PhenixFIN Corp (PFX) 2016 Q4 法說會逐字稿

Welcome, and thank you for joining the Medley Capital Corporation's FY16 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 the 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 Risk Management, who will host this morning's conference call. Mr. Anderson, you may begin.

Thank you, operator. Good morning, everyone. Thank you for joining us today for our FY16 fourth-quarter 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, please visit our website at www.medleycapitalcorp.com.

In addition, our FY16 fourth-quarter investor presentation is available in the Investor Relations section of the events and 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 MCC's quarterly call. Last night we announced our financial results for the quarter ending September 30. We reported net investment income per share of $0.23 and a net asset value per share of $9.49.

As announced in the press release last night, the Board of Directors approved a dividend of $0.22 per share for the quarter. And the dividend will be payable on December 23 to shareholders of record on November 23.

During the quarter we repurchased 289,000 shares under our existing buyback program. Since inception we repurchased over 4 million shares for a total of approximately $34 million, leaving us $16 million under the approved program. Our Board of Directors extended the share repurchase program, and we intend to complete the full share repurchase program in the quarters ahead.

Turning now to our earnings. Net investment income was $0.23 for the period, up from $0.20 in the prior period. We ended the quarter with leverage at 0.69 times, which is consistent with the prior quarter and down from 0.74 times at our previous fiscal year end. During the period we received repayments of $126 million and we invested $10 million to support existing portfolio investments. No new loans were originated during the quarter.

Turning now to the portfolio. The portfolio remains diversified and consists of approximately 88% senior loans, and that's across 58 portfolio companies and over 20 industries. In addition we remain diversified across the US. As of September 30, 6.1% 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 potential upside in those situations. As part of those restructurings we do have equity ownership. Over time we have the opportunity to turn these investments into earning assets with upside appreciation, which may provide upside to both NII and NAV in the future. As we finish 2016 and look forward to 2017 we are closely monitoring all of our positions, especially the nonaccruals. We're focused on stabilizing the overall portfolio and restructuring certain positions when necessary.

Across the platform at Medley we are experiencing growth in our AUM and continue to expand our product offering. This growth is a result of the solid performance across the platform. And as and when MCC is in a position to invest in new loans, it will benefit from the increasing scale and the performance at the rest of the platform. I would like to now turn the call over to Rick, our Chief Financial Officer, to review the financial results for the quarter.

Thank you, Brook. For the three months ended September 30 the Company reported net investment income of $12.4 million, or $0.23 per share, and a net loss of $3.2 million, or $0.06 per share. The net asset value per share was $9.49 at September 30 compared to $9.76 at June 30. For the quarter total investment income was $27.2 million, and was comprised of $24.5 million of interest income, $2 million of fee income, and $0.7 million of dividend income.

For the quarter total operating expenses net of management and incentive fee waivers were $14.8 million, consisting of $4.3 million in net base management incentive fees, $7.7 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 a net unrealized appreciation of $60,000 and a net realized loss from investments of $15.7 million.

Turning now to our full-year results. For the year ended September 30 the Company reported net investment income of $53.6 million, or $0.97 per share, and a net loss of $28 million, or $0.50 per share. For the year, total investment income was $120.7 million and was comprised of $112.2 million of interest income, $7.5 million of fee income, and $1 million of dividend income.

Total operating expenses net of management and incentive fee waivers were $67.2 million consisting of $27.3 million in net base and incentive management fees, $3.3 million in interest and financing expenses, and $9.7 million in professional fees, administrator expenses and general and administrative expenses. For the year the Company reported net unrealized depreciation of $42.2 million and a net realized loss from investments of $39.4 million.

As of September 30 the Company's total debt outstanding equaled approximately $515.5 million including $14 million outstanding on the revolving credit facility, $174 million of term loan payable, $177.5 million in notes payable, and $150 million of SBA debentures. The Company's debt to equity ratio excluding the SBIC debt was 0.69 times at September 30. That concludes my financial review. I now turn the call back over to Brook.

Thanks Rick, and thank you all for joining the call today. We are hard at work on our current portfolio and remain focused on positioning the Company for long-term success. Operator, we can now open the call for questions.

(Operator Instructions)

Ryan Lynch, KBW.

Good morning, and thank you for taking my questions. First one just goes to share repurchases. You guys spend about $2.2 million on share repurchases this quarter.

Meanwhile some of the insiders, including you, Brook, significantly bought big amounts of insider purchases, which is very positive and better aligns you with shareholders. But I was just wondering, you guys sit on a significant amount of cash today. And given where the stock was trading at and given the insider purchases, why not use cash at MCC to really drive forward and make share repurchases bigger this quarter?

Thanks, Ryan. I think hopefully we did communicate previously, and I think we did say it, but I will repeat it. Our decision to buy stock at MCC has not been related to share price, it's based upon the leverage at the Company.

We ended the period at 0.69 times and our target range is 0.6 to 0.7. So one constraint, and this relates to our own internal risk decision as well as overall liquidity and balance sheet matters. We intend to complete the program. It's going to be consistent with leverage and liquidity, and that's our plan in the quarters ahead.

Okay. And then with earnings coming in at about $0.23 per share, that was above the dividend. But this quarter there was no incentive fee paid. So if we normalize the incentive fee, assuming $0.04 to $0.05 per quarter, earnings would be well below the dividend, at least for this quarter.

Now, obviously you guys have a lot of cash to deploy, which could be -- drive earnings going forward. So can you just give us some confidence of your ability to earn this dividend with a normalized run rate of incentive fees?

Sure. Thanks for the question, Ryan. Again, hopefully I also communicated this in the past.

Our decision and target for NII has been on a normalized basis to make that consistent with the dividend. So if we didn't deploy capital and we weren't able to turn nonaccruals around in part and we did earn incentive fees, then the run rate NII would be lower than that dividend. So we do look forward on forward basis and say, the balance of nonaccruals coming onto accrual using capital and then stable performance, are we going to be in a position over time on average to earn the dividend?

The answer was, that is how we decided to set it there. But we do need some factors. There's two other things at work here at a high level. We are seeing overall yields come down, and as we take the leverage down from where it was, that also is a headwind.

And I think a third headwind continues to be liability structure. If you [term lock] your liabilities and/or cost of financing rises, that too would be a headwind. So there is several factors at work.

We are watching all of them carefully and pushing on all levers. But I think if you excluded incentive fees and didn't have leverage moving in your favor you would it be able to earn it the way -- said that way.

Sure. So obviously you mentioned the two of the main factors, nonaccruals. But then the other one you mentioned capital deployment. So there's been big net repayments or negative portfolio growth over the last 12 months.

And so obviously in order to get earnings to ramp up in line with the dividend or above the dividend with a normal incentive fee, capital deployment is very key. So what are you expecting for capital deployment over the next 12 months, or what's a reasonable pace of deployment?

I think you should expect modest deployment and it will depend on total leverage at the Company. So we have some capacity. We expect to do some over time.

We will complete the share repurchase, which has the opposite effect. Obviously capital there increases leverage if we use it. So we have two factors competing there. But I would expect modest origination in portfolio growth looking forward into 2017.

Well, just one quick follow up on that. Isn't leverage -- isn't the most capital -- just on over $100 million of cash at least of as of 9/30, so deploying capital, you could have close to $100 million of capital deployment, depending on how much you've repurchased shares. But just from deploying that cash, so shouldn't -- couldn't capital deployment be fairly healthy over the next couple of quarters as you deploy that cash and really wouldn't affect levers, depending on, of course, what you do with the buyback?

Correct, if we use the cash. $70 million of our cash is in our SBIC. I would expect that to be deployed in a measured way over the quarters ahead.

I think the $30 million on balance sheet that, just on the margin, will be dealt with, both share repurchase as well as at the toggle would be increased leverage. Does that help answer the question?

Yes. Thank you for answering my questions. That's all for me.

Thanks, Ryan.

Casey Alexander, Compass Point Research.

Hi, good morning. Thank you for the clarification that $70 million of the cash is in the SBIC, because that answers part of my question. But you still have $30 million outside and you are plenty of room on the revolver. Does it at any point in time make any sense to redeem some of your fixed rate leverage and replace it with a revolver at lower cost?

I understand the question. I think at this point when we look at it we're trying to balance medium-term liquidity with origination and share repurchase. I think at a high level it probably it does make sense.

But we do have constraints buying shares, thinking about origination, and overall balance sheet management. We'll keep you posted on the decision to do that and any other balance sheet items in the quarters ahead, Case.

Okay, great. Thank you.

Jonathan Bock, Wells Fargo Securities.

Hi, guys. Fin O'Shea in for Jonathan Bock this morning. Thanks for taking my question. Most have been answered here.

But curious on the -- in terms of new originations, kind of -- we've talked a bit about leverage yields coming down a little bit. Can you describe the nature of what kind of deals we'll see from you guys going forward with the lower cost of capital and a more conservative posture? Maybe what kind of target yields, capital structure, et cetera?

Sure. Thanks, Fin. As we look at the market today some of the themes that are resonating, and I would say this is a high level theme at Medley. And we have five different investment platforms here and over 20 vehicles.

So this would be themes that would be applicable across our platform. Migrate to the top of the capital structure, that's first lien, and to a much lesser extent, second lien. Floating rate and larger deals.

So those three things all come, I think you rightly pointed out, with lower expected returns in the current market. So as we look forward, new originations for us are going to come in with high single-digit total returns at this point.

And that would include LIBOR plus a spread, modest fees. And then as usual there are a natural portfolio roll that will come with prepayment fees and other events that occur a few times. We look at a holistic high single digit IRR, if you're using those themes, going to the top of the capital structure, staying, floating, and migrating to larger borrowers on average.

Okay.

Does that answer the question?

Yes, absolutely very helpful. So large, like maybe what kinds of transaction size maybe, are we talking lightly syndicated or club? Or do you have -- or even internal syndication, given your other funds?

Yes. I think as it relates to MCC, we touch the entire spectrum at this point in very significant size, from broadly syndicated down to direct and agented and held entirely. The range of size for us is generally on the low end at this point, $40 million to $50 million. And it would be as large as $100 million to $150 million deal size.

So if you thought about that in terms of EBITDA of the borrower you could put a pin in $10 million to $35 million as the likely and sort of range. And at the midpoint is pretty close, $20 million to low $20s million. Those would, from MCC purpose and the target returns that we might participate in, I would think the club deal, agented club deal, the broadly syndicated or lightly syndicated for us, the only home for that at MCC would be in our senior loan joint venture.

Okay. That's very helpful. Again, thank you. And then just one more question, if you want to take a stab at it. Any thoughts on the outlook for regulatory rollback and the banking community, both small and large coming back into leverage loans?

That's an interesting question. We've had that a number of times in the last month, as you might imagine. If we rewind four or five weeks, I think what we feel better about is the backdrop for companies on the margin.

If you said any of the following would be positive, either lower taxes, lower regulatory touch, lower healthcare costs, and generally more capital spending or more confidence around spending capital, these are -- on the margin you'd expect one, two, three or any version of this would help the animal spirits, would be general a favorable backdrop for credit. But I think in that sense we hope, although we all have to watch closely, whether that feeds through the system to top line GDP growth and then helping the companies themselves. But probably on balance if you said five weeks ago some of that would be happening, it would have to be seen as a positive.

From a regulatory perspective, the big question is, do the banks come back into the direct noninvestment grade, lower, middle market? I -- it doesn't seem persuasive that's a likely shift in the very short term or even medium term. So we're going to watch it like everyone else.

There is a possible interpretation that the banks want exposure at a high level to this that they become more favorable financing partners for us. So I think we'll watch closely how they behave and what the actual follow-through on regulatory relief is. And then how people decide to migrate their balance sheet. So we're watching it closely. We're not that concerned in the short and medium term, but it's certainly a new era to pay attention to.

Okay, guys. Appreciate it. Thank you.

Thanks, Fin.

Christopher Testa, National Securities.

Hey, good morning guys. Thank you for taking my questions. Just could you provide us with a refresher on the SBIC license? When did you last apply for the additional leverage? And did you receive a green light letter for that yet?

I do not have the date we filed. We are in process there. We are in dialogue with the SBA at this point. When we have something further to report for you all, we will certainly tell you.

Okay, great. And are there any thoughts on changing the way that you recognize origination fees? Instead of recognizing them upfront to amortize them over the life of the loan so that you're not put on the treadmill with the dividend?

That's a good question and we've had it before. I think the short answer is, we have not changed nor has our accountant, E&Y, changed their view on this treatment.

Given that we are an originating and that in the very short and medium term we don't expect significant volume of origination, I don't think this will have a material impact. But at this point there's been no further thought given to that.

Okay. And also has the Board given any consideration to potentially just changing the base fee to be on the lower fee on total assets instead of assets over $1 billion?

No. We have not. The Board has not given consideration to that.

Okay. That's all for me. Thank you.

Thanks, Chris.

Mickey Schleien, Ladenburg.

Brook, I wanted to follow up on your sort of big picture comments. We saw a blip in spreads widening after the election. But then they've started to continue to meaningfully tighten again implying continued excess capital in the system.

You made some comments that seemed pretty -- well, let's just say somewhat optimistic about the coming years. So do you think we might see a situation next year where there's a better balance between supply and demand for capital and this spread tightening may dissipate?

I guess I hope so, or we really do hope so. If you look today, we've obviously shrunk, purposefully we've shrunk the MCC portfolio and prioritized the other initiatives of buying back stock and reducing leverage. Part of that is, obviously, our view of what's the appropriate thing to do for shareholders.

The backdrop has also been one where it hasn't been exciting to go and reach for lower yields that are high risk. So that's with MCC. At the platform at Medley, our -- we have grown our assets, but our are in-place portfolio, I'd call that fee-earning assets, have been flat to slightly down over the last 24 months. And that high level stable to slightly shrinking portfolio is a reflection of not wanting to reach for returns in the challenging market.

So we are finding things to do. We do invest on a quarterly basis. But we acknowledge what you have said clearly, that is challenging to find high quality things to do. So we are -- there's plenty of volume to do.

We have a dry powder, we're optimistic there'll be opportunities through time. But it sure would be nice if we got an opportunity where there was some widening.

Okay, I understand. Brook, some more granular questions. Were the repayments in the SBIC subsidiary idiosyncratic or was there some sort of theme there, perhaps having to do with year end and tax planning or something like that?

We did not see anything unique about it, all idiosyncratic. I would say at a high level just capital flowing in and people are refinancing, and that's it. Nothing specific, Mickey.

Okay. And of the cash that's outside the SBIC, do you intend to inject any of that into the SLS and take more advantage of that opportunity?

Hi Mickey, this is Rick. Yes we do, approximately about $10 million into the SLS.

I'm sorry, I just want to make sure I understand. You expect to inject another $10 million into the SLS?

Correct.

Is that -- can you give me a timeframe?

Over the next several quarters.

Okay. And maybe, Rick, for you, the SLS, if I calculated it correctly, generated a net loss on a reported basis in the quarter. But the dividend to Medley actually increased. Can you discuss the dividend policy, or how the dividend policy is set for the SLS?

It is set quarterly based upon distributable cash available at the SLS to distribute out to the respective equity owners.

So there's some timing differences involved?

Correct.

Okay. Last question is portfolio question. Brook, CP OpCo was previously performing as of June and marked almost at par, but obviously something transpired during the quarter leading to the restructuring. Can you just walk us a little bit through what happened there?

Sure, Mickey. That's a combination for us of at this point first and second lien. During the quarter lenders and the sponsor completed a consensual restructuring and actually jointly provided capital for liquidity purposes. The restructuring was a result of just really underperformance, financial underperformance and the capital needs at the company.

So we're working closely with the sponsor and the agent on this one as they work to kind of improve the performance. But today the mark reflects that combination of financial underperformance, the restructuring that we entered into, and the capital needs of the company.

Fair enough. Those are all my questions. I appreciate your time. Thank you.

Thanks, Mickey.

Matthew Brotman, FBR and Company.

Hi. Thanks for taking my calls. Most of what I had -- wanted to ask has been answered already. But I was wondering if you could provide a bit of color on what drove the realized losses this quarter?

Sure. So the -- during the quarter we completed restructurings of certain investments. And the realized loss that was recorded equals the difference between the fair value of the new restructured investments and the cost basis of the old investments.

Okay. And was there one particular investment that drove the majority of that, or it came from across a variety of things?

The two primary drivers were CP OpCo and AAR.

OpCo and AAR. And my only other question was you said that you expect to complete the current share repurchase program in coming quarters. Would there be any consideration of a second share repurchase program once the current one is completed, or is that not something that has been discussed yet?

We have not discussed that yet. We have said previously that we would not rule that out. We're focused today on what's in front of us. We'll discuss that further in the future.

Okay. Thanks for taking my questions.

Ladies and gentlemen, that's all the time that we have for questions today. So I'd like to turn the call back over to management for closing comments.

Great. Well, thank you all for joining today. We appreciate the continued support. And on behalf of our entire team at Medley we'd like to wish you all a very happy and healthy holiday season. And we'll look forward to speaking to you in a couple months. Thanks very much.

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program, and you may all now disconnect at this time. Everyone have a great day.