PhenixFIN Corp (PFX) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Medley Capital Corporation's third quarter fiscal 2011 financial results conference call. Today's call is being recorded for replay purposes. At this time, all participants are in a listen only mode. We will facilitate a question and answer session towards the end of this conference. (Operator Instructions)

This conference call may contain statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual outcomes and results could differ materially from those forecast due to the impact of many factors.

The Company does not undertake to update its forward-looking statements unless required by law. The third quarter 2011 investment presentation is available in the Investor Relations section of the Company's website at www.medleycapitalcorp.com. I would now like to turn the call over to the Company's Chief Executive Officer, Mr. Brook Taube. Please proceed, Mr. Taube.

Thank you, and thank you all for joining today. Welcome to Medley Capital Corporation's quarterly earnings call. As many of you may have seen from our press release yesterday, we've been very active since we last spoke to you in May and we're glad to be able to report solid progress on many fronts.

On this call we're going to quickly review our new credit facility, our dividend and dividend outlook, new investment originations, the pipeline and then turn quickly to questions. Over the past quarter the team has performed extremely well and we continue to focus on growing an attractive and stable dividend and building shareholder value.

The team has grown from 37 to 42 over the past three months with additions on both the origination and the investment side of our business. We're pleased to report the initial closing on the $125 million revolving credit facility that was arranged and led by ING. We said on the last call that we expected to close a credit line by the end of the third quarter of this year and are happy to have delivered the closing ahead of time.

Commitments today to the line are $60 million with several banks currently looking to join. We expect to add participants over the next several months. The reason we closed early on the line is that our visibility on deal flow has accelerated over the past 3 months. On the last call we indicated an expectation to begin borrowing by the end of 2011.

And at this time, it's fair to say we expect to begin borrowing as early as the end of the current quarter or early in the fourth calendar quarter. The pricing on the line is LIBOR plus 3.75% with a 1% LIBOR floor and we're pleased to be working with ING and the other lenders and look forward to expanding the line as we continue to deploy capital and grow our equity base over time.

Turning now quickly to the dividend; pleased to report that the Board of Directors declared a $0.21 dividend for the quarter ending June 30th. This amount mirrors our net invest income for the quarter. And, I'd just like to point out, as we sit here today, having invested additional capital since the quarter end, our run rate net in this investment income is higher than that $0.21.

And, as we look out to the balance of the year, if we continue to meet our origination targets, our net investment income will grow even further. So, investors should continue to expect dividend growth to map to the net investment growth over time. Just a -- one quick note, the dividend will be paid on September 15th to shareholders of record on September 1st.

The pipeline and backlog at Medley continue to be very active and we're pleased with the volume of deals that we're seeing. During the quarter ended 6/30, we originated $38.4 million in four new investments. Since June 30th, we've originated an additional $34.5 million in five new investments and our current backlog -- some of this is detailed further, if you have access to the investor presentation, on page 7.

The investment backlog currently stands at $44 million, and that's in five transactions. If you recall from the last call, we indicated a backlog at that time of $47 million in five transactions. So, the comparable time period from the last call to this call, we closed $51 million in seven transactions. This was higher in both volume and number.

And, as I indicated on the prior call, backlog to us represents transactions we expect to close in the forward 90 days, and our experience over many years of originating and closing transactions is that this backlog is a good proxy for the total volume that we'll ultimately close over that forward 90 day period. Again, you can refer to the 10-Q and also page 7 of the Investor Presentation for more details on these deals as well as the backlog.

Now, quickly on the portfolio performance; as of June 30th, the portfolio consisted of 48.1% in senior secured first lien investments, 18.5% in second senior -- secured second lien investments and 33% in cash. As of June 30th we had 12 investments in 11 portfolio companies across 9 industries with an average portfolio investment size of 13 -- just over $13 million.

As we invest the balance of the IPO proceeds and begin to lever the portfolio we will continue to diversify by industry and issuer. The credit quality of the book remains very strong. There are no loans on non-accrual. The weighted average yield, as of June 30th, was 14% and the weighted average loan to value was 45.7%.

And we sit here today, and it's hard not to see headline -- economic data suggesting headwinds to housing recovery, employment growth and overall confidence -- but with respect to our portfolio and our large pipeline of transactions that we filter, we've seen stable performance on the corporate side. Default rates remain low and revenues and cash flow, broadly speaking, are stable. So, we are always careful and focused on disciplined underwriting. But, it's fair to say that we are comfortable lending in the current environment.

Now quickly, on the exemptive relief application; we received comments back from the SEC on the application in late June. The comments appeared routine and it gives us comfort that the application is continuing on a normal process.

We re-filed that application with responses to the SEC questions in early July and we look forward to hearing back soon. We have no further guidance on timing at this point. Quickly, like to turn it to Rick Allorto, the CFO, to review the third quarter financial results.

Thank you, Brook. The Company's net income for the third quarter, ended June 30th, 2011 was $4 million, or $0.23 per share. Our net investment income was $3.6 million, or $0.21 per share and our net gain on investments was $400,000 or $0.02 per share. Our net asset value per share was $12.55 at June 30th, compared to $12.48 per share at March 31st.

Our total investment income for the quarter was $4.9 million and was comprised of $4.2 million of interest income, $600,000 of other fee income and $22,000 of interest income on cash balances. For the quarter, our total operating expenses, net of management fee waiver, were $1.3 million and consisted of $551,000 in net base management fees, $132,000 in professional fees, $330,000 in administrator expenses, $125,000 in director fees, $80,000 in incentive management fees and $127,000 in general and other administrative expenses.

For the quarter we reported net realized gains of $55,000 and net unrealized appreciation of $344,000. During the third quarter, on a net basis, we invested $38.4 million in four new portfolio companies. As Brook noted previously, subsequent to the quarter end, we invested an additional $34.5 million in five new portfolio companies.

To date we have invested a total of $93 million, or 72%, of our net IPO proceeds. Pro forma for the additional investments, we have $36.7 million of capital available to fund future investments. Lastly, MCC Advisors, the Company's investment advisor, has extended its waiver of base management fees earned on cash from June 30th to September 30th. That concludes my financial review. I'll now turn the call back over to Brook.

Thanks, Rick. So, overall we're very pleased with the progress we've made during the past quarter. We remain focused on originating a portfolio of high quality loans at attractive yields. The pipeline continues on the same trend.

We look forward to continuing to grow the net investment income in the dividend in the quarters ahead. And, I'd like to thank all the shareholders for their continued support. And we can open the call up now for questions.

(Operator Instructions) And your first question comes from the line of Greg Mason representing Stifel Nicolaus. Please proceed.

Great. Good morning, gentlemen. Could you talk on your new credit facility, the $60 million of capacity, are there any limitations to that today on borrowing base or can you draw the full $60 million?

Good morning, Greg.

Good morning.

The credit facility is basically subject to a standard borrowing base with advance rates and certain other concentration limits. However, based upon the current portfolio and the collateral support, we would be able to fully draw down on the full $60 million.

Okay. And, so, to follow up on the comment about additional capacity; the $36.7 million of additional capacity versus a backlog of $44 million; can you talk about how you're planning on, you know, handling your capacity constraints versus the backlog at this point?

Sure. I think --- I just want to clarify; $36.7 million is cash. That's cash on balance sheet. The remaining IPO proceeds; you would add the $60 million to that to get $96.7 million. So, if you looked at that, that's a -- that's something that we are -- comfortably takes us through the balance of the year and into next year. And as I said, you should expect us to add on the accordion feature additional lenders in the next several months. That's our plan.

Okay. Great. And, the exemptive relief that you mentioned; I believe you're filing for kind of two things, co-investments with other funds and then paying a portion of the incentive fee in stock. Were the comments related to both of those or one or the other?

They're independent applications. Early in July we filed our response to the SEC's comment letter for co-investment and then about two weeks later we filed a separate response to their comments regarding the incentive stock.

Okay. And then, is there any additional update or color you can provide on your SBIC application process?

As I mentioned on the last call, we had to re-file. So, we re-filed the Form 2181, which is the Management Questionnaire as a public company. That was done on June 9th and we're waiting to hear back.

And then, one final question and then I'll hop off. It looks out there that there's another BDC filed Sierra Income fund that -- at least the way I read it -- looks like it has you guys as the manager. Can you explain what's going on there and if that would be any different than Medley Capital?

Sure. So, Sierra is independent; it's separate from Medley Capital Corporation. We observe many of our, kind of, high quality peers registering vehicles to distribute in what's called the non-traded BDC market. As we saw the appetite there, we filed a registration statement to pursue that channel.

This would be a 2012 event. It would not acquire or originate the same assets as Medley Capital Corporation. We have a separate team that would manage the portfolio and they concentrate on more liquid credit assets; and then assets we're currently seeing in our normal origination that we're not pursuing at Medley Capital Corp.

I think that what you're seeing is that having the ability to do that broader type of transaction will deepen our relevance to borrowers and we believe it's going to complement, not detract from, the efforts at Medley Capital Corp.

Okay. Great. Thanks, guys.

Your next question comes from the line of Casey Alexander representing Gilford Securities. Please proceed.

Thank you. Greg got most of my questions, but I did notice that there was a small capital gain in the quarter. Do you have any color on that?

So, which one are you referring to, Casey?

Well, the unrealized I can understand is a standard mark to the market. But, the realized one with the portfolio that's so new I'm a little curious about that.

Oh sure. I'm sorry. I know what you're referring to. One transaction that we were looking to do was earlier in the quarter. I think it was a different time; probably a little bit more permissive in the credit markets.

We actually had tried to take a $10 million piece of a transaction. We ended up getting allocated $2 million, which was substantially below our hold size and desire. It ended up actually trading up and we sold it at a slight profit.

Oh. I got it. Okay. All right, that makes sense. Thank you.

Sure. Thanks, Casey.

And your next question comes from the line of John Hecht, representing JMP Securities. Please proceed.

Morning, guys. Thanks for taking my questions. First, with respect to the bank line; is there any fees we should kind of incorporate into the interest accrual?

Yes, we have a commitment fee; a 1% commitment fee to the extent we're below 50% utilization and then it drops to 50 basis points if we're greater than 50 -- 50% utilization. Brook commented on the interest risk stated coupon itself.

Okay. And then from a modeling perspective is there some base level of cash that you'd want to keep on your balance sheet? What I'm trying to get at is, you know, is just sort of what composition of borrowings versus cash should I incorporate in my model going forward?

I think $10 million to $15 million of liquidity is probably something you can model.

Okay. And then, looking at your more recent transactions; both the transactions that were done during the quarter, as well as the ones subsequent to the quarter -- its ranges were sponsored, non-sponsored. You had fairly strong yields; 13% to 16%.

Some of the senior first lien yields are stronger than -- or higher than the second lien yields and I was just kind of wondering for your color on how you're driving pricing. What is the factors that enable you to drive these prices and is there any difference in pricing from sponsored or non-sponsored transactions?

Sure. Well, I think if you -- generally speaking the first lien non-sponsor is going to be the widest; that's where we go direct and we'll structure the transaction. That's a big part of the business. Given our deal size constraints at roughly $10 million at our size, we can't do all of them in that first lien senior, nor do we expect to.

The sponsored channel -- our observation was tighter earlier in the year and clearly has widened on balance with the credit markets and overall markets becoming a little more challenged. And I think you'll see us be able to generate the yields we are looking for comparable to the first lien in the sponsored channel, but having probably to go to the second lien. That's not on every single transaction, but broadly speaking, you'll see the sponsors will be second lien in the yield targets we're looking for.

Okay. And then, any change in kind of leverage or LTV in the newer transactions relative to the, I guess we'll call it the legacy book that you brought forth?

I think -- there's no change we've seen consistently in total leverage on transactions. I think if you looked at the contributed book, those were at lower loan to values and that was purposeful. I think today you look and we're going to be -- we're trending up. We're at 45% loan to value.

That's probably going to trend slightly higher as we enter and remain in a more normalized lending environment. But no, we haven't seen a significant stretch. It'll be interesting to watch as this quarter and the back half of the year in response of the market dynamics whether or not leverage stays stable or contracts or expands. I don't think we expect to have to reach on total leverage to continue to generate our expected returns, or target returns.

Okay. And my final question is, given your pipeline in the markets -- I guess, just thinking about deal execution -- what's the timeframe that we should think about? I mean, you mentioned it's your pipelines, which you expect to close in 90 days, but is there anything changing from start to finish in a particular transaction recently?

No. I think we -- we over the years have been very measured and disciplined about how we fill the pipeline, how we filter transactions and then how we kind of monitor the closing process. And one of -- and interestingly, I think if you had raced to put capital to work, which some people did early in the year, you put yields on at lower levels than you can achieve today.

So, the approach of being disciplined, consistent and driving that sort of consistent origination, we think allows us to keep a much more stable yield target as well as volume growth. I think it's important to stay -- when you do transactions today -- all of our transactions are going to be contributing to three- and four-year dividend decisions. So, I think we benefit from not having put capital up fast. We wouldn't race to do it now by calling the market opportunity. And, you'll see us be consistent and measured, as we always have been.

Great. Thanks, guys.

Thanks, John.

And your next question comes from the line of Dean Choksi representing UBS. Please proceed.

Good morning, gentlemen. Thanks for taking my question. John kind of touched on this in his last question. But, in my recollection, from the IPO road show was that the focus was on the direct origination platform.

Looking at -- and going directly to non-sponsored companies -- looking at the loans that you've closed more recently in the backlog there's a higher mix of sponsor. And Brook, you kind of mentioned that spreads in the sponsor market have kind of widened.

Should we think that the strategy is to go back and forth between the two markets, based on perception and relative value or kind of how -- what's the -- kind of the plan going forward between those two markets?

That's the -- sorry, go ahead.

I guess, second part of the question would be, you know, looking at first lien sponsor for some of your peers, the yields are a little bit higher that you're getting. Is there some sort of dynamic of the loans; either smaller borrower, EBIDTA, or how should we think about what's -- how you're driving those higher yields and maybe what some of your peers are putting on?

Sure. Let me answer the first part of the question first. Our core business is going direct to the borrowers. We have -- we also cover sponsors. Over the last several years there's been more permissive credit available, so the pricing has not made it as interesting. I think, as we look today, there's opportunities there at pricing that we like.

So, we don't exclude it for any reason other than we've traditionally found that to be a harder place to drive yield. Some of the sponsor you see here would be a sponsor group that may not have a fund so it wouldn't be necessarily a traditional private equity shop so we might be able to give you more color on that.

But, we're not competing in the large auction private equity deal flow. We never have and most of it's because of the yield. As we look out today, I think you'll see a mix. It's hard to be specific, but you still see us going direct.

The characteristic of why our yields are higher -- and we did talk about this on the road show and I think it's remained persistent over the last five, ten and maybe even 15 years, is that with the exit of the banks there's been more pressure on smaller size companies. Some of the non-bank financial players stepped in and were able to provide cheaper capital than our capital to larger transactions.

And that never seemed to filter down to the smaller deal size. So, I think you are leading in the right direction in inferring that the first lien type of transactions we can generate on the smaller transactions will be wider than the first lien stuff we're seeing in the larger transaction sizes.

Thank you for clarifying. Just a couple kind of tough questions. On the new credit facility, was there any sort of like a fee that would be amortized in, or is that lumped into the spread that you gave?

In response to one of the earlier questions, the commitment fee, 1% if we're less than 50% utilized, 50 basis points if we're greater than 50% utilized.

Was there like an upfront fee that's amortized over the term of the facility?

Yes, 1%.

Okay. Thanks. And then, in the Q it mentioned that the loan participation interests that the private fund had were cancelled. Is there anything significant there?

No. That was a function of correcting for the credit facility. Just one of the conditions was that we -- Medley Capital Corp. held the loan directly and not through a participation agreement.

Okay. Thank you.

And you have a follow up question from the line of Greg Mason representing Stifel Nicolaus. Please proceed.

Great. As we look at the $36.7 million of cash available that you said today, versus $23 million at the end of the quarter; would it be reasonable to assume that you had a couple repayments and if so could you outline those?

I'm sorry. Where did the $23 million number come from, Greg?

I apologize, unless I've got it -- you're right. I apologize. I looked at the wrong number in my model. So, moving on; looking at kind of a big picture, as you think about -- in answer to Dean's question, you're driving excess yield by smaller companies.

What size of investments can you do that fit this company profile to generate these outsize returns before you start -- because of necessity you're too big, you need to start doing bigger deals that moves you kind of down that coupon structure?

Meaning, what size does Medley Capital Corporation need to be?

Both -- what size -- how big can Medley grow and still do these size of transactions and kind of, at what size of individual investment is the Company still small enough where you can get these higher coupons, versus if you get into needing to do $30 million, $40 million size of deals to move the needle, can you find these high yields?

Sure. I think -- our observation is that in the $10 million to $40 million -- or $10 million to $50 million deal size we're able to find the opportunities. On balance it's probably -- it gets more challenging as it gets closer to $50 million.

But, if you put a pin in the average of $25 million to $30 million it's achievable. It has been over time. It oscillates a little bit, but you know, if you look at enough transactions and you're selective enough you'll find them all along that range.

So, if you look at our capacity -- if we have -- I'll pick a number; 75 transactions at a $30 million average deal size, you can be pretty substantial as a BDC before we would begin to have to deal with an issue of maybe competing with our larger competitors. That's our view.

Great. Thanks.

At this time there are no further audio questions. I would now like to turn the call back over to Mr. Taube for closing remarks.

Great. Well, thank you all for your time. We're pleased with the quarter. We've had great progress in the beginning of this third calendar quarter and look forward to talking with you again after the third quarter results. Thanks very much and have a nice day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.