PhenixFIN Corp (PFX) 2014 Q4 法說會逐字稿

Welcome and thank you for joining the Medley Capital Corporation's fiscal fourth-quarter 2014 conference call. I'd like to remind everyone that today's call is being recorded.

(Operator Instructions)

And now, I would like to introduce Sam Anderson, Medley's Head of Capital Markets and Strategy, who will host this morning's conference call. Mr. Anderson, you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fiscal fourth-quarter 2014 earnings conference call. I'm joined today by Brook Taube, our CEO, and Rick Allorto, our CFO.

Before beginning, I want to call your attention to our customary Safe Harbor disclosure in our press release regarding forward-looking information. Today's conference call may also include forward-looking statements and projections, which are subject to risks and uncertainties.

Any statements other than the statement of historical fact may constitute a forward-looking statement. Please note the Company's actual results could differ materially from those expressed in any forward-looking statement for any reason, such as those disclosed in our most recent filings with the SEC.

We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings and press release, please visit our website at www.medleycapitalcorp.com.

In addition, our fiscal fourth-quarter 2014 investor presentation is available in our Investor Relations section on our website under the events/investorpresentation link. I would now like to turn the call over to Brook.

Thanks very much, Sam, and welcome, everyone, to MCC's quarterly earnings conference call. I were pleased to be here today and I'd like to thank you all for taking the time to join us and thank all of our investors for your continued support.

We'd also like to acknowledge our entire team at Medley for a very strong operating performance in this past year. We completed our FY14having paid dividends of $1.48 per share. On October 30, the Board of Directors declared a dividend of $0.37 for the quarter ended September 30, and this dividend will be payable on December 12 to shareholders of record on November 26.

As a quick agenda on this call, we're going to give an update on the following. Our platform and the current market, an update on our portfolio and the investment activity for the quarter, update on the SBIC, and a financial review of FY14and our fourth quarter.

As we head toward the end of 2014, our team at Medley now consists of 81 people, of which 45 are focused on investing and credit management and 36 support the operations of the firm. Senior team has been executing this strategy for over 12 years and we continue to invest in people, processes and infrastructure at Medley.

Today we have one of the highest ratios of professionals to assets under management in the industry. The recent IPO of our management company has provided capital that will allow us to continue to invest in our business and attract additional high quality professionals to our organization.

Turning now to the market environment. We continue to see a powerful secular trend of assets by degrading off of the bank's balance sheets. And for our middle market opportunity, this trend is pronounced.

As a reminder for folks, the middle market in the US is substantial and accounts for approximately 40% of GDP, and on a standalone basis it would be the third largest economy in the world. There are approximately 39,000 companies in the target market, which we define as companies with revenues between $50 million and $1 billion. On average at Medley, we see over 1000 investment opportunities annually that typically invest in only a small percentage of these.

Turning now to the investing activity. During the quarter ended September 30, we invested $299.4 million in 12 new investments and 13 existing investments. We received amortization and repayments in the quarter of $89.5 million, resulting in net portfolio growth of approximately $210 million.

The performance for investments that were fully realized during the period was a 16% gross IRR on a compounded basis, providing a multiple of 1.3 times our money. During the quarter, 81% of our new investments were in floating rate loans, bringing our total portfolio to 74% floating rate.

During the period, the average yield on new investments was 12%. This average yield was approximately 90 basis points lower than the prior period and resulted primarily from the increase in floating rate investments as well as an increase to approximately 76% in the sponsor related investments, which historically have come at lower average yield than non-sponsored investments.

Our portfolio today, which consists of approximately 93% senior secured loans, is well diversified with 79 portfolio companies across 24 industries. And our expectation is that we will continue to further diversify as we grow the overall size of the portfolio.

During the past quarter, we recorded an unrealized loss of $0.20 per share. The majority of this unrealized mark down relates to four investments, which now represent approximately 3.2% of the fair value of our portfolio.

Turning now to the SBIC. As of September 30, our SBIC subsidiary had $140 million invested in 12 portfolio companies with an average position size of $11.7 million. And as of September 30, we had drawn a total of $100 million in SBIC leverage.

On October 3, we increased our regulatory capital at the SBIC subsidiary to $65 million, an increase of $15 million, and in addition, we've received approval to borrow an incremental $30 million from the SBA, bringing our to current total leverage capacity to $130 million for our SBIC subsidiary. In the future, we may increase the regulatory capital to the full $75 million, which is an increase of $10 million from here, and that would give us access to an additional $20 million of SBIC leverage, bringing it up to its maximum capacity of $150 million for the SBIC subsidiary.

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

Thank you, Brook. For the three months ended September 30, the Company's net investment income and net income were $20.4 million and $8.8 million, or $0.37 per share and $0.16 per share, respectively. The net asset value per share was $12.43 at September 30 compared to $12.65 at June 30.

For the quarter, total investment income was $38.3 million, and was comprised of $29.8 million of interest income and $8.5 million of fee income. Total operating expenses were $17.9 million and consisted of $10.5 million in base and incentive management fees, $5.6 million in interest and financing expenses, and $1.8 million in professional fees, administrator expenses, and general and administrative expenses.

For the quarter, the Company reported net unrealized depreciation of $11 million and a net realized loss from investments of $500,000. The Company's net investment income for the fiscal year ended September 30, 2014 was $74.7 million, or $1.58 per share, and net income was $52.2 million, or $1.10 per share. For the fiscal year, total investment income was $139.4 million, and was comprised of $110.3 million of interest income and $29.1 million of other fee income.

Total operating expenses for the year were $64.7 million and consisted of $36.4 million in base and incentive management fees, $20.1 million in interest and financing expenses, and $8.2 million in professional fees, administrator expenses, and general and administrative expenses. For the fiscal year, the Company reported net unrealized depreciation of $22.9 million and a net realized gain of $400,000.

As of September 30, the Company's total debt outstanding equaled $521.5 million, including $146.5 million outstanding on our revolving credit facility, $171.5 million term loan payable, $103.5 million in notes payable, and $100 million of SBA debentures. The Company's debt-to-equity ratio, excluding SBIC debt, was 0.58 times. As of today, our liquidity for new investments is approximately $168 million, and this includes $30 million of undrawn SBIC leverage.

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

Thanks, Rick. Again, we are pleased with the performance in our FY14. The team remains focused on originating a portfolio of high-quality loans at attractive yields that will generate a stable and consistent dividend for shareholders in the quarters ahead.

I would like to thank all the shareholders for their continued support and we can now open the call for questions.

Thank you.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Yes, good morning, Brook. Wanted to ask you about AAR Intermediate? That's a significant investment in the oil and gas sector, which obviously has been under pressure, so I was curious what drew you to that and what's the outlook for that company?

Sure. This is a company that we invested in during the period. Approximate leverage was just over 2 times EBITDA, and it has an attractive yield.

It does have a concentration with an investment-grade oil company. And basically it's been announced that there is continued CapEx by that Company and they have hedges through 2015 and 2016. The services that they provide are across-the-board wells, plumbing, water holding pens, maintaining sites, et cetera, so it's a diversified business.

Obviously, we are all watching oil carefully, but this is a first lien loan. It's low leverage and it's supported by what we believe an investment-grade credit that has demonstrated. And we'll expect to continue to provide CapEx in its specific areas.

Okay, I appreciate that. I wanted to ask you if you could give us any background on the outlook for the non-accruals? There's now several in the portfolio.

And be interested in understanding whether you expect those to be worked out relatively quickly? Are they going to remain on non-accrual for an extended period of time?

Sure. Well, I think we did add, as I mentioned, we had $0.20 unrealized mark down in the period. That related primarily to four We've talked about several of these in the past quarters.

I'd say on a high level, we are working closely with our team on all of these. We are pushing to get resolution as quick as possible. But it would really be difficult to speculate how quickly we are going to get resolution at this point.

But you can rest assured that we have our teams working extremely hard on each of these to produce a results here as soon as possible.

Understand. Just a couple more questions then I'll get back in the queue. Perhaps this one's for Rick.

I noticed that there was a $7.5 million return of capital. Well, the dividend was characterized as partially return of capital in the last fiscal year. And I just didn't understand that given that NII was more or less equal to the dividend, could you go over that?

And lastly, is the Board considering instituting a share repurchase program?

Sure. Regarding the return of capital, that happened as a result of several of the equity issuances during the quarter. The new shares that were issued were entitled to receive the dividend.

So, just mathematically, some of that capital, some of that distribution back to them is classified as a return of capital.

And, Mickey, on the share repurchase, obviously we're seeing commentary about this. It has not been taken up by the Board, but we're obviously watching carefully at expectations in the market. And we are looking at it carefully.

Okay. Thanks for your time.

Douglas Harter, Credit Suisse.

During on any of the four non-accruals, was any interest accrued during the quarter? Or when they were placed on non-accrual?

No interest was accrued during the quarter. So effectively, they were non-accrual retroactive to the beginning of the quarter.

Okay. Just, I mean, I guess, just trying to then reconcile, looks like some of the, if you look at the cost basis and the par value, looks like those didn't necessarily move in sync. Or they didn't, unlike Water Capital, both the cost and par went up, so I guess just trying to understand that if you didn't accrue?

Specifically for Water Capital, there is a PIK component. And the PIK component is recorded at the current mark.

Okay.

So there was some PIK accrual.

Got it, okay. So looking, fast forwarding, assuming these four stay on non-accrual, there wouldn't be any drop in interest income in the December quarter?

Right.

Okay. Thank you.

Chris York, JMP Securities.

Good morning and thanks for taking my questions. Origination fees contributed meaningfully to debent coverage on the quarter. With the stock trading at well below book value, and given shareholders didn't approve the Company to issue stock below book, how are you guys thinking about the stream of this income in 2015 without new equity capital to fund new originations?

Sure. Thanks, Chris. Look, fees have been and always are a big part of the business.

We've said consistently, obviously, that we were not intending to issue below book. So independent of that point you made about the approval to do it, we have said we're not going to.

So in a period of lower growth, we would still expect, based upon portfolio churn, for there to be fees. But they probably would not be in the magnitude that we've seen in the prior quarters when we are growing.

Got it. And then in regards to new originations, it appears to be a record for the quarter.

How are they spread out throughout the months, the three months? Where are they, heavily weighted towards the front? To the back? Are they pretty spread out throughout the quarter?

Chris, I don't actually have the final closing dates. I'd say on average, this quarter is probably on average past the middle of the quarter. So later in the quarter than earlier, but we don't have the exact breakdown of that.

Okay. It appears you invested an additional $17 million in equity to URT. Were you guys the only stakeholder to add capital? Or did the sponsor add capital here?

No, we were not the only stakeholder to add capital at this point. Give you a little bit of color, on our past call we said that we are actively engaged with the sponsor on the restructuring. And in this quarter, we did complete what was a consensual restructuring with both management and the sponsor.

Balance sheet's now right sized. We did receive equity as a result, and we are pleased with both the outcome of the restructuring and the position in the Company today.

Okay. So the sponsor did add equity as well?

No. The bulk of the capital here came from the credit providers.

Okay. And then lastly, do you expect to issue the remaining debentures available under your SBIC license in 2015?

As I said on the prepared remarks, we would expect to contribute the remaining capital down and then request the additional leverage. I would expect to see that in 2015.

Okay. So at what level of GAAP leverage are you comfortable running the business at?

What we've said in the past, and I think we stick with it, is our target leverage, excluding the SBIC debt, is 0.6 to 0.7 times. Does that answer the question?

Yes. That's it for me.

Okay, thanks.

Thanks.

Troy Ward, KBW.

Yes, and just a couple quick questions. First of all, when you said you pulled a new SBA debentures in the quarter, did you lock those in the September lock? And if so, what was the rate?

They were not locked in the September lock. We got the request in the fourth quarter for the debt.

Okay. So they're held at actually a pretty low cost until the next lock. Is that in March? Is that correct?

Troy, just to clar -- we simply received the commitment from the SBA. We actually did not do a draw request yet.

Okay. All right. And then following up on -- I'm sorry? (multiple speakers)

Following up on the one of Mickey's questions on AAR Intermediate in the quarter. I know Chris actually asked when the other investments closed. Can you recall when AAR closed in the quarter and how long that was in the process, just so we get a feel for when the transaction details were put in writing?

Sure. Look, this goes back at least a quarter, maybe even sooner. It closed towards the end of the quarter. But this was the deal that was on the runway this summertime.

And as the energy market made any changes, I mean, how are you viewing that transaction? I know you talked about the hedging put on by one of the clients.

Do you have any mandates in there that a certain amount of the product is supposed to be hedged? And how do you just protect yourself from these type of investments?

Well, I think first and foremost is the underwriting. I mean, it is a service provider that's going to have sensitivity, but not directly. We like the location of where it operates, it has a high-quality sponsor.

Again, we're 2.2 times leveraged and the trailing EBITDA was between $40 million and $50 million. So we did, this was obviously something we looked at very carefully.

But again, combined with the continued CapEx commitments, the combination of the hedges in place by the ultimate significant contractor for AAR. At this point, we're obviously watch it closely. We have the same cyclical concerns that everybody does.

But given the position today, I think at this yield and this leverage, we're comfortable with the investment.

Okay. Then just one more for me. On Water Capital, obviously the fair value took a hit this quarter and it went on non-accrual.

Can you just give us an update on Water Capital and what you're seeing in that business?

Yes, sure. We've placed that on full cash non-accrual this period, and it's marked down to 67%. Our valuation reflects March 31 financials, 2014. And those are the most recent that we have from the company.

We did not receive the June 30 financials. We typically get quarterly financials and we would have expected those in late August. The company's indicated that it's downsized its operations, but it's planning to present a reorganization plan to bulk its equity and debt providers soon.

So we are currently awaiting receipt of the plan and I would expect would have more color, both on the value as well as the go-forward plan in the quarters ahead.

And with the lack of financials, what kind of due diligence are you able to do with respect to getting the fair value? And how much are you even able to dive into this?

Well, as I said, we're not in receipt of anything past March 31. So beyond the financials, most recently as of March 31, we have limited ability.

We have been in discussions with management, but it relates to the reorganization plan that they're intending to provide us, so we have limited ability to due diligence beyond March 31 numbers that we have. But we are actively in dialogue and expect to have more color on this one, as I said, in the quarters ahead.

Okay. Great. Thanks.

Christopher Nolan, MLV and Co.

Hello, thanks for taking my call. Was any PIK income from Calloway recognized in the quarter?

No, it was not.

And would you consider raising any non-SBIC debt in coming quarters in addition to the SBIC?

We haven't ruled out financing. I'd say we're always looking at credit capacity and our overall laddering of maturities.

We have no plan at the moment, but we are continually evaluating. As I said before, from an overall leverage, our target will remain 0.6 to 0.7 times inclusive of the on-balance sheet debt. Does that answer the question, Chris?

Yes, it did. Thank you very much. And finally, on Security National Guaranty, any update in terms of timing as to when next steps could be?

And also, do you think there will be any sort of impact on the income statement in terms of expenses?

Let me do it in the reverse order. We don't expect a significant cost related to this. I do want to clarify very clearly that MCC has no relationship with this borrower or any interest in the loan that the claim relates to.

The loan was made from a private Medley fund. MCC, of course, was named, and we believe inappropriately. And we brought motion seeking to dismiss MCC from that claim entirely.

Do you have any time frame when you get an answer on that motion?

I do not have a time frame on this, unfortunately, at this point.

Okay. Thank you for answering my questions.

Thanks, Chris.

Mickey Schleien, Ladenburg.

Brook, a few follow-up questions. Have you started the process for applying for the second SBIC license?

We have not started the process.

Okay. And there's a lot of liquidity at the external manager following its IPO. Would you consider injecting some of that liquidity into MCC at NAV to support the balance sheet?

I'm not exactly sure I understand the question or how that would be done. Is there a precedent or a specific thing that you're working on, Mickey?

No. I'm just curious whether the external manager would be simply willing to buy MCC shares at NAV to support the NAV? I don't know about a precedent, but it certainly would help MCC, I think?

Sure. Look, at a high level, we haven't thought about that or considered it. I think I understand the question, but we haven't considered that at this point.

Okay. And Brook, can you give us the portfolio's debt to EBIDTA at your attachment point on average?

I don't have an exact number, Mickey, in front of me, but it's in the 4 or low 4 times EBIDTA on an average across the portfolio today.

Okay. And lastly, you made an investment in unsecured debt of SafeWorks. I was just curious what you liked about that credit that would draw you to the unsecured portion of the balance sheet?

Yes. Let me just recap. This has gone into the SBI subsidiary and we did make the investment with, coinvestment, with one of our other vehicles.

And it's basically a business that provides safety suspension systems and other safety manufacturers, a broad portfolio of hoists, there's work platforms, and other rigging to prevent fall and this services wind turbines, other climbing, and then residential. So it does have an exposure to building and real estate.

It does have exposure, again, to like wind and turbines. It has a very high-quality sponsor that's put in very substantial amount of capital. We are at mid-to high-4 turns here against the stable business and earning an attractive yield. So this is a business that we actually quite like. Okay. Thank you. Those are all my questions.

Jonathan Bock, Wells Fargo Securities.

Hello, good morning, and thank you for taking my questions. Maybe a few easier ones first.

Brook, as we look at the origination breakout, could you give us a sense of true proprietary directly originated credits versus what you'd consider more club deal type activity? If you could maybe give us a break out on the back of the napkin?

Yes. I'd say, as I said, it was about, I think it was 76% related to sponsors. Not all of that I would consider clubbed or highly any kind of broadly syndicated.

But if we think about our portfolio in terms of what we would characterize as direct, I'd say about 80% of it was direct where we've led the negotiations, so it kind of flip-flops. Does that make sense?

Yes, it does. No, I appreciate that. And then, also, just ways to perhaps enhance return.

Can you discuss what you're considering or perhaps viable options as to the utilization of the non-qualified asset bucket? Some have used SSLP, others have bought CLO equity.

Maybe some views of that underutilized, we'll call it, an asset for all intents and purposes. Maybe thoughts there would be helpful?

Great question. Look, we are evaluating the options to date. We have said that we're going to stick with the senior lending.

We are actively looking at the senior lending strategy. That does make sense, especially now that we're at scale that we are at, both as Medley in terms of our relevance to the borrowing community and the ability to do, let's call it, the one-stop deals in size, so it's beginning to look like that makes sense.

That's a timing issue in terms of our ramp, not necessarily a drive extra return. I think what you're not going to hear from us here at Medley is looking to drive yields, to stabilize yields, or enhance yields at the expense of the overall portfolio. But the SLS is a good example of something that we are looking at carefully.

So, maybe on that question, as we talked about driving yields and not wanting to elevate risk, so you obviously at current prices aren't going to be issuing equity anytime soon, which is very respected. There is a general pressure on all-in spreads, just broadly. It might have loosened a little bit, but it's still one direction in general?

And the one-time fee makeup of the dividend is relatively high in terms of upfront fee income? Maybe if I was going to reword a question that was asked before, it's at a steady state level of fees, which you mentioned there's some form of steady stasis.

Can you currently cover the dividend from NOI if you are not issuing equity and growing the balance sheet?

Well, it's a great question, Jonathan. I think, looking just at the numbers, we can't pay a $0.30 dividend and cover it from NOI on a static basis without fees.

So, I think if you think about how we think about the business -- I'm sorry, I meant to say $0.37. We can't cover the $0.37 dividend without these fees today.

But I would say conceptually, to give you a frame of the business, at the $0.37, we've always -- you look at that, that's approximately a 12% return to the book for a dividend yield at book value. I'd say, I'd leave you with the idea that we've always looked at this at being able to drive a 10% or a little higher yield, static yield.

We've been growing the book, as everyone knows, and our intention has been and will continue to be to go to approximately $3 billion At $1.3 billion-ish, we're about 40% of the way on that path, but I'd put the range at 10% return to the book, adding some fees to that because it's just normal and customary.

But certainly not enough to get to 12%, which is the yield that we're driving and have consistently been able to drive when we're growing the balance sheet.

Appreciate the candor. And honestly, we also get a question like this as it relates to scale, and you mentioned growth at the asset manager in order to further invest in people and process, et cetera.

But the question is we'll get from investors would be similar to if we look at just over the past year, the portfolio at cost has grown almost 70%, I think 68% to be exact. Investment fees paid to the manager have grown roughly 60%, yet earnings and dividends are relatively flat.

So, what's our general response when we get a question like that, from an institution that looks at that divergence and feels a substantial amount of the upside on growth has been accrued to the manager as opposed to the shareholder?

It's a good question. I think under any growth circumstance at the pace, like I said, we are four years in now at $1.3 billion going to $3 billion, so let's call it seven years.

I think if you looked at some point on any steady-state dividend, those fees that the manager will earn, which goes to building our team and our business, are always going to outpace the incremental potential growth to a dividend. Order of magnitude today, I think you could put a spotlight on it, as you did, and I think it's a very fair characterization of the overall, the numbers.

But in terms of growth and being relevant in the market, I think it does benefit shareholders. And we've said this before, it does bear repeating, bigger is better. Being more diversified, being able to continue to provide a valuable, relevant solution to the borrowing community, we expect over time to continue to access lower cost of capital.

We expect that will come if yields stay under pressure. It will help as we scale, both in terms of ratings. And overall, in general, we believe on the fixed cost base.

I don't think it's fair for us to offer that our fees are going to be in line with dividend yield growth or earnings growth. But I do think on balance, the business will be better. We are talking about and still intending to grow to that $3 billion size at MCC staying in line in our middle market strategy.

Yes. Just to put a point on it, everybody does appreciate scale and what can come from it, so I appreciate your candor in that response. Thank you.

Thank, Jonathan.

Casey Alexander, Gilford Security.

Hello, good morning. A couple of things. We are pretty well into Q4, but I haven't heard any discussion of what your backlog looked like going into Q4?

And maybe a general discussion about the general level of deployments versus repayments as fourth quarter has developed and what you look like going to the end of the year?

Yes, sure. I mean, look, the portfolio, we do have a strong backlog. I think if you looked at the mix on the backlog today, it's approximately 90% first lien, it's diversified by industry.

And we expect to continue to grow the portfolio during this quarter. Does that answer the question, Case?

It's close. I mean, have you seen any unusual level of repayments during the quarter?

No. There's not been an unusual or outlier in terms of repayment. We have seen a few. I would call it consistent, but nothing outlier.

Okay. And I don't generally like to get into portfolio specific things, but just two real quick questions. The AAR has a notation on it in the 10-Q of a bridge loan.

Does that presuppose that this is, even though it's a 2019 dated maturity, that there is some expectation that the money may be coming back to you sooner rather than the ultimate maturity date?

There was a small portion that was related to an expected repayment that's scheduled for the middle of next year. And that just related to the financing. But that's not -- it's a very small part of the overall term loan.

But it's lumped into the same document, so that's why it's notated that way?

Yes, I think that's correct. But the bridge piece is a small piece of that and we can come back to you with the portion.

Okay. And secondly, there's one that new deal that stands as an outlier. The CP Opco, LLC with a coupon of 7 3/4.

I mean, not for nothing, but that's an outlier compared to the types of deals that MCC has put on the books in the past. Can you explain the rationale for that investment?

Yes, that was part a business that we like. It's a rental solutions provider, got a broad portfolio of event rentals and temporary structures. It's one of the largest that has came out of bankruptcy by one of the large private-equity sponsors, which has a large equity position in it.

I think if you look today, we're probably at 2 times EBITDA here. And it's just part of the overall mix and the relationship base. So we like the business, 2 times levered, we believe very safe, and this is on the lower end of the yield, obviously.

Is that SBA or just in the general portfolio?

Today it's currently in the general portfolio.

Yes, okay. All right. Thank you.

Thanks, Casey.

David Miyazaki, Confluence Investment Management.

Hello, good morning. Brook, you made a comment earlier that with the manager going public, it freed up more capital to invest in the business. And that strikes me as an odd thing to bring up on this call because the asset management industry is not very capital intensive.

So sneaking right in between Mickey's questions and John's questions, what exactly does that mean for the BDC? Or should we expect lower G&A or better operating leverage going forward?

Yes, that's a good question. Look, we've continued to build the basis. One of the challenges and important parts of building and continuing to build the direct origination platform is the people. That's both on the front end, which is investing, and the credit management.

But it's also on the back end, which is managing the assets of the firm. We've been through this for many cycles and I don't want to overstate the role that the capital will play with respect to MCC shareholders, but it does add value in our ability to continue to attract, I would also say, retain our top talent. And give ourselves flexibility to grow Medley, which on balance, does help the durability of the platform and the team that's highly focused on MCC.

But I would expect the ability to grow the people, which is really the business, to be covered by the variable nature of the fees that are charged off of the base fee in the incentives. Is that not already being covered?

I'm not sure. David, is the question, if we're growing our business, did we make enough money to pay the people, and therefore, don't need capital to expand?

No. It's that I would expect as you grow out your platform and your business that you're going to need more people and more resources. And that's the utility building out the teams at the MCC shareholders.

But that construct is already being funded because as you grow the assets, you're already going to grow the fees. And so, the incremental utility that is delivered by having a public manager with excess capital that you mentioned, should be incremental to the benefits that we are getting from by paying out higher fees.

So if it really is going to benefit the public shareholders of MCC, there should be something that actually improves the margins that are being delivered. Otherwise, the MCC shareholders really don't benefit from having a publicly traded manager.

And that's fine. That's what my assumption was going forward. But when you brought that up, it sort of implied that we're, as shareholders of MCC, there's some benefit that we're going to have from having a publicly traded manager.

No. Look, I take your point clearly and maybe I can just recharacterize. I wasn't trying to imply that there would be a direct economic benefit, so I think your point is well taken and that's worth clarifying.

I think going to a little bit of a different altitude, the question, and if I can touch on it, so why is did we take MDLY public? And I think there's really three important factors here, and I do think that they, on a qualitative basis, will help and already have helped MCC in terms of the people we're attracting.

So this is a -- it builds the brand. We are in a very competitive business, as you all know, and there's potentially more people coming in. So the idea to continue to enhance the reputation and presence in the brand of Medley as a solutions provider, we think that does help in terms of attracting the best borrowers and the best presence in the market.

It does give us capital to grow. If you had the idea that people are partners in the firm, having capital to grow the business does matter. I think it also feeds into the brand and presence in the market, the durability of the firm.

And finally, I think retaining, attracting but also retaining talent. Everyone at Medley, the whole team that focuses really all their time and really all of their time on every asset that goes into MCC, whether it's co-invested or not, it's everything goes to the same people.

Everyone in this firm now has a share in MDLY. Many own shares in MCC as well, which is on the senior level, public. But this idea that we've aligned interest and people have made what amounted to very long-term commitments, I think is very important.

So hopefully that gives you some color on the thinking, but I take your point. Your point is very clear and I think your characterization is right.

You'd need to see real mathematical benefits to MCC. And we'll look carefully at that and come back to you in the quarters ahead.

Okay. Thank you. And just to follow up a little bit on Mickey's point, I think the precedent that he was referencing was Apollo. When the manager bought shares at NAV that were substantially higher than the market price at the time, that was the method through which they injected capital into the BDC from the manager.

If I could, I'd like to just shift gears with you a little bit. One of the things that I've seen more broadly in the BDC industry has been an embrace of the oil and gas industry, which happened to be timed right in front of a $20 decline in oil prices.

And it strikes me as the timing being somewhat of a concern, because if you look over the past several years, the oil and gas industry has raised an enormous amount of debt capital and largely done it without too much participation from the BDC industry, with the exception of a small handful. And then with this year, we've seen a lot of BDC underwriting in the oil and gas side, which begins to beg the question as to why did the other lenders step back and make that opportunity available?

And was that just serendipity on their part? Or misfortune on the BDC industry's part? Because I would suspect if you underwrote oil and gas loans today relative to six months ago, you'd probably get a lot better pricing and terms.

So are you seeing other lenders in the oil and gas industry stepping back with more caution? And if that's the case, are you seeing spreads continue to widen and multiples going down and covenants getting stronger?

Sure. Well look, I think it's undeniable if you read the press that today, there is a pullback. You see it in prices, you see it in the headlines.

Our experience has been that we're not going to make or lose money based upon the headlines and decision making on the headlines. There seems to be a pullback. We don't have what we would consider an outlying percentage of exposure.

We have had exposure consistently over the last several years, so this was not new for us. We are looking at it carefully. I think if you look in hindsight today and you're not paying attention to this, then you're not being prudent.

In terms of what others have done in increasing their exposure is, I don't have a specific comment. Our approach to the business has always been to be diversified because we are not actually out here trying to tell folks that we can decide which sectors a priori are better or worse, or even what the cycles will be in the sectors.

We care. We try to make our best judgments obviously at each turn. And in terms of our exposure, and I just want to reiterate that on average, we're at mid-2 times EBITDA. The borrowers have $35 million, $40 million of EBITDA on average, and we have covenants in all the positions, and most importantly, we're first lien.

I made reference to hedges and some of the overall fundamental backdrops that drive the credit in our book that we're comfortable with. But that doesn't withstand precipitous further drops completely.

Many of us have been through the cycle before. They're manageable. It does not feel good, but if your first lien and you're diversified, that's the best position to be in.

I take your point. I think it's fair. This is something we all need to watch as a group.

I think I would be surprised if people increased their exposures to this going forward, but depending on how the cycle goes, you may see people taking different approaches. You're not going to see us increasing our exposure from the level it's been at, but this has been consistent here as part of our overall portfolio, as I said, for a couple years anyway.

Okay.

Did that get all the points, David?

Yes. I mean, it's just of concern to me that we are seeing so much, we've seen so much volume come in. And you just wonder, who had the wisdom to step back? And who didn't have the wisdom to not step in?

If we think about, one of the things we hear a lot about is that the lending is taking place in a secured basis. It is hedged, but one of the things about, particularly on the services side, is that you really can't hedge against lower activity.

And so, even if the exposure directly to production is hedged, at some point on the services side, if there's less drilling and there's less activity in development, then that's going to hurt the EBITDA. And so, you may be in it only EBITDA at 2 times, but business falls in half and suddenly you're at 4 times. So do you have any thought as to when you're underwriting this, to address the possibility of lower activity?

Yes, look, I think you hit the nail on the head. If you're at 2 times and change and it cuts in half, you go to 4. If you say it out loud you're 4 times EBIDTA and you knew it was stable, you'd prefer to be lower, but that would not be the end of the world.

What we have experienced is when you go from 2 times to 4 times, it actually feels a lot worse than just saying your 4 times because the trend is coming against you. So you're looking at things like collateral value, you're looking at things like equity injections from sponsors, you're looking at strategic activity that will likely pick up in the sector to get leverage over fixed costs.

I think you're right or your production about the direction happened, we'd all be faced with 4 times credit. We're happy to be first lien. That's certainly a better place to be, but, yes, that would be we'd be under more pressure in those positions. I think we all would.

Okay. Thank you.

Thanks, David.

Okay, that concludes the question-and-answer portion.

Great. Well, thank you very much. We are, again, we're pleased with the performance in 2014.

Our team is actively and continues to focus on originating high-quality loans at attractive yields. And would like to thank all the shareholders for their continued support. Have a great quarter, all.

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