PhenixFIN Corp (PFX) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome and thank you for joining the Medley Capital Corporation fiscal third-quarter 2015 conference call.

I'd like to remind everyone that today's call is being recorded. Please note that this call is 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. (Operator Instructions)

Now I'd 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 third-quarter 2015 earnings conference call. I am 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 in 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 fiscal third-quarter 2015 investor presentation is available in our Investor Relations section in the Events/Investor Presentations section of the Company's website.

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

Thanks, Sam; and welcome, everyone, to the call today. As a quick agenda, we're going to give you an update on the net investment income and the dividend, our share repurchase program, the amendment and extension of the term loan and the revolving credit facility, quickly on the senior loan joint venture and our recently announced financing line for that effort. We will talk about the portfolio and investment activity in the quarter, an update on the SBIC; and then Rick as usual is going to give a brief overview of the financial results.

On Monday we announced the financial results for the quarter ending June 30. Net investment income per share was $0.30, and NAV per share was $11.53.

On August 5 the Board approved the dividend of $0.30. That is for the quarter ended 6/30 and that is going to be payable on September 11 for our shareholders of record on August 19.

As we announced on the first-quarter earnings call, the Board had approved the $30 million share repurchase program. During this quarter we purchased 169,000 shares, bringing the total repurchased since inception to just below 1 million shares. We intend to complete the remaining approximately $20 million of authorized repurchase over the next two quarters.

On July 28 we announced we had amended and extended both our revolver and the term loan facility. That came with a reduction in pricing on the term loan, and there's a further reduction in pricing when we receive an investment grade rating for the Company.

Last quarter we announced the formation of the joint venture with Great American Life Insurance that created MCC Senior Loan Strategy Joint Venture. As we announced on August 5, the Company raised a $100 million credit facility that was agented by Credit Suisse; this facility has a seven-year term and will support the ongoing investments of the joint venture. As I've said in the past, we expect this joint venture will add to net investment income over time.

Turning now to the investment activity, we continue to see attractive opportunities and we remain active at Medley in the market through our various investment vehicles. However, as I said in the past, while we're executing the share repurchase program we're going to remain selective with respect to any new investments. During this quarter nearly all of the new investments were made either through our SBIC or in support of existing lending relationships.

During the quarter we invested $47.5 million, and we received amortizations and repayments of $49 million. This resulted in a very small increase in the overall portfolio size.

The portfolio today consists of approximately 93% senior secured loans. It is well diversified: there's 71 borrowers across 21 industries. As of June 30 nonaccruals represented approximately 1% of the fair value of the portfolio.

In terms of exposure to the energy sector, that is limited to four positions today and it represents approximately 6% in the portfolio. We said this in the past, but it bears repeating: these are senior positions; they are first lien; and they benefit from credit protections that include covenants, amortization (technical difficulty) and excess cash flow sweeps. Nevertheless we do remain actively involved and in dialogue with all of the borrowers and continue to monitor all of these positions very closely.

On the SBIC, at June 30 we had drawn a total of $130 million of the SBIC leverage. At the time of this call we have drawn down the remaining amount available under the $150 million, so our total facility is now drawn.

I would like now to turn the call over to Rick for a brief financial update.

Thank you, Brook. For the three months ended June 30, the Company's net investment income and net income were $17.2 million and $8.4 million, or $0.30 per share and $0.14 per share, respectively. The net asset value per share was $11.53 at June 30 compared to $11.68 at March 31.

For the quarter, total investment income was $36 million and was comprised of $33.8 million of interest income, $2.1 million of fee income, and $0.1 million of dividend income. Total operating expenses were $18.7 million, consisting of $9.9 million in base and incentive management fees, $6.2 million in interest and financing expenses, and $2.6 million in professional fees, administrator expenses, and general and administrative expenses.

For the quarter the Company reported net unrealized appreciation of $427,000 and a net realized loss from investments of $9 million. As of June 30 the Company's total debt outstanding equaled $586.7 million, including $181.7 million outstanding on the revolving credit facility, $171.5 million in term loan payable, $103.5 million in notes payable, and $130 million of SBA debentures.

The Company's debt-to-equity ratio excluding SBIC debt was 0.69 times. Additionally, as Brook mentioned earlier in the call, the Company's credit facility agented by ING was amended following the end of the quarter. The Company was able to reduce pricing, extend final maturity to 2020 for both facilities, and amend certain covenants and borrowing base definitions that provides flexibility and reduces balance sheet risk.

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. We continued to implement the share repurchase program in the quarter, and we intend to complete the full $30 million repurchase over the next two quarters.

Importantly, we amended the current ING credit facility, which strengthens our balance sheet. As well, we added lending capacity through the Credit Suisse agencied facility that is associated with our Senior Loan Joint Venture. Both of these financings demonstrate strong support from our lending partner group.

The team at Medley continues to grow. We are excited about the opportunities that we're seeing in the market, and we will continue to seek ways to enhance shareholder value at MCC. We can now open the call for questions.

(Operator Instructions) Mickey Schleien, Ladenburg.

Good morning, Brook and Rick. Wanted to just ask quickly: the realize loss was on Family Christian; is that correct?

Yes, that is correct.

Okay, Brook, can you walk us through the reasoning behind that exit, as opposed to working it out through the bankruptcy process?

Sure. This was a complex bankruptcy. As the quarter unfolded we determined along with our lending partners in this deal that it was likely going to require substantially more capital in the follow-on if we were going to pursue a credit bid effectively, and it was an uncertain outcome.

So the opportunity we were faced was more capital with an uncertain outcome; or an available recovery in cash. I think we, along with the other lenders, decided that with these two outcomes the assessment was that -- choose the latter, and it was in the best interest to take the cash.

I understand. So you had net unrealized appreciation of $3.4 million; but that must have been net of reversals of almost -- well, sort of $9 million for Family Christian. Is that correct?

It is net of the reversal, but not $5 million. It would be net of just what the prior-quarter mark was.

Okay. Rick, can you just walk me through what were the major changes in unrealized appreciation or depreciation for the quarter? Just highlights.

Family Christian is the major change. The balance of the portfolio by and large performed well, and slight uptick with the majority of our market yield analysis calculations.

Okay. My last question. Brook, I looked; I couldn't find where the terms on the new Credit Suisse facility for the senior loan fund are listed. Can you give us any color on that, and how much leverage you expect to use there, and what sort of ROE you expect there?

Sure. As we said in prior periods our intention -- and we have available $100 million of equity capital balance between ourselves and our partner -- this is the first $100 million. So it would be the equivalent of 1 times debt-to-equity. We intend to expand that as time goes on.

What we said previously is that we expected to use, and this would be a target, of up to 2 times leverage over time to drive a mid-teens return to our capital. To give you an idea, this is approximately 7-year final, and we're going to intend to increase it.

The terms of the facility are not public, Mickey.

Okay. I appreciate your time this morning. Thanks.

Kyle Joseph, Jefferies.

Morning, guys; thanks for taking my questions. I just wanted to get your outlook for the blended portfolio yield. It looked like it stabilized in the quarter; but just in terms of your near-term maturities' yields, versus the yields you are seeing in your pipeline replacing those assets.

Sure. As we're seeing across the platform today, I think there has been a stabilization in all-in yields. I think some have said they have begun to see a pickup in opportunities in terms of target yields.

Some of the commentary we are hearing is that with BDCs trading below book and capital constrained, that that is partly driving it. I think our view is that, whether it's Greece or macro or rate rising or all oil, there are a number of factors contributing to a risk-off mentality.

It feels like it's been the case each of the last several summers, anyway. So certainly the overall formation of capital in our specific sector is a component, but it's broader than that. Those are driving the stability, if not widening.

I think from our perspective what's more important is that we are seeing opportunities to keep our structure and covenants. So we are able to source opportunities that we would call on balance at or more senior and more secure.

But for the first time in many quarters I think we seeing an opportunity for stabilized to slightly wider yield opportunities, and that is across the board.

Okay, thanks. Then just with the new -- with the credit facility for the joint venture, do you guys expect that to be a key focus for capital deployment?

Then just going back to the income statement, where exactly are we going to see that income flow through? I imagine it's a control company.

Sure, taking the second question first, on the income statement it will be a control company; it's just the joint venture itself is an equity interest. And it will flow through that line item, yes.

And, Kyle, as a recap, I think we have said this before: the two sources for us on the asset side are contribution of existing assets, which we are looking at, as well as new assets. Because of the broader platform and origination capabilities we have at Medley, we do have a pipeline of high-quality opportunities, of new opportunities.

We would expect in the next two quarters to begin to put assets into the facility as well as begin to ramp the financing. But you will see that begin to emerge in the next several quarters and then into 2016.

Great. Thanks for answering my questions.

Christopher Nolan, MLV & Company.

Hi; thanks for taking my questions. Is there any plan to get a second SBIC license?

Yes. I think we have said this before: we do intend to pursue that. We will complete the investing of the existing one, and we'll be in dialogue with our good partners at the SBA to pursue the second license.

We are also looking forward to possible positive regulatory upside there. And we will keep you posted in the quarters ahead on that progress.

Okay. So you expect it to be, what, a six-month or nine-month process, do you think?

I don't think we can comment on the timing. I think we will do it as quickly as we can, but it is likely to be a 2016 event if I had to put a target on it. I just don't know when would be realistic during 2016 to expect to complete a process.

Got you. On the SLF, you guys commented in terms of a mid-teens return. Given that the current yields for the portfolio are roughly 12.5%, this is roughly 150 to 200 basis point net incremental difference. Is that a correct way of looking at it?

I think that's right. It should be -- on the margin it will be accretive to NII if you use that framework.

Then given that accretion to NII, wouldn't putting -- since your commitment is $87.5 million in capital, given where the share price is wouldn't it make more sense to actually, rather than doing the SLF, do more share repurchases with that capital?

I think as we have said in the past we have an intention of implementing the existing share repurchase, and that remaining balance is $20 million. That is going to take us the next several quarters.

And during that time we do intend to ramp the SLF. We do believe it is accretive to earnings.

Depending on where the stock is in 2016, we have not ruled out the idea that we would revisit share repurchases in the future.

Okay. So the share repurchases you think right now will probably be completed within the next two quarters, and we can possibly re-up on the authorization beyond then?

I said we will revisit based upon the market and the various factors, which will include opportunities to originate, stock price, market dynamics. So I don't think we are going to commit to that, but it is certainly not off the table as we look into 2016.

Okay. Thanks for taking my questions.

Jonathan Bock, Wells Fargo Securities.

Good morning, Brook and guys; thank you for taking my questions. Starting first with the SLF and its intended ramp, and at times we see when -- and Brook, your commentary on deal flow was helpful. But let's say that liquidity continues to just flood the market and at times make risk-adjusted return a bit more difficult perhaps in illiquid products.

Is it possible that you'd consider more of a liquid credit ramp route in order to get ROE up within SLF, to generate adequate shareholder return, waiting for the potential surplus of capital to diminish and perhaps deploy more into idiosyncratic illiquid specialized opportunities that you guys have done, done well at, in the past?

Yes, I think I understand the question. Let's separate the two.

If we have existing assets that we like that have a higher yield, or we have pipeline of assets that have higher yield than liquid, those will be contributed first. We do have an active team here that invests in the liquid or semi-liquid club deal market; that has representing now about 20% of what we do at Medley as a Firm -- not MCC but the Firm. So our ability to look at that, more liquid assets, is something that is being evaluated.

Would we contribute those type of assets? The answer is if we believed that that was accretive to NII that is something we will look at.

If you look at one-to-one leverage on liquid assets, taking capital away from the average yield of the portfolio today, I don't know that you would find that buying liquid assets at 1 turn would give you that pickup. But if we can find things that we like, we are not constrained; and it would not be unreasonable to expect, Jonathan, that we would put assets like that in the portfolio to help the ramp.

But it would be only if it was accretive, not just to do a deal in the market, if it had any negative impact on the marginal NII.

Totally understand and appreciate it. Then, Brook, also asking a question as it relates to the share repurchase, which I very much appreciate the comments of its utilization over the next two quarters, which is great. So trying not to split this question one way or another, just curious.

Is there a reason you tried to slow repurchases this quarter based on perhaps facility reviews or re-reviews? And then now we'll become, after getting the lenders on board, more aggressive in the next two quarters?

I'm trying to actually my own question. But curiousness we will receive from investors is just: why the lull now with the ramp towards year-end? Understanding that either are both very positive.

Yes, thanks for the question. You answered your own question, but I will recapitulate it to make sure I got it right.

We purchased on a daily basis in the first quarter with purpose. The second quarter we focused on extending and amending our credit facility. I think we did imply in the prior call that we had both balance sheet target leverage constraints; there remained liquidity in the stock as a constraint; and there were certain covenant issues that we just as a risk matter didn't want to bump up against too closely.

We anticipated the amend-and-extend. It has given us significant flexibility, which is positive for the balance sheet and is a risk mitigant on the balance sheet. And we're now in a position to go back to the pace that we were before.

So there was no subjective slowdown other than risk and credit details. So we are back on pace, and there is no ramp; we're going to just be back in doing it at the pace we had been initially. And that's the reason.

Yes; appreciate that. Then finally, Sam, I know you mentioned, outside of Family Christian, relative marks generally in line with your expectation. Just one mark that we saw that's a name that has generated just a few news items would be Modern Video, which I believe took an additional $4-million-plus loss unrealized (technical difficulty) excuse me, in the quarter.

So, Brook, Sam, to the extent that you're able, just a discussion on that, realizing that from a fair value perspective it's small. But at times when news items hit it's just -- it's s a good opportunity to remind us the position, the focus, and where you're moving in the next few quarters. And that's it for me, thank you.

Thanks, Jonathan. Yes, this was small loss is not immaterial, any loss or markdown we take very seriously. So the size is not relevant to the level of effort and energy we put into this stuff.

Over the quarter it has been announced that the assets of MVF were merged with Point. 360. We believe that the combination creates a very strong number-two player.

This is the content management and postproduction services industry. We support the management team, and we think there's opportunities both on the cost and revenue synergy side, as well as growth within the industry, taking share.

Our assessment was this was the best opportunity to maximize the value over time. All of our valuations -- now getting to this question of valuation, which is not insignificant, we value it on a Level 3 basis; and until we see the combination and the synergies, independent valuation with the metrics and the process that we will use to you this, we have to stick with.

So we will and have the intention and expect to capture value here. On a personal level, I think getting back all of our capital here is ambitious. If you look back to the initial investment, it's not off the table; but our team is going to be focused extremely hard on supporting this business and getting back as much of our initial investment as we possibly can.

Doug Harter, Credit Suisse.

Looking through the portfolio, I guess how would you characterize loans that are on watch list and not great, non-accrual? But how would you view the performance of the credit quality as we look forward into the coming quarters?

Thanks, Doug. It's hard to tell. We obviously value these positions independently.

From a credit perspective we have taken ground on fixing issues. Obviously some of this comes with attending to Family Christian and things like Modern Video.

We have begun to see positive tractions on several of the positions that we're optimistic on. So if you took a static view today or we did, I think we would look to begin to see some positive signs, holding everything equal. That is just a bias.

From a macro perspective, if we look back a quarter or two we saw low 2%, 3% revenue and EBITDA growth on a portfolio-wide basis. It's difficult to look on a granular quarterly basis; but on balance we have seen slightly lower revenue and EBITDA growth.

If you looked at it on an apples-to-apples trailing 12-month basis I would not describe that as indicative of a turn. But we are watching it closely. So that is a long-winded answer, but we feel somewhat constructive at this point, if everything were static.

Great, thank you.

Troy Ward, KBW.

Great; thank you and good morning, guys. Brook, first on the buyback, when we were getting ready for this call we just assumed there was going to be a lot of questions regarding why the buyback was quite a bit lighter this quarter. It's great to hear your confidence about completing that buyback over the next two quarters, as well as some color on why you stepped back a little bit in the June quarter.

So appreciate that. We hammer a lot of guys on buyback; it is good to see you actually doing it.

As we think about the income statement, you commented on a previous answer to a question that the yields seem to have stabilized and expected the volatile item now, probably as we see it, is fee income. So the absolute level of fee income has declined, obviously, with lower activity in the portfolio.

It is kind of the run rate over the last couple quarters has been, call that $2.5 million range. Is that what we should maybe expect going forward given the available capital that you have to make movements in the portfolio?

That is a good question. I don't think I have an easy answer. I think our sense is we will have fee income that has to do with prepayments, new investments, as well as any amendment or other extensions that are done in a positive way.

I don't know whether that is a realistic number. I think since I don't have a better one I would say the run rate that we are producing seems sensible to use.

Okay, thanks. Then just some housekeeping on the model; make sure we have it right. The credit facility you just rated, what is the committed size of that, and what is the unused fee on that facility?

Committed, it is $517 million. And the unused -- let me just track that down real quick; 50 basis points.

50 bps? Okay; just to make sure the model is right. Then is the -- I saw in the Q and then you mentioned it, the rating agency; I think it's a 25 basis point benefit if you get a positive rating.

Is that a new wrinkle? Is that just added this time, or was that already in there?

That is added this time.

Great. Have you started that process, and are you actively and dialogue with the agencies?

We are at the forefront of that process.

Okay, great. That is all of my questions. Thanks.

Casey Alexander, Gilford Securities.

Good morning. Most of my questions have been answered, but the addition of the $20 million to the SBA debentures, is that -- should I read that as potentially that we are going to see some portfolio growth this quarter through the SBA subsidiary? Or is that to a certain extent replacing something on the non-SBA side of the business?

Well, let me make sure I understand the question. We expect the SBIC will grow. To the extent that we are buying back stock, which we intend to, that is going to be a shrink.

Right.

So I think apples-to-apples if we didn't change the target leverage I don't think we are going to expect to be growing the portfolio materially. You may see some total asset growth as we begin to ramp the SLS.

But that is going to be -- I don't think you should look at that as portfolio. It won't show up. It's going to be in the subsidiary.

So we will be producing more assets, but it is not going to show up as a balance sheet portfolio growth.

Okay. The SLS actually, if I understand this right, you guys haven't started funding the SLS yet.

We have not started.

Okay. Next, it appears as though Calloway Labs has stabilized a little bit. Is there any -- I mean, can you give us some color on the pace of working that out?

Are there any improvements? I mean I think it's good news that it stabilized quarter to quarter.

Well, let me put it this way. If there was significant good news to report we will report it. I think at this point, given the effort and time that we are putting in on this, it is tempting to want to be positive.

I think what we are going to do is, when we actually have really specific information to give you on the positive side, we will give it to you. Until then I think we -- just after all of the effort has gone on and will continue to go, on I don't want to over-characterize it yet.

All right, that is fair. All right, thank you for taking my questions.

Christopher Testa, National Securities Corporation.

Good morning, guys. Most of my questions have been answered. But just with regards to the JV, Brook, how long do think that is going to take to ramp and use the entire $100 million of the Credit Suisse facility before you uptake more leverage in that?

Well, let me separate the question, Chris.

Sure.

I think our idea is we are going to continue to pursue more financing. We are not going to wait to make efforts to expand that financing line. We decided with our partner, Credit Suisse, very strong relationship with them on many fronts, that we're better to get that started and then we will expand it.

That is not waiting based upon asset ramp. I think the idea of committing the capital, it's early 2016 would be a target. Again it's really going to be dependent -- and I think the question from Jonathan was appropriate and leading -- it is going to be dependent upon opportunities that we see in the market.

But if we did see opportunities, and given the capability to originate on the platform here, which is really outside of MCC at this point in terms of capital, I think you'd begin -- we would have a target of early 2016. But it may extend, and that would be based upon opportunities we see, not on any specific reason to hold the ramp of that portfolio.

Okay, thanks. That is helpful. And just with repurchases, if you're committed to do the $20 million over the next couple quarters and, say, the discount on an out basis really compresses with your stock, would you be willing to possibly put off the repurchase the following quarter to pursue an investment opportunities? Or is that is something you are solidly intent on doing and completing the remaining $20 million?

We are going to put the $20 million to work. That is our intent today.

If the question is, if we immediately went back to book value from a trading perspective, would we still do it? I think the answer is we're going to have to evaluate that.

But that is a little bit of a hypothetical in the future. We would expect to be in dialogue with you all. But I just want to leave you with the thought that, based upon what is a realistic view here as we look forward, we're going to put that money into the repurchase and we're going to complete it.

Okay. Just my last question is just a general broad market question, in terms of what you're seeing in credit quality of across the board and how you think of your asset mix going forward between first and second lien.

As I commented before, we are putting more and more attention on making sure we have senior and secured positions. We, like other investors, are looking at macro impacts. We are not calling the markets or turns, but we're aware of the volatility in certain subsectors; and we are using our expertise in these areas to make specific decisions on sectors.

But the overriding theme is senior secured. Given that we are not going to be ramping the MCC portfolio, it's hard to see a shift in the mix, right? It's going to be hard to move the existing mix if we are not doing new stuff.

But on the margin the themes are floating rate, first lien where possible, secondly more secured. And I would say on bias, increasing the quality and size of the positions in terms of the borrowers.

Great. That is all for me, thank you.

At this time I am showing no further questions in queue. I would like to turn the call back over to Mr. Brook Taube for any closing remarks.

Well, thank you all for your time today. We appreciate the continued support. As usual we will be available by phone or in person for any follow-ups for any of the analysts and the shareholders.

Thank you all very much again and have a good week.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.