Business Context and Reporting Period
Company: Medley Capital Corporation (Note: Input metadata listed "Phenixfin Corp," but the filing text identifies the registrant as Medley Capital Corporation).
Filing Type: Form 10-Q (Quarterly Report).
Period Ended: March 31, 2016.
Business Overview: Medley Capital Corporation is an externally-managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The Company's investment objective is to generate current income and capital appreciation by lending to privately-held middle market companies, primarily through senior secured first and second lien loans, often accompanied by equity participation features.
Key Financial Metrics
| Metric | Six Months Ended Mar 31, 2016 | Six Months Ended Mar 31, 2015 |
|---|---|---|
| Total Investment Income | $65.1 million | $76.6 million |
| Net Investment Income | $30.2 million | $38.1 million |
| Net Increase/(Decrease) in Net Assets from Operations | $(38.8) million | $(6.5) million |
| Net Asset Value (NAV) per Share | $9.80 | $11.68 |
| Total Investments at Fair Value | $1,036.1 million | $1,216.1 million |
| Cash and Cash Equivalents | $12.7 million | $15.7 million |
| Total Debt Outstanding (Principal) | $526.8 million | $620.2 million |
| Dividends Declared per Share | $0.60 | $0.67 |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased by approximately $180 million (14.8%) from September 30, 2015, to March 31, 2016. This decline was driven primarily by net unrealized depreciation of $74.1 million and net repayments exceeding new originations.
- Operating Results: Net investment income decreased by $7.9 million (20.7%) compared to the prior year period, largely due to a smaller portfolio size and fee waivers. Net assets from operations decreased by $38.8 million, compared to a decrease of $6.5 million in the prior year, primarily due to significant unrealized losses on investments.
- Debt Structure: The Company significantly reduced its Revolving Credit Facility usage, paying down from $192.7 million to $25.3 million. Conversely, the Company issued $74.0 million in 2021 Notes during the period, increasing total notes payable.
- Non-Accrual Status: The number of investments on non-accrual status increased from three (fair value $25.5 million) at September 30, 2015, to eight (fair value $64.1 million) at March 31, 2016.
Guidance, Outlook, and Management Commentary
- Fee Reductions: Effective January 1, 2016, the Company implemented a permanent reduction in fees payable to its investment adviser, MCC Advisors. The base management fee was reduced to 1.50% on gross assets above $1 billion, and the incentive fee on net investment income was reduced to 17.5% over a 6% hurdle rate, subject to a rolling three-year look-back mechanism.
- Stock Repurchases: The Board extended the share repurchase program through December 31, 2016, increasing the aggregate authorization to $50.0 million. During the six months ended March 31, 2016, the Company repurchased approximately 1.57 million shares for $10.7 million at an average price of $6.80 per share (a 32.7% discount to NAV).
- Dividends: The Company declared a quarterly dividend of $0.30 per share on May 5, 2016, payable June 24, 2016. The Company intends to distribute substantially all taxable income to maintain its Regulated Investment Company (RIC) status.
- Risks and Contingencies: The Company is a defendant in a lawsuit filed by Moshe Barkat and Modern VideoFilm Holdings, LLC, seeking damages in excess of $100 million related to a loan to Modern VideoFilm, Inc. The Company disputes the claims and is vigorously defending the action. Additionally, the Company faces market risks related to interest rate fluctuations, with 78.5% of its income-bearing portfolio bearing floating rates.
Important Facts for Investor Verification
- Unrealized Losses: Verify the magnitude of the $74.1 million net unrealized depreciation and the specific portfolio companies contributing to the increase in non-accrual assets to $64.1 million.
- Fee Waiver Impact: Confirm the long-term impact of the new fee structure on Net Investment Income (NII) per share, noting the $2.1 million in incentive fee waivers recorded in the current period.
- Debt Maturity Profile: Review the contractual obligations table; while the Revolver was paid down, significant debt maturities (Notes and SBA Debentures) are scheduled beyond 3 years, with $213.5 million due after 5 years.
- Legal Proceedings: Monitor the status of the Modern VideoFilm litigation, as the potential liability exceeds $100 million, though the Company asserts the claims are without merit.
- NAV vs. Market Price: Note the significant discount of the market price ($6.60) to the NAV ($9.80) as of March 31, 2016, which the Company is addressing through its active share repurchase program.