PFX

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended December 31, 2010, for Medley Capital BDC LLC (subsequently converted to Medley Capital Corporation). The entity was a newly organized closed-end management investment company formed on April 23, 2010, intending to operate as a Business Development Company (BDC). As of the reporting date, the company had not yet commenced operations or investment activities. Operations officially began on January 20, 2011, following the consummation of its Initial Public Offering (IPO).

Key Financial Metrics

Debt and Liquidity: The company held a $50,000 non-interest bearing contributed loan from the Managing Member. Liquidity was minimal with only $14,155 in cash, as the entity was in the pre-operational phase funding organizational and offering costs.

Material Changes and Subsequent Events

While the reporting period ended with no operations, significant events occurred immediately after December 31, 2010:

• Conversion and IPO: On January 18, 2011, the LLC converted to Medley Capital Corporation. On January 20, 2011, the company consummated its IPO, selling 11,111,112 shares at $12.00 per share.
• Capital Raised: Net proceeds from the IPO and partial over-allotment exercise totaled approximately $129.7 million.
• Asset Acquisition: Prior to the IPO, the company acquired loan participations with a combined fair value of approximately $84.95 million from affiliated funds.
• Loan Repayment: The $50,000 contributed loan to the Managing Member was repaid on January 21, 2011.

Guidance, Outlook, and Risks

Investment Strategy: The company intends to generate current income and capital appreciation by lending directly to privately-held small and middle-market companies. The portfolio will primarily consist of first lien senior secured loans and, to a lesser extent, second lien secured loans, often with equity participation features.

Fee Structure: The company entered into an investment management agreement with MCC Advisors LLC. Fees include a base management fee of 1.75% of gross assets (waived on cash through June 30, 2011) and an incentive fee of 20% on net investment income above a 2.0% quarterly hurdle rate and on capital gains.

Risks and Contingencies:

• Forward-Looking Statements: Actual results may differ materially due to market conditions, interest rate changes, and the ability to deploy capital.
• Valuation Risk: A significant portion of the portfolio will lack readily available market quotations, requiring fair value determinations by the Board of Directors, which involves subjective judgment.
• Related Party Transactions: The company relies on MCC Advisors for management and administration, creating potential conflicts of interest regarding investment allocation and fee structures.
• Dividend Policy: The company intends to qualify as a Regulated Investment Company (RIC) and distribute at least 90% of taxable income to avoid federal income tax, but dividend payments are not guaranteed.

Investor Verification Checklist

• Verify the final deployment of the $129.7 million in IPO proceeds and the specific terms of the $84.95 million in legacy loan assets acquired.
• Confirm the company's compliance with BDC asset coverage requirements (minimum 200%) and RIC distribution requirements (90% of income) in subsequent filings.
• Review the valuation methodology for non-public portfolio investments, as fair value determinations are subjective and critical to Net Asset Value (NAV).
• Monitor the utilization of the management fee waiver on cash assets and the impact of the 1.75% base fee on future net investment income.
• Assess the extent of related-party transactions and the allocation of investment opportunities between the BDC and other accounts managed by MCC Advisors.