PhenixFIN Corp (PFX) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Medley Capital Corporation third Quarter fiscal 2014 financial results conference call. Today's call is being recorded for replay purposes. (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 third quarter 2014 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 welcome, everyone to Medley Capital Corporation's quarterly earning conference call. We are pleased to be here today and thank you for taking the time to join us. We are delighted to have a record quarter to report. A quick agenda, today we're going to discuss the following, first, the recently declared dividend of $0.37 for the quarter ending June 30. Second, we will provide you an update on originations and of the pipeline, including a review of the origination activity for this quarter and our current outlook for the quarters ahead. Third, an update on our recently amended and extended credit facility. Fourth, an update on our SBIC activity, and we will also discuss liquidity and capital availability for new investments. And then finally, a review of our results for the quarter ending June 30.

First, on the dividend, on July 30 the Board of Directors declared a dividend of $0.37 per share for the quarter ending June 30. The dividend will be payable on September 12 to shareholders of record on the 27th of August. 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. On the origination side, during the quarter we originated $206 million in 11 new investments and 6 existing investments. This was a record gross origination for the team so we are very pleased with that result. We did receive amortizations and repayments of $117 million during the quarter resulting in net portfolio growth of $89.4 million.

Pricing on the non-sponsored investment opportunities remain stable and we continue to find attractive risk adjusted returns in the market. Our pipeline remained strong and we expect to continue to deploy capital in a steady and consistent manner. Our portfolio, which consists primarily of senior secured loans, remains stable and well diversified. We currently have 74 portfolio companies across 25 industries. Our expectation is that we will continue to diversify as we grow the overall size of the portfolio. As we mentioned on our prior call, we intend to increase the floating-rate portion of the portfolio and during this past quarter 84% of our new investments were floating rate. So as of June 30, the percentage of our portfolio invested in floating and fixed rate assets were 66% and 34% respectively. Overall the credit quality of the portfolio remained stable.

Turning now to the credit facility, on June 2 we amended and extended our revolver and term loan and highlights of this change include the following; one, we increased our borrowing capacity on the revolver from $245 million to $346 million and we extended the maturity to June of 2018. Importantly, the interest rate on the revolver was reduced from LIBOR plus 3.25% down to LIBOR plus 2.75%. We also increased our term loan from $120 million to $171.5 million and we extended the maturity to June of 2019. The interest rate on the term loan also was reduced and that was from LIBOR plus 4% down to LIBOR plus 325 basis points. The aggregate accordion feature was increased from $400 million up to $600 million.

So turning now to the SBIC. As of June 30 our SBIC subsidiary had $98 million invested in 9 portfolio companies with an average position size of $10.9 million and we had drawn a total of $48 million in SBIC leverage. As we have communicated on prior calls, we may in the future increase our regulatory capital as a subsidiary to a total of $75 million. Again, that is an increase of $25 million. And this would allow us to borrow an incremental $50 from the SBA, bringing the total leverage to $150 million for the SBIC subsidiary.

As of today our liquidity for new investments, including the proceeds of our equity offering in the past quarter, is approximately $271 million, this includes $22 million of undrawn SBIC leverage.

I would 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 3 months ended June 30, the Company's net investment income and net income were $21 million and 16.6 million or $0.41 per share and $0.33 per share, respectively. The net asset value per share was [$12.65] at June 30 compared to [$12.69] (sic-see press release) at March 31. For the quarter, total investment income was $38 million and was comprised of $29.5 million of interest income and $8.6 million of fee income.

Total operating expenses were $17.4 million and consisted of $9.8 million in base and incentive management fees, $5.3 million in interest and financing expenses, and $2.3 million in professional fees, administrator expenses, and general and administrative expenses. For the quarter the Company reported net unrealized depreciation of $4.9 million, this includes a provision for income taxes on unrealized gains on investments, and a net realized gain from investments of $0.8 million.

As of June 30 the Company's total debt outstanding equaled $408.6 million including $85.6 million outstanding on the revolving credit facility, $171.5 million term loan payable, $103.5 million in notes payable and $48 million of SBA debentures. The Company's debt-to-equity ratio, excluding the SBIC debt, was .55 times. As of today, our liquidity for new investments is approximately $271 million and this includes $22 million of undrawn SBIC leverage.

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

Thank you, Rick. Again, we are very pleased with the performance in our third fiscal quarter. The NAV is stable, net investment income is high, and we have a forward outlook that is very promising. 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 quarters ahead. And again, I would like to thank all of the shareholders for their continued support. And we can now open the call for questions.

Thank you. (Operator Instructions). Your first question comes from the line of Douglas Harter with Credit Suisse. Please proceed.

Thanks. Brook, you've now -- your net investment income has exceeded the dividend through right about 10% for the first 3 quarters of this year and your outlook said you expect to continue it. Now, how do you envision the dividend path going forward?

I think I will just comment to say, reiterate, we expect the net investment income can meet or exceed the current dividend on average in the quarters ahead. We have obviously had some very positive performance and return of positions that drive fees. So I think on balance we have set the dividend, or recommended the dividend, policy to the Board that we think is stable or consistent over time. And I think I will stick with that comment for now.

Great. And, I guess, given the combination of your available liquidity with the stock training right around NAV, do you envision, sort of, being able to continue to put new investments to work at a similar pace to what you have been doing recently?

Yes, sure, as we look out now we plan for a consistent origination of volume. As we've said, I believe consistently we expect to increase the portfolio as much as 2 times or 3 times in a steady and consistent manner. If you look at the overall growth of the portfolio, in number and visually, it has been measured and we have said that, and this is now coming up into the second half of our fourth year. I think you'll continue to see us recommend and deliver measured and consistent growth. That is our view about the appropriate origination policy over time.

Great. Thank you.

Thanks, Doug.

And your next question comes from the line of Terry Ma with Barclays. Please proceed.

Hi. Just given the strong pace of your originations over the last 3 quarters can you just maybe comment on what channels that higher volume is coming from? And also what you are seeing in the competitive environment?

Sure. Our higher volume, as I said on the prior call, is not a higher volume at Medley on the platform. We have just allocated a larger portion of our origination volume to Medley Capital Corporation. The team is now over 70 people and we have over 35 investment professionals. So we have a very consistent and robust pipeline. MCC, as it gets bigger, holding constant our idea that we should originate at a constant rate will consume a larger share. The volumes have been high across the board. I think last year we looked at 1035 investment opportunities, that is on a trailing 12 month basis.

There has not been much volatility quarter-over-quarter in the number of investments we have seen. For the prior 2 quarters we saw stable pricing, I would characterize this recent quarter as also stable pricing although I would say on average it is down 10 or 20 basis points, not material but it has trended down on the margin. Most of that has come from the sponsor driven origination, we have active dialogue with 100 sponsors and we have invested with, I think, 100 sponsor investments over the last 10 years.

We see net volume pick up, there has certainly been activity. You have heard us comment that we have seen steady and increasing growth. So our revenue comps have been just under 5% and our EBITDA comps are just over 5% and that is a backdrop against, I think, a recent print of 4% in GDP. So again, a couple of years ago when we were talking about growth and volume increases and positive backdrop that was lo-- (technical difficulty-dropped audio) lonely, it is become less lonely a point of view. But we remain constructive on the economy and on the volumes we are seeing. And continue to believe this is a good time to be providing credit in the middle market.

Okay. Thanks. That is good color. And can you maybe just give us the split between your sponsored and unsponsored deals or maybe in the pipeline? And just given the 10 points to 20 points lower on pricing, can you maybe just talk about the relative value or the spread differential between those 2 channels?

Sure. It has been relatively balanced, quarter-over-quarter I wouldn't read too much into it, but I would say over half is sponsor in the recent past and therefore under half has been on the direct or non-sponsor. We have seen a little compression, actually, in the non-sponsor. So a couple of years back it was over 200 basis points, the difference is now around 200 or slightly under 200. We track this pretty carefully, but again, I wouldn't read too much into a quarter-over-quarter. So our origination between the channels is relatively balanced. As we look out on a forward basis I would say it is coming from equal -- balanced equally from the sponsor and non-sponsor channel.

Okay. Thanks. That is it for me.

Okay. Thanks, Terry.

And your next question comes the line of Mickey Schleien with Ladenburg. Please proceed.

Good morning, Brook and Rick. Can you hear me?

Yes.

I would like to get your thoughts on what major assumptions management made toward the end of the last fiscal year when you raised the dividend. How did you think about the downside case if you were, for example, temporarily shut out of the equity markets? And in particular given the size of your portfolio turnover at this point, would seem to be pretty important in terms of your ability to generate future fee income to help cover the dividend.

Great, thank you, Mick. We have been at this now for over 10 years as a team, we have a pretty good visibility on the forward pipeline and an understanding of how both portfolios and origination behaves. So I think as I said initially, I sort of answered part of this question when Doug asked it. We have come up with a dividend policy that we think is a good proxy for what we expect to be able to deliver over time. So impounded in that would be some assessment of not raising capital, either by choice or because of the market, we have said that we're not going to raise capital below book, we have said that since we came public. So the idea that we wouldn't do that and may have a period of time where we couldn't we have a couple of levers, and I will go through them. A, liquidity, meaning we are not fully levered. B, we have access to our SBIC facility and you should expect that we will broth drop down the additional regulatory capital, access the additional debt, and then seek a second license. That takes time and it is not certain but we have a reasonable basis to assume that.

Third, we have some positions that we would characterize as liquid, that has always been a part of our portfolio that is there both to provide liquidity as well as to allow us to stay in the market and active if we weren't raising capital. And I think the final point, which bears repeating, which is I believe what you said, is that a portfolio of loans that has a 3.5 year average life will naturally roll. So in any given year looking forward, we would expect a reasonable portion of the portfolio to roll and that too would give rise to further origination. So it is hard to predict the future, we don't even try. But we do have a very very clear perspective on how the business works and our capabilities and our dividend approach that we recommend to the Board impounds all of that. And again, I will reiterate, we have a reasonable expectation that our NII on average will meet that dividend or exceed it over time.

I appreciate that color, Brook. Just one follow-up question. Now that MCC is becoming a little bit more mature, we're starting to see, inevitably, some deterioration in some credits which is part of the business. Is there any scope for the portfolio to get more exposure to equity to help mitigate some of that risk as the Company continues to grow?

Sure. Just to back up a minute, we do have exposure to change in the book and on a net realized basis it has been positive. So our net realized gains or losses, our net realized gains since inception. At the moment we do have, obviously, like anyone positions that are marked below book, but those are marks to markets, not necessarily realized. And I will also comment that we have positions that are marked above book. And we have in the recent quarter one more position that is significantly in the money and post quarter end it has been fully realized. So just to give you an example, Geneva we did realize at the mark that produced a realized loss. We have a position that was above the mark that produced a realized gain and with those two taken in combination still have a position that is a net realized positive. So I think this needs to be looked at holistically, we have had a NAV that is up since inception, that is a good proxy for credit. And we're driving an 11% plus dividend yield. So I think as you consider this over time there will be upsides on a number of fronts. Our hope and expectations is those will mitigate downsides and we're going to protect the NAV and drive a steady dividend. And people, I believe, as we enter and finish our fourth year and go into our fifth year having been through many cycles as a team I think that will increasingly become obvious and valued by investors.

Very good. I appreciate your time this morning. Thank you.

Thanks, Mickey.

And your next question comes from the line of Chris York with JMP Securities. Please proceed.

Good morning. Thanks for taking my questions. I just wanted to get some clarification, Brook, as you alluded to that you realized your gain in US Well Services post quarter end; is that correct?

It was US Wells, that is right.

Okay. And then secondly, so Geneva Woods was exited a realized loss as well in post quarter end?

That is correct.

Okay. And then how are you thinking about the maturity of Calloway Labs over the next 5 months? What are your expectations for repayment in that investment?

Sure, I don't have a lot of color to provide. We and the other lenders continue to work closely with the management and the sponsor to improve the performance and the value of the company. We have commented before, we are seeing sample volume stability in some positive outlooks for profitability are beginning to come through. We need additional performance there and we have a team actively working on it. So I have no further comment at this point.

Okay. And then just one last one. It looks like Prestige was given some flexibility through a potential amendment in terms going from cash pay to all pick, can you talk about the reasons for this amendment and recent performance at Prestige?

Sure. The sponsors supportive there and we, as always, try to provide the support for the borrowers. More capital has been injected and they do have a plan to both return and enhance the value there. And we, as we always are in the market, supportive of our borrowers and our sponsors.

Got it. That's it for me. Thanks.

Thanks, Chris.

And your next question comes from the line of Christopher Nolan with MLV & Company. Please proceed.

Hi, thanks for taking my call. In the quarter it seems like the investment mix changed slightly favoring more unsecured loans and less first lien loans, but the overall yield is flat. Any particular color you can give us on this?

I think that I wouldn't read too much into the volatility, we had one position in CM that we did which was large and was and was the first -- not secured position, that is a high-quality opportunity with a high-quality sponsor. I think that slightly shaded the number, it is over $22 million. We are very positive and optimistic on that credit but I wouldn't lead anything into the mix shift just on this quarter.

Great. And can you give us an update in terms of the target threshold for debt-to-equity ratio? Any change there?

Sure. No change. We have set it .6 to .7 is the range, that is excluding SBIC debt. No change to our target there.

Great. Thank you for taking my questions.

Thanks, Chris.

And your next question comes from the line of Casey Alexander with Gilford Securities. Please proceed.

Good morning. You have answered most of the questions that I have already. So that has been very helpful, thank you. I would ask that since you're in touch with such a broad swath of companies across the general economy, what kind of economic feel are you getting from your companies and specifically from their results? And what type of EBITDA growth are you seeing through the portfolio? Presumably across the portfolio there would, you know, if the economy is operating well you would be seeing some EBITDA growth and that would be bringing some of your multiples down, actually.

Yes, that is a good question. I think that a general sense, as we said before, we have said this now, I think, for a number of quarters going back, maybe 2 years, we are beginning to see action. People have kind of giving up on feeling bad and there is activity. Our revenue comps were just under 5% our EBITDA comps were just over 5%. So those are trending ahead of the most recent GDP print of plus 4%. We don't really track it relative to GDP, it does always a little bit of an art to read it. There's clearly still pressure in the system whether it is healthcare or competition. But unbalanced, we are seeing activity both on the refinance capital to grow plant and equipment working capital, as well as on the strategic acquisition side. So all in all, constructive.

And what was the -- is there a general nature to your add-on investments? Have they been for acquisitions or for organic growth plans? Kind of, do you have a feel for what the nature of your add-ons were?

Yes. I mean, the add-ons were planned primarily, I would say 95% of it was planned addition. In one case it was financing, just increasing working capital, another case was construction. I am just thinking right now, in other words, purchase of additional assets. In one case it was involving a refinancing but it was in a creative refinancing. Again, this was capital we had previously made available. So the disproportionate majority of our almost $23 million follow-on and, I think, by that I mean over $21 million or $22 million of it was to follow-on on prior commitments. It has been positive and it all feeds in almost on all three of those examples that I had mentioned.

All right, great. And the rest of my questions were already answered. So thank you for taking my call.

Okay. Thanks, Casey.

And your next question comes from the line of Greg Mason with KBW. Please proceed.

Great. Thanks. Good morning, guys. First, I wanted to retouch on Calloway Labs, I know in your Q you talk about revenue recognition, saying you are not going to accrue pick if portfolio company valuations indicate the pick is not collectible. As we look at Calloway, the fair value dollar basis was unchanged but the cost basis went up for the pick. I guess my question is what is the risk that ultimately that stops accruing that pick income based on what we are seeing is your policy in the fair value not moving? Can you help us understand the risk there?

Good morning. We are currently accruing at the mark so we have a partial reserve against that pick. The risk is if we see deterioration in the enterprise value, deterioration in the underlying business, then it likely would need to go on full amount accrual for the full pick fee.

Okay. So you are only accruing, call it, 60% of that pick amount? Am I understanding that correctly?

That is correct.

Okay, great. And then one other portfolio question. United Road Towing I know had the maturity right at June 30. Can you give us any update on it was amended or extended anything post quarter end with URT?

Sure, we are working very closely with the management and the sponsor, we will be able to announce something on the next call. But we are encouraged by the company's recent financial performance and the prospects.

Okay. Great. And then on the SBIC, that is obviously very attractive capital, over the last 6 months you have drawn $4 million of debentures. Is there something kind of technical of not drawing that or investments not fitting in that bucket? Just curious of why the ramp hasn't happened a little faster and are we going to see that ramp occur in the SBIC?

Yes. I wouldn't read too much into that. I think we'll be on our pace, that is to say we will catch up against that $25 million quarterly estimate we had offered earlier. Again, we are trying to give averages. We did have a repayment which was positive which drove it down. We then had one deal that should have been in this quarter slip to next quarter. So you should see more activity this quarter and I think keeping the idea of hitting that $25 million per quarter or more, we'll be back on that.

Okay. And then one final question on capital availability. You said $271 million of capital availability, my back of the math, you said target range is .6 to .7 debt-to-equity, with current equity it, kind of, gives you $100 million of regulatory debt to be drawn, plus the SBIC. What other numbers are going into the capital availability for new deals?

Greg, did you factor in -- because our numbers included the recent equity raise, subsequent to the quarter.

Okay, I apologize. Yes. All right, great. That is it. Thanks, guys.

Thanks, Greg.

And your next question comes from the line of Vernon Plack with BB&T Capital Markets. Please proceed.

Thanks. Most of my questions have been answered. I'm not sure if I missed this in the beginning, but was most of the unrealized depreciation, was that the result of Modern VideoFilm?

Yes.

Okay. All right, that is it. Thank you.

Thanks, Vernon.

And your next question comes the line of Ron Jewsikow with Wells Fargo Securities. Please proceed.

Good morning and thanks for taking my questions. Most of my questions have been asked, like the other callers. But just a quick asset level question if you can provide additional clarity. We see Water Capitals kind of maturing here in the next 5 to 6 months and there was called a 10% write down this quarter in that asset, I was just wondering if you can give us a little clarity on that business if it is possible?

Sure. The change quarter-over-quarter related to an increase in a discount rate that was used to value the position. At this point I don't have any further color on that.

Does that discount rate have to do with the nature of the business being in Latin America? Or am I thinking of the business correctly?

It had to do with, yes, the underlying business.

Okay. I was just wondering if maybe it was because it was foreign. And then, I guess, most of the other questions have been asked. Thanks for taking my questions, guys.

Okay. Thanks, Ron.

(Operator Instructions). Now we have a follow-up from Mr. Chris York. Please proceed.

Just a quick follow-up here. You had a large amount of prepayment fees in the quarter, yet it has kind of been volatile over the last seven quarters. How do you think about the normal contributions of this line for your portfolio in terms of setting a dividend?

It is hard to measure. What we have observed over 12, 13 years now is that you can expect 10% to 15% of the book to roll with some advance, meaning prepay earlier than expected. It is never certain, and when it does it typically leads to prepayment. We don't factor in a lot of it but it is reasonably expected that some will come, on average, in the course of a year. Not certain in any quarter but on average we do get additional fees that are driven by prepayment and other restructurings, et cetera.

Okay, That's it for me. Thanks.

Thanks, Chris.

And at this time we have no questions. With that I would like to turn the call back to Mr. Taube.

Thank you very much, everyone, for your time today. It has been a terrific quarter and the outlook looks very strong. The team is hard at work and as usual we are available for follow-up questions, so feel free to reach out. And we wish you all a good weekend. Thanks very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. And have a great day.