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, 2015
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 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, 2015 | Nine Months Ended June 30, 2015 | As of June 30, 2015 |
|---|---|---|---|
| Total Investment Income | $35.96 million | $112.59 million | - |
| Net Investment Income | $17.24 million | $55.38 million | - |
| Net Increase in Net Assets from Operations | $8.37 million | $1.84 million | - |
| Net Realized Gain/(Loss) | ($9.01 million) | ($18.63 million) | - |
| Net Unrealized Appreciation/(Depreciation) | $0.43 million | ($34.14 million) | ($66.23 million) |
| Total Assets | - | - | $1.27 billion |
| Total Liabilities | - | - | $604.71 million |
| Total Net Assets | - | - | $665.52 million |
| Net Asset Value (NAV) per Share | - | - | $11.53 |
| Dividends Declared per Share | $0.30 | $0.97 | - |
| Weighted Average Shares Outstanding | 57.86 million | 58.36 million | 57.74 million (End of Period) |
Debt and Liquidity
- Total Debt Outstanding: $586.7 million (Revolving Credit Facility: $181.7M; Term Loan: $171.5M; Notes Payable: $103.5M; SBA Debentures: $130.0M).
- Cash and Cash Equivalents: $36.24 million.
- Asset Coverage Ratio: 2.46x (Required minimum is 2.0x).
- Unfunded Commitments: $52.3 million to 13 portfolio companies.
Material Changes vs. Prior Comparable Period
- Net Income Decline: Net increase in net assets from operations dropped significantly from $43.32 million for the nine months ended June 30, 2014, to $1.84 million for the same period in 2015. This was primarily driven by a shift from net realized gains of $0.89 million in 2014 to net realized losses of $18.63 million in 2015, and increased net unrealized depreciation of $34.14 million in 2015 compared to $11.58 million in 2014.
- Investment Income Growth: Total investment income increased to $112.59 million (9 months 2015) from $101.14 million (9 months 2014), driven by higher interest income ($103.77M vs $80.51M) despite a decrease in fee income ($8.71M vs $20.62M).
- Expense Increase: Total expenses rose to $57.21 million (9 months 2015) from $46.86 million (9 months 2014). Interest and financing expenses increased to $18.77 million from $14.50 million due to higher debt levels and new issuances.
- Portfolio Valuation: Total investments at fair value decreased to $1.204 billion from $1.246 billion at September 30, 2014, reflecting market conditions and realized losses.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management noted that the portfolio's weighted average yield based on cost was approximately 12.4% as of June 30, 2015. The company continues to focus on lending to middle-market companies. A new joint venture, MCC Senior Loan Strategy JV I LLC, was formed with Great American Life Insurance Company to co-manage a $100 million equity commitment, though it had not commenced operations as of the reporting date.
Risks and Contingencies
- Legal Proceedings: The company is defending a lawsuit filed by Moshe Barkat and Modern VideoFilm Holdings, LLC seeking damages in excess of $100 million related to a loan to Modern VideoFilm, Inc. (MVF). The company disputes the claims and is prosecuting counterclaims. Another counterclaim regarding a loan to Security National Guaranty, Inc. was voluntarily dismissed by the plaintiff in June 2015.
- Cybersecurity: The filing highlights increased risks related to cyber-attacks and data breaches, noting that the company does not currently maintain insurance coverage specifically for cybersecurity risks.
- Non-Accrual Status: Three portfolio companies were on non-accrual status as of June 30, 2015, with a combined fair value of approximately $12.4 million (1.0% of the portfolio), down from four companies ($40.3 million) at September 30, 2014.
Unusual Items
- Realized Losses: The company recognized $18.63 million in net realized losses for the nine months ended June 30, 2015, a significant deviation from the gains recognized in the prior year.
- Stock Repurchases: The company repurchased 994,758 shares for approximately $9.51 million during the nine-month period, at an average discount of 18.9% to NAV.
Investor Verification Checklist
- Realized Loss Drivers: Verify the specific portfolio companies contributing to the $18.63 million in realized losses and the nature of the dispositions.
- Legal Exposure: Monitor the status of the Modern VideoFilm lawsuit and the potential impact of the $100 million+ claim on financial results.
- Debt Covenants: Confirm continued compliance with the 200% asset coverage ratio requirement under the 1940 Act, especially given the increase in total debt to $586.7 million.
- Fee Income Volatility: Assess the sustainability of fee income, which dropped significantly year-over-year ($8.7M vs $20.6M for the nine-month period).
- Non-Accrual Trends: Track the performance of the three companies currently on non-accrual status to ensure no further deterioration in portfolio quality.