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: Three months ended December 31, 2011.
Business Overview: Medley Capital Corporation is a non-diversified, externally managed closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The Company commenced operations on January 20, 2011, following its IPO. Its investment objective is to generate current income and capital appreciation by lending directly to privately-held small and middle-market companies, primarily through senior secured first and second lien term loans and senior secured notes.
Key Financial Metrics
| Metric | Value (Three Months Ended Dec 31, 2011) |
|---|---|
| Total Investment Income | $8,229,200 |
| Net Investment Income | $4,791,149 |
| Net Increase in Net Assets from Operations | $4,389,218 |
| Earnings Per Share (Basic & Diluted) | $0.25 |
| Net Asset Value (NAV) Per Share | $12.57 |
| Total Investments at Fair Value | $244,035,973 |
| Cash and Cash Equivalents | $1,445,700 |
| Total Liabilities | $36,099,851 |
| Credit Facility Outstanding | $32,600,000 |
| Dividends Declared Per Share | $0.25 |
Material Changes vs. Prior Comparable Period
The Company commenced operations on January 20, 2011. Consequently, there is no activity in the comparable period for the three months ended December 31, 2010, and no year-over-year comparison is available.
Quarter-over-Quarter Changes (vs. September 30, 2011):
- Investment Portfolio: Total investments at fair value increased from $199.2 million to $244.0 million, driven by $47.9 million in new investment purchases and $4.7 million in additional investments in existing portfolio companies.
- Liquidity: Cash and cash equivalents decreased significantly from $17.2 million to $1.4 million as capital was deployed into the portfolio.
- Leverage: The Company drew down on its credit facility, increasing outstanding debt from $0 to $32.6 million.
- Unrealized Gains/Losses: The portfolio experienced a net unrealized depreciation of $513,452 for the quarter.
Guidance, Outlook, and Management Commentary
Portfolio Composition and Risk: As of December 31, 2011, the portfolio consisted of 24 companies with a weighted average loan-to-value (LTV) ratio of 48.5%. The weighted average yield on the income-bearing portfolio was approximately 14.4%. Management utilizes a 1-to-5 credit rating system; 84.9% of the portfolio was rated "2" (performing within expectations), and 10.9% was rated "1" (performing above expectations). No investments were rated 4 or 5.
Capital Resources and Liquidity: The Company maintains a $60 million senior secured revolving credit facility (expandable to $125 million). As of the reporting date, $32.6 million was outstanding. The Company intends to raise additional capital through equity offerings, debt, or operational cash flows to fund growth.
Tax Status and Distributions: The Company intends to qualify as a Regulated Investment Company (RIC). It recorded a federal excise tax expense of $35,501 for the period because it did not distribute at least 98% of its ordinary income for the calendar year. A quarterly dividend of $0.25 per share was declared and paid.
Recent Developments (Subsequent Events):
- January 2012: Closed a $10.0 million investment in Welocalize, Inc.
- January 31, 2012: Increased credit facility commitments by $25 million to a total of $85 million.
- February 2, 2012: Declared a quarterly dividend of $0.28 per share.
Risks: Key risks include the illiquidity of private debt investments, credit risk of portfolio companies, interest rate fluctuations (34.3% of the portfolio is floating rate), and the Company's reliance on its investment adviser, MCC Advisors LLC.
Investor Verification Checklist
- NAV vs. Market Price: Verify the current market price of the stock against the reported NAV of $12.57 to assess the premium or discount.
- Dividend Sustainability: Confirm that the declared dividend of $0.25 (and the subsequent $0.28) is fully covered by net investment income and does not rely heavily on return of capital.
- Portfolio Concentration: Review the top 10 portfolio companies (e.g., Water Capital USA, Inc. at 10.4% of net assets) to understand concentration risk.
- Leverage Utilization: Monitor the usage of the $85 million credit facility and the impact of interest rate changes on the floating-rate portion of the portfolio.
- Excise Tax Exposure: Verify future distribution policies to ensure the Company avoids the 4% federal excise tax on undistributed income.