PhenixFIN Corp (PFX) 2016 Q3 法說會逐字稿

Welcome, and thank you for joining the Medley Capital Corporation third-quarter FY16 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'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 third-quarter FY16 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 third-quarter FY16 investor presentation is available in the Investor Relations section in the Event/Investor Presentation section of our Company's website.

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

Thanks, Sam, and welcome, everyone, to MCC's quarterly conference call. Today, we announced our financial results for the quarter ending June 30. We reported net asset value per share of $9.76, net income per share of $0.26, and net investment income per share of $0.20. As announced in our press release, the Board of Directors approved a dividend of $0.22 per share for the quarter ended June 30. This dividend will be payable on September 23 to shareholders of record on August 24.

Based upon our current leverage and limited repayments during the period, we did not repurchase shares under our existing buyback program. Since inception we have repurchased just under 4 million shares for a total of approximately $32 million, leaving us with $18 million remaining in the approved program. We do intend to complete the full share repurchase program in the quarters ahead.

Turning now to our earnings and dividend. Net income for the period was $0.26 per share, driven by portfolio appreciation. Net investment income was $0.20 per share for the period and lower than prior periods due to several factors that are affecting us and many of our peers in the industry.

These drivers impacting NII include: refinancing and repayment of higher-yielding assets; lower yields available on new investments; declining leverage at MCC; reduced fee income due to our limited origination activity; and reduced income from certain loans that we placed on nonaccrual. Based upon the above-mentioned factors, we adjusted our dividend to reflect an NII level we expect to earn on average over time.

We ended this quarter -- this most recent quarter with leverage at 0.69 times, which is consistent with the prior quarter and down from 0.78 times at the calendar year end. During the period, we did receive repayments of $12 million, and invested approximately $12 million to support existing portfolio investments. And at MCC, no new loans were originated during the quarter.

Turning now to the portfolio and credit, net asset value was stable, quarter over quarter, and portfolio values increased modestly. Our loan portfolio today is diversified and consists of approximately 89% senior secured loans across 63 portfolio companies and over 20 industries. In addition, we're well diversified geographically across the United States.

Quick update on energy, our exposure is currently limited to four positions and it represents approximately 5% of the portfolio. Specifically, these four borrowers are service providers across multiple geographies, both domestically and globally. During the period, we have seen modest positive trends in performance, although the sector clearly remains under pressure.

As of June 30, 6.6% of the portfolio was on nonaccrual. I would like to note that we have supported and restructured certain investments to focus on future growth and upside potential. And, as part of these restructurings, we now have equity ownerships. Over time, we have the opportunity to turn these investments into earning assets, with potential equity appreciation, which may provide upside to both NII and NAV in the future.

Before turning the call over to Rick, I would like to comment briefly on a new initiative we have at our Management Company. During the past quarter, we established a partnership with one of our large institutional partners that will allow our Management Company -- that's MDLY -- to be a long-term investor in our existing and future investment vehicles, including MCC. We all [assessed] that MCC is an attractive investment opportunity at the current discounted levels, and we intend to be a meaningful buyer of MCC stock at our Management Company in the quarters ahead.

I'd like to turn the call over now to Rick to review the financial results.

Thank you, Brook. For the three months ended June 30, the Company reported net investment income of $11 million, or $0.20 per share, and net income of $14 million, or $0.26 per share. The net asset value per share was $9.76 at June 30, compared to $9.80 at March 31. During the period, the fair market value of our assets increased. Excluding the difference between dividends paid and net investment income for the period, our NAV would've increased to $9.86.

For the quarter, total investment income was $28.4 million and was comprised of $27.8 million of interest income and $600,000 of fee income. Total operating expenses, net of management and incentive fee waivers, were $17.5 million, consisting of $7.6 million in net-based management and incentive fees; $7.7 million in interest and financing expenses; and $2.2 million in professional fees, administrator expenses, and general and administrative expenses.

For the quarter, the Company reported net unrealized depreciation of $32.3 million, and a net realized loss from investments of $29.2 million. As of June 30, the Company's total debt outstanding equaled approximately $530 million, including $28 million outstanding on the 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 0.69 times at June 30.

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

Thanks, Rick, and again, thank you all for your time today. We remain hard at work on the portfolio and we're pleased that asset values improved during the quarter. As I stated previously, we have the intention to complete the approved amount in the Company's current share repurchase program in the quarters ahead. In addition to that share repurchase program, our Management Company intends to begin buying MCC stock with the opening of our trading window.

Finally, I'm pleased to announce that Dean Crowe has recently been promoted to Head of Investing at Medley. Dean has been the Senior Portfolio Manager for Sierra Income Corporation, our public nontraded BDC, where he's done a great job overseeing strong performance over many years. Dean will take on the additional role of Senior Portfolio Manager for MCC. We look forward to his involvement and contribution in the years ahead.

Operator, we can now open the call for questions.

(Operator Instructions)

Our first question comes from the line of Kyle Joseph of Jefferies. Sir, your line is now open.

Morning guys. Thanks for taking my questions. I was just hoping to get a little sense of the performance of your Portfolio Company that you guys commented on. Energy improving a little bit, but ex-energy what are you seeing in terms of EBITDA -- or revenue in EBITDA growth trends from your Portfolio Company?

I'd say on balance we're seeing flattish revenues in EBITDA. If you had to take the exact numbers, it's hard to weight on average, Kyle. Slightly positive, but if you wanted to see a trend that was favorable, you'd have to see low- to mid-single digits on revenues and EBITDA. So I'd say on balance we're seeing performance that's soft but slightly positive if you tried to aggregate or weight the average for that portfolio.

Got it. Thanks. And then just as a follow up, the new deal flow and repayments in the second quarter were pretty light. We're seeing that across every BDC. I just want to see your -- if anything's changed into the third quarter, or this calendar year third quarter and your outlook for deal flows ahead? Both repayments and new transactions.

Sure. I think -- let me just take the two separate ones. Repayments we expect higher. We've already experienced a few this quarter, so we have capital coming in. At a high level those yields are at a slight premium to the portfolio average yield, which is to be expected.

From a market perspective, we are starting to see volumes pick up. There's been a couple of factors we've noticed. Pricing is tighter than six to nine months ago. That's not unexpected given where we were in Q4 and Q1.

And it's -- overall there's been a [up in] quality trade that we've witnessed. So we're expecting -- we are seeing volumes pick up that relates to -- some of it relates to overall refinancings. It also relates to activity we're seeing with sponsors as well as companies in general.

Does that answer the question, Kyle?

Yes, thanks a lot for answering my questions, guys.

Okay.

Thank you. And our next question comes from the line of Jonathan Bock of Wells Fargo. Sir, your line is now open.

Good morning, and thank you for taking my question. One small modeling question I wanted to just try to understand. So we saw roughly a $140,000 I'd say like management fee waiver that went into this quarter. Was there some form of clawback on fees not received in the prior quarter, et cetera?

What really was that number just to make sure we were getting it right? Because we know you've instituted a new fee structure. Everything is good on that point, but what are we missing? It's just a technical point there.

Sure, Jonathan. The change in management fee structure was executed through a waiver, and for financial reporting purposes --

Got it.

We're showing it on a gross basis calculated quote, unquote the old way, and the new way is mathematically showing up through that waiver.

Okay. Thank you.

And getting back to business, so one greatly appreciate the alignment in order to originate high quality senior secured assets. That's the right thing to do. It's a very good move and prudent one.

And then the additional question as it relates to credit quality gets between sponsored and nonsponsored. There was a peer that has not done very well that will likely need to reduce their dividend that has some unsponsored deals that have not done too well. And I know, Brook, you've also at times focused on the nonsponsored community, and my question would be how are you looking at the risk reward sponsored, nonsponsored today, and do you have a preference between the two given many of the folks' problems have been nonsponsored transactions?

Sure. I think I understand the question, Jonathan. Let me take a crack and then you can circle back if we didn't get it. The bulk -- the disproportionate majority of origination and opportunities that we're seeing today are sponsor driven.

Okay.

There's a couple factors driving that; you alluded to them. Larger deals. The firm now has over $5 billion of assets under management, so we are increasingly relevant at scale to larger situations that are sponsor backed.

There are nonsponsored deals that we would assess are reasonable and high quality. We have not done much of that recently. We're looking carefully at it.

We would expect that majority, or the disproportionate majority, to be sponsor related going forward, and at a high level, I think you're well aware, those come with -- on margin, lower all-in yields. Does that answer the question?

That does. Thank you so much.

Thanks, Jonathan.

Thank you. Our next question comes from the line of Ryan Lynch of KBW. Sir, your line is now open.

Good morning. I just first wanted to hop into the dividends. So get some more color around that. The dividend reduced down to $0.22 per share. How should we view that dividend going forward, because in light of this quarter NII was $0.20 per share?

At first look, it looks like that dividend is still going to be tough to be even supported by earnings based on this quarter's earnings run rate. So what are we missing? Why did you guys choose the $0.22 level, and how are earnings going to cover -- more than cover that dividend based on a $0.20 number this quarter?

Sure. Thanks, Ryan. Considering all the factors that we know today, we set the dividend at a level that we expect approximates average NII as we look at the current portfolio overtime. And we did take into account several factors when assessing the level.

It includes the target leverage, overall risk profile. We included normalized fee income. And then an assessment of what we would call normalized repayments and the origination.

Additionally, share buybacks, and then the impact potentially of fee waiver as was alluded to previously. So looking at the constellation of all of these factors, our assessment of the average earnings power of the portfolio as we look at it today on average was how we chose the current dividend.

Okay. That's all for me. Thanks.

Thanks, Ryan.

Thank you. Our next question comes from the line of Casey Alexander of Compass Point Research. Your line is now open.

Hi, good morning. I certainly like the idea that you intend to continue to repurchase the stock, because I think that's very shareholder friendly, but I also understand that you have to balance that with deleveraging. So strategically how do you look at that?

And, for instance, in an effort to manage leverage down at the same point in time that you're allocating some money to repurchase stock, can you do things such as small partial calls against MCQ, which I think is currently callable as a way of managing your leverage down alongside of repurchasing the stock? Strategically how do you look at that?

The short answer to the MCQ question is yes we can. And I think we're looking at it, if I'm not mistaken, the way you are suggesting, which is we'll balance both the share repurchase as well as the fund repurchases over time.

Okay. And secondly, the suggestion that you're looking at much more in the way of sponsored deals as opposed to nonsponsored now. Is that a qualitative decision or a quantitative decision?

And by that what I mean is, is the nonsponsored channel not showing you the credit quality and the covenant protection that you think you need, which is leading you to the sponsored channel, or why -- how have you gotten there? Because in the past you guys have been so strong in the nonsponsored channel.

Sure. At a high level, Casey, it really relates to scale. As we passed through $5 billion of assets with open fundraising channels at Medley including institutional managed account, private funds, as well as Sierra, and a newly launching Sierra product, we have significantly increased the scale of our capability.

In the nonsponsored channel, if you think about it, was generally speaking smaller deals and lower volume. So higher volumes, more capital, allows us to just be more relevant to the sponsored community. It has been an important part of what we've done for the last several years.

It's been the disproportionate majority. So we're not ruling out the nonsponsored. It's just as we scale the business it's becoming less and less critical and even less and less of a driving factor to support the scale that we're going to need.

So it has more to do with the co-investment privileges across the entire Medley platform, and nonsponsored doesn't really fit that capability?

That's correct.

Okay, great. Thanks. I appreciate your taking my questions.

Thanks, Casey.

Thank you. And our next question comes from the line of Christopher Testa of National Securities. Your line is now open.

Hey, good morning Brook. Thanks for taking my questions. Just with the buyback program you have $18 million remaining, but you also have the Management Company purchasing shares. Do you intend to renew the repurchase program once it's exhausted, or should we be looking at MDLY purchasing the shares as a replacement to that?

They're not a replacement. They are separate programs as I mentioned. The decision to purchase stock by the Company MCC will be based upon liquidity and leverage.

As we get more liquidity we will continue to be a buyer. We expect to complete that in the next several quarters. What the future holds after that, I'm unwilling to comment at this point.

But I have said in the past that I would not rule out further repurchases, but at this point we're going to stick with completing the Company's repurchase. Again, that will be a separate program from the Management Company's purchases.

Okay, great. And just with regards to your comments on the NII impacted by the lower yields available on new investments relative to the yields on what was previously repaying, are you seeing these lower yields -- is that a function of just more of a first lien focus doing more sponsor originations which tend to have lower yields, or just general spread compression?

I think it -- it's all of the above, Chris.

Okay.

We're seeing both sponsor compression as well as an increasing focus on first liens. So you hit the nail on the head of the three factors driving.

Okay. And you know you mentioned over time turning some restructured investments in which you have equity into income producing. Are there any particular companies that have been restructured where you anticipate that might occur in the future?

Well, we're optimistic that any of them could go that route. At this point it would be premature based upon what we're seeing to tell you which ones we thought, but we're hard at work at each one of them.

As I mentioned, for example, on energy we're seeing modest positive trends, but we're going to watch carefully. We are optimistic that one or more of these will be positive, but at this point premature to comment on the specific credit.

Okay. And last one from me. Just -- I know you had mentioned somebody new taking over Portfolio Management at Medley from Sierra. Just wondering if there have been or whether you anticipate any further Management changes, changes to origination infrastructure, anything like that just given how asset quality has been shaky over the past year or so?

I'm not sure I entirely understand the question, but --

Basically is there a change in how you are going to be viewing underwriting? Are you going to be changing up people within the organization in an effort to bolster credit quality going forward?

Okay, great. No, there's no substantial changes. We've increased -- the firm has grown substantially in the last year. We now have 88 people.

We have significant growth on the other 80%-plus of our business. It does have a general increased focus on senior and first lien and sponsor. That relates to the strategies that they pursue.

Have been performing very well. Dean was shepherding that at Sierra. He's been with the firm for years.

So this is not a change. It's an acknowledgment of his performance as well as the trajectory we're on and the growth of the firm. And we're adding people on a quarterly basis.

So the team is growing, the capability is growing. There's no wholesale change. There's just an enhancement, and we're lucky to benefit from the performance we got out of Dean as well as his team and the whole team in general.

Great, that's all for me. Thank you for taking my questions.

Thanks, Chris.

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

Brook, can you hear me?

I can, Mickey.

Brook, I apologize if the question's already been asked. I'm just juggling a lot of calls. Can you comment on your outlook for activity in the second half of the year? It's been relatively slow across the industry and we have a number of uncertainties, whether it's the Fed, or the elections, or Brexit, et cetera. I'm just curious what your thoughts are high level on that issue.

Sure, I'll take a quick crack. I think we've said before that you all should not count on us to predict the future, but I'll give you some thoughts on what we've seen here and coming out of the second quarter and into the second half of 2016.

In Q2 there was a continuation for sure of just a positive sentiment coming out of that Q1 -- middle of Q1 lows. Spreads tightened. That would be public as well as private.

We saw rallies of course in the equity markets, but off the back of that we began to see an increase in our pipeline of opportunities. Our expectation is that we're going to be able to convert this increased pipeline into investments that will fund during the second half year of 2016. At a high-level pricing, on this is 50 to 75 basis points tighter, if not more than what we saw 9 to 12 months ago.

And I'd say the only other comment that I would make at a high level is there's clearly been a flight to quality. We saw that with first liens outperforming second lien. And some of what we're seeing now in the second lien is that spreads are still perhaps even wider than they were a year ago.

So I mentioned to this, I think our idea is that this up in quality trade has continued. It's continued already into the second half, and we continue to see a pipeline growing. We have to convert it, but we would expect to do that in this quarter and next quarter.

And Brook, just one modeling question. On your floating rate investments, which LIBOR rate do you usually refer to? Is it one month, three months? What's typical in your deals?

Mickey, it is at the election of the borrower. One and three month are the most common.

Okay. Appreciate that, Rick. Thanks for your time this morning.

Thanks, Mickey.

And I'm showing no further questions in the queue at this time.

Great. Well, thank you all for joining. We look forward to speaking to you again next quarter, and as usual feel free to reach out if you have any specific follow-up questions. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program.

You may all disconnect. Everyone have a great day.