PhenixFIN Corp (PFX) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Medley Capital Corporation's third-quarter fiscal 2013 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 conduct 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 re-citations of historical fact, constitute forward-looking statements. 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 2013 investor presentation is available in the Investor Relations section of the Company's website, 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 we appreciate you all taking the time to join us this morning. As a quick agenda, for the call we're going to discuss the following -- first, we'll discuss our dividend which the Board increased to $0.37 for the quarter ended June 30; second, we'll give you an update on originations and the portfolio, including a review of the origination activity for the quarter and our current outlook; and finally, we will provide you an update on our SBIC activity during the quarter and discuss liquidity and capital availability for new investments.

On the dividend we're pleased to report that the Board of Directors has increased the dividend to $0.37 for the quarter ended June 30. The dividend will be payable on September 13 to shareholders of record on August 23. As we have stated in the past, we expect net investment income will meet or exceed the current dividend as we look forward, assuming we are able to deploy capital as planned.

Now on the origination, during the quarter ended June 30 we originated $119 million, that was in eight new investments and two existing investments. We received amortizations and repayments totaling $22.5 million, which resulted in that portfolio growth of $96.5 million. We are pleased with the second calendar quarter originations volume and our pipeline remain strong.

With respect to pricing, for the non-sponsored investment opportunities we've seen stable pricing and continue to find attractive risk adjusted returns in the market. Our deal flow remains strong and we expect to continue to deploy capital in a steady consistent manner for the balance of 2013.

On the portfolio, which consists primarily of senior secured loans, the portfolio remains stable and well diversified with 56 portfolio companies now across 23 industries and an average position size of $12.3 million. Our expectation is that we will continue to diversify as we grow the overall size of the portfolio. And in addition, we expect to increase the percentage of floating-rate loans in the quarters ahead.

During the quarter we added one loan to nonaccrual, Geneva Wood Fuels, which represents 0.6% of the overall portfolio as of 6/30. As we stated on a prior call, this company is currently in a sale process and we expect the process to be complete in the current calendar quarter.

Turning now to the SBIC -- during the quarter we invested the balance of the $50 million in regulatory capital that is in the SBIC subsidiary, so we completed our first drawdown of SBIC leverage which totals $5 million. A large portion of our current pipeline qualifies for the SBIC and we expect to continue to draw the SBIC leverage in a consistent and measured manner in 2013.

During the most recent quarter we completed our first examination by the SBA and, as a result, we now have access to a total of $50 million of SBIC leverage. This is referred to as the first turn of leverage on our $50 million of regulatory capital. We anticipate gaining access to the second turn, an additional $50 million of leverage, once the first turn is fully drawn and invested. That would give us a total of $100 million or the full two turns of leverage on our current $50 million of regulatory capital.

We may in the future increase the regulatory capital at the SBIC to the maximum of $75 million, that would be an increase of $25 million, and that would allow us to borrow an incremental $50 million which would bring the leverage to $150 million for the SBIC subsidiary.

In addition -- during the quarter, in addition to the SBIC financing, we increased commitments to our revolving credit and term facilities by $31 million, which brings total commitments to $345 million. As of June 30, we had drawn $54.7 million of capital on our revolver and I'd like to point out that the combination of the lower-cost revolver, availability and the SBI (sic) term financing provides us with low-cost financing capacity for future investments as we grow the portfolio.

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

Thank you, Brook. For the three months ended June 30, the Company's net investment income and net income were $12 million and $3.2 million, or $0.37 per share and $0.10 per share respectively. The net asset value per share was $12.65 at June 30 compared to $12.73 at March 31.

For the quarter total investment income was $23.6 million and was comprised of $20 million of interest income and $3.6 million of fee income. Total operating expenses were $11.6 million and consisted of $6 million in base and incentive management fees, $4 million in interest and financing expenses, and $1.6 million in professional fees, administrator expenses and general and administrative expenses.

For the quarter the Company reported net unrealized depreciation of $8.7 million and a net realized loss from investments of $137,000.

As of June 30 the Company's total debt outstanding equaled $278.2 million including $54.7 million outstanding on the revolving credit facility. And our debt to equity ratio, excluding SBIC debt, was 0.65 times.

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

Thanks, Rick. Overall we're pleased with the performance in the first half of calendar 2013. The team remains focused on originating a portfolio of high quality loans at attractive yields. So we will continue to generate a stable and consistent dividend for our shareholders in the quarters ahead. Thank you all for joining and we can open the call now for questions.

(Operator Instructions). Jonathan Bock, Wells Fargo.

This is [Ron Ipsco] in for John Boch. Brook, real quick, I noticed that fee income as a percentage of overall revenue continues to trend higher. And I believe you book origination fees upfront and into income when fees are received. One question, how do you look at the steady-state income kind of excluding fees relative to the fee income? And what would you say the stable cash flow in your portfolio is excluding fees?

Thanks for the question. I'm just going to reiterate that we expect net investment income will exceed -- meet or exceed our dividend over time.

Okay and then just kind of one question. I noticed there was a balance sheet entry for $1.6 million in fees receivable. And the first question kind of related to that is -- is that included in the $3 million fee number this quarter?

Yes.

Yes.

Okay and could you kind of walk through how it's possible to book the fee income if you haven't received it yet in cash?

The transaction was completed and so the fee was earned (multiple speakers) accrual basis.

All right, and then just one question as it relates to the SBIC. I appreciate the color on the available leverage currently and where it is trending going forward. Could you give an idea on the sense of deployment or utilizing the leverage going forward?

I don't want to get too specific, but I think we said on a prior call that we would expect to allocate somewhere around $25 million per quarter.

All right, and I have one final question then. I noticed the fixed floating asset mix kind of skewed heavily towards fixed this quarter. Is that something you expect to continue going forward kind of as you utilize the SBIC to match funding? Or was it just (multiple speakers)?

We don't look at the SBIC in isolation. As I said on the call, we expect floating-rate assets to increase over time. I think on any given quarter I don't think folks should infer too much from any specific quarterly activity. I'll stick with the overall comment that we will over time be increasing floating-rate assets.

All right, thanks for that color, guys.

Greg Mason, KBW.

Could you talk about on the eight new loans you made this quarter, how many of those were sponsored versus non-sponsored?

I don't have the number right in front of me. Let me just try to track that down quickly.

Sure, while you're taking a look at that, the PDF on the website, which breaks out all of your investment backlog in summary, it looks like it cuts off the yield to maturity. Can you talk about the yield to maturity on the backlog of deals that you are currently looking at?

Yes, I would say right now yields in the market have been stable. So we produced assets at just over 13% this quarter. The amortizations and prepayments rolled off at approximately 12.5%. So there was actually a slight yield pick up on that portion that rolled.

In terms of the market, on our backlog the yields are at or above. And one comment I have, I believe, made in the past is that the indicative pricing on a backlog does not tell you where it will close, but that it's been stable and is higher than our current booking would lead us to believe or leads us to expect that pricing is now stable and that's what we're seeing in the current quarter.

Great. And then also looking at that backlog, several of those deals look larger than definitely your average being around $12 million, one is close to $40 million, and several are in the high $20 million's, low $30 million's size. Can you talk about -- is there any shift going on for kind of the change in larger size?

No, there has not been. Again, I think as you are aware, we have co-investment capability with our private fund. So I would not expect to see a significant shift in the average deal size in the balance of this year.

So the bite-size that would go into your portfolio, the [BDC], is probably not representative of the whole amount in that backlog chart?

I think that's correct.

Okay great. And then one question and I'll hop back in the queue. Last quarter you had talked a little bit about Calloway Labs. It looks like you added to it this quarter. Given that it's one of your largest investments can you give us an update on that credit and just thoughts about if that has a potential for nonaccrual down the road or just what you're seeing in the trends there?

Yes, I mean this -- as we've talked about in the previous calls, this has been a tricky position. A quick recap that what's driving the performance issues was our continued reimbursement rate cuts among the commercial providers. And we also have seen customer attrition resulting from increased competition from some of the larger industry players.

The team that has come in has now been in place. There are cost-cutting initiatives that have resulted in somewhere around $13 million or $14 million of annual cost savings. And the integration of the Willow Street Lab is going forward. So we are watching it carefully. We expect to have more information.

There is a plan for this to be back on trend revenue and EBITDA. I think as the balance of 2013 rolls through and we see the turnaround plan taking root we'll be able to give more color. But at this point it's for sure the trickiest position. But over the quarter there has not been a material change.

Great, I appreciate that color. Thanks, guys.

Mickey Schleien, Ladenburg.

Good morning, Brook. Actually following up on Calloway, can you talk about your general policy of allowing a borrower to restructure their loan into PIK while they are struggling? Where do you draw the line on allowing that to happen given the risk profile?

I will try to comment generally, Mickey. Part of our business, as I think people know well, is that we are active and we our hands-on. Our team is 54 people and we -- many of our 30 investment professionals have deep experience from prior lives in restructuring. That's a very important tool for us. So as you would likely expect in the credit business, not every position is going to go swimmingly all of the time.

What we did in this case is -- there are a couple of ways that you can support a borrower that faces hurdles. They can raise equity, they did; they can bring in restructuring groups, for example in Calloway they did; and the borrowers can provide liquidity and support for the company, which we did. And I think if you think about the two ways you can provide liquidity, one is fund a lot more capital. We see that, that occurs, that's not our preference. Another way is to let interest accrue.

So in this case we have effectively provided liquidity, it was done on purpose, we are supporting the borrower. We have reason to believe it can turn, although, as I said, it has not but were watching it. And from a policy perspective you should expect every time that we look at a situation and do anything that involves providing liquidity that there is a thorough re-underwriting and a very careful decision that's being made.

So this situation is at this point quarter of quarter about stable. We are watching it carefully and we will definitely keep you all posted, like I said, as 2013 rolls forward.

Okay, that's a great explanation. Thanks, Brook. And in relation to that, there are two other positions that look like they are -- I'd like to know whether they are experiencing fundamental problems or whether their markdowns were for technical reasons; those are Exide and Modern Video.

Sure, let me take them in order. On Exide -- I may have my dates wrong, but we invested in 2012 and our basis was in the low $80 million's. The idea there was we were going to earn par plus interest. At the time there was a recovery underway and the company was actually experiencing contract wins.

And as we came into 2013 on this position there were significant input cost issues that led to lower fundamental performance. That was exacerbated -- this is public knowledge -- by their issue in California where they had to close down a recycling facility. So there were liquidity issues that resolved it.

These combinations led to a bankruptcy filing this June. And obviously the mark to market today is lower. At this point we look at sort of on a re-underwriting and a recovery expected outcome, the Company has approximately $1.9 billion of assets and round numbers $1.1 billion of total debt at filing. So the market is around $60 million, so that is a mark-to-market adjustment based upon publicly traded numbers.

Our recovery now at the mid-$80 million's, over an 18-month recovery has an IRR or expected total return at this point in the mid 20% range. So where we sit today were comfortable with the position. I think the overriding comment will be obviously it's a mark-to-market adjustment. It's going to take time but we like our position where we are today. Does that answer it on Exide for you?

And you're still accruing on Exide right?

Yes, during the that bankruptcy process it is accruing

Okay, and Modern Video?

Modern Video has experienced fundamental deterioration. There was a decline in the enterprise value, it was related to credit. There was lower performance at the Company and it's really a top-line issue. What is happening at the Company is they are implementing cost-saving measures, approximately $4 million. And they have one critical business that we expect will get revenue and EBITDA back to a 2013 plan number. Or actually the 2014 fiscal, which is their May year.

They are also in discussions -- I can't comment on specifics -- but with a large strategic partner on an initiative that would add revenue and EBITDA leveraging their existing capacity. But based upon the fundamental performance, the independent valuation resulted in an enterprise value declines. Does that answer it for Modern?

Yes. And I'll ask my last two questions and I had the same sponsored/non-sponsored question which I'd like to also understand. So my other two are -- can you refresh our memory as to your target leverage including the SBIC? And is there any chance that Medley Capital, the BDC, will acquire a stake in Sierra Income's external manager?

There are no plans on the latter with respect to Sierra. In terms of leverage, we've said publicly, and we will stick with it, that our target on balance sheet X SBIC is 0.6 to 0.7. We ended the quarter at 0.65, so at the top end of that range. We have a little bit of flexibility and the SBIC we have access to. So that is not a change, I'm just reiterating what we've said before.

Okay, and the sponsored/non-sponsored?

I'm just getting the number. In number it was half sponsor, half non-sponsor this period. In terms of notional value, I'm getting that for you.

Okay. Thanks, Brook.

Douglas Harter, Credit Suisse.

Thanks, Brook. My questions were asked and answered.

Thank you

Kyle Joseph, Stephens.

Most of mine have been answered, but, Brook, where do you guys expect your cost of funds to be on the SBA debt? I know you haven't locked in the rate yet, but just given the recent increase in treasuries, where do you guys see your cost of funds there?

Well, I wish I could predict where rates are going, but I think I'll stick -- I'll let you guys make the call of where the proxy rate will set next time the SBA fixes.

All right. And then in terms of revenues and EBITDA for the portfolio, just on an average basis, what sort of trends you guys seeing there?

Yes, on a revenue basis, if you -- I think -- look, I don't know the exact GDP, I think it's mid 1.5% to 1.7% GDP. Our revenues are tracking slightly above GDP. Last quarter -- and that was consistent with last quarter. It was slightly higher on a trailing latest 12-month basis on the last call.

In terms of cash flow, our EBITDA is flat, so slightly below GDP. I would characterize these as not significant deviations, but in line. Which as our portfolio grows I would expect we would look more like that, more consistent with what you would be seeing kind of top-line and cash flow in the broader market.

Got it. Thanks a lot for answering my questions.

Casey Alexander, Gilford Securities.

Brook, you said that looking forward that the non-sponsored market sort of rate wise looks steady. So what I want to know is by default are you saying that they sponsored market seems to be squeezed? We've heard a lot about competition from banks, from BDC is getting more aggressive. Has the sponsored market become much more competitive?

Let me answer in two parts. I think what we have seen is yields actually have not been coming down this quarter. There was a compression in the Q1 calendar. I'd say that Q2 calendar we did not see it. What we are watching for carefully and we've seen a little bit of is more aggressive structure. So it will be interesting to watch, we're watching it carefully.

Do you see more aggressive behavior as capital comes in on the credit side? So the comment on the quarter is no, we have not seen it. We're watching it carefully. But I was really trying to just draw the distinction that we're still seeing 250 to 300 basis points excess return in the non-sponsored deal flow.

So are you -- does that mean if yields are not coming down that covenants are getting lighter or that there is a higher proportion or lower attachment rate to second liens, things like that? Is that how you would characterize it?

Yes, that's what I would characterize us watching carefully. I don't think I can make a statement that it's been a significant shift in Q2, but we're watching it to see how that trend continues here through the middle of the year and into the back half of 2013.

Okay. And secondly, in the $8 million plus in unrealized losses for the quarter, how much of that would be assigned to credit markdowns versus how much of that would be assigned to general market movement?

Two-thirds was related to specific credit and a third was related to market.

Perfect. Okay, thank you very much.

Greg Mason, KBW.

Great, just one quick kind of follow-up on the SBA. Once you deploy the first $50 million of debentures do you have to be reviewed by the SBA again to get the second $50 million or do you just get to roll right into it?

I wouldn't characterize it as a review. I'd say you have to apply. Since we have not applied before I don't want to comment on how long that will take, but it's my understanding that we make an application and that we reasonably expect to get that second turn in very short order.

Great. Thanks, I appreciate it.

J.T. Rogers, Janney Capital Markets.

I had a couple of questions. I guess first, I just want to get a little clarity on Geneva. I believe Geneva is still on cash accrual. Are they continuing to pay interest on time or is that -- or are you accruing interest that you expect to get on the sale?

Can you ask that question one more time?

Sure. I think that, just looking in the Q, Geneva is on PIK nonaccrual but isn't on cash nonaccrual. Are they continuing to pay cash interest?

Yes, the cash portion is current and the PIK portion is on nonaccrual for Geneva.

Okay, great. And then I guess sort of the same question on Exide. I mean they went into bankruptcy, they are still on accrual as of the end of the second quarter. Would you expect to continue to recognize interest income from Exide?

On Exide there is an accrual for the portion of the claim piece. So rough justice you can assume 60% at the current mark is accruing and the portion that is not in the claim at the current price is not accruing.

Okay great. And then just looking also at the Q, there was a little change in the disclosures. In past quarters you've had LTV for each of the investments and I didn't see it in the Q this quarter. Is that something that you're going to be discontinuing?

Yes, we have a new format. I would characterize it as industry conforming standard, it's easier to read and it has more industry-standard disclosure. So you should expect the current disclosure to be the format going forward.

All right and then just sort of a last question -- do you guys have a view on the macro environment just sort of generally? I mean, looking through your new investments there are some restaurants in there and some commercial sort of consumer exposure as well as I see a loan to [JD Norman], it's a fairly large loan to what I understand to be a small company.

Are you guys seeing things improve and is that allowing you to take maybe more risk than you would if you saw a flat to down economy?

We don't really have a comment on the overall market. I wouldn't read too much into the origination in any given quarter about our perspectives. Again, we're going to stay diversified. We obviously like our positions that we are putting on the book and we do actually remain very optimistic about being a creditor in a low growth environment.

It's a very good backdrop for us. We've seen stable return opportunity. That is the flipside. If it were all off to the races I think you would see more pressure on yields. So at this point we feel comfortable, we're in a nice balanced environment that is favorable to be a creditor buyer.

I guess maybe another question -- a different way of asking that question is do you all need to see economic growth for the majority of your portfolio to continue to perform?

We underwrite assuming stable growth, flat growth. So the answer I guess is no.

Okay, great. Thanks for taking my questions.

Thank you. I'd now like to hand back to Mr. Taube for closing remarks.

Well, thank you all for joining. It was a good quarter here at Medley. We appreciate the support. And as always, we are available for any follow-on questions. Thank you all, we'll talk to next quarter.

Thank you. Ladies and gentlemen, that concludes your call for today. You may now disconnect. Thank you for joining and have a good day.