PhenixFIN Corp (PFX) 2015 Q2 法說會逐字稿

Welcome and thank you for joining the Medley Capital Corporation's second-quarter FY15 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 the call will be available by using the telephone numbers and pin provided in the Company's earnings press release. At this time, all participants are in listen only mode. But, will be prompted for a question-and-answer section following the prepared remarks.

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 begin.

Thank you, operator. Good morning, everyone and thank you for joining us today for our second-quarter FY15 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 filing 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 second-quarter FY15 investor presentation is available in the investor relations section in the event/investor presentation section of the Company's website. I would now like to call -- turn the call over to Brook.

Thanks, Sam and welcome, everyone, to our quarterly earnings conference call. As an agenda on the call today, we're going to give you an update on net investment income and our dividend, the share repurchase program, our senior loan joint venture, the current portfolio and our investment activity for the quarter, and updates on the SBIC. And then, finally, Rick is going to provide a quick financial review for the quarter ended March 31.

Last night we announced our financial results for our March 31 quarter. Reported net investment income of $0.30 per share and net asset value of $11.68. And, on May 6, the Board approved a dividend of $0.30 per share and it'll be payable on June 12 to shareholders of record on May 20.

As we announced in our first-quarter earnings call, the Board approved a $30 million share repurchase program. As of March 31, we have purchased 825,677 shares. The weighted average price was $9.60. We intend to complete the full amount of the approved share repurchase plan as we said previously.

On March 30, we announced the formation of a joint venture with Great American Life Insurance. It's a premier US provider of property and casualty. Creating MCC Senior Loan Strategy, JV I. This joint venture will invest primarily in first lien, floating rate, middle market loans and represents a natural extension of our current lending franchise.

MCC and Great American have initially committed to provide $100 million of capital. That's split with MCC committing $87.5 million and Great American life committing $12.5 million. And in addition, the joint venture will seek a credit facility from a third-party financial provider. We expect that the joint venture will add to net investment income per share over time. Again, this broadens our product offering. Enhancing our value proposition to the borrowing community.

Now on investing, we continued to see attractive opportunities and we remain active at Medley in the market through our various investment vehicles. As we've said before, while we're executing the share repurchase program at MCC, however, we'll remain selective with respect to new investments.

During this quarter, nearly all of the new investments were made either through our SBIC or were in support of existing portfolio companies where we had pre-existing commitments. During the quarter, we invested a total of $54 million and we received amortization and repayments of approximately $63 million; resulted in a decrease in the overall portfolio size of a -- by about $9 million.

On the portfolio. Portfolio consists of approximately 93% senior secured loans. It's well diversified. We currently have 72 portfolio companies across 21 industries. As of the March 31 break, non-accruals represented approximately 1.8% of the fair value of the portfolio.

In terms of our exposure to energy, it's currently limited to four positions that represents approximately 6% of the portfolio. All these positions are senior secured, first lien. And, benefit from significant credit protections which include covenants, amortization, and excess cash flow sweeps. We remain in active dialogue with all these active borrowers and we continue to monitor the positions closely.

Turning to the SBIC. As of March 31, we had drawn a total of $110 million of SBIC leverage. And, since the quarter end, we increased our regulatory capital at the SBIC subsidiary to $75 million. That was an increase of $10 million from the 12/31 quarter. That's going to give us access to an additional $20 million of SBIC leverage, which, once approved, will bring the total available leverage at the SBIC subsidiary to the maximum of $150 million.

I'd like to turn the call over to Rick to give a brief financial overview.

Thank you, Brook. For the three months ended March 31, the Company's net investment income and net income were $17.8 million and $11.8 million or $0.30 per share and $0.20 per share, respectively. The net asset value per share was $11.68 at March 31, compared to $11.74 at December 31.

For the quarter, total investment income was $36.8 million and was comprised of $34.3 million of interest income and $2.5 million of fee income. Total operating expenses were $19 million, consisting of $10 million in base and incentive management fees, $6.2 million in interest and financing expenses, and $2.8 million in professional fees, administrator expenses, and general and administrative expenses.

For the quarter, the Company reported net unrealized appreciation of $4.1 million. And, a net realized loss from investments of $9.4 million. As of March 31, the Company's total debt outstanding equaled $579 million, including, $194 million outstanding on the revolving credit facility; $171.5 million term loan payable; $103.5 million in notes payable; and $110 million of SBA debentures. The Company's debt-to-equity ratio, excluding SBIC debt, was 0.69 times.

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

Thanks, Rick, and thank you all for your time today. Just to highlight again. We formed the senior loan joint venture with the high quality partner this quarter. It's going to drive NII in the quarters in years ahead. And, allows us to broaden our loan product set to the borrowing community.

We commenced our share repurchase program this quarter and intend to complete the full $30 million. And, we currently have 80 people of which, 45 in investment professionals at Medley. We're excited about the opportunities in the market today and we'll continue to seek ways to enhance shareholder value at MCC in the quarters and years ahead.

We can now open the call for questions.

Thank you.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Yes, good morning, Brook. Just one -- was just wondering how your sponsored deal flow has been developing so far this year, given how weak M&A has been in terms of volumes? And, what your expectations are for the balance of the year for M&A activity?

Thanks, Mickey. It's above balance right now, looking at the pipeline. Again, we -- about half of our volume today; and it's been consistent at this level, has been direct versus sponsor. There's been a lot of discussions about GE and the impact in the community. We're not clear exactly how that will play out. But, specifically, we've heard from a few folks that they are focused on certainty of close. They're focused it on the partner that they're teaming with on the credit side.

So, I think we at Medley, with our various sources of capital and presence in the market, can be competitive with folks that are known as good partners for borrowers and private equity sponsors. So, that's something that we're seeing. I would expect that's going to continue, this idea of having strong partners in the market. And, I -- in terms of M&A volume for the balance of the year. I think I'll leave that one to the prognosticators. (laughter)

Okay. Brook, can -- do you have a sense of where we are in the -- or what's your view of the point in the credit cycle where we are today? I'm just getting the feeling looking at first-quarter results, that we're seeing more stress in a lot of portfolios. And, it feels like we're later in the cycle than perhaps folks thought going into the year. Any thoughts on that, that you could share with us?

Sure. Yes. Thanks for the question. Again, it's hard to call these things. I think we've had a -- quite a -- several number of years where we've had benign credit. In the last year or year-and-a-half, we've focused on solid structures, covenant packages, and overall senior and security, with floating rate assets. So, I think we, and I would assess that most people are focused on that.

We are in a credit business, so expecting certain credit events is just part -- it's predictable. In terms of where we are, I think we're certainly deeper in the innings than we were two or three years ago. We're paying attention to it. We're focused on what we assess we should be. Solid structures, sensible exposures, and good borrowing partners.

Thank you for taking my questions.

Thanks, Mickey.

Doug Harter, Credit Suisse.

-- look for origination volumes and origination fees in the coming quarters? Obviously, in light of, kind of, the capital position.

Sorry, Doug. You got cut off on the first part of that. Could you just repeat that?

Sure. Just hoping you could give us some outlook on how, kid of, how you see originations and origination fees, sort of, trending in the coming quarters?

Sure, look, as we said on the prepared remarks. We're pro -- we're going to prioritize the share repurchase. We were active every day that we could be, to what we assess was the maximum potential. So, that's priority number one.

Having the joint venture and a pipeline that we are filling is a big opportunity for us. We're able to be in the senior loan strategy market because we have the capacity beyond MCC. So, the opportunity is there. It will be available. The constraints will be capital and the drivers are amortizations clearly from our existing portfolio. We don't expect and assess that we would be raising capital in a year Obviously, we're buying the shares back at the moment.

So, I think you'll see fees. We expect fees. It's normal and customary. There will be some. But, I don't think I would have said that they'd be dramatic in the quarter.

And just, to the extent that there are fees. Do those all go to the JV? And then, they share -- and, you would get your pro rata share.

It'll be a mix. But, since we own 87.5% of the joint venture, it's effectively -- we're capturing the bulk of the fees. But, the joint venture partner will receive fees in this case.

Great. Thank you.

Troy Ward, KBW.

Hello, Brook -- just a couple -- great, thank you. Just a couple quick additional questions on the SLF. First of all, we've seen other entities doing the SLF where they're actually moving some assets from their balance sheet to get it started and seed funded, so to speak. Do you anticipate moving any assets from the MCC balance sheet.

Yes, that's our intent. That is our intention, to look at that carefully. We obviously have. This is a partnership which requires the clear approval of our joint venture partner. So, I can't give you certainty around that. But, that's clearly something that we're going to look at.

And, as we look at the mix of yields in the portfolio, kind of. What would, kind of, be the upper bound of the targeted yield, do you think in the SLF that would actually fit?

I don't think there is, in fact, a upper bound. I think from a target asset strategy, if we, kind of, looked at this slightly larger bar where I'd call it, all in yields of 6% to 8% would be the target.

Again, we'd be care -- cautious on this -- on the lower end there, going lower. And, I think to the extent that we have stuff that's a little bit higher, but still suitable, we would still look at -- to contribute that. Possibly.

Okay. And then finally, can you speak to what you're -- and maybe this is in the release -- I didn't see it -- but, your targeted leverage is for the SLF? What do you anticipate the cost of that leverage? I think we've seen others around LIBOR 250. And, also, what's your return expected on the investment on your -- on MCC balance sheet.

Yes, let me answer those in sequence. I think, number one, target leverage is 2 times, 2 to maybe 3 times. We will see the mix of the assets. The financing cost, I think, we would expect to be right in line with that LIBOR 250. And then, in terms of return to MCC and the partner, we'd be looking at mid-teens.

Great. Okay. And then, one final one on the portfolio at MCC. The non-accruals. As we look at the four non-accruals, Exide and Calloway and Modern were all done in 2012. And, of course, Water Capital is one of your oldest -- older investments, for sure.

Can you just speak, Brook, about maybe, the origination? Looking back, the -- what you were doing in 2012 or prior that has may be changed where, maybe, you feel more comfortable with originations? Or, is the level of credit quality that you're seeing in the portfolio today kind of what you expected?

I think it's a little bit early to tell. We look at it a little bit over time. The measurement clearly is realized losses over time. Looking at some of our existing positions I think there's -- we have reason to be optimistic about what might be rehabilitated. That's not a -- there's no certainty around that. But, we typically need time. This is not a -- this is not a liquid market approach.

I will make one comment, generally. As we were -- we had a nearly all directly originated portfolio. The mix has shifted now to 50/50. I'd probably go a little higher on the sponsor side. Part of that is availability in the market as well as cost of capital. Our issues have not been exclusively focused in the direct or nonsponsored, but we've seen a bias there. I think we would expect less volatility, perhaps, in the marks. And, especially as you look at first lien assets, as we shift to sponsor and slightly larger borrowers.

Great. Thanks for the color.

Thanks.

Chris York, JMP Securities.

Good morning and thanks for taking my questions. So, I'd like to talk a little bit about expenses. Looks like professional and G&A expenses picked up a bit. Should we expect these run rates to continue, given the level of non-accruals on your balance sheet?

Yes, the expenses are going to continue increase in line with asset growth. The -- one of the largest expense items there is the use of third-party valuations, which is not necessarily directly rated -- related to non-accruals. It's just more just the growth in the portfolio year over year.

Okay. That's it for me. Thanks.

Casey Alexander, Gilford Securities.

Yes, all right. Good morning. First, the SBIC. Do you anticipate filing for a further SBIC license to expand that to $225 million? Or, do you have to wait until you're at the regulatory limit of $150 million before you fall out?

We do expect to file that, Casey, and I don't believe we have to wait until the very last dollar. But, I will check on that and get back to you.

Okay. All right. Secondly, we've heard from some others, do you have any comment or color about your feel for the environment as GE goes out for sale? And, maybe, the leopard changes it spots to a certain extent.

I think, really, it's hard -- it's really hard for us to tell the impact. It feels like there's a number of people interested in that property. So, I think the idea that it would go away is not persuasive. I think the people, on a human capital front, there may be availability that could lead to other teams. They're -- they were a big player. They were important for sponsors. They were a reliable source of financing. They had a low cost of capital.

If you -- hypothetically, we're anticipating, although we'll have to wait and see if it comes through, that borrowers might prioritize certainty of close. The partnership -- and, I think, the possibility that the same cost of capital exists for the going forward group is -- we'll have to see. It's unlikely it'll be a lower cost of capital. But, it's possible, I guess.

So, I think we're looking to benefit from remaining a high quality partner. A hold-to-maturity player. And, one that has multiple sources of capital and some durability as a true partner in the market. And, we'll keep -- we'll continue to pursue that. And, we have, as I had mentioned, anecdotal feedback that sponsors and companies do -- are increasingly favoring those criteria.

Okay. Lastly, I think people would appreciate to hear -- I mean, I think we all appreciate that structurally you're positioned well, with your oil and gas investments, being that they're first lien covenants amortization. But, I think people would appreciate hearing what -- how your companies are feeling? And, what your conversations with them are like, given, sort of, the state of the oil and gas marketplace? I think there would be some value to all of us in hearing that.

Sure. I think any one of them that's not concerned about the precipitous price decline, is probably not shooting straight. So, we have folks that are saying, when we're having active dialogues -- we talk to these folks weekly or bimonthly. It's obviously a volatile environment. We're first lien on our positions. The average multiple is 2.3 times EBITDA. And, that EBITDA is $38 million.

So, you can kind -- you can think of a company that has a reasonable revenue stream diversification, a good position in the market, good customers, and a good prospect looking forward in the course of this year. Everyone is concerned about excess supply, price volatility, et cetera. As we've said in the past, our observation is that they're acting prudently to control costs. And, in many cases looking proactively to take advantage of the dislocation that is having, perhaps, a more profound effect on smaller or less well positioned companies.

As the first lien provider, we're obviously in dialogue and an important partner of these folks. As they look to protect their balance sheet and their business over time.

Yes, well that was going to be my next question, is what type of opportunities are you seeing out there? Also, as a result -- I mean, I would certainly think that some assets are going to be out there and available that might be attractive assets at a particular price.

I agree with that inference. What we've seen specifically is a couple of situations that we have participated at, at Medley, not MCC, that have been a result -- these are financings that have been a result of the dislocation that we assessed were attractive. I believe I said in a prior call, and I'll repeat it. That, our view is that the larger players are going to have opportunity and that there may be a disproportionate challenge for smaller players. Again, our EBITDA is $38 million. We're comfortable with the positions we have today, but we're watching them carefully.

Okay. Great. Well, thanks for taking my questions.

Thanks, Casey.

Christopher Nolan, MLV & Co.

Hi, thanks for taking my questions. Quickly on the SLF. Is the mechanics, if you do transfer assets to actually sell the assets into the SLF, from MCC?

Yes, that's right, Chris.

And then is -- the first priority is to repurchase stock. And, I think for -- you mentioned that you're going to re-up the repurchase authorization. Would it be for $30 million or so, or?

Let me describe what we have. We -- the board approved, last period, a $30 million authorization that was good for one year.

Yes.

And, our intention is to complete that full repurchase amount.

Got you. How -- is there any intention to re-up that once it's completed?

I think we'll assess as the year goes on. We haven't said that we intend to, but I wouldn't rule it out.

Okay. Thank you for taking my questions.

Christopher Testa, National Securities Corporation.

Good morning. Thank you for taking my questions. Just with regards to the energy investments. When the third-party valuation firms are looking at those, are they utilizing PV-10?

Are they using, you're asking, PV-10?

Yes.

Is that what you? I do not know off the top of my head.

Okay.

Let me get back to you on that.

I will tell you, Chris, though, just to make one comment. These -- our exposure is to service companies.

Yes.

So, we're not -- there isn't an asset value component in the traditional sense for these businesses. These are service providers in their respective markets, generally.

Okay. Great. And, just with the, about $4.1 million in the positive unrealized appreciation. Did that come from any improvement in previously problematic investments? Or, were those just other investments being marked up?

I don't have the exact split. There was some positive event in a few. I would call it not material. There was, obviously, a overall tightening of spreads in the market. So, I would say it's -- the majority is from general increase in value. With -- there is some specific positive news in a couple of existing positions that were previously below par.

Okay. Great. And, my last question. Just, what's your outlook for prepayments for the rest of the year?

It's always hard to predict. I mean, I think it's interesting to see where rates go here. We have -- we do have some indications. We typically know a month or so in advance. It doesn't just show up as a repayment. So, there is some visibility.

As we look up past midyear, it would be difficult to say. I think I've said in the past, our expectation is that 10% to 15% of the book, maybe a little bit more, is a good number in terms of your expected annual roll that happens, if not quarterly with predictability, certainly over the course of a year.

Okay. Great. Thank you for taking my questions.

Thanks, Chris.

Jonathan Bock, Wells Fargo Securities.

Good afternoon and thank you for taking my questions. Brook, first one. Congrats on the buyback. Certainly, some BDCs talk a good game about buying back shares. Very few actually do. And, it was great to see the utilization. So, that's definitely a very, very attractive outcome for shareholders.

The question we'd have is, as you prioritize the buyback, kind of, when are you available or able to buy stock? Is one. And two, my apologies if I've missed this, what was the quarter to date amount of shares repurchased?

We intend -- just big picture, we intend to be in the market daily post, the black out, the window being lifted which is just right after earnings here.

Okay.

I don't actually have the exact number for the quarter. As I said, it was 825,677 shares. That was a little bit better than 25%. We're obviously blacked out a bit, kind of, heading into earnings. So, I don't have an exact quarter-to-date number. But, we're going to continue to prioritize it. And, our constraints are just how many days we can be there with liquidity, in the market. And then, obviously availability of capital too from our side.

Absolutely. And then, as we think about the availability of capital. Just another item is, the service as it relates to regulatory issues, are unfunded commitments and how those unfunded commitments are to be accounted for in regulatory leverage? To the extent you filed a shelf, I'd imagine you've received this note. Or, are likely to expect to.

So, can you give us a sense as to how you, one, what -- the amount of unfunded commitments that you have? We'll exclude the JV, because you're 50/50 partner. Or, you could just choose to not fund. But, excluding the JV, how much unfunded commitment do you have outstanding? And, what that would do to your regulatory leverage to the extent you were to include them?

Sure. Jonathan, this is Rick. We have $65 million of hard committed unfunded to the borrowers. If you pro forma that into the regulatory calculation, we are still in compliance at around 226%.

Okay. And Brook, when you think of the 226% on an asset coverage basis. Just curious, if you take the unfunded commitments into account, as to how one is thinking about JV growth, how one is thinking about additional fundings, and how one's thinking about stock buyback. Or, is it your view that the commission is likely to arrive at the way they've been looking at things as they have in the past?

There was a lot of questions in there. Let me try to get to the heart of it. And then, you can follow up if I didn't hit it. We're carefully monitoring all of these. We do have, generally, an idea of the frequency and the possibility of that forward 65. So, it is a commitment contractually. But, there's a lot of reasons to think that we're not necessarily going to have to borrow $65 million next week or next month. So, some of this.

But, we do monitor it carefully. This is an important component. We're going to be very measured. We've kept leverage in our target window to drive return on equity. So, we do have some constraints. We're not going to push this higher.

But again, we have the ability to drop down assets to the SLS. We have a pipeline that we can invest from that is not at risk to funding, meaning we can participate with other vehicles at the Medley platform. So, that's a positive. It doesn't put a pressure on us on that origination side. But, we do have a pipeline. So, I would say we're anxious to use it.

And again, we're going to prioritize buying shares back. So, we'll look at the whole complement of that -- those factors, and we'll balance each one. Again, the priority is share buyback. We will put the senior loan strategy in place. That's important. And, of course, we're going to monitor carefully, just the regulatory leverage, as well as, just the overall business leverage.

Kind of -- this make sense. And, appreciate the color. Then a question as it relates to the SLS. Is it your intention to partial sale assets, and have them, perhaps some, on the balance sheets of MCC and some on the balance sheet of SLS in order to start? Or, do you believe it to be outright sale of assets? Or, obviously, [all transferred] at fair value? Or, perhaps, the more tradable credit type of assets that flow in there?

I think that's a good question. I wouldn't rule out tradable, but that's not the priority. So, I think you could think originated assets. I think we will contribute partial.

Okay.

Some of the constraints are going to be obviously, diversification and other position sizing that the financing is going to require. There is no issue with the partial. In terms of partially putting a new loan, a newly originated loan, partially on MCC's balance sheet and the SLS, I believe we have the capacity elsewhere, so that we don't have to take the 6% to 8% par asset onto MCC's balance sheet. That we would rather put that in the SLS to drive the mid-teens returns. And, because we have the capacity at this platform at Medley, I think that we aren't going to be faced with that challenge, in all likelihood.

Understood. None of these, or, these assets aren't necessarily what sits on the balance sheet today. But, you'll get the reasoning for the question in that there has been an increased amount of regulatory scrutiny along the JV structures, partly because sometimes the reliance on the JV partner is different. To the point where they don't bring much origination capability to the table. And so, you'll get additional scrutiny on how these JVs -- are they being used to circumvent leverage?

That's a sector-wide problem. Not one here. The only reason I'm asking a question is, if you own the same asset at two different leverage points; and again, this is why the question of partial sale versus full sale comes a little closer to the pin. If you own the same asset, the question is, does that somehow create a potential liability to, at some point, being forced to include that debt; the two-to-one leverage you spoke of, on the balance sheet? And, I'd just be curious with the amount of legal and, kind of, accounting work you've gone through in order to ensure that such a balance sheet vehicle remains off balance sheet.

We've gone through a lot of our analysis on this. And, you can rest assured that we will be extremely comfortable when we pursue an investment in our joint venture. Specifically, on our partner, this is a very, very high-quality player. We've known 'em. They are a credit buyer. They do deals. They're in the CLO business. They have $30 billion. They know the space extremely very well. And, we're grateful to have them as a co-investment decision maker.

So, I would assess that this partnership is significant. And, we'll get a benefit at MCC from it. And, we will benefit at MDLY and our -- Medley, generally, by having a high quality partner. So, I'm not sure we could do any better in terms of presence in the market, capability, and activity as a credit investor.

Much appreciated. Thank you. And, I appreciate you taking my questions.

Thanks a lot, Jonathan.

Thank you. I would now like to turn the call over to Brook for closing remarks.

Okay. Thank you all for joining us today. We look forward to continued performance and getting back with you all on the next quarterly call. Thanks a lot.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.