PhenixFIN Corp (PFX) 2011 Q4 法說會逐字稿

>> Operator Good morning, ladies and gentlemen, and welcome to Medley Capital Corporation's fourth quarter fiscal 2011 financial results conference call. Today's call is being recorded for replay purposes.

This conference may contain statements that, to the extent they are not recitations of historical facts, 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 these forward-looking statements unless required by law. The fourth-quarter 2011 investor 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 very much, and thanks, everybody, for joining this morning, and welcome to the Medley Capital Corporation's quarterly earnings call. We appreciate the time in the busy part of this year, and on behalf of the entire team, I would like to wish everyone a happy holiday season.

A lot has happened here over the last four months, since we last had a call. I thought we would lay out a quick agenda about what we are going to discuss. First, we're going to touch on origination, including the activity for the September quarter, which is our fiscal fourth quarter. You may have seen some already in the 10-Q. We're also going to discuss the origination activity for our current quarter, and then touch on liquidity and capital availability for new investments in the next three to six months.

Second, we'll talk quickly about the recently declared $0.25 dividend, and the outlook for our dividend growth in the next several quarters. We'll give a brief update on the revolving credit facility. And finally provide an update on the SBIC license process, and our two exemptive relief applications with the SEC, the first which is to allow the Company to pay a portion of the incentive fee in stock, and the second, to give us the right to co-invest with our other vehicles.

Okay, on origination, during the quarter ended September 30, we originated $54 million in seven new investments. The existing portfolio is performing very well, and we are pleased to report stable performance on the credit side across the entire book. On balance, during the quarter we saw an increase in the deal flow, yet remained highly selective. For our first fiscal quarter, this is the December calendar, our expectation is that we will finish with over $50 million of new investments, and with $50 million of originations in this calendar quarter, we will end the year having drawn over $30 million on our revolver. As we sit here today, the pipeline of deal flow remains very strong. Our expectation looking into 2012 is that volumes will continue strong, and that we will continue to draw on the revolver, and drive dividend increases into 2012.

Briefly on the market, we've seen and observed more conservative structures and generally wider pricing. This is, we think, a reflection of the overall market volatility, and we are pleased to be in a position to deploy our capital in this type of a market environment. I think it is fair to say we are benefiting from having been disciplined and measured in the deployment of the capital from the IPO proceeds.

Turning to the dividend, pleased to report that the Board of Directors declared a $0.25 dividend for the quarter ended September 30. That is an increase of $0.04 per share, or a 19% increase versus the prior quarter. The dividend will be payable on December 30 to shareholders of record today, December 15. As we sit here today, we have very good visibility on the current quarter's net investment income, and we will end the quarter with higher net investment income in the December quarter versus our September quarter end.

Now on the revolver, during our call in August, we announced the initial closing of $60 million of commitments on the $125 million revolving credit facility that was arranged and led by ING. We are in active discussions with several new lenders, and expect to add additional participants in the coming months. And that is important because we are going to need additional borrowing capacity at the end of the first calendar quarter, and into the second calendar quarter of 2012. I would like to draw everyone's attention to the fact that we extended the revolving period on the revolver from two years to three years. That is a very positive outcome for the Company. It gives us a new final maturity of August of 2015.

Quickly, on the SBIC, we communicated in our November press release that we received the green light letter from the SBA. This was to continue our application process to obtain a license to form and then operate the SBIC as a subsidiary of Medley Capital Corporation. We filed our license application on December 9, and we look forward to working with the SBA over the coming months to complete the process. We don't have specific visibility on the timing for receiving the license, and we are aware that the SBA is busy, but we are optimistic that the process will be completed by the middle of the coming year, and that time would be consistent with our need to use the capital. So, as we expand the availability on the revolver, and invest that capital, and then we hope to receive the license and then make use of the attractive SBIC debt, we will be able to meaningfully expand the net investment income and our dividend-paying capacity in the quarters ahead.

Quickly, now, on the exemptive relief applications. We are awaiting further comments from the SEC with respect to the application to permit the payment of a portion of our incentive fee in stock. We don't have any specific comment on the timing for that application. However, I am happy to report that we believe we are nearing the finish line on the application for relief to co-invest. We've responded to what we hope are the final-round comments from the SEC, and look forward to wrapping that process up early in 2012.

I'd like to quickly turn the call over to Rick Allorto, our Chief Financial Officer, to review the fourth quarter financial results.

Thank you, Brook. The Company's net income for the three months ended September 30 was $3.9 million or $0.23 per share. Net investment income was $4.4 million or $0.26 per share, and the net unrealized loss on investments was $0.5 million or $0.03 per share. The net asset value per share was $12.57 at September 30, compared to $12.55 at June 30. For the quarter, total investment income was $6.9 million, and was comprised of $6 million of interest income, $0.9 million of fee income, and $6,000 of interest income on our cash balances.

Total operating expenses, net of management fee waiver, were $2.5 million, and consisted of $770,000 in net base management fees, $634,000 in incentive management fees, $262,000 in professional fees, $346,000 in administrator expenses, $163,000 in interest and credit facility financing expenses, $127,000 in directors' fees, and $161,000 in other, general, and administrative expenses. For the quarter, the Company reported net unrealized depreciation of $493,000. The Company's net income for the fiscal year ended September 30, 2011 was $9.5 million or $0.55 per share. Net investment income was $9.6 million or $0.56 per share, and net realized and unrealized loss on investments was $0.1 million or $0.01 per share.

For the fiscal year, total investment income was $14.6 million, and was comprised of $12.7 million of interest income, $1.8 million of other fee income, and $0.1 million of interest income on our cash balances. Total operating expenses, net of management fee waiver, were $4.9 million, and consisted of $1.6 million in net-based management fees, $714,000 in incentive management fees, $628,000 in professional fees, $866,000 in administrator expenses, $163,000 in interest and credit facility financing expenses, $449,000 in directors' fees, and $510,000 in other, general, and administrative expenses. For the fiscal year, the Company recorded net realized gains of $55,000, and net unrealized depreciation of $150,000.

During the September quarter end, the Company invested $54 million in seven new investments, and as of September 30, the investment portfolio consisted of 55% senior secured first lien investments, 37% in senior secured second lien investments, less than 1% in equity and warrants, and 8% in cash and cash equivalents. As of September 30, the Company had 20 investments in 18 portfolio companies across 16 industries, with an average portfolio company investment of $11 million. The credit quality of the existing portfolio remains very strong, with no loans on nonaccrual. The weighted average yield to maturity on the portfolio at September 30 was 14.5%, and the weighted average LTV was 49.4%.

That concludes my financial review; I'll now turn the call back over to Brook.

Thanks, Rick. Overall, we are very pleased with the progress that the team has made throughout 2011. We remain focused on originating a portfolio of high-quality loans at attractive yields. We look forward to continuing to grow the net investment income and our dividend in the quarters ahead. We have very clear goals for 2012, and we expect to achieve them. I'd like to thank all the shareholders for their continued support, and we can now open the call up for questions.

(Operator Instructions)

Troy Ward, Stifel Nicolaus.

Great. Thank you. Good morning, gentlemen. Real quick, can you just talk little bit more about the SBIC and your expectations? I think, Brook, you said you expect to get the license in mid- 2012. At least, maybe not expect it, but that would be kind of in line with what you've seen in the past. How do you intend -- first of all, how much of the equity portion do you intend on funding, and how do you intend on funding that?

Okay, we don't really have color, Troy. I think it is represented that it has been several months in the past, and that is extended. So, we've just asked counsel their best guess, and I think looking at the middle of the year seems realistic to expect. I think that will be consistent with timing for us in terms of usage. Our expectation is that we would drop $30 million of equity capital into a subsidiary, and then make use of $60 million of the SBIC leverage if we get the availability.

Great.

That would be funded off of the revolver.

Great, okay. Good color. And then on the dividend, Brook, as you continue to grow the portfolio in 2012, can you just tell us kind of the dividend policy that the Board kind of wants to go by. Is your intention to keep the dividend in-line with NII, or can you just give us a little bit of color on your intended dividend policy as the portfolio matures?

Yes, I think we stated over the course of the whole year, that our policy is to suggest to the Board that the dividend reflect the NII. I think there is -- again, any given quarter it could be off by $0.01 here or there, so I'm not sure it's going to track exactly, but I think you could see, especially over any three-, six-, nine-month period we're going to try our best, but we will recommend that it reflects NII.

Great, and then one last one, I'll get back in the queue. Just from an industry perspective, you guys do more off-the-run kind of investments it seems, than many of the BDC peers. How would you describe the current competitive environment of the market you play in, and more importantly maybe, who are your main competitors out there that you see? Is it other BDCs, is it banks, who do you see in the marketplace for your assets?

That is a good question. I think, let me start with the competitive question, and then we'll talk about who we see. From a competitive perspective, I think we're benefiting across-the-board in the small and middle market. I'm not sure that is a Medley-specific observation; you have seen a lot of funding pressures in the inter-bank market that is putting pressure up and down the system, and I think it is reverberating down to the smaller borrowers. Our position has been that there is a secular trend that has kept banks away from the lower end of the middle market.

An interesting development today is that when we do see banks, it is typically as a partner. They are coming to us to partner with them on transactions that they are not going to do, or that they can do a revolver for, or it is a client of theirs. So, we think that for the next -- for the foreseeable future, which would be a couple of years, they are likely to be partners of ours as we look to originate.

Now, on the competitive side, there are other opportunity funds. We have selectively seen BDCs, but I think our observation is, a lot of folks are fully invested and the larger players are really not in our space in the smaller end of the market. So, it remains less competitive than you would expect. I think we expect that to persist, and I think spreads have widened over the back half, the last six months, as a reflection of the overall market volatility. And that is a good thing, as we have capital to deploy.

Great, thank you, guys.

Thank you, Troy.

Casey Alexander, Gilford Securities.

HI. Good morning. A couple of questions -- at the end of the quarter, do you know what the fixed rate to floating rate composition of your assets was?

Yes, give me one second, Casey. I believe the fixed rate was somewhere in the 70%, 75%/ 25%.

75%/25%, okay. (multiple speakers) Secondly, your portfolio has a higher proportion of financials than probably most BDCs that we look at; it seems to be a real specialty of yours. How does your pipeline look in terms of -- is it continuing to move in that direction, or create greater diversification away from that direction as you go forward?

Good question. We do not have financials in our pipeline. That is a reflection of a couple of things. One, we have exposure coming in. I think the larger percentage that you are talking about as in the book today is a reflection of the formation portfolio. I think you'll see financials would likely be declining as a percent as we grow the portfolio, and would not look outsized versus other sectors.

Okay. Lastly, the unrealized depreciation in the quarter, was that mostly market based or spread related, or is there individual credit involved in it? How did it break down?

It was predominantly all market-based, Casey.

Okay, great. All right, thank you.

And the answer to your first question, was about 68% fixed, and the balance is floating.

68%/32%. Great, thank you.

Dean Choksi, UBS.

Can you talk about thoughts on where you'd raise equity relative to book value?

I thought we were supposed to wait and have the bankers tell us when to do that, Dean. Look, we don't expect to raise equity capital at the discount-to-book that we are at.

Okay, and then on the -- for the extending the revolver, can you talk about what your target leverage is? I think on the IPO you mentioned 0.3 or 0.33 times, and then how do you include the SBIC debt in that?

Okay, I think the SBIC debt is not included in our target, so that would be the non-recourse off subsidiary debt. Obviously, I think folks are aware of the attractiveness of the term nature of that debt. So, I think that is additive.

In terms of the revolver, the number's $125 million. I don't think you'll see us use all of that facility; we will keep some liquidity. But I would expect over $100 million of that, when we have the availability, will be used, and with our equity base I think that is pretty much in line with the target we had laid out. And that is going to allow us to drive a substantial, obviously, increase in NII. We are continuing to do that, so that will be reflected in a very systematic way over the next one, two, and three quarters.

I mean, does that imply a little bit higher leverage than 0.3 times, if you draw down on $100 million of the revolver?

I just want to clarify. I think our intention was to be 1.5 times, so 0.33 times or 33% of assets. So, I think the revolver size was set to reflect our target leverage ratio, so I'm not sure if we're saying the same thing with different multiples?

Okay, thank you. Yes, I was thinking debt-to-equity, but that makes sense.

Yes, I think we're saying debt to assets, so maybe that is the difference, so -- .

Okay, thank you.

John Hecht, JMP Securities.

First of all, I wonder if you could review or characterize the deployment during the quarter, what was the yield on average of the new investments? And maybe -- I know you give a lot of this information in the 10K, but maybe if you could provide some information about the sourcing, were they sponsored and nonsponsored deals, and refis or new capital. And then the second question would be -- for the pipeline, wonder if you could characterize that in a similar fashion? You guys did mention $10 million thus far but you have a pretty -- (inaudible - technical difficulty).

We lost the last part of that question, John, sorry.

The second question is effectively -- given the information you disclosed about the pipeline, do you expect it to be toward -- deployed mostly in the latter part of the quarter?

Are you talking about the calendar?

Yes, the pipeline, I'm sorry.

Sure. As we look out into Q1, I think you should expect that we are going to be deploying, on average, middle of the quarter, perhaps in the first calendar quarter of '12 it will be towards the front end. I think on the sponsor/nonsponsor, it was pretty evenly split. I think you will continue to see that. Obviously, since the number of deals is five, six in a quarter, one deal can swing it, but I think sort of an even split today is what you would expect. Our expectation as we get the exemptive relief, obviously you will see us increasing the nonsponsor component, which has been our target and will remain our target as we are able to co-invest with our larger vehicles.

And quickly, I'm going to have Rick just comment on the yield characteristics. You want to know the overall, or just kind of deal by deal? What is the nature of the question?

The pipeline seems pretty strong -- one of the questions that you addressed was what is your expected timing during the quarter. But the other kind of characteristics I would be interested in is -- were you seeing pricing on a loan-to-value basis, as well as yields? And then, where the sourcing is coming from, is it consistent between this nonsponsor and sponsor, like you did last quarter?

Yes, I think it is going to be consistent, as I said before. I think loan-to-values are looking in that 50% to 60% range, so that is consistent. It has not been a significant tack. I think, broadly speaking, spreads are wider. And I think what is also important to note is that, which doesn't necessarily get reflected in reported materials, is that our ability to get structural benefits obviously increases as the markets get less liquid. There is less ability for borrowers to have a say on covenant levels or thresholds, and perhaps even the covenants themselves. So, I think you're seeing more conservative structure, wider pricing, stable to lower LTVs.

And my final comment, which I guess is a market one is, as we get further and further into what we -- call it post-recession environment, we may be we're pre-next recession, but we're certainly post the great recession, we're getting more comfort on the revenues and EBITDA of the borrowers that we are seeing. I think we can't underestimate that lending at 55% loan-to-value or a constant multiple of cash flow is increasingly more comfortable for us as we see these companies have stabilized and are in some cases obviously growing or expanding.

Okay, and final question related to your last comment is, as you look forward, it seems like you characterized the environment as you benefiting from the impairment of your competition, whether it is from the banks or other sources. I'm wondering if, at this point in the cycle, you are also seeing increased demand for capital in the lower middle markets, whether it is expansion capital related or LBO kind of middle market take-out related, and if you see that being a theme that you might look for coming into the next calendar year?

I think there is -- it is consistent, as it always is. There is refinance activity. We don't really look at the dividend recaps, so I can't comment on that. There is interest in growing and expanding; I think that is very fair to say. And I think if you just look at the refinancing story, the wall of debt that has been talked about, a lot of that appears to be getting absorbed in the very large deals. I think very little of it is getting absorbed on the lower end. So, as we look out into back half of '12, '13, and '14, it looks like that refi or that demand for capital is going to persist, and it's hard to see where the size of supplier of capital is going to come in. And certainly, unlikely if that supply or the competition comes in, it's unlikely to be coming in at a cost of capital that we think is going to have a real pricing effect.

Okay, great, thanks for the color.

Troy Ward, Stifel Nicolaus.

Just a quick follow-up on Casey's line of questioning about the portfolio movements. Flexera Software, I believe, was an investment that was made in the quarter, and then by the end of the quarter, it did take a bit of a mark. Can you talk about what you saw from the fundamentals intra-quarter there, and maybe as important is, how is it doing post-September 30?

I'm sure -- that is one in which -- that closed at the very last day of the quarter. We took the origination fee. It went into the market with OID, but we took the fee instead, and the unrealized loss you see is just a reflection of -- we actually funded at par, it went into the broader market at the OID, and we marked it for valuation purposes at that mark.

You just said it closed -- ?

On a net income basis, it's zero.

Okay. And you said, when it closed the end of the quarter, you meant September 30 or June 30?

September 30.

Then, on the positive side, it looks like the warrants in Cymax were written up nicely; what are you seeing in that investment?

Things seems steady there. In fact, there is actually some interest on the strategic side with that. I can't comment further at this point, but we think that's going -- there will be some positive developments heading into the first quarter for Cymax.

Great. And then finally, can you give us an update on Bennu Glass? Are they still on track to reopen the factory in early 2012?

Yes.

Great, all right, thanks, guys.

Rob Brock, West Family Investments.

Excellent quarter, guys, thanks. Brook, could you spend one minute talking about the cost of your credit facility?

Sure, it is LIBOR plus 3.75%. We did extend it, the revolver period, for a year; that is a positive event. There was a LIBOR floor, and I think from our modeling, as far as a year ago, that is consistent with our expected costs.

And how big is the facility again? I think you mentioned earlier -- one more time?

Sure, we have $60 million of commitments. We are in active dialogue with folks who are aware of the timing that we'll need it, and expect to add people. The cover is $125 million. And I think we will go from $60 million to $125 million in time for our usage.

Great, thanks.

Ross Haberman, Haberman Management.

Two quick questions -- could you talk about, as you grow the asset base, your goal in terms of your mix of the types of loans? Are you happy with the current mix, or do you want to grow other sectors more as you leverage up here?

I think you'll see increased diversification. I think you'll see an increase in the floating rate components. Two-thirds of the pipeline is floating, and I think you will see us begin to migrate. We have obviously benefited in this low-rate environment from having higher fixed-rate paper. But I think our strategy or our policy over a number of years at Medley is to be diversified by sector, by asset type, and just use diversification as a tool.

Do you want to lessen the amount in senior secured? I think you had about a little bit more than 55% as of the quarter. Will that number as a percentage of the total drop as you invest in, I guess, lower-tranche assets?

I think you'll see it balance. I think we've indicated we will probably try to be balanced between the two. So, anything other than 50/50 other than the ebbs and flows in the market. But as we get begin to get more invested, I think you'll see it probably 50/50.

So, that senior secured might drop a couple of points, you're saying?

Yes.

Will the subordinated area -- is that of interest to you, or that is too far down the ladder?

Yes, we generally stick with secured paper, so second lien. I mean, it is a second lien, but if you are talking about unsecured, deeply subordinated paper, that is just not what we are doing. I think our observation is that if you can generate the target yields we would like, in the type of paper we are getting, there is no reason to reach, I think. Whether your view is we're heading in or coming out of a cycle, if you can generate the yields which we can today, there is no reason to go deeply down the stack.

And just one quick question on pricing. How do you price the securities? Do you use a third-party pricing, or how do you go about that on the debt as well as some of your equity in warrants?

Do you mean from the valuation on a quarterly basis?

Yes.

Yes. All third party.

It is. Okay. All right, guys. Thank you. Best of luck.

Thanks very much.

And we have no further questions at this time.

Great. Well, I want to thank everybody for participating. I think we are looking forward to continuing to deliver positive news. We have a good pipeline, good objectives for '12, and we appreciate the continued support. So, thanks everybody, very much.

This concludes the presentation for today, ladies and gentlemen; you may now disconnect. Have a wonderful day.