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 and six months ended March 31, 2013.
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 invests primarily in senior secured first and second lien term loans and senior secured notes of privately held middle-market companies. It also holds equity/warrants in portfolio companies.
Key Financial Metrics
| Metric | Six Months Ended Mar 31, 2013 | Six Months Ended Mar 31, 2012 |
|---|---|---|
| Total Investment Income | $37.93 million | $18.20 million |
| Net Investment Income | $20.01 million | $10.20 million |
| Net Increase in Net Assets from Operations | $21.14 million | $10.23 million |
| Net Asset Value (NAV) per Share | $12.73 | $12.63 |
| Weighted Average EPS (Basic & Diluted) | $0.79 | $0.59 |
| Total Assets | $639.85 million | $415.77 million (Sep 30, 2012) |
| Total Liabilities | $274.37 million | $126.43 million (Sep 30, 2012) |
| Cash and Cash Equivalents | $29.66 million | $4.89 million (Sep 30, 2012) |
| Total Debt Outstanding | $234.60 million | $105.00 million (Sep 30, 2012) |
| Portfolio Fair Value | $594.16 million | $401.95 million (Sep 30, 2012) |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately $192.2 million (47.8%) from September 30, 2012, to March 31, 2013. This growth was driven by net investments of $186.6 million during the six-month period.
- Revenue Increase: Total investment income more than doubled to $37.93 million from $18.20 million in the prior year period, primarily due to portfolio expansion and increased interest income.
- Expense Increase: Total expenses net of management fee waiver rose to $17.91 million from $7.97 million. This increase is attributed to higher base management fees (due to asset growth), increased incentive fees, and significantly higher interest and financing expenses resulting from new debt issuances.
- Capital Raising: The Company raised approximately $73.9 million in net proceeds from the issuance of common stock during the six months ended March 31, 2013, compared to no equity issuance in the prior year period.
- Debt Expansion: The Company significantly expanded its leverage, issuing $63.5 million in 6.125% Senior Notes due 2023 and increasing commitments on its Revolving and Term Loan facilities. Total debt outstanding increased from $110 million (Sep 30, 2012) to $234.6 million (Mar 31, 2013).
Guidance, Outlook, and Risks
- Dividends: The Company declared a quarterly dividend of $0.36 per share for the quarter ended March 31, 2013. On May 1, 2013, the Board declared another quarterly dividend of $0.36 per share payable June 14, 2013.
- Subsequent Events: On April 12, 2013, the Company completed a public offering raising approximately $63.4 million. In April 2013, the Company also made new investments totaling $9.9 million in DLR Restaurants, LLC.
- SBIC License: On March 26, 2013, the Company's subsidiary, Medley SBIC LP, received a license from the Small Business Administration (SBA) to operate as a Small Business Investment Company, allowing for potential leverage via SBA-guaranteed debentures up to $150 million.
- Risk Factors: The filing references risks related to interest rate fluctuations (48.2% of the portfolio is floating rate), credit risk of portfolio companies, and the illiquid nature of private debt investments. The Company notes that fair value measurements for Level 3 assets involve significant management judgment.
- Asset Coverage: As a BDC, the Company must maintain an asset coverage ratio of at least 200%. The filing indicates the Company is in compliance with this requirement.
Investor Verification Checklist
- Debt Covenants: Verify the Company's compliance with asset coverage ratios and other covenants in its Revolving Facility, Term Loan Facility, and Senior Notes indentures.
- Portfolio Quality: Review the distribution of investment performance ratings (86.1% rated "2" as of March 31, 2013) and monitor any loans moving to non-accrual status or requiring restructuring.
- Interest Rate Sensitivity: Assess the impact of rising interest rates on the Company's net investment income, given that 48.2% of the portfolio is floating rate while a portion of debt is fixed.
- Valuation Methodologies: Scrutinize the fair value assumptions for Level 3 assets (97.3% of the portfolio), particularly the market yields and EBITDA multiples used.
- Capital Deployment: Monitor the pace of new investments versus the availability of capital from the recent equity offering and debt facilities.