Business Context and Reporting Period
Company: Medley Capital Corporation (filing as Phenixfin Corp in metadata, but identified as Medley Capital Corporation in text; name change to PhenixFIN Corporation effective Jan 1, 2021).
Reporting Period: Fiscal year ended September 30, 2020.
Business Model: A non-diversified closed-end management investment company regulated as a Business Development Company (BDC). The Company 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/warrant investments.
Management Structure: Externally managed by MCC Advisors LLC through December 31, 2020. The Board approved an internalized management structure effective January 1, 2021, appointing David Lorber as interim CEO and Ellida McMillan as CFO.
Key Financial Metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total Investment Income | $21.5 million | $46.3 million |
| Net Investment Income (Loss) | ($2.7 million) | ($20.9 million) |
| Net Realized Gain/(Loss) | ($50.0 million) | ($112.2 million) |
| Net Unrealized Appreciation/(Depreciation) | ($10.6 million) | $38.5 million |
| Net Increase/(Decrease) in Net Assets from Operations | ($65.8 million) | ($96.6 million) |
| Total Assets | $306.1 million | $486.3 million |
| Total Liabilities | $155.5 million | $269.8 million |
| Total Net Assets | $150.6 million | $216.4 million |
| Net Asset Value (NAV) per Share | $55.30 | $79.46 |
| Cash and Cash Equivalents | $56.5 million | $68.2 million |
| Portfolio Fair Value | $246.7 million | $396.9 million |
| Weighted Average Yield on Debt Investments | 8.5% | 9.5% |
| Asset Coverage Ratio | 199.2% | Not explicitly stated (implied >200% based on prior distributions) |
Material Changes vs. Prior Period
- Portfolio Contraction: Total portfolio fair value decreased by approximately 38% from $396.9 million in 2019 to $246.7 million in 2020, driven by exits, repayments, and write-downs.
- Net Loss Reduction: Net decrease in net assets from operations improved significantly from $96.6 million in 2019 to $65.8 million in 2020, primarily due to lower realized losses and reduced operating expenses.
- Expense Reduction: Total operating expenses decreased by 62.9% to $24.2 million, aided by a $0.7 million expense support reimbursement from the adviser and a reduction in professional fees due to insurance proceeds related to a dismissed class action.
- Debt Repayment: The Company fully repaid its Israeli Notes ($120.2 million) and SBA Debentures ($135.0 million) during the period, significantly reducing interest and financing expenses.
- Dividend Suspension: No dividends were paid in 2020 compared to $3.00 per share in 2019. This was due to the asset coverage ratio falling below the 200% threshold required by the 1940 Act.
- Reverse Stock Split: A 1-for-20 reverse stock split was effected on July 24, 2020, to regain compliance with NYSE listing requirements.
Guidance, Outlook, Risks, and Unusual Items
- Asset Coverage Restriction: As of September 30, 2020, the asset coverage ratio was 199.2%. Consequently, the Company is prohibited from making distributions to stockholders or employing further leverage until the ratio reaches 200%.
- Management Transition: The Company is transitioning from external to internal management effective January 1, 2021. This involves terminating the Investment Management Agreement with MCC Advisors and hiring new executive leadership.
- COVID-19 Impact: The pandemic has caused downgrades in certain portfolio company credit ratings and increased the risk of defaults, particularly in vulnerable sectors like hospitality and energy. The Company notes uncertainty regarding the long-term economic impact.
- Legal Proceedings: The Company settled a lawsuit with Modern VideoFilm Holdings for an undisclosed amount, fully funded by insurance. Several class action lawsuits regarding payday lending activities (American Web Loan) are ongoing or recently settled with no liability to the Company.
- Subsequent Events:
- Sold its interest in MCC Senior Loan Strategy JV I LLC for net proceeds of approximately $39.5 million, expecting to record a realized loss of ~$40.3 million in Q4 2020.
- Redeemed all outstanding 2021 Notes ($74.0 million) on November 20, 2020.
Investor Verification Checklist
- Asset Coverage Ratio: Verify the current asset coverage ratio to confirm if the Company has regained the ability to pay dividends and incur new debt.
- Internalization Costs: Monitor the transition to internal management to ensure projected cost savings are realized and that the new management team can effectively source and monitor investments without the former adviser.
- Portfolio Quality: Review the latest credit ratings and non-accrual status of portfolio companies, particularly in the hospitality, energy, and retail sectors, given the economic downturn.
- Liquidity Position: Assess the $56.5 million cash balance against upcoming debt maturities and unfunded commitments ($3.9 million).
- Realized Losses: Confirm the impact of the MCC JV sale on Q4 2020 earnings and the resulting realized loss.