PhenixFIN Corp (PFX) 2016 Q1 法說會逐字稿

Welcome and thank you for joining the Medley Capital Corporation first fiscal first quarter 2016 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 Risk Management, 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 first fiscal quarter 2016 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 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 statements 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 first fiscal quarter 2015 Investor presentation is available in the Investor Relations' section in the Investor/Events -- Events/Investor Presentation section of the Company's website.

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

Thank you Sam, and welcome everyone to our call this morning. Today, we announced the financial results for the quarter ending December 31. We reported net investment income of $0.28 per share and net asset value per share of $10.01. As we announced in our press release, the Board of Directors approved a dividend of $0.30 for the quarter ended December 31. This dividend will be payable on March 18 to shareholders of record on February 24.

During the quarter ended 12/31, we repurchased 143,000 of our shares at a weighted average price of $7.68. That brings the total shares repurchase to 2.5 million. Our most recent round of share repurchases was completed by our $50 million by our 10b5-1 repurchase program. As we previously stated, this 10b5-1 repurchases stock up to our most recently published NAV per share on a programmatic basis. The amount of repurchases during any given quarter will depend on liquidity that's primarily driven by the role of our existing portfolio.

During the quarter, we raised $70.8 million of five-year 6.5% senior notes from both institutional and retail investors. And subject to the quarter end, the underwriters exercised a $3.3 million of the greenshoe, bringing the total capital raised in this note to $74.1 million.

Turning now to the portfolio. Our $1.1 billion portfolio remains diversified; it consists of approximately 91% senior secured loans, across 68 portfolio companies and over 20 industries. In addition, we remain diversified geographically across the US. Our energy exposure is limited to four positions and represents approximately 5% of the portfolio. Specifically, these four borrowers, are service providers across multiple geographies, both domestically and globally.

The loan positions are senior secured first lien and benefit from credit protections, including covenants, amortization, and excess cash flow sweeps. Clearly, the energy markets remain challenging and the borrowers are feeling this impact. We are in active dialogue with all the borrowers and continue to monitor each of these positions very closely.

As of December 31, non-accruals represented approximately 4.2% of the fair value of our portfolio and that consisted of seven positions. During the 12/31 quarter, we added four loans to the non-accrual status and these include AAR, which is one of the energy names as well as Essex Crane, Lydell and URT.

We're working closely with each of these portfolio companies to affect a beneficial outcome for MCC shareholders. We continue to see opportunity in the market today; however at this point, we see it enormous value in MCC stock and are committed to prioritizing the share repurchase program as it provides immediate value to the MCC shareholders.

I would like to turn the call over to Rick now to review our financial results for the quarter.

Thank you Brook. For the three months ended December 31, the Company reported net investment income of $15.7 million, or $0.28 per share, and a net loss $39.2 million, or $0.70 per share.

Net asset value per share was $10.01 at December 31 compared to $11 at September 30. For the quarter, total investment income was $34.4 million and was comprised of $31.4 million of interest income and $3 million of fee income.

Total operating expenses were $18.8 million, consisting of $9.3 million in base and incentive management fees, $7 million in interest and financing expenses, and $2.5 million in professional fees, administrator expenses, and general and administrative expenses. For the quarter, the Company reported net unrealized depreciation, including the provision for income taxes of $60.2 million and a net realized gain from investments of $5.4 million.

As of December 31, the Company's total debt outstanding equaled $587.5 million, including $89.2 million outstanding under revolving credit facility, $174 million term loan payable, $174.3 million in notes payable, and $150 million of SBA debentures. The Company's debt-to-equity ratio, excluding the SBIC debt, was 0.78 times at 12/31.

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

Thanks very much, Rick. We can now open the call for questions.

(Operator Instructions)

Mickey Schleien, Ladenburg.

My first question is a high-level question. We're getting such mixed signals on the economy, while most of the BDC management teams I speak to have indicated that their borrowers are generally doing okay, apart from energy. And defaults seem manageable, also apart from energy.

But on the other hand, the credit and equity markets are pointing to a sharp slowdown in the economy. So I understand that you will always underwrite to a slow economy or even a recession.

But has your perception of where we are in the credit cycle changed in the last few months? And if it has, has that affected what type of credits you are more interested in now then perhaps a few quarters ago?

Sure, Mickey. This is Brook. I think it's fair to say that we do share the view that the credit markets have changed on the margin. I think the way we're looking at that, as we look at new originations, include a few things.

One is, borrowers that have durable revenues and earnings that we have seen perhaps through prior cycles or that we're comfortable with, less aggressive structuring, as well as more participation on the equity side. These, I think, would be considered natural steps if you're looking forward in a more defensive manner. We haven't changed our view that it appears to be a sensible time to underwrite capital is clearly less available.

We have yet to see some of the pricing dynamics filtered through. That is to say there appears to still be capital in the middle market.

Our view is the amount is going to be less, not more and there typically is a lag. So some of the price action and the overall yields in the public market have not flowed through completely yet to the middle market but we are being careful and holding our dry powder in anticipation of more favorable opportunities as we look out in the quarters ahead.

Okay. I appreciate that. A couple of more specific questions. Can you give us some background on what happened at Essex Crane to drive it to non-accrual because it was marked almost at par last quarter. My last question is, what exit caused the realized gain this quarter?

Sure. Let me start with Essex and then I will have Rick take you through the details. Obviously, this is a substantial discount from prior quarter on the mark. We see that the company is delisting.

They have experienced default and are currently operating under an amended credit agreement, that we are party to. All of the lenders are working with the company and its chief restructuring officer as well as the advisors there to improve the operating and financial performance.

Also, there's also obviously strategic initiatives underway there that we support to maximize our value. But in the prior quarter, as the company's financial position and the overall market environment deteriorated, so too, was the expected value of our recovery here.

Mickey, this is Rick, regarding the realized gain for the quarter, that was almost entirely driven from our realization of Meridian, that is small equity position as well as a loan that would be paid and the equity was exited at the gain.

Thanks Rick. Those are all my questions. Thank you for taking them.

Kyle Joseph, Jefferies.

Thanks for taking my questions. Just -- I haven't had time to run through the whole Q yet. But in terms of the unrealized depreciation on the quarters, how much of that is just related to credit spread movements versus actual performance of the Company? And was the vast majority related to those that you placed on non-accrual in the quarter?

Kyle, this is Brook. Yes, the majority did relate to Essex, URT, Lydell, AAR. It's hard to calculate specifically what was related to credit versus market but I would characterize the move, the majority were related to credit-specific events although there certainly was an impact overall due to rising yields in the market.

Market yields are an input overall. But the majority, a majority of it was related specifically to the credits we mentioned and a couple others.

All right. Can you give us an idea for how much buyback capacity you guys have left and how your outlook for buyback changes as a result of rising spreads in the market?

Sure. We have repurchased approximately $22 million under our buyback program; currently it's a $50 million 10b5-1. We intend to complete that. We expect to have that capacity as we look forward in the quarters ahead.

All right. Great. Thanks for answering my questions; that is helpful.

Troy Ward, KBW

Brook, you talked about the new non-accruals and you mentioned URT. I show that as already being on non-accrual; I think the fourth one would be Brantley Transportation; does that sound right? A new one for the quarter?

That is correct.

Okay. And then one of the questions I had, and again, I was going to back to Mickey's little bit -- the big writedown and we saw it in a couple of these, Essex being the biggest one. The footnote that you have on there on a lot of your first liens, footnote 12 was a portion that's sold via participation agreement. We you're selling off those participation, are you selling out into a last out position so you're actually lowering your priority on those first liens?

No, we're not, Troy. This is Rick. That's associated with the co-investments with one of the private vehicles. Medley Capital Corporation is taking the -- as an example, $10 million position and through participation, discharging, for example purposes, $5 million out to one of our private funds.

Just through co-investment then. So when we see a senior secured first lien in those, your true first lien, you're not last out in any of your first liens?

That's correct.

Great. And then, just on the income statement this quarter, obviously, with all the new non-accruals, just a couple questions. Were all of the new non-accruals on for the whole December quarter, so effectively, we got no income from those?

And also, was there any interest income in the quarter that was reversed out from prior quarters? Just trying to get a feel for, was it a clean number on the top line from interest income perspective.

The first question, Troy, is yes, it was non-accrual for the full quarter. And then the second question, there was just a very, very small amount of reversal in the current quarter related to prior periods.

Okay. So materially, it's a pretty clean number.

Correct.

Okay. And then lastly, just obviously, you made a lot of changes to the management agreement in October, I think it was, and just again applaud the team for taking those tough steps and the Board for making those decisions, especially putting back -- putting in the total return hurdle on the incentive fee. So thanks for the time, guys.

Thanks Troy.

Jonathan Bock, Wells Fargo Securities.

Good morning and thank you for taking my questions.

My apologies if this was asked. Brook, when we look at unrealized losses today, the kind that transpired. It would make sense in the near term, maybe as you were evaluating the portfolio late in December, that these marks would closely come to fruition.

So you were absolutely proactive in choosing to align the NOI incentive fee, starting the January 1, 2016. Any view as to whether or not you would be willing to make those NOI incentive fee changes retroactive to 9/30 considering shareholders just lost $1 in unrealized depreciation on NAV?

Sorry, Jonathan, I'm not sure what the question is specifically.

I'll start this -- so you plan to align the NOI incentive fee starting January 1, 2016. Yet I am under the impression that the losses investors experienced as of 12/31, right, in the fourth quarter, those losses will not be considered in the NOI incentive fee; am I correct?

Yes. That is correct, Jonathan.

Why wouldn't you want to go ahead and make that retroactive or start the NOI incentive fee alignments as of 9/30 to allow shareholders the benefits that comes with that depreciation in the form of a lower incentive fee because you are doing it anyway?

Sure. I think I understand where you're coming from. Just to clarify, the valuation process that we go through is -- basically happens at the end of the year and into January. So just to clarify, we didn't really have visibility.

Fair enough, my apologies. Just as the markets were trading down and things were -- I'm just thinking in general and maybe we could just start today. Would it make sense if you're aligning the fee henceforth and forevermore to just include last quarter's to give your shareholders the additional benefit?

Sure. I'm not -- I see -- now I see where you're coming from. Sorry, so look, we began our dialogue internally on this overall matter of appropriate level of fees. Also, the -- I think the core issue that you are referring to which is alignment of interest -- to use your word.

And just to kind of remind you, when we did our IPO five years ago, we had a fee agreement that's obviously, as you know, highly disclosed and I would call it, the market is still seems to be the majority, our legacy fee structure. So we embarked on a strategic plan to consider that. We look at it carefully.

It's a process we went through internally as well as with the Board. We chose to implement it effective January 1 and we communicated that and messaged that prior -- early in December. But the plan was put in place before that.

So I would just say our intention was clear. Our plan was clear. The message was clear and we are following through on the commitment that we made.

That's fair and shareholders do appreciate the move, Brook. I -- please don't want to take away from that. It is very valuable and a very shareholder-friendly, proactive move and sometimes markets just move against you. That is just the nature of the business.

And then the next is, questions as it relates to some of these near-term maturities that are still headed par, close to par, RCS, Aurora, Merchant Cash. Just as we get a bit closer to that maturity date, these are relatively at high rates, it's a bit of a volatile environment. How would you describe the liquidity situation at several of those companies that are nearing maturity?

Sure. So, look, I'll just take that on high level. I don't know if you had a specific question on the -- a name, but if I look at our 2016 maturities there's approximately $100 million by memory. We're obviously in active dialogue with all the credits. Those are included.

I expect those to pay back on time. I can't predict the future but in those specific credits, to the extent that there was a refinancing of any kind and we were a participant in any way. As we look here today, we do not expect a refinancing where we were or were not a participant would at this moment, look forward, would result in any kind of a mark either.

So just to clarify, we do expect to get paid back to the extent that the refinancings look different and I would not want to make any assumptions about availability of credit, et cetera. This obviously -- it's more challenging now than it was even a quarter ago, the overall markets, but I just want to make that one clarifying point.

Appreciate that. And then this is the last question. So fundless sponsors, right, effectively, which -- it's a non-sponsored transaction, but to describe it for folks, this would be where a portfolio company that a BDC would lend to but basically, you're lending to it on a senior secured basis.

You take the -- you have the collateral and then eventually you would be waiting for an equity check to come into the company from a PE firm that is effectively starting. Right? The question that we have is, Brook, are you familiar with the fundless sponsor concept? Clearly, you are but have you funded fundless sponsored deals?

And I understand, I'm not saying a non-sponsored deal. I know that -- I know you can bifurcate between what a non-sponsored deal is and what a fundless sponsored deal is. They're both one and the same, your underlying company, your first lien, you're getting a high rate. But any clarity or discussion or balance you can give us on the fundless sponsored concept within the portfolio?

Yes. That is a good question, Jonathan. I did actually take a look at the report you wrote. But -- and just to clarify and to be specific, I'm going to use a high level comment, which is to say we have fundless sponsors that we look to do business with. As I think about a few that are in the portfolio today, the characteristics are fundless sponsor, 60 deals, 30-year track record.

So not an equity check but back to (multiple speakers) it does this, that's how we think about it. With respect to your piece, I took a quick glance at it, and if I remember from recollection, you referenced 12 investments and I checked on that, 9 of those 12 have a traditional sponsor, 6 would be fundless but 3 of them would be fundless, but 3 of those 9 had track records.

One of those was an asset-based loan so I think it's not relevant on the sponsored versus non-sponsor. And then two of the companies, we have meaningful equity positions today. So I see where you're coming from, the fundless sponsor business is not an equity business. It's backing a group that has experience. That's the strategy. It doesn't always work out. In one case, I said we do have meaningful equity -- two positions, we have meaningful equity and we're looking -- those look positive to us as we look forward.

Got it. And we appreciate it Brook because the balance that we were given is you just look and say what first lien investments have higher-than-average rates depending on what average is and there that's kind of the list. So thanks for the clarity and we'll kind of put this, non-sponsored lending is a great focus for your business.

No one -- a lot of money can be made there and so we appreciate the additional clarity and do understand that there's a lot of returns to be gained from investing there smartly. So thanks again.

Thanks Jonathan.

Douglas Harter, Credit Suisse.

This is actually Josh Bolton filling in for Doug. Just one quick housekeeping thing. It looks like there was an uptick in prepayments in the quarter and I'm just curious, any reason specifically that you can point to on those and then maybe any guidance around how we should be thinking about prepayments going into 2016? Thanks.

Sure. At a high level, we obviously have some visibility on deals that are looking to refi. You look back into some of the positions that were in the back half of 2015.

Nothing was a particular surprise other than the high level, I think it's nice to see that there is continued activity in refinancing as well as corporate activity. Whether that signals a more positive backdrop than we're seeing in liquid markets is a separate issue. It's hard to read those tea leaves.

We've said, over time, that our expected role would be around 15% of a portfolio, and maybe as high as 20% in any given year. Obviously, there is a range, so that's sort of an expectation. It seems intuitive looking forward in a tight credit market that, that would be on the lower end or lower than expected, but, also in markets like this, we are beginning to see more strategic activities.

At a high level, you would say it's the M&A cycle. On the lower and middle market, you see people looking at small acquisitions, cost leverage, et cetera. So I don't want to be ambiguous in the response.

I think our expectation would be to be at the lower end or maybe inside on the lower end of that range. There was expected repayments but there will still be some and if it was on average, it wouldn't surprise us.

Okay. Thanks.

Christopher Testa, National Securities Corp.

Thanks for taking my questions. Just first, where did the pick up in amendment fees come from? What portfolio company or companies was that attributable to?

Hi Chris, this is Rick. I don't have that detailed directly in front of me. I will follow up with you.

Okay. Great.

Just as you have plenty of buybacks left to do, given where the stock is on a NAV discount, even for the new $10 per share now that you reported. Are you planning on lowering the credit facility and the term loan facility balance actively this quarter, with repayments coming in, in order of prioritized repurchases? Or are you looking to just kind of do that on a smaller, more measured basis?

Chris, let me just clarify. Was your question, would we use paydowns to buy stock and not amortize a credit facility?

Yes. If you would use paydowns to potentially lower the balance sheet leverage and also to use that to repurchase stock?

Sure. That's a good -- yes, that is clear now. I think we said last quarter and I will reiterate it now.

We intend to pursue the share repurchase. Again, that will be based on liquidity. We also have the intention of lowering the overall leverage on the balance sheet so we're going to do both and I think you should expect to see both as we look forward to in the quarters ahead.

I know this is more of a Board decision and you haven't exhausted the repurchase program yet but assuming that the stock remains heavily discounted, should we be anticipating as an analyst community, a renewal of further authorization of repurchases?

Sorry. Did you say removal or renewal, Chris?

Renewal, renewal.

Sure. We've commented in the past that we intend to pursue this $50 million. Our expectation is we will look at the market when that's complete and make a decision at that point.

Look, if the stock is attractive, we have demonstrated a willingness to purchase it and we're going to continue to do that. We'll look at the future when we get there and if it's as attractive, I wouldn't -- will love the option of continuing.

Okay. Given the concentration geographically and in the Southwest, would you characterize a lot of non-oil and gas companies as having an indirect exposure whereas most of the employees of these companies are employed within oil and gas. How do you assess that risk, if it's not oil and gas directly, per se?

Good question. We do not, as we look at the portfolio, have these correlated risks that we see, to the extent that the economic issue and a consumer issue, we are exposed to those like everyone else. But no, I would not infer from the geographic concentration that there is underlying exposures there.

Okay. My last question, just with a couple of non-accruals, OmniVere and United Road Towing, they are controlled positions. Has there been any progress that you're able to discuss here on the call with regards to what you're able to do to help those companies turnaround and what, if any, progress been made with those?

Sure, with respect to URT, as we said on our prior call and that continues there, there's weak industry conditions and there's litigation. I can't comment further for that reason on URT at this point, other than to say we are actually are hard at work. We've have a dedicated team and we are focused on maximizing value there.

With respect to OmniVere, we do have a majority position there in the company. I've said this in the past. I will repeat, they're are leading provider of e-discovery and legal staffing services, so the clients for OmniVere includes major law firms, Fortune 1000 countries as well as, to a lesser extent, federal and state courts throughout the US.

This quarter which is recently, this was announced publicly, we supported their -- OmniVere's acquisition of a company called Kiersted Systems. They are a leading provider of the e-discovery technology and services, that's a platform. They have certain certifications that are required as you go larger in the customer base.

This was to further enhance OmniVere's, I would call it, a full-service product offering in their market position. This is a -- remains a fast-growing industry. We're at -- hard at work with this management team and we're going to continue to help drive value in the business, in a business we think is attractive.

There remains a lot of private equity activity here. We have a lot of work to do at OmniVere, but we are supporting it and looking forward to that decision and what upside there might be as we -- as the company develops in a year over the course of this year and next.

Great. Thanks for taking my questions.

Christopher Nolan, FBR & Company.

Thanks for taking my questions. What is the peak debt-to-equity ratio you guys are looking at now?

Well, we said previously and we'll stick with it that our target range is 0.6 to 0.7. It has peaked up a little bit this quarter as we've continued with the buyback as well as the adjustments to NAV.

I think we were asked a question previously. We expect to continue with the buyback and we also expect to reduce the leverage. It will be back down into that range as we look forward.

Any update you can provide on the second SBA license?

No, there's no update at this point. Still working on it.

Final question, the stock has been trading at a discounted NAV for almost two years now and we have seen significant erosion in NAV per share. As you're talking to the Board strategically, I applaud the efforts to modify the management compensation agreement but beyond that, is the plan simply just to buy back stock until as long as it's trading at a material discount or is there anything aside from that strategically that's going to change to possibly improve valuation multiples?

There's nothing beyond the performance, the initiatives we have with the Company that relates to loan strategy, second, SBIC license. The team is hard at work always at maximizing NAV -- NII and NAV. I think the share repurchase is the most powerful tool we have at our disposal today but with respect to other strategic initiatives, we are not -- we have none underway.

Given the erosion in NAV per share over the last two years, is there any sort of change in the approach of how you underwrite credits now?

No. We're sticking to our focus on senior. I think Jonathan alluded to the fact that the smaller company in the non-sponsored have certain attended risks. NAV per share, the most recent mark, was unrealized, that we have -- we are hard work at -- with folks who are increasing it.

Other than to say, we are always evaluating every part of the business which includes process, underwriting, people, et cetera. We do that on a continuous basis. But there have been no substantial or material changes in the overall strategy.

Great. Final question. Have you -- for any of the private equity sponsors that you work with, given the change in the financial market, have you seen any sort of change or lower capability to step into some of the deals and provide additional equity?

Well, the answer to that is no. I think our experience is the firms have capital on balance. Our view is multiples are beginning to come down. So for the dry powder in that space, their expectation, I think we've heard from them directly is that it's maybe common increasingly attractive environment to put capital to work.

I've said in the past, I don't -- we don't go to work expecting sponsors to do things that are uneconomic to themselves but we also have seen sponsors step up and do the right thing in support of their borrowers. So I think on balance, this market requirement is one where you have to manage existing portfolio. And as we look forward, at Medley, we are seeing increased and interesting opportunities and as and when MCC is in a position to participate, the MCC platform will also be a participant in that deal flow.

Great. Thanks for taking my questions.

Troy Ward, KBW.

Yes, thanks. Actually, I was going to ask about the SBIC in your leverage range and Chris just asked that, so I am good. Thanks guys.

Thanks Troy.

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

Okay. Thank you very much, operator. We appreciate the time today and we look forward to speaking directly to many of you and also to the next call coming up on a short cycle, considering that this one was later and it was a K. So we look forward to speaking with you when you get a chance. Thanks very much.

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