PhenixFIN Corp (PFX) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Medley Capital Corporation's first-quarter fiscal 2014 financial results conference call. Today's call is being recorded for replay purposes.

At this time, all participants are in listen-only mode. If at any time you require operator assistance (Operator Instructions). This conference call may contain statements that, to the extent they are not recitations 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 first-quarter 2014 investor presentation is available at 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 welcome to Medley Capital Corporation's quarterly earnings conference call. We appreciate everyone's taking the time to join this morning.

A quick agenda. First, we'll discuss the recently declared dividend of $0.37 for the quarter ending December 31. Next, we'll provide an update on originations and our portfolio, including a review of the origination activity for the quarter and our current outlook. Third, an update on our SBIC activity as well as our overall liquidity and capital availability for new investments. And finally, we'll review the financial results for the quarter ended December 31.

On the dividend, on February 5, the Board of Directors declared a dividend of $0.37 per share for the quarter ended 12/31. The dividend will be payable on March 14, to shareholders of record on February 26. As we've stated in the past, we expect net investment income will meet or exceed the current dividend as we look forward, assuming we're able to deploy capital as planned.

On origination, during the quarter we originated $160 million in 12 new investments and 5 existing investments. Amortizations and repayments totaled $92 million during the quarter, resulting in a net portfolio growth of $68.6 million. We're very pleased with this quarter's origination volume. We experienced an increase in amortizations and repayments during the period compared to prior periods; however, we were able to deploy capital and produced our largest quarterly growth originations.

A quick comment on pricing. Pricing on the non-sponsored investment opportunities remain stable, and we continue to find attractive risk-adjusted returns in the market. The deal flow remains strong, and we expect to continue to deploy the capital in a steady and consistent manner.

Turning now to the portfolio. Again, it consists primarily of senior secured loans, which the credit performance is stable and well diversified. We have 63 portfolio of companies now across 25 industries. So the average position size as of 12/31 was $13 million.

Our expectation is that we will continue to diversify as we grow. And, as I mentioned on prior call, we intend to increase the floating rates portion of the portfolio. During the past quarter, nearly 80% of new origination volume was floating rate. We expect to increase the overall floating-rate portion of the portfolio in the quarters ahead.

And, as of December 31, the percentage of our portfolio in floating-rate assets was approximately 60%, with the balance in fixed-rate assets at approximately 40%.

On the credit side, on balance the portfolio remained stable.

Turning now to the SBIC, for the quarter ended December 31 we drew down an additional $14 million of SBIC leverage to end the quarter with a total of $44 million drawn on our SBIC leverage facility.

As of December 31, the subsidiary had $75 million invested in 7 portfolio companies with an average position size of $10.7 million. A large portion of the existing pipeline qualifies for the SBIC, and we expect to continue to draw the leverage in a consistent and measured manner throughout 2014.

As we've communicated in prior calls, we may in the future increase the regulatory capital at the SBIC subsidiary to $75 million. That would be a $25 million increase from the current $50 million of regulatory capital. And that would allow us to borrow an incremental $50 million from the SBA, bringing the total leverage available to $150 million for the subsidiary.

So as of today, our liquidity for new investments, including the proceeds from our recent equity offering, is approximately $300 million. This includes $56 million of undrawn SBIC leverage that's available today.

I'd like now 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 December 31, the Company's net investment income and net income was $17 million and $14.3 million, or $0.42 per share and $0.36 per share, respectively. The net asset value per share was $12.68 at December 31, compared to $12.70 at December 30.

For the quarter, total investment income was $31.7 million and was comprised of $25.1 million of interest income and $6.6 million of fee income. Total operating expenses were $14.6 million and consisted of $7.9 million in base and incentive management fees; $4.5 million in interest and financing expenses; and $2.2 million in professional fees, administrator expenses, and general and administrative expenses.

For the quarter, the Company reported net unrealized depreciation of $2.8 million and a net realized gain from investments of $45,000.

As of December 31, the Company's total debt outstanding equaled $363 million, including $96 million outstanding on the revolving credit facility, $120 million term loan payable, $103.5 million in notes payable, and $44 million of SBA indentures.

The Company's debt-to-equity ratio, excluding SDIC debt, was 0.63 times. As of today, our liquidity for new investments is approximately $300 million, and this includes $56 million of undrawn SBIC leverage.

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

Thanks, Rick. Again, we're very pleased with the performance in the first fiscal quarter for our 2014. The team remains focused on originating a portfolio of high-quality loans at attractive yields that will generate a stable and consistent dividend for our shareholders in the quarter up ahead.

We'd like to thank all the shareholders for their continued support, and we can now open the call for questions.

(Operator Instructions) Jonathan Bock, Wells Fargo Securities.

Good morning, and thank you for taking my questions. And congratulations on a great quarter and [beat]. One quick question as it relates to Calloway Labs, just as I noticed that this was a markdown. And Brook, we've mentioned it in the past, and this has obviously been an investment that you have mentioned is tricky. Can you walk us through, now that it's a 17% PIC investment, how is this PIC accrued into income? Is it accrued at the full rate or at the mark?

At the mark.

Okay, great. Then the only other question I'd have is so as you accrue at the mark and we notice a slight decline quarter over quarter, can you give us as investors a bit maybe a sense of how you look to realize value from this investment in the future, given that you're not new to this. It's just a matter of understanding, given the fact that it is a bit sizable relative to some of the other investments in the portfolio.

Sure, but thanks for the question, Jonathan. Look, we do look forward at some point to giving positive news on Calloway. We don't have it at this point. Revenues have still been the broader backdrop for the Calloway situation, as there is competitive pressure from the larger toxicology labs. The company has faced customer attrition as well as lower sample volumes. I'm happy to report that there are new customer wins; we are watching that carefully. But we haven't had the conversion of these sort of new accounts as rapidly as necessary for revenue producing. So we are watching that carefully.

I have told everyone that there's a team in there looking carefully at it. We are in constant contact. The new management team appears to be well-positioned. But, on balance, the performance is not better than it was in the past.

Now, in terms of how we would expect to get value from this, that's a priority at Medley. We have skills to do that. We have an expectation that we will. There are several strategic initiatives -- I'm not in a position to disclose specifically, but we have strategic initiatives underway, and I think most people that are aware of how this business works would imagine the various outcomes. So we're carefully paying attention to it. I don't want to give you a timeline at this point, but it's on the front burner and we'll keep everyone posted.

Fair enough. Thank you so much. Maybe turning to fees for a moment. Obviously these do ebb and flow. And the question would be that with roughly, let's say, $3 million of origination and $3 million prepayment -- looking forward, is it possible that the velocity of the portfolio will persist in a manner where you'll see about a 50-50 split between origination and prepayment fees? Or, based on call protection, et cetera, that you might have on newer investments, would it be fair to say that that origination versus prepayment fee split will be somewhat different? Can you give us some color on the velocity of the portfolio and how you see that translating into your income statement from a fee perspective over the next several quarters?

Got it. Well, first of all, I think it's tricky to comment on what the future will hold. That's not something we're comfortable doing generally. I would characterize this quarter as abnormally high prepayment. Our -- my general sense looking forward is that we would expect a more normal, not abnormal, split. I think that was uniquely high; we got paid a lot of fees; that's part of the business. We have call protections, prepayment penalties, et cetera. Getting your money back and increasing returns. I don't have the exact number; but to give you a flavor of the realizations that are put on, as you know, at our book yields of approximately [13%] -- [12%], [13%], [14%], it's been the average in the past year or two. The IRR on the realizations was well was in the mid-20% IRR. So getting your money back with fees is a good thing in our business.

The question about what then is about how you can redeploy it and if you can at attractive yields. So prepayments are not a big issue today as we look at our pipeline and opportunity. They're not a big issue as we look at the secular trends in the part of the market that we are focused on. So we're more favorable than other towards the opportunity to originate sensible investments right now.

So hopefully that gives you a little bit of color. The prepayments are not an issue if you can re-originate. And, secondly, I will make the general comment my expectation is that this quarter was an outlier in terms of the percentage of prepayments that we would reasonably expect.

Okay. That's great color. And then one last one as it relates to equity issuance. I think, first, everybody does appreciate a management team that chooses to leverage the balance sheet as you have and are doing. And as we kind of look at a recent equity issuance that you have completed this current quarter, with all-in required returns on assets at break-even, at roughly around 13%-ish, perhaps a little bit lower depending on the more leverage one uses within SBIC. Maybe just kind of giving us a sense of confidence of what you're seeing in the market today in terms of all-in IRR -- so you threw out a 20% number. How can one look at your ability to more than over earn what some would look at as a required rate of return in that 13% range on your assets?

Well, I don't actually have a comment on your assertion about the required yield. Taking your number at face value, I would just say we're going to issue when we think we can invest capital in an accretive basis for shareholders.

Appreciate it. Thank you very much.

Troy Ward, KBW.

Real quick, Brook, can you just speak a little bit on what you're seeing here so far in the first quarter? I know a lot of times as we roll the calendar into a new year, we start to see a drop-off as stuff got pulled into the previous year. Can you speak to what you're seeing in the current quarter activity?

A standard quarter for us. I mean, it's a little bit early in the quarter to say what we would expect. I think we're right in line here based upon the number of deals and the volume that we are seeing.

Okay. And then the last question I have is just on the SBIC. Can you remind us what hurdles you kind of have to clear in order to get the additional [$25 million] clearance to put additional $25 million of capital into the SBIC facility?

There are no hurdles. It's simply the pace at which we originate. We don't need the capital there. We have [$50 million]; we'll use the two turns of leverage, and then we'll inject the extra regulatory capital, and there are no hurdles to getting that invested or the leverage.

Okay. That's great. All right, thanks, guys.

Mickey Schleien, Ladenburg.

Brook, I was hoping you could give us a little background on the quality of deal flow as it breaks down between the dividend recap, refi, growth capital, et cetera. And also how the deal flow is breaking down between sponsored and non-sponsored, and what trends you are seeing in the sponsored market in terms of pricing and (inaudible).

Sure, I'd characterize it as consistent. We have volume coming from all of the channels, and the use of proceeds is pretty evenly split on balance. I don't have the breakout, Mickey, and I can get back to you. But we basically -- we're seeing capital used for growth opportunities in refinancing. We're not focused on the dividend recap selectively. It does occur. But the bulk of our capital is to either expand or to refi. And we're seeing it broad-based.

One comment I'll make on the volumes. The average size this quarter of the deal we saw was almost spot on with prior quarters. So in the market we're in, we're seeing demand at the same size. Now with respect to pricing, again, I've mentioned in past calls we track origination volumes -- that would be all of the deals we see -- very carefully. We have indications on those. So while those aren't prices that print in the market, if you keep a consistent database on those through time, you get a real flavor on the movement in that group and quarter to quarter. So we actually saw a slight uptick in pricing. I wouldn't say it was significant, but it's the first quarter in four quarters where we've seen pricing moving up not down. And that is assuming sort of a constant structure and constant leverage. That's not driven by a shift in risk.

So as we sit here today, without commenting on the economic backdrop, I think some of the risk off in the market, the lack of issuance at the same rate in our market sector, as well as formation of capital in the private market, which we watch carefully -- that may describe some of the pricing stabilization and trend. But we're looking -- we think it's favorable. I think, secondly, I'll make the comment we do see continued pressure in the sponsor side, and we do look at the larger [cap] markets in particular. That's obviously been under enormous pressure.

So if you look today at Medley's opportunity -- stable to rising yields, consistent volume at consistent risk profile and size; versus larger market with the opposite, arguably wider risk at lower yields -- the relative value at a constant risk of the yield we produce is rising. So I think we feel very good about the opportunity. We feel very good about the origination. And it's really becoming a really attractive relative market opportunity in the credit and the overall fixed income space.

Brook, did you say that the deal flow was roughly split between sponsored and non-sponsored? I didn't quite catch that.

I don't have the split for you, Mickey, but it's balanced. We have volume from both.

All right. Fair enough. Thanks for your time.

John Hecht, Stephens.

Thanks for taking my questions. First one, can you give us a sense for the timing of deployments in the last -- well, this reported quarter?

I don't have that number. Sorry, John.

Do you have a -- just thinking about the quarter, did seem front-end, back-end, or balanced in your perspective? Or are you just -- it's not even worth commenting if you don't have anything in front of you?

I just don't want to comment. It wasn't unnaturally weighted one way or the other versus prior quarters, but I don't have the numbers in front of me.

Okay. And then, Jonathan asked some questions about fee income earlier that you addressed, but I'm wondering if we could ask in a different way If repayment activity was normal -- and I don't even know necessarily what that means, given the [projected] trends we've seen the last few quarters. But in a normal-environment repayment activity, do you have a sense what a good base-level fee income would be just from a modeling perspective?

It really will depend -- I don't want to answer that question specifically. I think you can make a judgment. We typically have a window of no-call, and then we have prepayments that come down through time. So it could be [321], no call one, [321]. You'd have to pick the deals that prepaid, and you would have to have a real crystal ball that could sort of come up with a number specifically. I think your assumptions going forward would likely be as good as ours for your judgment on that.

Yes. Fair enough. I got you.

And then you commented that this quarter saw the first uptick in pricing relative to the last few quarters. If I look at your pipeline, it looks like that that trend is persisting. And you talk about the market trends. I mean, are you -- and your commentary was optimistic. Do you think you guys are a little bit potentially even an outlier given your source of originations, and you're a little bit more proprietary feet-in-the-street? Or do you think this is more of an industry trend where maybe the pricing in the middle markets is getting more favorable to the group of lenders?

Well, I think the comment of overall volume, we just track every deal that comes in. And I would just -- made the reference to stable to up, which is different from the prior quarter's trends. It's hard to know what drives that, but I think the notion that there's not as much capital and that maybe the kind of risk-off idea is there. It may be the case and may be that we rolled into the new year. We'll keep an eye on it and keep you posted.

Our market opportunity (inaudible) is attractive. What we are witnessing on a secular trend, as you can see, is the players that were otherwise here and departed years ago are [going] even larger. So the competitive threat from in-market players that are bigger has not emerged. That's not the say they may not come back down-market, but we're seeing them consistently go up-market. There have been obviously some people enter, but you haven't seen the new entrants focused on what we do. So that's more of an overall comment.

With respect to the direct origination, look, there's -- we know of 60 people. We've done this for — this is our 12th year as a team. There is value in going direct. We've talked about this on calls previously. The returns are higher. The structures we [on balance] think are better. And the performance -- no, it's certainly not riskier; it may actually be safer. So if you do the hard work and you have the funnel, there is an attractive risk-adjusted return. So I do think there's value especially in this market.

Does that answer the question?

That does very much. Thanks very much, guys.

Thanks, John.

Casey Alexander, Gilford Securities.

That actually leads into my question, which is -- looking at your backlog, it almost appears as though you are pushing a little up-market. And say $45 million piece there. Now, are you planning on taking partners to sort of right-size that or splitting some between your co-investment opportunity? And when you get into deals of that size, are you seeing a different competitive element?

Yes, I think as we've always said on both the sponsored deals that we look at, there is generally more competition and lower pricing. It's not bad or good; it just is what it is. On the larger deals, they tend to be more competitive. That's fair, but not always. We have the ability to take all of a $45 million deal at Medley now. I would expect that we would not put $45 million onto the balance sheet of MCC today.

So there's two things we would do on a larger deal. We'd either split it, which we have the ability to do. Or in some instances, and it's just a topic just by way of example on one of our deals in the pipe, we're specifically reaching out to a group that is in our business and also has expertise on the equity side in the industry specifically of this opportunity. And they're friends, and they will come in and we'll effectively add them to the deal. And that would be both a risk mitigation, risk-size issue for us, as well as inviting in people we know extremely well that are -- have much -- have better and deeper knowledge in the industry specifically.

Does that answer it?

I think the answer to every question was yes. (laughter) But, yes, that definitely answered it. Thank you.

Thanks, Casey.

Patrick Buckley, UBS.

I wanted to again talk about your comment on pricing, stable to rising yields. As you have shifted from an increasingly floating rate exposure, you've gone from the low 40s earlier last year to up to 60% this year. Has that affected any of the yields that you've seen in your new originations? I just wanted to see if you could talk about that. Thank you.

I think we've kind of foreshadowed that. If you're in a positively slow yield curve, and this one is buried on the front end, there is a give-up by being floating versus fixed. I mean, that's generally speaking. That is the case. So, for example, on a deal that yielded 11% floating LIBOR plus the spread that was floating to make it a fixed rate, you would earn higher yields, apples to apples. So there has been, in hindsight, clearly a modest cost to being floating. And, as we've said, that shift we're going to do over time has been measured; it's been the right decision. If you rewind three years, we told folks it was appropriate to be fixed. We saw deflation; we saw challenges. That's starting to shift. We're not calling the economy, but we're migrating toward more floating-rate assets as the risk reward. On the front, we believe it is favoring rising rates at some point. So, yes, it does -- there was a slight cost versus what we otherwise could have done, but our judgment on a risk-adjusted basis was that that was the right move.

Great, that's what I thought. Thank you.

Okay, great.

Jonathan Bok, Wells Fargo Securities.

Just a quick follow-up, Brook, as it relates to the origination composition just this past quarter. First and second lien. Broadly speaking, it would appear that some of the second liens maybe carry a slightly higher dollar amount relative to maybe some of the first liens, where the first liens are larger in number. So your mix is still there. I'm just curious is there a reason that one is taking maybe a larger portion in terms of chunkiness in size in that second-lien category as opposed to the first? Maybe just a little bit more color on that mix and breakout and where you see attractive risk-adjusted returns first versus second.

Sure. I don't -- there was no a priori decision. It wouldn't read anything into it. It's just a quarter and the volume and the way the deals came in.

Okay, that's fair. Thank you.

Thanks, Jonathan.

This concludes our question-and-answer session. I will now turn the call back to Mr. Brook Taube.

Well, thank you all for the continued support. We're looking forward to a very successful 2014. And, as always, we're available here at the office if you'd like to follow up. So thanks again, and we look forward to speaking to you on the next call.

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.