SEC Filing Summary: Medley Capital Corporation (10-K)
Business Context and Reporting Period
Company: Medley Capital Corporation (MCC)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2019
Business Model: MCC is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC). It generates current income and capital appreciation by lending to privately held middle-market companies, primarily through senior secured first and second lien term loans, unitranche loans, and equity investments.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total Investment Income | $46.3 million | $66.8 million |
| Net Investment Income (Loss) | ($20.9 million) | $12.4 million |
| Net Realized Gain/(Loss) | ($112.2 million) | ($89.2 million) |
| Net Unrealized Appreciation/(Depreciation) | $38.5 million | ($32.2 million) |
| Net Increase/(Decrease) in Net Assets | ($96.6 million) | ($110.9 million) |
| Total Assets | $486.3 million | $741.6 million |
| Total Liabilities | $269.8 million | $420.4 million |
| Total Net Assets | $216.4 million | $321.2 million |
| Net Asset Value (NAV) per Share | $3.97 | $5.90 |
| Portfolio Fair Value | $396.9 million | $655.4 million |
| Weighted Average Yield (Income-Bearing) | 9.5% | 9.9% |
Liquidity & Debt: As of September 30, 2019, the Company held $84.3 million in cash and cash equivalents (including $16.0 million restricted). Total outstanding debt (Notes) was approximately $257.0 million. The weighted average interest rate on borrowings was 6.0%.
Material Changes vs. Prior Period
- Portfolio Contraction: Total portfolio fair value decreased by approximately 39.5% from $655.4 million in 2018 to $396.9 million in 2019. This was driven by net investment activity of ($193.5 million), including $259.9 million in exits and repayments versus $66.4 million in new investments.
- Operating Loss: The Company reported a net investment loss of $20.9 million in 2019, compared to net investment income of $12.4 million in 2018. This reversal was due to a decline in investment income and a significant increase in professional fees ($19.3 million in 2019 vs. $4.4 million in 2018) related to merger and legal costs.
- Realized Losses: Net realized losses increased to $112.2 million in 2019 from $89.2 million in 2018, primarily due to non-cash restructuring transactions and write-offs.
- Debt Reduction: The Company repaid $135.0 million of SBA-guaranteed debentures and terminated its Revolving Credit Facility, reducing overall leverage exposure.
Guidance, Outlook, Risks, and Unusual Items
- Asset Coverage Breach: As of September 30, 2019, the Company's asset coverage ratio was 184.2%, falling below the 200% minimum required under the Investment Company Act of 1940. Consequently, the Company is prohibited from making distributions (dividends) to stockholders and cannot employ further leverage until the ratio is restored.
- Merger with Sierra Income Corporation: MCC is in the process of merging with Sierra Income Corporation ("Sierra"). The merger agreement was amended in July 2019. The exchange ratio is contingent on litigation settlement fees. The merger is subject to stockholder approval, regulatory approvals, and court approval of a settlement in the "FrontFour Action."
- Legal Proceedings: The Company settled the "FrontFour Action" stockholder class action regarding the merger. A settlement fund of $17 million cash and $30 million of Sierra stock was established. The Court awarded attorney's fees, including a fixed $3.0 million and a contingent fee of 26% of the settlement fund value.
- Covenant Risk: The Company is at risk of breaching the minimum net assets covenant ($215 million) under its Israeli 2021 Notes. With net assets at $216.4 million, the cushion is only $1.4 million. A breach for two consecutive quarters could trigger an event of default.
- SBIC License Surrender: Effective July 1, 2019, the Company's subsidiary surrendered its Small Business Investment Company (SBIC) license and repaid all SBA debentures to avoid regulatory issues.
Key Facts for Investor Verification
- Dividend Status: Verify the current status of dividend payments; the Company is currently prohibited from paying dividends due to the asset coverage ratio being below 200%.
- Merger Completion: Monitor the status of the merger with Sierra Income Corporation, specifically the court approval of the settlement and the final exchange ratio determination.
- Covenant Compliance: Track the Company's Net Asset Value (NAV) closely. A drop below $215 million for two consecutive quarters could trigger a default on the Israeli 2021 Notes.
- Portfolio Quality: Review the composition of the portfolio, noting that 5.6% of the portfolio fair value was on non-accrual status as of September 30, 2019.
- Legal Costs: Assess the impact of the contingent attorney fee award (26% of the settlement fund) on the final value of the merger consideration.