PhenixFIN Corporation — Form 10-Q
Business context and reporting period. PhenixFIN is an internally managed business development company (BDC) and regulated investment company (RIC), investing principally in loans and equity of private companies. This fiscal third-quarter report covers the three and nine months ended June 30, 2023; balance-sheet comparisons are to September 30, 2022.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Total investment income | $4.84 million, versus $3.66 million | $14.45 million, versus $10.45 million |
| Net investment income | $1.22 million, versus $0.21 million | $4.64 million, versus $1.56 million |
| Net realized investment gains/(losses) | $(1.34) million | $(2.14) million, versus $15.49 million |
| Net change in unrealized gains/(losses) | $9.04 million | $17.08 million, versus $(18.21) million |
| Net increase/(decrease) in net assets from operations | $8.92 million, versus $(9.23) million | $19.58 million, versus $(1.45) million |
| Basic and diluted earnings/(loss) per share | $4.26, versus $(4.19) | $9.34, versus $(0.61) |
Balance sheet and liquidity at June 30, 2023: investments at fair value were $218.69 million; cash and cash equivalents were $10.88 million; total assets were $232.44 million; total liabilities were $92.49 million; and net assets were $139.95 million. Net asset value (NAV) was $67.01 per share, up from $57.49 at September 30, 2022. The reported market value per share was $38.00 at quarter-end.
Debt and coverage: principal debt outstanding was $85.74 million, comprising $57.5 million of 5.25% notes due 2028 and $28.24 million drawn on a revolving credit facility. Debt carrying value, net of issuance costs, was $83.96 million. BDC asset coverage was 263.2%, above the applicable 200% minimum. The $50 million revolving facility bears interest at Term SOFR plus 2.90%; the company reported compliance with its covenants.
Cash flow: operating activities used $16.22 million during the nine months, compared with $31.92 million used in the prior-year period. Financing activities provided $4.33 million, and cash declined by $11.89 million to $10.88 million. The filing reports no dividend distributions declared in the current-year period.
Material changes versus comparable periods
- Quarterly and nine-month investment income and net investment income increased year over year. The filing attributes the broader income growth principally to higher portfolio interest and dividend income.
- Nine-month results shifted to a $19.58 million increase in net assets from operations from a $1.45 million decrease a year earlier. The improvement was driven by $17.08 million of unrealized appreciation, versus $18.21 million of unrealized depreciation in the prior period; realized results also moved from gains to losses.
- Portfolio fair value rose to $218.69 million from $192.96 million at September 30, 2022. The portfolio mix shifted toward first-lien loans and affiliated investments; equity and warrants were 50.5% of fair value, while first-lien loans were 48.0%.
- Non-accrual investments increased to six portfolio companies with a combined fair value of approximately $7.0 million, or 3.2% of portfolio fair value, from five companies and $5.2 million, or 2.7%, at September 30, 2022.
- The company redeemed all $22.52 million of its 2023 Notes in January 2023, funding the redemption with borrowings under the new revolving credit facility. The facility had $28.24 million outstanding at quarter-end.
- During the nine months, the company repurchased shares for approximately $0.47 million. It expanded the repurchase authorization to $35 million; approximately $9.8 million remained authorized at June 30.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings, NAV, or distribution guidance. Management states that quarterly distributions are discretionary and cannot be assured; none were declared during the reported 2023 period.
- Interest-rate exposure is material: management says 81.3% of income-bearing investments by cost were floating-rate, while the market-risk disclosure reports 77.1% by fair value. The filing estimates that a 100-basis-point rate increase would raise annual net results by approximately $1.8 million, assuming no defaults or prepayments; a 100-basis-point decrease would reduce them by a similar amount.
- Rising rates may increase the company’s floating-rate funding costs and may impair borrowers’ ability to service debt. Management also highlights market volatility, credit risk, illiquidity, refinancing and capital-access risks, and potential effects of geopolitical events, including the war in Ukraine.
- Valuation risk is significant: much of the portfolio is valued using Level 3 inputs and management estimates. The company cautions that actual sale values could differ materially from reported fair values. Unrealized appreciation was a major driver of reported profits.
- Concentration and credit concerns include exposure to the affiliated asset-based lending business, which represented 14.7% of total assets, and a portfolio that includes distressed/non-accrual positions. Lucky Bucks had filed for bankruptcy; PhenixFIN provided debtor-in-possession financing.
- Unfunded investment commitments were approximately $3.5 million in the financial-statement note. The MD&A commitment table reports $2.941 million, an apparent inconsistency to reconcile.
- Management concluded disclosure controls were effective as of June 30, 2023 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile the conflicting unfunded-commitment totals ($3.541 million in the note versus $2.941 million in the MD&A) and confirm current draw obligations.
- Review the valuation assumptions and subsequent developments affecting Level 3 holdings, particularly Kemmerer, Maritime Wireless, Lucky Bucks, and the non-accrual portfolio.
- Assess whether net investment income and cash receipts support future distributions, given that current-period operating cash flow was negative and no distribution was declared.
- Monitor debt-facility availability, borrowing-base and covenant headroom, asset coverage, and the effect of further rate changes on both funding costs and portfolio borrowers.
- Confirm the floating-rate exposure measure used for analysis: the filing reports 81.3% by investment cost and 77.1% by fair value.
- Consider the effect of share repurchases and the discount between reported NAV per share ($67.01) and quarter-end market value ($38.00).