PhenixFIN Corp (PFX) 2015 Q4 法說會逐字稿

Welcome and thank you for joining the Medley Capital Corporation's FY15 fourth-quarter 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.

(Operator Instructions)

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

Thank you, operator. Good morning, everyone, and thank you for joining us today for our fiscal fourth-quarter 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 fourth quarter 2015 investor presentation is available in our Investor Relations section in the events/investor presentations section of the Company's website. I would you now like to turn the call over to Brook.

Thanks, Sam, and welcome, everybody to MCC's quarterly call. Today, we announced the financial results for our quarter ending 9/30 and reported net investment income of $0.31 and net asset value per share of $11. As we had announced in our press release on November 5, the Board of Directors approved a dividend of $0.30 per share for the quarter ended 9/30, that will be payable on December 18 to shareholders of record on November 25.

During the past quarter, we repurchased 1.4 million of our shares at a weighted average price of $8.35, bringing our total shares repurchased since we announced the $30 million share repurchase program to 2.4 million shares. On December 3, our Board authorized an increase in the share repurchase program to $50 million, and extended it through the end of 2016. We've been authorized as well to programmatically buy stock up to NAV under a 10b5-1 program.

The amount of repurchases during any quarter will be dependent on liquidity, primarily driven by the role of our existing portfolio. Based upon our expectations of amortizations, we intend to implement a meaningful amount of share repurchases in each of the next several quarters, while remaining in our communicated target leverage range of 0.6 to 0.7 times. I'd also like to point out that as of today, we are currently at 0.64 times.

Turning now to fees, as of December 3, our Board acknowledged Management's decision to waive certain fees and restructure our incentive fee to include netting. Our fee waiver includes the following: Base management fee will be reduced to 1.5% on all assets above $1 billion. Second, we'll lower our incentive fee from 20% to 17.5%, with a 6% hurdle rate, subject to a netting structure, with a three-year look back that will begin on January 1, 2016.

Turning to updates now on our business, during the quarter we closed an amendment on our existing credit facility with ING, extending the maturity, increasing flexibility, and reducing pricing. In addition, we closed a new facility agented by Credit Suisse for our senior loan joint venture, and while we intend to prioritize the 10b5-1 repurchase plan, we may selectively add capital to the senior loan joint venture which we expect will drive mid-teens IRRs over time. I'm pleased to announce that following quarter end, we received an investment grade rating from both Kroll and Egan-Jones.

Turning now to the portfolio and credit, our $1.2 billion portfolio is well diversified and consists of approximately 91% senior secured loans across 72 portfolio companies and 22 industries. During the quarter, we drew the remaining $20 million of our $150 million SBIC facility, and we are in the early stages of seeking a second license at this time. As of September 30, non-accruals represented approximately 2% of the fair value of the portfolio.

Our energy sector exposure is currently limited to four positions, and it represents approximately 5% of our portfolio. The positions are senior secured, first lien, and benefit from credit protections, including covenants, amortization requirements, and excess cash flow sweeps. We remain in active dialogue, as always, with all of these borrowers, and we continue to monitor these positions closely.

Just a quick comment now on the market environment. Most know that credit spreads widened during the September quarter, with the more junior layers of the capital structure clearly experiencing the most negative performance. Generally, secured loans outperformed, although total were still negative.

Among senior secured loans, there was significant widening between first lien and second lien assets. For example, in the broadly syndicated loan market, we witnessed over 25 to 50 basis points widening for first lien, while second lien loans widened by 100 to 150 basis points on average.

As well, and as most people are well aware, broad markets experienced significant declines in the September quarter. S&P was down 7%, oil 24%, and S&P high yield corporate bond index was down 5%.

And one data point, double B new issuance high yield spreads were in the 7% range at the end of September, which is a level we had not seen since 2011. Despite the negative trends in the overall market, a majority of our underlying portfolio of companies continued to perform well. Latest 12-month revenue and EBITDA on average were each up approximately 3% to 4%.

Our team at Medley continues to grow. We've added over $500 million of new capital commitments to our platform since September 30, bringing our total assets under management at Medley to over $4.5 billion. Medley remains an important and trusted partner to our borrowers, private equity sponsors, and institutional investors. Our direct and fundamental approach positions us well for the current market environment, and we expect to capitalize on the increasingly volatile backdrop, by taking advantage of attractive new investment opportunities, as we have done during similar cycles in the past.

As and when MCC is in a position to participate, we expect MCC-2 will take advantage of the market that we're seeing, but at this point in time, we see enormous value in MCC stock, and we're committed to the repurchase program, as it provides immediate value for the MCC shareholders. I'd like now to turn the call over to Rick Allorto to review our financial results.

Thank you, Brook. For the three months ended September 30, the Company reported net investment income of $17.6 million or $0.31 per share, and a net loss of $16.6 million or $0.29 per share. The net asset value per share was $11 at September 30, compared to $11.53 at June 30.

For the quarter, total investment income was $36.6 million, and was comprised of $34.6 million of interest income, and $2 million of fee income. Total operating expenses were $19.1 million, consisting of $10 million in base and incentive management fees, $6.8 million in interest and financing expenses, and $2.3 million in professional fees, administrator expenses, and general and administrative expenses. For the quarter, the Company reported net unrealized appreciation of $8.1 million, and a net realized loss from investments of $42.3 million.

For the year ended September 30, the Company reported net investment income of $72.9 million or $1.27 per share, and a net loss of $14.8 million or $0.26 per share. For the year, total investment income was $149.2 million, and was comprised of $138.4 million of interest income, $10.7 million of fee income, and $0.1 million of dividend income. Total operating expenses were $76.3 million, consisting of $40.7 million in base and incentive management fees, $25.5 million in interest and financing expenses, and $10.1 million in professional fees, administrator expenses, and general and administrative expenses.

For the year, the Company reported net unrealized depreciation of $26.8 million, and a net realized loss from investments of $60.9 million. As of September 30, the Company's total debt outstanding equaled $620 million, including $192 million outstanding on the revolving credit facility, $174 million term loan payable, $103.5 million in notes payable, and $150 million of SBA debentures. The Company's debt to equity ratio, excluding SBIC debt, was 0.76 times at September 30. Subsequent to quarter end, we reduced the balance outstanding on our revolving credit facility, and as Brook indicated, our current leverage ratio stands at 0.64 times today.

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

Thanks, Rick, and thanks everybody, for your time today. Just quickly to summarize, we continue to pay a stable dividend that's covered by net investment income. We received authorization to upsize the existing share repurchase program to $50 million, and to implement it now as a 10b5-1 program through the balance of 2016.

We will lower our base management fee. We'll lower our incentive fee, and we'll implement a netting concept with a three-year look back.

And now with over $4.5 billion of capital and expanding product offerings, Medley as a firm is well positioned for future growth. Our team is hard at work on these new initiatives, but very focused on shareholder value creation at MCC.

Thanks, all for the continued support, and now we can open the line for questions.

(Operator Instructions)

The first question comes from the line of Greg Mason with KBW. Please proceed.

First, I want to say thanks, and congratulations on changing your fee structure. I think, given the discussions going on in the BDC market, it is a wise move to address the fee issues. Regarding just credit, first, looking backwards at credit, the realized losses of $42 million in the quarter, what were those associated with? I'm guessing Water Capital and Modern Video, looks like those were gone. Is that those two? And anything else that's in the realized losses this quarter?

Greg, this is Rick. That's correct, those are the two primary contributors to the realized loss in the quarter.

Okay. And then, as we look at -- looks like United Road Towing and Omnivere were new non-accruals this quarter. Could you talk about United Road Towing a bit, given that one of the preferred equity pieces, your largest is still at right in line with your full cost basis? So from a mark perspective, it looks to be okay, but you've got it on non-accrual. If you could just touch on United Road Towing a bit?

Sure. Greg, it's Brook. With respect to the performance, they've experienced weaker than expected tow volumes, and also been hit by steel and scrap prices, and both of those have negatively impacted performance. There was a temporary legal matter around one of their large contracts. There's a discussion now to extend that. Management is comfortable, and actually believe they will be fine when that comes back up, and the new RFP is released.

We're monitoring the situation closely. We do have people on the ground there, and I think that the Company has got their situation well under control. So we're watching it carefully here, but again, this is the largest integrated towing Company. They have a lot of good contracts and relationships, and they're hard at work at making sure they deal with this short-term performance issue.

So as we look at that loan that's still valued at $17.7 million, but on non-accrual, or the preferred equity, I should say. Is there risk of material future write-downs, do you believe, or just trying to figure out the line between putting it on non-accrual but not yet seeing a significant negative mark in the risk there, with that mark.

I can't really comment on what the future's going to hold here. I'd say, based upon the independent valuation, our view of where the Company is, I'd say our view is it's fairly marked today, based upon all of the information that we are in receipt of.

Great. I appreciate it, and again, thanks for making the management changes.

Thanks, Greg.

The next question comes from the line of Jonathan Bock with Wells Fargo Securities. Please proceed.

To reiterate Mr. Mason's comment, definitely an appropriate response, and something that MCC shareholders should and will appreciate. So quite a very proactive move. Congratulations there as well.

A question just relates to credit quality, Brook, and wanted to tie very quickly to a few nearer-term maturities with some news items. So discussing Aurora Flight for a moment, this would be a second lien term loan that comes up for maturity in the next -- close to the next quarter, March 16, I believe, just looking at the -- and currently held at par, but then we've also seen a bit of a discussion about tight liquidity, and issues surrounding the military not purchasing additional drones. I know you've had a lot of experience with this name, Brook, so would you give us a quick item, or a quick update on this, as it relates to its upcoming maturity, and a few questions related to tight liquidity constraints?

Sure. This is a credit we've known for a long time. It has long-term backlogs. I would just say that they're in the process of seeking a refinancing, and I think that this position is marked fairly, and we would expect there to be a financing solution here, consistent with the maturity.

Got it. So another question, in terms of marking assets, and that would be one that we're trying to understand in terms of disparity of marks between yourself and other BDCs that own the same asset. And it's normal. It does happen, and it's just a matter of trying to understand the viewpoint.

But if we were going to look at Reddy Ice, which I believe was marked at 79 at quarter end, which I think currently broker dealer quotes were in the 60s or in another BDC holds the same exact loan marked at 60. Or looking at velocity, where perhaps there's going to be dissonance between broker dealer marks which you could pull off of loan desks, at times it's a bit higher, but the question is there's a lot that goes into your valuation processes. So can you give us a sense of how you look at some of the quasi liquid positions, and choose to mark them where you do? It would be helpful for shareholders.

Thanks, Jonathan. Look, I think it's a great opportunity for me to comment. Victor Dessis is our head of valuation. He's got a long history in the business, and gets high marks across the board. I think as you are well aware, for a 9/30 quarter, we mark every position using third parties. So this was our K. Everyone gets marked.

Yes.

With respect to Reddy Ice, I'll just give you an example. The independent folks are aware of marks or indications in markets. So are we.

I'd like to point out that there's been no trades at any time on this asset in the public market. So that would not, while it's on the screen, I'm not sure it's necessarily indicative. No trades at all. So I think marking at those prices, high or low, is something one could do, but it may or may not reflect an actual bottoms-up valuation process. So I would say screen indications with no trading is clearly in the mix. People know about it. It's a factor.

So too are the fundamentals of the business. Our mark, I think last quarter, was about 93. The indication, if I remember from memory, was 70 something. The markdown from 93 for us to 79 represented an actual change in the fundamentals that we measure.

Anecdotally, we've received, just to give you some color as well, further on that, the 6/30 mark was using March numbers, because we don't have real-time. 9/30 uses 6/30 numbers, so 9/30 financials we didn't have. Those are now recently available and show a significant positive performance for the credit, which has not yet been included. We'll see where the independent folks come out, but the trajectory now, instead of down, is back up, so we'll see where it comes out. We continue to like this piece of paper, and our view is that it's a par asset.

Okay. And appreciate it. Look, it's an art. It's not necessarily an exact science. So it's appreciated to understand that. Now, taking our attention back to two more assets in terms of credit, so Omnivere, understand the write-down, but then also is it fair to say you also sold down the position at a loss? The question is, if you were liquidating the position at a loss for exposures, why not just simply liquidate the whole thing, if one is feeling to sell it at a loss. Tell us the decision to drive some potential realized losses in the asset at 0.85, I guess would be the mark you might have sold it at, or not. Because we see cost declined at a point when fair value was below cost, at that point in time.

Sure. It's a good question. We did not take a realized loss on Omnivere.

Okay.

There was a restructuring. We're supporting the Company. It experienced softness. We have discussed that in the past. The management team is hard at work. This is an e-discovery business. There's a lot of interest and a lot of activity, and there's top line revenue growth that's significant. Many private equity folks are actually active and interested in the space.

We did have a restructuring. We have significant equity upside here that's purposeful. We are going to continue to support the Company, and we're looking right now at a small acquisition that would give it significant strategic advantages in that e-discovery sector. So new CFO, strong management, significant upside potential, but fundamentals, while we're turning the corner, were down. This is a position we're all paying close attention to, and looking positively to, as we look into 2016 and beyond for potential upside.

Great. And then the last one, just relates to -- these are names that you discussed before and it's just good, the candor and get the answers. As it relates to Calloway Labs. We see it marked to zero as of 9/30. Can one surmise that once you sit at a zero that we should expect them to move from the unrealized loss to the full realized loss bucket as of 12/31, in light of it being marked at zero, or do you have option value to protect? That's the last update we'd look for, and thank you for taking our questions.

Thanks, Jonathan. We have obviously worked really hard at Calloway. I would say it was August, I may have misremembered the date. They were in active discussions to sell the business. We had assessed that was in our best interest, after trying to re-establish it with new product and new offerings.

And then simultaneous, I think it was the end of September, CMS reimbursement rate proposal came out, and it was something like 40% to 50% rate cuts. Basically, put everyone's bid off. It had a meaningful impact on public companies. It was nearly catastrophic.

So the Company announced on October 7 that they were going to wind the business down, so we marked it at zero. Our assessment is there's negligible recovery. You'll see, I would expect, a realized loss come through in the next several quarters, because they are actually liquidating. So there may be a tiny amount. But our assessment at this point was that it was likely immaterial, and that's why we marked it at zero. If it's not 12/31, I would expect it within the next several quarters.

One has to respect, in lending, you do have fees. It's part of the game. But when you net your incentive fee, and then you also point that the potential realized loss could occur at a point once you start netting, I do believe that's a mark of integrity, and it's appreciated. And so thank you for answering our questions.

Thank you, Jonathan.

The next question comes from the line of Mickey Schleien with Ladenburg. Please proceed.

I want to ask two questions. I'd like to hear a little more about your thoughts regarding the current quality of deal flow, with respect to terms that you're seeing including spreads and leverage multiples. And secondly, I'd like to ask you whether you're seeing borrowers withhold their decision making or commitments while they wait for the Fed's decision later this month, and whether that may cause the fourth calendar quarter to be a little slower than normal, and whether that may cause them to lean more toward fixed rate investments as opposed to floating rate?

Good questions. I think it's a little challenging to predict what the future's going to hold for investors' decisions, and we're monitoring it closely. I think if you -- from our perspective, we've said, and this goes back five years, that we were ready for and expecting a low growth, low rate environment. Our general view is that persists, regardless of a move by the Fed. I'd say the middle market opportunity, unlike liquid markets, behaves a little bit different, based upon this. We're hearing more issues related to healthcare and rising costs and other margin issues, as opposed to the LIBOR factor.

Specifically on spreads, we have seen widening in pricing. The middle market typically lags both ways. And our experience is that's generally because you have a backlog of deals that you made commitments on, and for most of the players, we're not pricing at close. We're indicating levels we'll make loans at, and then we go to close it and there's no finish line changes, based upon public market spreads. So that means as yields come down in the public markets, we stayed wider for longer, and I think now as yields have gone up, you'll have a little lag.

That being said, we have seen wider spreads. At Medley, we're holding multiples constant, if not reducing our advanced rate in a sense. That also is coming with a continued focus on structure, which includes covenants across the board. So I think on balance, like most lenders, people are acknowledging that we're later in the credit innings, and most people are behaving more prudently. Careful structure, covenants, and those spreads widening certainly will be a benefit, if it continues.

Brook, just one quick follow-up. Can you give us a sense of -- and I haven't looked at the investor presentation yet. It might be there. Can you give us a sense of the portfolio's debt to EBITDA ratio, at least within a range, at your attachment point?

I don't have it here. What I can tell you is that our average EBITDA rose a little bit per borrower, which was approximately $23 million, up I think slightly from $22 million, and I don't have the exact number, Mickey, but we hover around 4 times EBITDA as an average.

Okay.

That would be inclusive of first lien and second lien, obviously.

That's overall. That's it from me. Thanks for your time this morning, Brook.

The next question comes from the line of Kyle Joseph with Jefferies. Please proceed.

Most of them have been asked and answered. But just wanted to see if we could get any more color on the investments you made in the quarter. It looked like investment activity picked up a little bit, if you could talk about some of those investments, and in terms of yield trends, and everything?

Sure, Kyle. Thanks. I'm not going to comment specifically on all of the names. I'll just comment generally. We can follow up on the specific ones, but the general comments should suffice. All of the loans we made were either in support of existing borrowers, or into the SBIC. Actually, I would say, nearly all of them.

We prioritized the share repurchase program. During the time where we're buying stock, we're not going to be actively looking for new loans. But I would expect, and as I mentioned in the prepared remarks, supporting existing borrowers and to a small extent, populating the mid-teens target IRR joint venture is something that we'll continue to do. But people can expect us to continue on the share buyback under the new 10b5, and still continue to stay within or around our target liquidity leverage level of 0.6 to 0.7 times.

Got it. That makes sense and is helpful. Thanks. Just one other question I had was, repayments were pretty light in the quarter. Just given the broader market volatility we're seeing, what's your outlook for repayments? I know they're lumpy in general, but has that changed at all?

It's hard to predict. I think what I've said in the past is we typically see 10% to 20% of the portfolio over the course of the year, probably put a pin in 15%, if we had to take a stab. It's never quarterly with predictability, but as I said in our prepared remarks, we have visibility on amortization. Some indications of expected early prepayments that give us comfort that we're going to be able to pursue the buyback in the next several quarters, and also stay within our target leverage range.

Great. Thanks very much for answering my questions.

Our next question comes from the line of Christopher Nolan with FBR and Company. Please proceed.

Does the revised lookback now include realized as well as unrealized gains or losses?

Yes, it does, includes both.

Okay. Great. And then the incentive fee on net investment gains or losses, is it 20%, or has that changed at all?

That would change, as well.

So it's now 17.5%?

Correct.

Great. And is there still a catch-up?

Yes, there is.

Great. Thanks for taking my questions.

The next question comes from the line of Doug Harter with Credit Suisse. Please proceed.

Actually my questions were just asked and answered. I appreciate it. Thank you.

Thanks, Doug.

The next question comes from the line of Jim Young with West Family Investments. Please proceed.

In your prepared remarks, you had mentioned and commented on that you're working hard on new initiatives at the Company. Could you discuss some of these specific new initiatives that you're undertaking, to improve the overall performance? Thank you.

Thanks, Jim. Just to clarify, I'm sorry if it was confusing. We had said that we're going to prioritize the buyback at MCC, and when I was discussing the growth of Medley, I was referring to the platform. MCC has $1.2 billion of assets, approximately. At Medley, the firm, through our various institutional funds, managed accounts, non-traded BDC and other partnerships, we have cumulatively now over $4.5 billion, and we have several new initiatives at Medley, not MCC.

So when I said that, I meant the team's actively growing the platform. We're in the strong position to make proactive decisions that we think are in the best interest of shareholders, which we've done. But the team is well-positioned, so those initiatives are at Medley, the firm, not specifically Medley Capital Corporation. So I'm sorry if that was confusing.

At this time, there are no further questions in the queue. I would like to turn the call back over to Brook Taube. Please proceed.

Thanks everybody, so much, for the time. Just to summarize, we continue to pay a stable dividend that's covered by net investment income. We've upsized the share repurchase to $50 million. That's going to now be implemented through a 10b5-1. We had a very successful amendment to the credit facilities, and we also have the joint venture commencing.

We're in the market -- excuse me, we're in the process with SBIC for our second license, and I think I was very clear and I hope everyone understood, we lowered our base management fee, incentive fee and implemented the netting concept, and as I just mentioned to Jim per his question, the firm has over $4.5 billion now. We're well positioned for growth, and we look forward to continued focus and value creation at MCC. So thanks everybody for their time, and we look forward to speaking to you next quarter.

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