PhenixFIN Corp (PFX) 2015 Q1 法說會逐字稿

Welcome and thank you for joining the Medley Capital Corporation's Fiscal First-Quarter 2015 conference call.

I'd like to remind everyone that today's call is being recorded. Please note that this call is the property of Medley Capital Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of this call will be available by using the telephone numbers and PIN provided by the Company's earnings press release.

(Operator Instructions)

And now, I'd like to introduce Sam Anderson, Medley's Head of Capital Markets & Strategy, who will host this morning's conference call.

Mr. Anderson, you may now begin.

Thank you, Operator.

Good morning, everyone, and thank you for joining us today for our Fiscal First-Quarter 2015 Earnings conference call. I'm joined today by Brook Taube, our CEO, and Rick Allorto, our CFO.

Before we begin, I want to call your attention to the 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 statement other than a statement of historical fact may constitute a forward-looking statement.

Please note that the Company's actual results could differ materially from those expressed by 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 quarter 2015 investor presentation is available in the Investor Relations section in the Events/Investor Presentation section of the Company's website.

I would now like to turn the call over to Brook.

Great. Thanks, Sam.

Welcome, everyone, to MCC's quarterly earnings conference call. Last night, we announced our financial results for the quarter ending December 31, 2014. We reported net investment income per share of $0.35 for the quarter and net asset value per share of $11.74.

On February 5, 2015, the Board of Directors approved a dividend of $0.30 per share for the quarter. The dividend will be payable on March 13, 2015, to shareholders of record on February 25, 2015. And also on February 5, 2015, the Board authorized a $30 million share repurchase program.

As an agenda, on this call we're going to give an update on the following: net investment income for the dividend; the share repurchase program; our portfolio and investment activity for the quarter; an update on our SBIC; and finally, Rick will provide a financial review for the quarter.

First, on the declared $0.30 dividend, this new level reflects a dividend that we expect to meet or exceed with NII, on average, during a period of low or limited overall portfolio growth. The 12% target we have met for many quarters has required origination fee income that was driven by the steady and consistent growth of the book. But without this growth in the portfolio, the higher 12% target return is not achievable.

Since inception, we have clearly stated that we will not issue equity below book value. I would like to reiterate that point today. Given the current share price of MCC, and the BDC sector in general, we assessed that meaningful portfolio growth is unlikely in the near term. And while the dividend now is not as high as our previous level, this $0.30 quarterly dividend provides a greater than 10% return on the current book value and over 13% effective yield for the stock price as of the close last night.

Turning to the share repurchase, as I mentioned in the initial remarks, we received approval from the Board to implement a $30 million share repurchase program. The program is approved for a one-year period. I'd like to give you a little color on how we think about the share repurchase.

Like now and during times of equity market volatility for our stock, and the sector in general, the marginal returns from re-investing in our existing portfolio may exceed the return opportunity presented to us in new loan originations. In these circumstances, we believe it's in the best interest of shareholders to re-invest in the existing portfolio through these share repurchases.

We expect to implement this share repurchase program, and will balance the timing and amount of shares repurchased against our liquidity, the cost of the financing, and the market environment. Shareholders can expect the program will be implemented in the quarters ahead.

Turning now to investing during the quarter. As of the December 31, 2014 mark, we had invested $93.9 million and received amortizations and repayments of $80.2 million resulting in net portfolio growth of approximately $14 million. During the quarter, nearly all of our new investments were in floating rate loans, bringing the portfolio total now to 74.5% floating rate.

During the period, the average yield on the new investments was approximately 12.8%. This average yield was about 75 basis points higher than the prior period. We continue to see spreads widening in the middle market as the markets digest the movement in energy and commodity prices, as well as overall market and geo-political news globally.

At Medley, we're seeing very attractive lending opportunities and remain active in the market through our various investment vehicles. However, while executing on our share repurchase program, we will remain very selective with respect to investing in any new loans at MCC.

Turning now to the portfolio and credit. The portfolio consists now of approximately 93% senior secured loans. It's well-diversified, with 76 portfolio companies across 23 industries. Our expectation is we will continue to further diversify as we grow the overall size of the portfolio over time. But we feel comfortable with our mix at this point.

During the past quarter, we recorded an unrealized loss of $0.66 per share. Of this mark-down, $0.27 related to widening market yields, of which $0.7 was due to energy. The remaining $0.39 related to credit-specific performance.

Currently, our energy exposure is 6.8% of the portfolio, consisting of five positions. And four of the five positions constitute 96% of the overall energy exposure. These positions are senior secured; they're first-lien; and they benefit from significant credit protections including covenants, amortization requirements, and excess cash flow sweeps. We're in active dialogue with all of our energy borrowers, and observe that in the energy sector, management teams are reacting quickly and appropriately.

As of December 31, 2014, non-accruals represented approximately 1.3% of the fair value of the portfolio. This is down from last quarter, where non-accruals represented 3.2% of the fair value of the portfolio.

Turning now to the SBIC. As of December 31, 2014, our SBIC subsidiary had $161 million invested in 13 portfolio companies, with an average position size of $12.4 million. As of December 31, 2014, we had drawn a total of $100 million of SBIC leverage.

As I communicated on prior calls, we intend to increase the regulatory capital at the SBIC subsidiary to the $75 million maximum. That would be an increase of $10 million from the December 31, 2014 break. This would give us access to an additional $20 million of SBIC leverage, which would bring total available leverage up to its maximum capacity of $150 million for the SBIC subsidiary.

I'd now like to turn the call over to Rick to review the financial results.

Thank you, Brook.

For the three months ended December 31, 2014, the Company's net investment income and net loss were $20.4 million and $18.3 million, or $0.35 per share and $0.31 per share, respectively. The net asset value per share was $11.74 at December 1, 2014, compared to $12.43 at September 30, 2014. For the quarter, total investment income was $39.8 million, and was comprised of $35.7 million of interest income and $4.1 million of fee income.

Total operating expenses were $19.5 million, consisting of $10.9 million in base and incentive management fees; $6.4 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 $38.5 million, and a net realized loss from investments of $0.2 million.

As of December 31, 2014, the Company's total debt outstanding equaled $591 million, including $216 million outstanding on the revolving credit facility; $171.5 million in 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 0.71 times. This concludes my financial review. I will now turn the call back over to Brook.

Thanks, Rick.

And thank you all for your time today. This was a challenging quarter in many ways. We confronted many of the market conditions that our peer group did, including widening yield and falling energy prices. However, the market has given us an opportunity to acquire shares of MCC at what we assess is an attractive valuation; and we intend to do that.

The team at Medley continues to grow. We now have over 80 people, of which 44 are investment professionals. We're excited about the opportunities presenting themselves in the market, and we will continue to seek ways to enhance shareholder value at MCC in the quarters ahead.

We can now open the line for questions.

(Operator Instructions)

Christopher Nolan of MLV & Company.

Hi, thanks for taking my call. Two questions.

First, for the repurchase program, is there a target minimum IRR that you have on it, particularly given that your new investments are yielding 12.8%?

We don't have a target IRR at this point. But I would assess we are going to prioritize this share repurchase, assuming the stock's in the neighborhood that it was at the close last night. And we'll continue to re-assess, based upon the market.

Okay. And do you think that the share repurchase program, once completed, could be re-upped again, assuming the share price remains at discount the way it is?

I'm not going to speculate on the future. I think we'll always balance what we're seeing. But we're going to be carefully looking at overall liquidity, leverage ratios and opportunities in the market. So I would not rule it out, but I'm not going to forecast that it will increase in the future, at this point.

Great. And just on Calloway. Given Calloway is an entirely PIK coupon, what's changed, where suddenly a PIK coupon is now non-accrual -- I mean, what changed in the business?

Well, there has not been officially a range in how we've accounted for at Calloway, so I don't believe there's been a quarter-over-quarter change. The Company continues to work hard on a restructuring. We're remaining supportive of the management and the sponsor, and we continue to assess the plan in a realtime basis. But this plan that we're pursuing is what we believe will maximize our potential return in the case of Calloway.

Great. And final question is, given that so much of your originations tend to be in sponsored companies, do any of the write-downs or depreciation in the fair value of the investments reflect a weaker financial position of the sponsor, where the sponsor is less capable of back-stopping the Company?

Well, no, I'll give a big-picture comment. We balance sponsor versus non-sponsor. I think the sponsors generally want their companies to succeed. But I don't know that they would do uneconomic actions at the benefit of the creditors.

So I would say there is no apparent difference in sponsor support, up to the point at which I think they would assess it's not in their best interest. Nothing's changed this quarter versus last quarter, I would say, with respect of our expectations of sponsors, generally.

But you know, we are watching carefully. That's a good question on a larger-scale basis. The universe of sponsors is large. It may be shrinking if you look carefully at the institutional allocators -- large state plans and others that are talking about how they're going to look at private equity.

That's a much bigger-picture comment. I think, generally speaking, we like the sponsors we back, and we have seen no change in their behavior or their intentions with respect to our portfolio companies that we're working on them with.

Great. Thank you for taking my questions. I'll get back in the queue.

Thanks, Chris.

Casey Alexander of Gilford Securities.

Good morning. Thank you for taking my questions.

First of all, I would like to commend you for the share repurchase program and your commitment to it. I've heard every excuse under the sun for not doing this from other companies, and I think it's a very strong expression about your desire to be shareholder-friendly. So I commend you for that.

My question relates to water capital. Is water capital -- was that a sponsored or a non-sponsored transaction? And since it's marked at zero, does that mean that there's no future to it? Or is it an expression that, at this point in time, there's only upside to it?

It's not sponsored, Casey, and thank you for your comment. I appreciate that. I'm sure we all at Medley do.

On water capital, specifically -- look, we took it to zero. We received information at the end of January, indicating that the Company had substantially reduced its workforce, and that the asset values had declined significantly. So the new information, unfortunately, painted a far gloomier picture of the state of the Company.

Management has indicated it may have new equity or venture partners interested in helping to grow the business in the future. But at this point, we just don't have enough information to make a determination on what future value there may be. But we have an experienced and seasoned team here, we have boots on ground, and we're focused on pursuing all pathways for any recovery on this situation. But our mark reflects our realistic expectation today of what we expect.

Okay. I appreciate your candor on that, and thank you for taking my question.

Okay. Thanks, Casey.

Troy Ward of KBW.

Great, thank you. Brook, you spoke in your commentary about implementing the buy-back in prior quarters. I just want to confirm that the share buyback is in effect today?

And then, could also you describe the window for a buyback? When does that open? And when are you excluded from buying back shares in the open market?

Boy, I want to be careful here. I don't have the exact day count. But it's a couple of days from now when it would be effective, and that would be consistent with just our normal window, consistent with buying by employees, for example.

Obviously with the calendar, every quarter, with earnings, we have blackout windows. But our assessment is that, based upon the volumes, the liquidity and our position is, we look forward, that we're going to begin putting this to work. And we'll stick with it in a consistent manner in the next -- in the quarters ahead.

Okay. But it will be effective as soon as the window opens following this announcement though?

That's correct.

Okay. And then, can you give us a quick update on the investment in Omnivere? It looks like the total exposure is about $24 million, with a NII yield of over 13%, and showing some weakness over the past couple quarters, with the fair value mark now in the -- call it the low-80% range. Any update on that investment?

Yes. We're working closely on this one. Obviously the Company is seeking to improve the performance.

I would say that this is an industry that we continue to like very much. It's demonstrating very solid growth prospects on the top line, which is encouraging -- and that's on a realtime basis. We're seeing real significant top-line performance.

I would characterize the business -- it's in a sector where there's a lot of private equity attention. So we have our hands on [ten and few] on this one, a very capable team that's working really closely, and we look forward to a positive result here.

Is the mark just reflective of them performing below your model expectations? Or what is the mark?

That's correct. It's based upon performance below expectations.

Okay. And then one final one. You touched on it in your prepared comments. But I assume the dividend reduction is a disappointment for you, for your team, just as for shareholders.

Can you describe what the differentiation was from your internal modeling that led to lower income, couldn't support the dividend? And how do you think you can better defend your dividend policy going forward?

Sure. I think I understand the question. Let me try to take it, and then I'll ask you if I've got you covered on it.

You know, we embarked over four years ago on a plan to go to $3 billion. I think many of you have heard me comment. We were going to do it in a steady and I consistent manner, and that was driven by the very deep and growing origination platform we have at Medley.

So at $1.2 billion-and-change, we're about 40% of the way there in four years. And I'm not saying it's linear, but it may not be logarithmic. But our plan to $3 billion, we're 40% of the way there. So if it was a 7- to 8-year plan, in total, based upon steady growth, I think our dividend plan previously was predicated on consistent growth.

So I'd say it's disappointing to us to take a hiatus on the growth plan, which is where we are today, based upon the stock price and our stated commitment to not issuing below book. So our hands are tied on continuing the growth. What's new is, the fee income that we generated from the growth is no longer able to sustain the higher dividend.

So we've level set it at a number we think we can meet or exceed on average. That's a statement that we've said we need to stick with. Defending the dividend versus the book is not a strategic plan.

So I think, yes, we are disappointed in the reset. It is related to the, we hope, temporary portfolio, or lack of portfolio growth. But we're looking now, as people would expect, at doing what we can to enhance value. That's both the buyback and then some strategic initiatives that we're considering as well.

And then a follow-up on the growth versus the dividend. Thinking about this logically then, at some point in the future, you knew you were going to have slowing growth. So what was the plan for the eventual decline in growth, as it impacts fee income?

And then secondarily, as we've seen this growth, we haven't seen an increase in the dividend. The dividend stayed flat, despite the strong growth in the portfolio. And then the dividend obviously got decreased.

I can't believe that was part of the plan. So what was -- how did you initially view growth versus the dividend?

Well, I would not say that we had a view of what the future would hold, in hind sight. Looking backwards, we didn't have a view of the future. I don't think that's a reasonable expectation. I certainly don't have that of myself.

But I will say, we had ratcheted the dividend as we grew. It does stabilize at 37, which is an approximation. We clearly out-earned it for a period of time, which, we didn't raise it. I don't know that, that was a signal, but we tried to keep it at a level that we thought was consistent.

Over the four years, we've been below book and above book, but the average cycle on these gave us some confidence that we'd be back to the market. I think today, quite frankly, with the chorus of people piling on, and the prices, our assessment is that it's going to -- may take some more time than we would have otherwise expected. So you're looking today, we said, at a level that we think we can meet or exceed.

I would comment that a 10% return to the book value, and 13% return to share price today, strikes us as a very attractive return. Notwithstanding people's view, this is an attractive return. That's our assessment; that's why we are buying the stock with the capital from the Company. And we're going to continue to do our best to communicate what we think we can deliver reasonably here and for the foreseeable future, based on what we're seeing. Does that answer the question, Troy?

It does. Thank you. I appreciate your comments. Thanks, guys.

Okay, thanks.

Greg Nelson of Wells Fargo Securities.

Good morning, guys, and thanks so much for taking my questions. Just a quick follow-up on the dividend and how you're thinking about it going forward.

Obviously you mentioned the lower level of fee income, but also that you expect to meet it or over-earn it. But is there anything else embedded in there, besides lower-in-fee income, that you expect to shake out? Like potentially more non-accruals?

Let me think about the answer here. I think it's predictable over time that there would be further non-accruals. If we thought they were imminent, you'd have seen them in this quarter. So I think this idea that there would be no non-accruals in a credit business that's driving a double-digit return on equity, is not realistic.

I think our dividend policy is one that is our best assessment of what we can deliver from NII now, on average, as we look forward. We've been capable of consistently doing that in the past. And I would just say, we've come up with a plan, recommended it to the Board, it's been approved, and with all the information we have today, that number represents our realistic assessment about what's possible.

Okay, that's great. I was just looking -- relative to last quarter, you still did $0.35 in NII this quarter, relative to the $0.30 dividend, on half as much fee income. So that's where that was coming from.

Then just looking forward, as we think about fee income and what we should think about as a steady state. And then also, are you reconsidering how you eventually book fees up front into fee income, and potentially accruing it over time?

We have not had a policy change on the accounting side. I would say -- I think I've said this in the past. But our reasonable expectation is that 15% to 20% of the portfolio would roll in the course of a year. It's not certain that it happens on a consistent basis quarterly.

But in our businesses -- whether it's M&A, amortization, re-financings, et cetera -- there's just a natural repayment that occurs. It will be interesting, I think, to watch in the next several quarters, with yields having widened, whether the activity on the re-pay side is as high. But generally speaking, it's pretty consistent when you have a large and diversified portfolio.

So we still expect to be investing. As I said, we will prioritize the share repurchase. But we still are running a business. We have an existing portfolio. And you know, it might be that there are interesting opportunities that present themselves. So I think, on balance some, I'd put it in the 15% to 20% range on an annual basis, would be a realistic expectation for a portfolio churn.

Great. And then one small question as it relates to fees. Obviously you guys put in place the buyback, which is a great thing for investors.

But still, comparing this year to last year, fees are up. So have you guys considered anything to potentially align fees with growth, or potentially a high water mark, or anything like that? Thank you.

Yes, thanks for the question. We spent a lot of time talking to shareholders. We'll continue to do that. We have not made any announcement or any commitment to do that.

I will reiterate, though, that we have a team here that's 80 people -- 44 investment professionals -- and we're driving a double-digit return on capital. And our view is that the BDC sector -- at on-average low-30s cost expense ratio, which is well-below REITs or MLPs or banks -- is not a particularly high effective cost structure, if you're driving attractive returns for shareholders.

My point of view is that there is a growing universe of folks that will find 10% return on capital or higher as extremely attractive in a sub-2% yield environment. So while there may be shareholders that have a different point of view on that -- and I assume they're probably selling stocks in our sector -- on a personal level, at MCC, we're happy to be buying shares today from folks like that.

Great. Thanks so much for taking my questions.

Thanks.

Chris Testa of National Security.

Hi, guys. Thanks for taking my questions, and for also implementing the buyback to protect NAV. Just with regards to the challenging environment for growing the portfolio, are you still sticking with the target regulatory leverage of between 60% and 70%? Or are you willing to take that up a little bit higher to grow the portfolio?

At this point, we do not have an intention of increasing the leverage.

Okay. So it should remain around that level?

And just in terms of the unrealized losses, I know you had stated this before; I missed it. Can you just tell me which ones were due to widening yields and energy, and the remainder of that portfolio specific?

Yes, I think it was $0.27 was widening. So $0.07 of the $0.27 was related to energy, which we assess as widening market yield. And then $0.39 were credit-specific adjustments.

Okay. And are the energy investments -- are those primarily downstream, or are those more upstream?

Yes, that's a good question. I mean, let me just give you a few data points from our perspective on the energy side. We (technical difficulty) some of our emergency exposure capital obviously last year, and we were looking, too, at the cycle. No one predicted the velocity of the price change. We're obviously watching it closely.

But we have 6.8% of the portfolio today in energy, and that's five positions. There are service businesses, and the revenues are diversified upstream, midstream and downstream. Primarily, midstream, I would say, if you thought about the average, but it is diversified. 96% of that energy book or of the position -- or four of the five positions -- represent 96%, and these are all first-lien for seniors.

Okay.

And they're secured. The average leverage is 2.5 times EBITDA, and the EBITDA, on average, is $34 million. So these are relatively well-positioned, well-sized. We're first-lien.

We have financial covenants in all of these. And they benefit from amortization, covenants, and in many cases, strong contractual relationships and hedgings for some or all of 2015.

Okay, great. That's good color. And how many of those are sponsored?

Let me come back to you. I don't have that off the tip of my tongue right now.

Okay. And just with regards to your funding capacity, are you looking to tap the revolver more or to get more into the SBA debentures going forward the next couple of quarters?

I would expect us to look at the SBA from expansion and a usage, or we may look at the unsecured market as well, to give ourselves flexibility here, especially as it relates to share repurchases. Three of the five are sponsored -- just so you've got that number -- another year.

Okay, great. All right, that's all my questions. Thanks, guys. I appreciate it.

Mickey Schleien of Ladenburg.

Good morning, Brook. A question on interest and dividend income. I'm trying to reconcile the fact that it increased 20% quarter-to-quarter, but I see that the average portfolio only increased 10%, and the portfolio yield was relatively stable.

Was there some sort of non-recurring dividend? Or something in dividend and interest income that makes up for the difference?

I'm not aware of anything. I mean, maybe you could reach out to Rick and reconcile. I don't think there's anything unusual.

Okay, I'll follow up with Rick. Could you tell me, Brook, of the cash on the balance sheet? How much is in the SBIC?

Well, as I indicated, we've committed -- are you asking how much have we committed, or how much cash is at the SBIC?

Yes, how much at the SBIC?

I'm not sure that we disclose -- let me see if I can grab that. As I said, we've committed all but $10 million of the regulatory capital.

Yes, I understand. I'm just trying to get a handle on what amount of cash you need for working capital.

I think there's limited cash in the SBIC today. But if you think about the 161 portfolio size and the $100 million in debentures outstanding, which you have to fund, we've used up low-$60s million of the cash. Obviously we have access today to another $30 million of debentures, based upon the regulatory capital commitment.

So we've got $30 million of debentures and then a little bit of cash. And then we would intend to put $10 million more, and then have $20 million more of debentures. Without going into the model, that's how I think about it.

We think about it on a daily basis. That's a rough estimate. Does that make sense?

Yes, it does. And last question is, can you give us a status update on Lydell Jewelry and Omnivere?

Well, I gave the Omnivere commentary before. Did you have any additional questions? Or did you just miss that one?

No, I'm sorry. You did. I just realize that you did. Just Lydell then.

Okay. It's got a retail exposure. It experienced softness in the operating performance in the quarter, and we're obviously marking these things at a wider yield. So operating softness, based upon some exposure, and it was marked down during the quarter.

All right, thanks, Brook. I'll follow-up with Rick on a couple other questions. Appreciate your time.

Okay, thanks, Mick.

Jim Young of Morgan Stanley.

Hi, Brook. Could you just remind us how your incentive fees are structured? Because in this quarter, which is obviously disappointing to see the unrealized depreciation and the dividend cut, yet your incentive fees increased over 20% to just over $5 million?

Yes. It's pursuant to the document; it's in our standard prospectus. We did grow the book, and we did earn income and pay the dividend. So was there anything more than that?

Yes, again, in this kind of environment, does that kind of structure make sense for shareholders?

Well, I think, as I said in the prior conversation, our assessment is that this is a long-term strategy. It's one that provides an attractive return to folks over time.

The average return for BDCs since we've been public has been a single-digit return to the positive. We've been in line with that. Even if you look at the current share price, our assessment is that we will close the gap to the group. If we close the gap just to the group, which is our intention, and the market stayed constant, we'd be a several hundred-basis point premium, from a return perspective.

So other than saying that I think in the financial services businesses, we all address issues like compensation, how you incentivize, how you do it best over time, we deal with it with respect to our portfolio borrowers. When we look at them, we look at it on a personal basis internally here, with our 80 employees.

I don't think there's any exact science to this, other than to say that we think that this return opportunity is attractive. We do get paid well, like most people in the financial services business. And our team here is hard at work and we're doing our best. So other people certainly can have a different point of view on that, and we would accept those points of view as fair and reasonable.

David Miyazaki of Confluence Investment Management.

Hi, good morning, Brook.

Hi, David,

Just as a comment, thank you for putting the share repurchase in place. I think we've talked about this in the past, and that's a good thing. We just want to reiterate that the difference between walking and talking in this space is often quite significant, so we look forward to seeing that actually getting put to work.

I wanted to also revisit with you -- you brought up how your growth plan was to get to on $3 billion. And now that we're in a pause on that progress, whether or not that's a good destination, in that, when you look at this industry, there aren't too many BDCs that have gotten to be that size. And if you look at the ones that are in that range, many of them are not operating particularly well, as far as generating good returns for shareholders. Part of it, I think, reflects a lack of scale, in that, becoming larger doesn't necessarily benefit the shareholder so much as it benefits the manager.

And so, when you look at that just as a fact, is it really a good objective for shareholders to have Medley become that size? And if we're talking about that, then is it also -- is this business scalable for the shareholders? Should we expect the margins to get better? Because maybe it is that we just need to calibrate our expectations, that the profitability is not going to get better as the BDCs become larger.

A lot of questions. Let me see if I can take them.

I think we've been clear since we started on the path that we intended to go on. We're building a broader business in Medley, which is beneficial to MCC. For example, we can pause, buy shares and still be active in the market.

I'm not going to specifically comment on other groups. We're looking carefully at what people have done, performance-wise, focus, what's available in the market. And I think you can expect us to continue to be very thoughtful and careful about how we think about growth, strategy, portfolio position, et cetera. And that will include learning from mistakes. It's the least we owe folks.

So that's what we're working on here. Our going to $3 billion was a plan we set out, and my assessment today is that, that's still an appropriate plan. It's in the best interest. That's the right size for us in the market we are playing in, assuming we stay at this focus, which is our intention.

We will benefit from a few things as we get bigger. That's a ratings, probably financing costs, more diversification, ability to continue to add to our team.

So I don't know if I have the crystal ball for you on what is the optimal size, but there are a few large ones that we think have done a very good job. I think the industry as a whole has done a great job for shareholders over time, compared to alternatives. And looking today, if you can go back to -- what we do at 30,000 feet here -- assets are coming off the banks, Tier 3 assets in particular. Leveraged financed assets are coming off the banks. They're moving out into the non-bank system.

BDCs have an enormous opportunity. We think that the good ones will get bigger, and still be able to add value.

I differ a little bit on this idea that it has to offer an ever-growing bean stalk of return growth. There's just a point at which, hypothetically, a 10% return on capital -- you could look at diversifying and protecting the book versus growing returns. So there is a risk-adjusted component to it.

As I said before, everyone has their own point of view on this. We're going to do our best, over time, to continue to take on more shareholders' points of view, listen carefully, and continue to deliver returns. So that's our intention.

I don't know if I hit every question. You're welcome to come back at me if you've got anything (multiple speakers)

No, I really I appreciate your perspective on that. I think that maybe what I'm trying to distill this down to is, as asset managers, when we invest in the BDC industry, there's a presumption that, for all of us that manage assets, we have break points on our own fee structures, in that there is operating leverage. That if I have more assets, I don't necessarily have a commensurate increase in my expenses.

But it sounds like, or at least it would look like, from the messaging that we hear from the industry, that unless you are internally managed, there just isn't cost leverage. Because we may get benefits from more diversification, from having exposure to larger credits, to not having to syndicate out good underwriting, lower interest expenses. But that the fee structure on the external manager is just not something that's going to come down. And I think that's something that a lot of people are expecting or requesting. But maybe it is that, if that's not going to happen in this industry, we just need to be clear about that.

I can't speak for others. I think you and I, David, have talked about this. I don't disagree with that point of view. I think it's a thoughtful one, it has merit, and I think a lot of industries at scale have looked at that carefully.

When and how that happens, at what scale, is TBD. I think this idea of leverage on fees with scale is the opposite of your point of perhaps staying smaller. But if you're talking about scaling -- thus, in our case, at $3 billion or above, or whatever the right number is -- I think your point of view is valid. We have not attended to that yet; we're midstream on a strategic plan.

But I think you make a good point. And we've seen it in other industries. So it will be interesting to watch.

I would not be willing to say that the future is cast for any matter, on any part of our industry, or any one of our industries. That's my view. We'll just see how it plays out.

Always appreciate your thoughts, Brook. Thank you very much.

Thanks, David.

Vernon Plack of BB&T Capital Markets.

Thanks very much. Brook, turning back to investing, tell me, where are you seeing the best opportunities right now, from an asset-class standpoint, as well as an industry standpoint? And I would be interested also to know what are those areas that you're just avoiding right now?

Yes, that's a good question Vernon. Well, I think the short answer is, our own stock. I mean, that's the shortest answer I can give you. Not to be too cute.

But we've seen a lot of interesting opportunities emerging. Everyone is reticent to comment about energy, because it appears to be declining. But generally, poking around and looking for opportunities where the headline is, can be interesting.

I would not expect us to be increasing exposure there. But I think it's fair to say that, that's going to be an interesting place to look and consider. It's capital-intensive, requires financing. People will talk about providing new capital that's likely to be in the form of rescue or some other recapitalization, is my guess. I think starting new opportunities may be more challenging when there's assets out there on the cheap.

We're seeing good performance in the business services sector, consumer is performing well, auto sector is performing well, adding jobs. So I think on balance, we're still seeing it in many sectors.

Our approach, as we've said from the start, is to be diversified. So I think the idea, right now, is continue to cast a wide net. And we're seeing opportunities.

Nothing is on the radar now as off the board. We haven't taken anything down from an opportunity. I think right now, our view is, there's not necessarily bad assets, there's just ones that need to be priced right, from an underwriting perspective.

Okay. Well, if you are feeling that way, I would suggest that -- if you look at the size of your buyback, at $30 million, while it's certainly positive, at least from my calculations, it's certainly not going to move the needle a whole lot, in terms of being accretive to NAV. If that is the case, I think we'd like to see you buy back more stock than that.

Okay, great. Thank you for sharing.

Andrew Kerai of BDC Income Fund.

Good morning, and thank you for taking my questions. To just add on a little bit to that last question as well, too.

Brook, as you well-know, you've tripled the size, roughly, of the portfolio in the past two years, in a very competitive environment for private credit, as you well-know, as well. So to just look at the buyback again at $30 million -- and it certainly is BDC to those investors in the sector. We appreciate not only you putting back an authorization, but giving color you plan to actually use the authorization, which not a lot of BDCs have done.

With that being said, as a percent obviously of your market cap and flow, it's not very large. And just looking, you're just taking the simplistic view. From a balance sheet perspective, you're at target leverage. You have $42 million of cash, some of which may be trapped in the SBIC. You're obviously going to have pay-downs that come, and you're going to have interest payments from your loans.

So why not say -- if your return accretion from buying back stock is about 13%, and it's risk free, why not have the buyback be of a magnitude that would make sense from a NAV accretion? As well as lowering your required ROE to cover your new dividend?

I'm sorry. Is the question why did we not do a bigger share repurchase?

Yes, right. Exactly. So as a percent of your float, why is the buyback so small, given the cash on balance sheet, that you 're still at target leverage, and you're obviously going to have pay downs coming in?

Sure. Well, obviously, we've made a recommendation to the Board. I'd say -- I'd characterize our plan as one that we're going to execute. Which, I think a few folks have pointed out, they're looking forward to seeing and would be atypical. So we look forward to doing it.

I'd say that when we make a presentation on a strategic basis to the Board, we look at a lot of factors. One is, an industry average -- what's appropriate. We're also looking at constraints that we have from a covenant perspective, and availability, not simply a wave a wand and do this. We have to take into account our own covenants, our own financing, et cetera. We're looking at what we can reasonably execute, and then our plan.

So a lot of careful thought has been put into it. We intend to execute it. And if I left you with the idea that we're not going to continue to listen to shareholders, then I apologize.

I think we've done that. We can expect to continue to do that. And I think you've been very clear, at least in terms of your point of view. So thank you for that.

Well, no, Brook. I certainly appreciate the commentary and color as always. But I mean, I was just running some math. And if you take the $42 million of cash on balance sheet right? You drive your NAV up 2% and you lower your cost of capital by 20 BPs.

From my perspective, even ignoring any liquid loans that you have on your balance sheet, as well as any pay-downs that come in, it just, from my perspective, seems like a larger magnitude of a buyback than would seem appropriate. But again, certainly appreciate -- you are one of the few BDCs that have a program that you plan to execute in place. So as investors, we certainly like to see that.

Just moving on to another larger top-of-the-house question, as well, too. Just looking back in terms of your growth plan and trajectory as well, obviously you have been very active in the market. You've raised equity pretty much every quarter for the past two years, excluding obviously where you've been trading below NAV.

Just wanted your thoughts. Obviously you have been growing very much in a competitive environment, credit quality has probably not been in line with your expectations. I mean, there is a point of view that there is an opportunity to hoard capital, when you can go out there and actually access it. Meaning, when the BDC sector is trading at a premium, the odds are that middle-market investing is probably a nice area to be in, that it is very competitive.

However, when there is a back-up like there is now, when there's an absence of capital, those that have been, you could argue, more conservative in not growing the book, would have dry powder and see opportunities as well. So looking back from your own experience and seeing where we are now, going forward, any take-aways you could have in terms of, one, when you think it's the right time to grow? And two, your ability to provide dry powder in times of market dislocation?

I think that's a good question, and I think you make some valid points. I'm not aware of who has been hoarding cash.

Well, one large name comes to mind.

Okay, well, to your point, that wasn't a policy and we didn't communicate it. I'll tell you, our point of view here -- and we have been through a lot of cycles -- is, this is a good business over time. Credit this quarter was challenging for most people, not everyone. I would characterize it as not outside the norm of expectations over time.

They tend to come in clumps. It may get better from here, it may get worse. But underwriting and providing an attractive return, over time, is appropriate. We don't assess that we're actually able to call the market. That's a very challenging idea.

What we did not do was give on covenants, or terms. And we didn't extend credit on balance that we thought was reaching. So we were able -- because of our origination platform, which continues to grow meaningfully -- to remain relevant to the market.

I would assess that the growth in MCC was exactly what we predicted and planned. We set out a plan, we executed on it. We provided a very attractive NII and dividend above the market for a very long time. We're now back, I would say, in line to slightly above. And we're continuing to look.

I think this pause has caused us to re-assess the short-term. I would agree with you that the market doesn't give us capital or allow us, if we are prudent managers and don't issue below book, it doesn't give us capital when we should be getting it. So that may actually be more of a comment about the way people trade these stocks than it is necessarily about the opportunity.

But the big-picture trends remain firmly in place here, which is, assets are coming off the banks. That's going to drive a secular opportunity for people to provide yield to investors. And the demand for yield is going to continue to rise. So we think that, that will --the cost of capital will come down over time for our sector, like it to for REITs, like it did for MLPs and others. It's a little bit less liquid.

People want to pile on, I think, at times like now, commenting on what's not working. And our view is that we're going to buy stock in this window and continue with a long-term strategic plan. I think that the demand for yield and the secular opportunity and the assets will overwhelm the short-termism.

And we're going to stick with our plan, listen carefully to the shareholders, execute every quarter to the best of our capability. And I think we assess that, that's going to be an attractive return for folks over time.

So that's a long-winded answer. But I just wanted to give you my thoughts, because I think yours was more of a general comment, Andrew.

Sure, yes. I appreciate the candor as well, Brook. And if I could just also take a look at the oil field services book as well, too. So just to be clear, when you talk about AAR and some of your other services' positions, you're looking at leverage obviously, based on a trailing 12-month EBITDA, is that correct?

Yes, I said on the last call that if you're at 2.5 times and you cut EBITDA in half, you go to 5 times.

Right. But then again, what happens if that contract for -- you're obviously seeing the E&B companies cut their CapEx, but that's not going to take place until probably the second half of this year. So the larger bigger-picture question is, if oil stays where it is, these contracts are repriced, does EBITDA get cut in half? Or is it a worst scenario? And is that reflected in where you have some of these loans marked on the book, at least as of December 31?

Yes, we look at all the factors. I don't have a crystal ball on what's going to happen here. I'd be surprised if folks -- and I just think it's hard to predict.

I'll tell you what we do have is, we have management teams we talk to weekly, who have been through many cycles, over many years, and are making, what we assess, is the prudent decisions. This relates to wages, overall cost structure, and as -- another thing that's happening, which I think it's easy to talk about the sky falling, and it may be. But the other thing that's happening is that you're seeing folks reposition, and take share in other markets where people are pulling back.

So we're expecting EBITDA declines; it's forecast. We have some visibility on 2015. I agree with you that 2016 is TBD.

But again, these management teams have been through it. We're first-lien. And all the information we have, and our realistic expectations are currently in the valuations, as well as the valuations of all the third parties who look at these books every quarter.

Great, thank you. Certainly appreciate the color, Brook.

And again, just want to reiterate, we do appreciate the buyback and the intent to use it. But we certainly wish it would have been more meaningful. So thank you.

Okay, thank you, Andrew.

Sir, you have no more questions at this time. I would now like to turn the call back over to Brook Taube for closing remarks.

Okay. Thanks, everybody. Appreciate the time today. Obviously, this was not the quarter we expected.

But again, the market has given us an opportunity to buy the stock at attractive levels. We're going to do that. The team's growing, and we've got a great platform to take advantage of the market opportunities. So thanks again for the participation, and we look forward to giving you an update on the next call.

Thank you for your participation inn today's conference. This concludes the presentation. You may now disconnect. Have a good day.