PhenixFIN Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023; filed December 22, 2023. This is an annual report, not a report limited to calendar Q4. PhenixFIN is an internally managed, non-diversified business development company (BDC) and regulated investment company (RIC) investing primarily in private-company debt and equity. Its objective is current income and capital appreciation.
Financial results and position
- Investment income: $20.1 million, up from $15.5 million in FY2022. Interest income was $12.1 million and dividend income $6.9 million.
- Expenses and investment income: Expenses were $13.6 million, up 12.5%. Audited statements report net investment income of $6.5 million, versus $3.4 million in FY2022.
- Operations: Net increase in net assets from operations was $26.9 million, compared with a $6.1 million decrease in FY2022. This included $31.9 million of net unrealized appreciation and $11.5 million of realized investment losses; FY2022 had $14.5 million of unrealized depreciation and $5.2 million of realized gains. Results therefore depended materially on fair-value changes.
- Portfolio and yield: Investments at fair value were $226.5 million, versus $193.0 million a year earlier. Weighted-average yield on debt and other income-producing investments was 13.3%, versus 10.85% in FY2022. The filing cautions that this yield is not total return.
- Cash flow and liquidity: Cash and cash equivalents fell to $6.0 million from $22.8 million. Operating activities used $20.7 million of cash, compared with $29.3 million used in FY2022. The filing reports $3.4 million of unfunded portfolio commitments, subject to borrower conditions.
- Debt and leverage: Principal borrowings were $85.9 million, including $57.5 million of 5.25% unsecured notes due 2028 and $28.4 million drawn on the revolving credit facility. The facility bears Term SOFR plus 2.90%; the reported weighted-average borrowing rate was 5.91%. Asset coverage was 270.7%, above the applicable 200% minimum.
- Net assets: Net assets were $146.7 million and NAV was $70.75 per share, up from $120.8 million and $57.49 per share, respectively. The market price remained substantially below NAV: FY2023 quarter-end market prices were at discounts, and the December 21, 2023 close was $38.25, about 54% of then-current NAV.
- Distributions and repurchases: No regular distributions were declared in FY2023. The company repurchased 28,416 shares for about $1.1 million during the year; approximately $9.3 million remained authorized under its $35 million repurchase program at year-end.
Changes versus FY2022
- Investment income and net investment income increased, while operating expenses also rose. Salaries and benefits increased to $4.2 million from $3.0 million, consistent with the internally managed structure.
- Portfolio fair value increased by $33.5 million. The investment performance-rating distribution improved: 87.4% of fair value was rated 2 (within expectations), compared with 82.6% in FY2022; 2.9% was rated 5, where some principal loss is expected, versus 2.7%.
- Investments on non-accrual declined from five portfolio companies with $5.2 million fair value (2.7% of portfolio) to four companies with $6.5 million fair value (2.9%).
- The company redeemed all remaining 6.125% notes due 2023 in January 2023, funding the redemption with its revolving facility. Borrowings increased from $80.0 million principal at FY2022 year-end to $85.9 million.
Outlook, risks and notable items
- The filing provides no specific earnings, yield, distribution or investment-growth guidance. Management describes private credit opportunities arising from reduced bank lending but emphasizes uncertainty in markets and portfolio-company performance.
- Key risks include rising rates and borrower stress, illiquid investments, valuation uncertainty, leverage, and concentration. FlexFIN, the affiliate asset-based lender serving the gemstone and jewelry industry, represented 16.2% of total assets; its collateral is exposed to price volatility, fraud and counterfeiting. The portfolio is also concentrated in business services, financial/real estate, and hotel/gaming/leisure.
- Level 3 investments were valued at $165.3 million using significant unobservable inputs. The auditor identified Level 3 fair value estimation as a critical audit matter, citing market-yield and comparable-company multiple assumptions. The financial statement audit opinion was unmodified; the auditor did not audit internal control effectiveness. Management reported disclosure controls and internal financial controls effective as of year-end.
- In December 2023, the company established an insurance subsidiary that agreed to acquire a controlling interest in VR Insurance SPV and provide additional capital. The expected investment is approximately $49 million; closing was expected in the first half of 2024, subject to conditions including regulatory approval.
- The filing also identifies exploration of strategic alternatives as a possible forward-looking matter but gives no assurance that it will lead to a transaction or other outcome. No material legal proceedings were reported.
Important facts for investors to verify
- Reconcile an apparent inconsistency: the MD&A summary table reports FY2023 investment income of $19.878 million and net investment income of $6.256 million, while the audited statements report $20.132 million and $6.510 million, respectively.
- Review the drivers and sustainability of the $31.9 million unrealized appreciation, the $11.5 million realized losses, and the valuation assumptions for Level 3 positions.
- Assess non-accrual exposures, especially investments rated 4 or 5, and the financial condition and refinancing prospects of borrowers.
- Confirm liquidity, credit-facility borrowing-base availability and covenant compliance, and the funding plan for the proposed approximately $49 million insurance investment.
- Monitor FlexFIN’s concentration and collateral risks, the share-price discount to NAV, and the absence of regular distributions in FY2023.