PFX

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).

Reporting Period: Three and six months ended March 31, 2014.

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 invests primarily in senior secured first and second lien term loans and senior secured notes of privately-held middle market companies.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Growth: Total investments at fair value increased by approximately $210 million (28%) from September 30, 2013, to March 31, 2014, driven by net investments of $209.5 million during the six-month period.
• Revenue Increase: Total investment income rose 66% year-over-year to $63.1 million, primarily due to portfolio expansion and increased fee income ($12.0 million vs. $6.4 million).
• Expense Increase: Total expenses increased 65% to $29.5 million. This was driven by higher interest and financing expenses ($9.2 million vs. $5.3 million) due to increased leverage, and higher management and incentive fees resulting from asset growth.
• Unrealized Losses: The Company recorded net unrealized depreciation of $6.8 million for the six months ended March 31, 2014, compared to net unrealized appreciation of $0.7 million in the prior year period.
• Debt Expansion: Total debt outstanding increased significantly to $403.7 million from $256.0 million, reflecting increased utilization of the Revolving Credit Facility ($136.2 million outstanding) and SBA debentures ($44.0 million outstanding).

Guidance, Outlook, and Risks

Management Commentary: Management continues to focus on generating current income and capital appreciation through direct lending to middle-market companies. The portfolio's weighted average yield based on cost was approximately 13.5% as of March 31, 2014. The Company maintains a weighted average loan-to-value (LTV) ratio of 56.3%.

Recent Developments:

• On April 28, 2014, the Company completed a public offering of 6,000,000 shares at $13.25 per share, raising approximately $76.7 million in net proceeds.
• On May 1, 2014, the Board declared a quarterly dividend of $0.37 per share.

Risks and Contingencies:

• Interest Rate Risk: 63.4% of the income-bearing portfolio bears floating interest rates. A 100 basis point increase in rates would result in a net decrease in operations of approximately $1.6 million due to higher borrowing costs exceeding income gains.
• Credit Risk: One portfolio company (Geneva Wood Fuels LLC) was on non-accrual status with a fair value of $4.1 million (0.4% of the portfolio).
• Liquidity: The Company has $67.3 million in unfunded commitments to 13 portfolio companies.

Investor Verification Checklist

• Debt Utilization: Verify the impact of the increased debt load ($403.7 million) on the asset coverage ratio and future interest expense.
• Unrealized Depreciation: Review the specific portfolio companies contributing to the $6.8 million unrealized loss to assess credit quality trends.
• Dividend Sustainability: Confirm that Net Investment Income ($33.6 million) continues to cover the quarterly dividend rate of $0.37 per share ($1.48 annualized) given the increased expense base.
• Equity Dilution: Note the recent equity offering in April 2014 and its impact on shares outstanding and per-share metrics.
• Non-Accrual Status: Monitor the status of the single non-accrual investment (Geneva Wood Fuels LLC) for potential write-downs.