PhenixFIN Corp (PFX) 2016 Q2 法說會逐字稿

Welcome and thank you for joining the Medley Capital Corporation's fiscal second quarter 2016 conference call. At this time I would like to remind everyone that today's call is being recorded.

Please note this call is the property of Medley Capital Corporation and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of this call will be available by using the telephone numbers and pin provided in the company's earnings press release. At this time all participants are in a listen only mode but will be prompted for a question-and-answer session following the prepared remarks.

Now I would 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 second FY16 earnings conference call. I'm joined today by Brook Taube, our CEO; and Rick Allorto 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 fiscal second-quarter 2016 investor presentation is available on the investor relations section in the events/investor presentation section of the company's website. I would now like to turn the call over to Brook.

Thanks, Sam, and welcome everybody to MCC's quarterly call. Today we announced our financial results for the quarter ending March 31 and we reported net investment income per share of $0.26 and net asset value per share of $9.80.

As we announced in our press release, the Board of Directors approved the dividend of $0.30 for the quarter ended March 31. That's going to be payable on June 24 to the shareholders of record on May 25.

During the quarter we repurchased 1.43 million of our shares at a weighted average price of $6.71 bringing the total amount repurchased to just under $32 million since inception. During the period we received repayments of $98 million, we deployed $29 million consisting of approximately $19 million in support of existing portfolio investments and $10 million was redeployed within our SBIC. The result was net repayment of $69 million. As a result at the period end our leverage had declined 2.68 times.

Turning now to the portfolio and credit. The loan portfolio is diversified and consists of approximately 90% senior secured loans. That's across 65 portfolio companies in over 20 industries. In addition, we are diversified geographically across the United States.

Our energy exposure today is limited to four positions and represents approximately 5% of the portfolio. Specifically, the four borrowers our service providers across multiple geographies both domestically and globally. These loan positions are senior secured first lien and they benefit from certain credit protections including covenants, amortization requirements, and excess cash flow sweeps.

As of March 31, non-accruals represented approximately 6.2% of the fair value of our portfolio and during the March quarter we added one loan to nonaccrual status that was Capstone Nutrition. We are working closely with Capstone to affect a beneficial outcome for the MCC shareholders.

Now I would to turn the call over to Rick, our Chief Financial Officer to review the financials results.

Thank you, Brook. For the three months ended March 31, the company reported net investment income of $14.6 million or $0.26 per share and net income of $400,000 or $0.01 per share. The net asset value per share was $9.80 at March 31 compared to $10.01 at December 31.

For the quarter, total investment income was $30.7 million and was comprised of $28.9 million of interest income and $1.8 million of fee income. Total operating expenses net of management and incentive fee waivers were $16.1 million, consisting of $5.9 million in net-based management and incentive fees, $7.9 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 depreciation of $14.1 million and a net realized gain from investments of $100,000. As of March 31, the company's total debt outstanding equaled approximately $527 million including $25 million outstanding on a revolving credit facility, $174 million of term loan payable, $178 million in notes payable, and $150 million of SBA Debentures. The company's debt to equity ratio excluding SBIC debt was 0.68 times at March 31.

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

Thanks, Rick, and thanks everybody for dialing in today. We appreciate the continued support. Operator, we can open the call for questions now.

Thank you.

(Operator Instructions)

Our first question comes from the line of Jonathan Bock with Wells Fargo. Your line is now open.

Hello. Fin O'Shea this morning in for Jonathan Bock. Good morning. First a bit of a technical question as it relates to the fee waiver this quarter. Was the amount placed on waiver according to the waiver agreement in February, or are there other components driving that?

No, it was placed -- the February waiver.

Okay. And then a couple names on accrual, AAR and more recently Capstone. These were removed to a PIC infrastructure. Can you just give some color on the approach or reasoning there in structuring a nonaccrual name from cash to PIC?

Just at a high level, Fin, recap on AAR. It's actually moved to PIC for purposes of the company payment, meaning we are still accruing interest, but the company's not paying and that relates to liquidity. Today the company does have reasonable liquidity in the form of cash on its balance sheet, it's proactively positioning itself for a continued challenging environment and we are still supportive of the company, but at this point, again we put the name on nonaccrual.

Okay. That helps. Thank you. Merchant cash, the maturity was extended to the end of the year. Can you give us some color on the expectations for that investment, and then does that company compete in the wheel house of the online, small business lenders?

Sure, let me start with the first question. The maturity was moved nine months to December? As you notice that mark is flat -- approximately flat quarter over quarter and the reason is the company is growing and had actually requested an extension and an upsize so other lenders did participate in the upsize there. MCC did not, but the company's performing well and we expect to be repaid on or before this new maturity date.

With respect to its competition, it is a merchant cash provider, so I think at a high level it is competing with some of the lenders you referred to.

Okay. Got it. That helps as well, and just one more as it relates to dividend coverage. You have a couple of letters with leverage capacity, stock buybacks, can you bring us up to the 30% number, and if you expect to be there within next quarter or by year end?

Sorry, Fin, I am not sure what you mean by 30% number.

Sorry. $0.30.

Sure.

Well, at a high level obviously we are working hard to maximize NII. Our headwinds today actually are a declining portfolio size and our stated intention to reduce leverage.

We have had a new nonaccrual and I think you will also notice we have increased fixed rate liabilities. So I think these three are really headwinds to NII. We have our -- you can assume we are hard at work trying to do the things that could positively impact NII over time, and you mentioned it includes share buyback for sure.

We have to resolve non-accruals and to the positive which we have our entire 85 person team focused on. Obviously rising yields over time will benefit, but at this point, and I'm not going to prognosticate on the trajectory or timing on NII rising from here.

Okay. I appreciate that and that's all for me. Thank you.

Thanks, Fin.

Our next question comes from the line of Kyle Joseph with Jefferies. Your line is now open.

Good morning, guys.

Thanks for taking my questions. Just wanted to get your thoughts sort of on any changes to the economy since we last spoke. You could give us your growth trends on revenues and EBITDA, and if you could do that ex-energy, that would be helpful, if possible.

Well, I'll characterize it first in two perspectives. One from a credit what we are seeing in the market today. Obviously MCC is not deploying capital. We are shrinking. But at Medley we have over $5 billion of assets and a lot of dry powder. So, we do have a very good view on what's available today and new deal flow is characterized by higher-quality credit, better structure in terms; although yields have not risen dramatically which people might have expected given the volatility.

Stable yield, better structure, better credit. In that context, we are comfortable on the origination side in the market today. On a static basis looking at the portfolio, if you ex-energy, we are seeing low single-digit comps on revs and EBITDA. That's been pretty consistent, but I think there's been a little bit of a headwind, obviously, in Q4 and Q1. So we are looking carefully at this. We are monitoring closely, as I'm sure you are, and we will keep you posted in the quarters ahead on what we are seeing.

Okay and can you just refresh us where you are on the SBA? Do you have one license? And what's your outlook for getting potentially a second or a third?

Good question.

We do have one license. It is fully drawn. The debentures are fully drawn. We have said on prior calls that we have the intention of seeking a second license. At this point I don't have any update for you in terms of timing and process, but we have submitted for a second license.

Great. Thanks very much for answering my question.

Our next question comes from the line of Mickey Schleien with Ladenburg. Your line is open.

Good morning, Brook and Rick and Sam. I would like to start just by asking you if it would be fair to assume that your preferences to continue to shrink the balance sheet and pay off the rest of the revolver and repurchase your shares given the current discount to NAV, in order to basically reinvest in the existing portfolio?

Well, I think we've said, Mickey, let me try to answer the question. We intend to complete our share buyback. So that's, yes, we intend to reduce leverage. Those are both going to have an effect on the portfolio.

I think another step we intend to do is pay down the notes that we referred to. So that's likely to happen before revolver, but that is based upon liquidity and overall leverage at the Company. Does that answer the question?

Yes.

Brook, if spreads, if leverage loan spreads and energy prices were to remain more or less where they are today and if the forward energy curve was also to remain unchanged, could you give us a sense of at least directionally where NAV might be today relative to March?

Generally not in the position to do it. I think at this point with energy where it is today we are starting to see some positives. I don't want to overstate it, because obviously that business is under pressure.

But we are seeing, as I have said before, our specific borrowers positioned themselves to have cash and liquidity on the balance sheet and they are positioned for an extended downturn. I think we will have to wait and see, but my sense is right now that we wouldn't expect further downward pressure, but again that is a general sense as we sit here today.

Okay. Understand.

Brook, there are a few names in the portfolio that are marked at levels that may indicate distress, or they could just be reflecting trades out in the market. I was wondering if you could give us any color on if there's credit issues that JD Norman, Prestige, Reddy Ice, or Velocity pull in?

I think the last two as you mentioned, those are prints. I don't have any specific comment on information beyond what's available publicly. In terms of Prestige, that's been a credit that's been under pressure given competition in the market. We are actively involved with the Company.

I don't have any specific relative comment on the trajectory in the last quarter, and JD Norman, no the specific comment. It continues to have headwinds on its performance, but I wouldn't call that at this point something that we would have to highlight as distressed.

Okay. And my last question, Brook, can you just give us a sense of what caused capstone to go on to nonaccrual?

Yes.

Just to give you a high level of capstone, this is a leading contract manufacturer, and they are in the science based nutriceutical product business. So that's basically for branded dietary supplement companies. They had some decreased financial performance and that really related to a situation with one single customer. The net result was we worked in a consensual manner with the company and the sponsor with the lenders, the group of us basically had a change of control.

We now have majority ownership. Capital has been injected to deal with what was ultimately a working capital shortfall that related to the large customer.

Since that time, the company has been adding new customers. So with this large customer no longer in the pipeline, or likely pipeline, this excess capacity to add customers, so we and the lender group in aggregate are all working to support the company as it works to really return to its previous levels of profitability. Does that answer it for you?

Yes, it does, and those are all my questions. I appreciate your time today. Thanks.

Thanks, Mickey.

Our next question comes from the line of Terry Ma, with Barclays. Your line is now open.

Hey, guys.

Can you give us a little color on Omnivere? It looks like the first lien loan was moved from cash to PIC. Can you just talk about what's driving that?

Again, I want to catch you up on Omnivere. I think I mentioned in the past we have a majority ownership in the Company. It is a leading provider of eDiscovery and staffing, and that is like major law firms, fortune 1000 companies and the state courts throughout the US.

As of the last quarter or this past quarter we supported the company in its acquisition of Kiersted Systems, which is a leading technology and services platform that does really the backend solution for eDiscovery. Now Omnivere's in a position to have a full service product and its market position has really expanded for it's capability for this fast-growing sector.

We are working closely with the team and we see significant opportunity to drive value in the business. In terms of the component pieces, I am going to let Rick just comment briefly.

That was part of a recent restructuring where it was moved to PIC, the cash piece.

Okay. But what's driving that? Is that cash flow or what's behind the actual move from cash interest to PIC interest?

We are just working with the company to grow. Ultimately it is a working capital issue as it looks to expand against new revenue streams. There's really two ways. We could fund more capital at this point because we are growing the business.

It was either inject capital and keep the interest rate constant. That is effectively paying yourself. So at this point we see EBITDA stabilizing and trend higher, we are going to actually -- I am sure this will go back on accrual status. Again, that will be related to performance and we are supporting it because we see that as a potential significant upside.

Okay, and what about United Towing? Your second lien. You also moved that from cash to PIC.

Sure. Well, this company in particular is suffering. We talked about this in past quarters, from weak industry conditions. The main reason this time is it is subject to some current litigation. Given that at this point I just cannot comment further on URT, but you can assume that we have a team SWAT team on this one.

Okay. Got it, and just actually on all your non-accruals, did you guys move everything to PIC this quarter and are they all still accruing on the PIC basis?

No. They are not accruing. There is a full reserve.

Okay. Thanks. That's it for me.

Our next question comes from the line of Christopher Nolan with FBR Company. Your line is now open.

Hi. Given the wording in the press release in the first paragraph, is the dividend partially return of capital?

The composition of the dividend the determination will be made at the end of our tax year, September 30. Apologize.

Okay. So that is a -- that does not clarify the answer for me. Does it include return to capital?

If you look at the current quarter in isolation, a component would be.

Okay.

The rules -- we look at the returning capital at the full fiscal year numbers. Full fiscal taxable income and full year distributions.

The follow-up question was on Disco Electronic Distribution. You had a small carrying the fair value above cost last quarter and now it's a slight discount to cost in the current quarter. Just an update as to what's going on.

Sure. Just at a high level, there was additional capital put in here. So it was really related to the -- an adjustment on the value of our small equity coinvestment. The company has had a little bit of headwinds due to a few customer issues. I would say at this point it was not dramatic, the sponsor injected capital. The equity valuation at which that capital came in had a mark to market impact on our small equity coinvestment. So the bulk of that was related to an unrealized mark on a small equity position. The term loan there stays close to par.

Okay. Thanks for taking my questions.

Thanks, Chris.

I am showing no further questions at this time. I would now like to turn the call back over to Mr. Brook Taube for closing remarks.

Thank you all very much. We continue to work hard here at Medley. We are committed to completing the share repurchase program and again hard at work at our specific non-accruals and look forward to having positive information to report in the quarters ahead. Thanks again for the support and look forward to speaking to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.