PhenixFin Corp. 10-Q Summary: Period Ended March 31, 2021
Business Context and Reporting Period
PhenixFin Corp. (formerly Medley Capital Corporation) is a non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The company elected to be taxed as a Regulated Investment Company (RIC). This filing covers the quarterly period ended March 31, 2021, and the six-month period ended March 31, 2021. Effective January 1, 2021, the company transitioned from an externally managed structure to an internalized management structure, terminating its investment management agreement with MCC Advisors LLC.
Key Financial Metrics
| Metric | Six Months Ended Mar 31, 2021 | Six Months Ended Mar 31, 2020 |
|---|---|---|
| Total Investment Income | $19.3 million | $12.8 million |
| Net Investment Income | $12.0 million | $(1.1) million |
| Net Realized Gains (Losses) | $(46.5) million | $(1.8) million |
| Net Unrealized Gains (Losses) | $36.0 million | $(69.8) million |
| Net Increase (Decrease) in Net Assets from Operations | $1.3 million | $(74.7) million |
| Total Assets | $229.5 million | $306.1 million (Sep 30, 2020) |
| Total Investments at Fair Value | $168.2 million | $246.7 million (Sep 30, 2020) |
| Cash and Cash Equivalents | $59.1 million | $56.5 million (Sep 30, 2020) |
| Total Debt Outstanding (Carrying Value) | $77.3 million | $151.0 million (Sep 30, 2020) |
| Net Assets | $151.2 million | $150.6 million (Sep 30, 2020) |
| Net Asset Value (NAV) Per Share | $55.91 | $55.30 (Sep 30, 2020) |
Material Changes vs. Prior Period
- Management Structure: The company ceased paying external management and incentive fees effective January 1, 2021, following the adoption of an internalized management structure. Consequently, base management fees dropped to $0 for the period, compared to $1.1 million for the six months ended March 31, 2020.
- Debt Reduction: Total debt decreased significantly from $151.0 million to $77.3 million. This was driven by the full redemption of $74.0 million in 2021 Notes in November 2020 and the prior repayment of Israeli Notes.
- Portfolio Composition: The company sold its interest in the MCC Senior Loan Strategy JV I LLC in October 2020, removing a significant controlled investment from the portfolio. Total investment fair value declined from $246.7 million to $168.2 million, primarily due to this sale and other portfolio dispositions.
- Realized Losses: The company recognized $46.5 million in net realized losses for the six months ended March 31, 2021, primarily due to the sale of one investment. This contrasts with $1.8 million in realized losses for the same period in 2020.
- Unrealized Gains: Net unrealized appreciation of $36.0 million was recorded, largely due to the reversal of previously recorded unrealized depreciation on investments that were realized, partially sold, or written off.
Guidance, Outlook, and Risks
Management Commentary: The company generated positive net investment income of $12.0 million for the six months ended March 31, 2021, a significant improvement from the prior year loss, driven by the elimination of external management fees and continued interest income. The company repurchased 19,773 shares of common stock during the period under a new share repurchase program.
Risks and Contingencies:
- COVID-19 Impact: The pandemic continues to create uncertainty regarding the economic outlook and the performance of portfolio companies. The company notes that the long-term impact on operations and portfolio valuations remains difficult to predict.
- LIBOR Transition: The company faces risks associated with the phase-out of LIBOR, which may require amendments to loan agreements and could impact the pricing and valuation of floating-rate investments.
- Legal Proceedings: The company is involved in a putative class action lawsuit (Class Action 1) regarding payday lending activities of a former portfolio company (American Web Loan). A settlement agreement has been preliminarily approved, releasing the company and its affiliates from claims, with the settlement funded by the portfolio company, not the company.
- Asset Coverage: As of March 31, 2021, the company's asset coverage ratio was 295.6%, well above the 200% minimum requirement under the 1940 Act, allowing for potential future leverage or distributions.
Key Facts for Investor Verification
- Fee Structure Change: Verify the impact of the internalized management structure on future operating expenses and net investment income sustainability.
- Debt Maturity Profile: Confirm the remaining debt obligations, specifically the $77.8 million principal of 2023 Notes maturing in March 2023.
- Portfolio Quality: Review the credit ratings of the remaining portfolio; 9.9% of the portfolio fair value was on non-accrual status as of March 31, 2021.
- Share Repurchases: Monitor the execution of the share repurchase program and its effect on NAV per share.
- Legal Settlement Status: Track the final approval of the settlement in the American Web Loan class action to ensure no further liability exposure.