PhenixFIN Corp (PFX) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Medley Capital Corporation's First Quarter Fiscal 2013 Financial Results Conference Call.

Today's call is being recorded for replay purposes. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator instructions)

This conference call may contain statements that, to the extent that they are not recitations of historical fact, constitute forward-looking statements. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors. The Company does not undertake to update its forward-looking statements unless required by law.

The first quarter 2013 investor presentation is available in the Investor Relations section of the Company's website at www.medleycapitalcorp.com.

Now I'd like to turn the call over to the Company's Chief Executive Officer, Mr. Brook Taube. Please proceed, Mr. Taube

Thank you. And welcome, everyone, to Medley Capital Corporation's quarterly earnings conference call. We appreciate you taking the time to join us this morning.

And, as a quick agenda, on the call, we're going to discuss origination, including a review of the activity for the December quarter and an update on activity in our targets for the current March quarter. We will also discuss our liquidity and capital availability for new investments for the first half of 2013.

Second, we'll discuss the recently declared $0.36 per share dividend and our outlook for the dividend in the next several quarters. Third, we'll provide an update on our revolving and senior term loans facilities. And, finally, an update on the status of our SBIC license application.

On our original during the quarter ended December 31, we originated $133 million in 11 new investments and seven existing investments. We received amortizations and repayments of $17 million, resulting in net portfolio growth of $116 million.

As we communicated in our last call in early December, there appeared to be increased transaction volume driven into 2012 from early 2013 due to the pending tax law changes. Our December quarter was clearly above our previous activity as a result.

As we finished 2012, we were curious about how the early 2013 origination volume would unfold due to the one-time tax effect -- one-time effect of the tax law change.

In this calendar quarter, it is active. We have a strong pipeline. And the quarter is unfolding in a normal manner. With the completion of our equity issuance in December and the additional expansion of our credit facility, we're well-positioned entering 2013 in terms of capital availability.

Now, with respect to terms and yield, overall, in the market, we have observed more aggressive structures and a tightening in pricing. However, as I mentioned previously, our deal flow remains strong and we expect to continue to deploy capital in the current market at attractive risk/reward levels.

Turning now to the dividend, we're pleased to report that the Board of Directors has declared a dividend of $0.36 per share for the quarter ended December 31. The dividend will be payable on March 15 to shareholders of record on February 27.

As we have stated previously, we expect net investment income will meet or exceed the current dividend as we look forward in this quarter and further into 2013, assuming we are able to deploy capital as planned.

Turning now to the credit facility. As discussed in our recent press release, we continue to diversify our bank lending group. And we've exercised the credit facility's full accordion feature. The combined $300 million credit facility is comprised of commitments of $200 million to the revolve and $100 million to the senior term facility.

Over the last 18 months, we've successfully implemented a strategy of diversifying our liabilities by funding source and maturity. And believe we are well-positioned to continue on that trajectory in the future.

Turning now to the SBIC. We continue with our license application process with SBA. Since our call in early December, we received formal pre-licensing approval for our third investment. To reiterate, this pre-licensing approval allows us to contribute a specific asset to a future SBI subsidiary when we are officially licensed. In a sense, it allows a head start on populating an SBIC portfolio.

While we have no guidance on timing at this point, we remain optimistic and look forward to finalizing the process as soon as possible.

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

Thank you, Brook. For the three-month ended December 31, the Company's net investment income and net income were $9.6 million or $0.39 per share. The net asset value per share was $12.69 at December 31, compared to $12.52 at September 30.

For the quarter, total investment income was $17.7 million, and was comprised of $14.8 million of interest income and $2.9 million of fee income.

Total operating expenses were $8.1 million and consisted of $2.1 million in base management fees, $2.4 million in incentive fees, $2.3 million in interest and financing expenses, and $1.3 million in professional fees, administrator expenses and general and administrative expenses.

For the quarter, the Company reported net unrealized depreciation of $226,000, and net realized gain from investments of $222,000.

During the December quarter end, the Company invested $133 million in 11 new investments and seven existing investments. And as of December 31, the investment portfolio consisted of 65% in senior secured first lien investments, 34% in senior secured second lien investments, and less than 1% in equities and warrants.

As of December 31, the Company had investments in 46 portfolio companies across 22 industries, with an average portfolio company investment of $11 million. As of December 31, the credit quality of the existing portfolio remains stable. And no loans were in non-accrual status.

The weighted average yield to maturity on the portfolio at December 31 was 14%. And the weighted average LTV was 56%.

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

Thanks, Rick. Overall, we are pleased with the performance of our team in 2012. We've had steady and consistent growth in the portfolio. We expanded the lending group and our overall credit capacity. And we've steadily increased our net investment income.

In addition, the portfolio remains strong with no loans on non-accrual. And we enter 2013 with capital available to invest. The team remains focused on originating a portfolio of high-quality loans at attractive yields that generate a stable and consistent dividend for our shareholders in the quarters ahead.

I'd like to thank all the shareholders for their continued support. We can now open up the call for questions.

Thank you, sir. (Operator instructions). Please stand by for your first question. It's from the line of Troy Ward and Stifel. Please go ahead, Troy.

Thank you. And good morning, guys. Hey, real quick, can you talk about what you've done so far quarter-to-date? I know in the recent developments, I think I counted about $14 million. Did you provide an update for that this morning? And not just on the origination side, but on the prepayment side?

We didn't and we're not going to. I think what I said -- I'll reiterate -- is the quarter is unfolding as planned and we have a strong pipeline, Troy.

Okay. And then, quickly, Rick, on fee income. Could you discuss the level of exit fees in the quarter versus origination fees? And what percentage are you taking in the current quarter versus what are you amortizing in for those fees over the life?

Sure. I don't have the specifics directly in front of me. But from memory, about 90% of the fee income is origination fee as opposed to kind of prepayment or exit fees. And our accounting treatment for the origination fees is to record 100% of the fee income when received. We're not amortizing any of the origination fees.

Okay. And then just one more question on a specific portfolio company -- with Calloway Laboratories. You know, reading some of the trade rags I saw where Ampersand was, hopefully, going to have that bought by the end of the year. But I don't see it in their portfolio as of today. Is that a transaction that took place? And if not, how are you viewing Calloway today?

Sure. I'll take that. The transaction did close.

Good.

About $10 million was funded. I guess that answers it. Was there another part of the question?

Well, did your previous investment in Calloway -- because I think it was over $20 million -- did that get paid off?

It did not. This was follow-on capital into the Company.

Okay. And then just some color on the Calloway situation. I know they had some pretty rough 2012. Can you just give us some color on kind of where that company is, kind of in the industry, and how they're trending?

Sure. Well, with the addition of the Ampersand industry veteran that they brought in, as well as the strategic plan, I'd said that, at this point, we're comfortable with where the company is. I'd say the leading part of the question, which is performance, without getting too granular, revenue was below budget. It was a high single-digit miss. It related largely to reimbursement rate cuts among the commercial providers. And it was most notably some of the larger ones.

So I think there were some meaningful non-recurring expenses regarding legal fees, professional fees and others that related to compliance, and looking at this rate cut change as well as the new deal.

But, yes, it was clearly challenged during the year. But I think, at this point, they're working on a good plan, a consolidation plan. And we're comfortable with the credit today.

That's great color. Thanks, Brook.

Thank you for your question. We have another question for you. This is from Casey Alexander at Gilford Securities. Please go ahead, Casey.

Good morning. Can you share how much you actually have in principal dedicated to the investments for the SBA subsidiary to date? Or as of the end of the quarter?

Casey, I don't have that. There were three investments to date. If memory serves me correct, it's slightly north of $40 million. But I'll get back to you on the exact numbers.

Okay. And those, if approved, would be representative of the Company's sort of principal investment prior to taking down SBA debentures to fund other investments -- isn't that correct?

Well, I'll say what I think is correct. I think what the process allows you to do is to have both assets be pre-approved, you contribute to your subsidiary and they would count as regulatory capital, as if you had funded equity and then done the deal there. So, I think that's the question you asked. But, yes, it would count as regulatory capital.

All right. Yes. That's correct. Now, do you have other investments already in your portfolio that you believe would likely be adequate or approvable for the SBA facility that would allow you to invest it up fairly quickly?

Well, I think there's two questions here. Let me answer one. I believe somewhere north of 70% of our portfolio would quality as an SBIC-eligible asset.

Right.

Existing -- the extant portfolio, however, does not -- you cannot take assets from the extant book and deliver them to the SBIC subsidiary as capital, unless you've gone through this pre-licensing process, which we have done for the three positions that we've mentioned.

All right. Okay. So you have to sort of apply for them as they're coming in?

That's correct. So, in effect, it's -- we anticipate future origination will be the source of assets for that subsidiary if we're able to receive the license.

Now you have three. Do you have anything in your pipeline that you're putting in for pre-approval to add to that portfolio?

At this point, where we sit today, I think that we have accomplished the number that seems sensible from both the SBA and our perspective. But if the answer is I wouldn't expect further pre-licensing in advance of the completion of the process.

In terms of what percentage of our pipeline -- I don't have it in front of me, but I would expect it would be at or near -- maybe a little higher than our average portfolio. There's nothing unique about the originations we're doing now where I would expect any deviation from their sort of eligibility criteria versus the existing book.

Okay. Great. All right. I appreciate it. Thank you.

Thanks, Casey.

Thank you, Casey. We have another question for you. This one is from the line of John Stilmar at JMP Securities. Go ahead, John.

Thank you. Brook, just really quickly -- given you've been a very active capital provider to consumer finance names, what is your perspective on the consumer? Is this still kind of a risk on environment, if you will? It seems like almost every non-prime ABS issuer or non-prime lender has been enjoying some pretty strong capital success. I'm curious about your perspective in both capital flows as well as the performance of the consumer -- kind of where we are in the cycle right now?

I think I'm going to let you answer that one yourself, John.

Okay.

Look, our perspective today -- why don't I comment on our overall perspective as a lender today?

Perfect.

I would characterize nothing unique. We don't have any unique insights, I would say, versus consumer, I think, in terms of your question.

However, as a credit provider today in the market, we're very comfortable. Going back 12 months, we have commented to you all that we see a stabilization. We thought that the baseline economy was turning. As we look at our existing portfolio, we're seeing revenue and EBITDA meaningful above GDP and trending to the positive.

So the backdrop we're looking at as a credit provider remains favorable. And, in fact, we would say, on balance, improving slightly.

So our ability to continue to [play] capital at very reasonable or sensible yields in this environment is a very favorable backdrop as a credit provider.

Perfect. Thanks for the clarification. Good quarter.

Thanks, John. Thank you.

Thank you, John. And we have another question for you. This one's from John Falk at Wells Fargo Securities. Please go ahead, John.

Good morning. And thank you for taking my questions. Brook, real quickly, as we look at the new investments -- maybe a few questions in terms of leverage through -- on average, your typical first lien, typical leverage through your senior secure and, perhaps, there's a revolver ahead of you. And then, maybe, second lien and how that compares to where you were originating, roughly, 12 months ago?

Good questions. I'll try to hit all of them. I don't have the granular data. I'll give you our color right now.

Over 80% of the origination in the quarter was first lien. I wouldn't characterize that as any view on the market -- any quarterly volume is a little too idiosyncratic to describe a trend. Although, as you can see, the first lien mix is higher.

I would say, on average, we're looking at the same level of three-and-a-half to four times. And a portfolio loan-to-value that is in the high (technical difficulty) [50s]. So, no significant change.

As we look at the positions today, despite obviously more aggressive structures in the market, what we've done is stuck to companies that have stable EBITDA. We believe relatively sensible fixed charge coverage ratios.

And, overall, I would say our decision on risk has neither gotten more aggressive or less aggressive. It's just standard lending practice that we've been doing for the last three or four quarters.

And in terms of risk mitigation, you know, the question of increasing rates is one that many [asks] from an ALM perspective.

But, I'm curious. IF we're lending to, perhaps, smaller companies at leverage levels between three-and-a-half to four times on a senior basis, and perhaps there's a floating element to those loans -- what happens in the event that rates rise? And how are you protected from a true cash flow perspective if LIBOR increases, maybe? How's that scenario run in your model and how do you work to prevent any potential loss as the result of rising rates?

Sure, that's a good question. I'll start by saying we have a very sensible balance between fixed and floating. So with respect to the fixed rate, I think that that borrow is fine.

With respect to floating rate, I think there's -- let's just talk about two states of nature. I think one is runaway inflation and LIBOR spiking. That would be a challenge. I don't think that there's any two ways about it.

If LIBOR rises in what would be a reasonably anticipated manner to a normalized level, I think the borrowers are fine. And I would just comment that we do think about these issues. We've been through it before. And our perspective is the following.

In an environment where you have a normalized rise in LIBOR is likely -- although not certainly -- but likely to be correlating with growing and stabilized GDP. So our view is that the growth environment that is likely to lead or precede that is actually going to be a net positive on the credit side.

So I think the hyper-inflation spike in LIBOR is a challenge. And people can put their own probability against that.

But the environment against which we're underwriting, we think, on balance, we have a sensibly balanced portfolio. The rise in LIBOR ought to contribute positively to NII, although I wouldn't overstate that.

Great. And in terms -- just two more questions. In terms of the mix of sponsored versus non-sponsored, could you, perhaps, walk us through where you're seeing, perhaps, a bit more deal flow and/or opportunity? And while you always look at both, if you, perhaps, see better opportunities in one as credit has increased and spreads have declined, broadly speaking?

Sure. I think our sponsor mix last quarter was, if I remember, was about 37%. And I think it was about 34%.

So the sponsor percentage of our total quarterly deal flow was lower, although only 3% of the volume.

I'd say the mix by industry was relatively balanced. Sizes of transaction was constant. And I'd say, on balance, yields, as we all know, are down 50, 75 basis points quarter-over-quarter.

In terms of risk profile, it's tough to tell. As I said, only a portion of our flow is sponsor-related. And, clearly, the sponsors in the financing community [at large] is getting more aggressive, although the positions we've taken are still well within our credit appetite.

On the non-sponsor side, which, again, is where we hope to produce most of our assets, we're still seeing the ability to structure documents with appropriate suite of covenants at yields that we think are attractive.

So I'd say, clearly, capital is returning. But, on balance, the economic activity is also driving more deal flow. We're comfortable, as I said before, providing capital in this type of market.

Great. And then the last question. More of a philosophical one.

At 1.2 times book, and a portfolio pipeline that continues to build, and your expectations that you're moving along at a normal pace, perhaps walk through the need for equity capital today -- obviously, it's not necessarily paramount -- versus I don't know what will happen in the future, thus I will choose to raise today to be safe.

Maybe just give us some philosophical comments on how you're looking at equity in this current environment, trading at a very healthy premium, a well-deserved premium to book?

I'll try to answer that as specifically as I can. Both of our issuances last year came in a month during which we needed the capital. So I think our statement, which we will stick to, is we're going to re-lever balance sheet -- that's the strategy -- at 0.6 to 0.7 times is our target. Today, we have room to originate and there's a strong pipeline.

But we're going to focus on re-levering the balance sheet, driving return on capital. But I will say that the time now is to be providing capital. So you should expect to see us, to the extent that we raise capital, doing it when we need capital.

All right. Great. Thank you very much.

We have another question for you. This one's from the line Mickey Schlein, Ladenburg. Please go ahead, Mickey.

Good morning, Brook. Most of my questions have been answered. I don't think I've asked you in the past whether syndicating some of your more concentrated positions is part of your business model. It doesn't seem to be a big issue. There's only a handful that look to be more than 4% of fair value. But could you tell us how you go about that, if you do?

Sure. We're not in the syndication business. That being said -- well, let me say another point. We've had a long experience as a team growing portfolios. So there will always be the challenge of position sizing as you're ramping.

This is something that we've done. So we have a reasonably expected growth of the portfolio. It will clearly be market-dependent.

But if we are on a trajectory, the times you would see us syndicating portions of positions, it's only around risk management. So that is to say if the position were slightly larger and we wanted the whole.

But, no. Our approach to the borrowing community is to say that Medley, we are your lender. We will be your partner and we intend to hold the position. And I think, on balance, that is a favorable tool when you're in the market trying to work with borrowers and provide capital.

I understand. Appreciate your time this morning. Thank you.

Thanks, Mickey.

Thank you very much. We have one further question for you. This one's from the line of Kyle Joseph at Stephens. Please go ahead, Kyle. You're on the call.

Thanks, guys. And congrats on a good quarter. Looking at the pipeline, the yields look pretty strong. Have you guys seen some yield stabilization? Or what are your thoughts on spreads going forward?

Well, we've seen -- as I mentioned before, we've seen 50 to 75 basis points decline. Some of that decline quarter-over-quarter was clearly a result of the mix being greater than 80% first lien.

Look, I think we're seeing more capital in the market and the market seems more buoyant. We're prepared for rates to decline, although I think as we look here today. You made the right observation as we look at the pipeline today, we're seeing attractive and sensible pricing.

Okay. Thanks. And then, for the last quarter, can you give us a sense of what percentage of the transactions were tax deal driven and what were kind of more along the lines of regular business?

That's a good question I haven't thought about. It's a little bit tricky to know. Best guess is 25%, 30% came over the (technical difficulty) in early.

Okay. Perfect. Thanks for Answering my questions.

Thanks, Kyle.

Thank you very much, Kyle. We've another question for you. This one's from J.T. Rogers at Janney Capital Markets. Please go ahead, J. T.

Good morning, Brook. Just a quick question on a portfolio company, Geneva Wood Fuels. Looks like that was maturing on 12/31. LTV is fairly high. I was just wondering what was happening there.

Sure. Good question. Well, there was a refinancing. It was slated for the end of the year. The management team decided in the quarter to turn and sell the asset instead of refinance and ask for our support. So we have supported it and extended. We expect the asset to be sold by the middle of the year.

Okay. Great. That's really all I had.

Thank you very much. There's no further questions at the moment.

Great. Well, thank you, everyone, for participating. And we look forward to speaking with you in three months. Take care.

Thank you. Ladies and gentlemen, that concludes your conference call. You may now disconnect. Thank you for joining us. Do enjoy the rest of your day today.