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 nine months ended June 30, 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 and completed its Initial Public Offering (IPO) on January 20, 2011. 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.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Nine Months Ended June 30, 2011 |
|---|---|---|
| Total Investment Income | $4,899,162 | $7,678,293 |
| Total Expenses (Net of Waiver) | $1,343,883 | $2,476,738 |
| Net Investment Income | $3,555,279 | $5,201,555 |
| Net Increase in Net Assets from Operations | $3,954,206 | $5,600,482 |
| Earnings Per Share (Basic & Diluted) | $0.23 | $0.33 |
| Dividends Declared Per Share | $0.16 | $0.16 |
Balance Sheet Highlights (As of June 30, 2011)
- Total Assets: $228,651,036
- Total Investments at Fair Value: $144,664,131 (Non-controlled: $98.5M; Affiliated: $46.1M)
- Cash and Cash Equivalents: $82,445,680
- Total Liabilities: $11,284,939
- Total Net Assets: $217,366,097
- Net Asset Value (NAV) Per Share: $12.55
Liquidity and Debt
- Cash Position: The Company held approximately $82.4 million in cash and cash equivalents. Net of unsettled trades payable ($9.8 million), available cash was approximately $72.6 million.
- Debt: As of June 30, 2011, the Company had no outstanding borrowings. However, in a subsequent event (August 2011), the Company closed a senior secured revolving credit facility with initial commitments of $60 million, expandable to $125 million.
- Management Fee Waiver: The investment adviser waived the base management fee on cash and cash equivalents held through June 30, 2011, resulting in a waiver of $424,226 for the quarter and $848,918 for the nine-month period.
- Capital Raise: The Company raised approximately $129.6 million in net proceeds from its IPO and the partial exercise of the underwriters' over-allotment option in January and February 2011.
- Portfolio Deployment: During the nine-month period, the Company invested approximately $60.4 million in new investments. As of June 30, 2011, the portfolio consisted of 11 portfolio companies with a fair value of $144.7 million.
- Asset Growth: Total assets grew from $64,950 at September 30, 2010 (pre-IPO) to $228.7 million at June 30, 2011.
- Investment Strategy: The Company intends to invest substantially all net proceeds from the IPO by the fourth quarter of 2011. The portfolio is expected to consist primarily of senior secured first and second lien term loans.
- Yield and LTV: As of June 30, 2011, the weighted average yield on the portfolio was approximately 14.0%. The weighted average Loan-to-Value (LTV) ratio was 45.7%, well below the Company's target of less than 65%.
- Credit Quality: 100% of the portfolio was rated "2" (performing within expectations) by the investment adviser. No loans were rated 3, 4, or 5 (indicating distress or default risk).
- Dividends: The Company declared a quarterly dividend of $0.21 per share on August 4, 2011, payable September 15, 2011, an increase from the $0.16 per share declared during the reporting period.
- Valuation Risk: All investments are classified as Level 3 fair value measurements, relying on unobservable inputs and management judgment. Fair values may differ significantly from actual market values.
- Liquidity Risk: Investments are in privately-held companies and may be illiquid. The Company may be unable to sell investments at desired prices or quantities.
- Interest Rate Risk: 87.9% of the portfolio bore fixed interest rates, while 12.1% were floating (LIBOR-based). The Company did not engage in hedging activities during the period.
- Related Party Transactions: The Company is managed by MCC Advisors, an affiliate. Certain affiliates purchased shares in the IPO, and the Company reimburses the adviser for administrative expenses.
- Capital Deployment Speed: Verify if the Company meets its target of deploying IPO proceeds by Q4 2011, as cash drag (uninvested cash) reduces yield.
- Fee Waiver Sustainability: Confirm the duration of the management fee waiver on cash balances, as this significantly impacts net investment income.
- Valuation Methodology: Review the independent valuation reports for Level 3 assets, as fair value is subjective and critical to NAV.
- Dividend Coverage: Monitor the ratio of Net Investment Income to dividends declared to ensure distributions are sustainable from operating income rather than return of capital.
- Subsequent Investments: Review the performance of investments closed in July and August 2011 (e.g., Gundle/SLT, Sequel Youth, Tempel Steel) as they represent a significant portion of recent capital deployment.
Material Changes vs. Prior Period
The Company commenced operations on January 20, 2011. Consequently, there are no prior comparable periods for the three or nine months ended June 30, 2011, to provide a year-over-year comparison. The financial statements reflect the Company's initial formation, IPO, and early investment activities.