of the portfolio is floating rate while a significant portion of debt is also floating rate.
- Dividend Sustainability: Confirm that Net Investment Income ($1.21 per share for the nine months) continues to cover the declared dividend rate ($1.11 per share for the nine months).