PhenixFIN Corp (PFX) 2017 Q1 法說會逐字稿

Welcome and thank you for joining Medley Capital Corporation's fiscal first-quarter 2017 conference call.

I'd like to remind everyone that today's conference 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.

(Operator Instructions)

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 fiscal first-quarter 2017 earnings conference call. I'm joined today by Brook, 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 on our most recent filings with the SEC.

We do not undertake to update our forward-looking statements unless required by law, and to obtain copies of our latest SEC filings and press release, please visit our website at www.medleycapitalcorp.com. In addition, our fiscal first-quarter 2017 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.

Thank you, Sam, and welcome everyone to MCC's quarterly call. Last night we announced our financial results for the quarter ending December 31. And we reported net investment income of $0.19 per share as well as a net asset value per share of $9.39. And as announced in our press release, the Board of Directors approved a dividend of $0.22 for the quarter. This dividend is going to be payable on March 24 to shareholders of record on February 22.

Following the end of the quarter we issued approximately $40 million of 6 1/8 notes. These are due in 2023. The proceeds from this offering will be used for the redemption of all of our outstanding 7 1/8 notes that are due in 2019. The effect of this was to extend our debt maturity and reduce overall interest expense.

As well following the quarter end, we reduced the size of our revolving credit facility. That was from $343 million to $200 million and the purpose of this reduction was to right-size the commitment level for our current portfolio size, expected originations, as well as to further reduce total borrowing costs.

Turning now to the earnings, net investment income was $0.19 per share for the quarter. And we ended the quarter with target leverage of 0.7 times. And that's at the higher end of our 0.6 to 0.7 times range that we have communicated.

During the period we received repayments of approximately $40 million and invested approximately $41 million in new opportunities, as well as supporting existing portfolio companies. The loan portfolio remains diversified and consists of approximately 88% senior loans. That's across 60 portfolio companies now and over 20 industries. In addition, we remain diversified geographically across the US.

At December 31, 6.6% of the portfolio was on nonaccrual. We're closely monitoring all of these loan positions, especially the nonaccruals. And I'd like to note that we have supported and restructured certain of these investments to focus on future growth and upside potential. As part of these restructures we do now have equity ownership and 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. I'd now like to turn the call over to Rick to briefly review our financial results.

Thank you, Brook. For the three months ended December 31, the Company reported net investment income of $10.1 million or $0.19 per share and net income of $6.3 million or $0.12 per share. The net asset value per share was $9.39 at December 31, compared to $9.49 at September 30.

For the quarter, total investment income was $26.1 million and was comprised of $24 million of interest income, $1.4 million of fee income and $0.7 million of dividend income. Total operating expenses net of management and incentive fee waivers were $15.7 million, consisting of $5.3 million in net based management and incentive fees, $7.8 million in interest and financing expenses, and $2.6 million in professional fees, administrator expenses and general administrative expenses.

For the quarter, the Company reported net unrealized appreciation of $2.5 million and a net realized loss from investments of $6.3 million. As of December 31, the Company's total debt outstanding equaled approximately $520 million, including $18 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 0.7 times at December 31. That concludes my financial review. I'll now turn the call back over to Brook.

Thanks, Rick, and thank you all for your time today. Before we break, I want to mention a few key promotions that followed our year end at Medley. Howard Liao was promoted to Senior Managing Director and he's the Head now of Corporate Credit.

David Indelicato was promoted to Head of Credit where he will assume responsibility for credit underwriting across the platform at Medley. These are well deserved promotions. In closing, we remain hard at work on our portfolio. We're focused on positioning MCC for the long-term success. Operator, we can now open the line for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Jonathan Bock with Wells Fargo Securities, your line is open, please go ahead.

Good morning, Joe Mazzoli filling in for Jonathan Bock. The first question relates to the reduction of the revolving credit facility and certainly we can appreciate the benefits of reducing the commitment fee, especially if, that level of bank commitments is not needed. But I just wanted to clarify, was the reduction driven by Medley or was there an amendment that needed to be done to the credit facility, and maybe one of the bank lenders wasn't comfortable recommitting or is this specifically something driven by Medley?

Thanks, Joe. We made this a proactive decision to reduce costs given our expectations of originations. We thought it in the best interest of shareholders to lower commitment costs. If anything, we have creditors looking to give us more capital, not just at MCC, but across the substantially growing platform that we have.

So we're turning away credit, which puts us in a good position. And at a high level I would say when the time is right for us to expand our credit, I think that does not strike me as any issue at this point looking forward. Does that answer the question, Joe?

Yes, that does. Thank you, Brook, and that's very helpful. And then now the next question, we noticed you have excise tax that was paid this quarter, so I think -- and correct me if I'm wrong, but I think this is coming from, even if a loan is on nonaccrual the income still could generate spillover?

And this is kind of where some of the excise tax is coming from? And if that's the case, I'm curious if it might make sense in some cases to restructure, proactively into maybe an equity position that would not drive spillover, from this accounting perspective. Am I thinking about that correctly?

Joe, you are correct. The excise tax is a result of the book-to-tax difference with regard to interest income and we are evaluating the portfolio with regard to interest accruals and the recognition of income.

Okay. Thank you for that. That's helpful. And just one final question here related to DLR and that's, I believe it's changed its name to [NVTN].

So the investment was restructured into a more significant equity position, and then also there's an additional commitment it looks like, but it still held at par. So I guess the question is just if you could kind of help give us some perspective as to, why the company needed additional capital and this did reduce the interest burden, but, if they had trouble supporting the existing capital structure, how is it still marked at this fair value?

Sure, Joe. We were the successful bidder in an auction that was held in November, and we ended up acquiring all of the existing or most of the existing assets of DLR. And a portion of the debt was converted to equity in connection with this to right size the balance sheet.

And this approach was viewed as the best option to provide the required capital going forward. Sponsor did not want to continue. We did what was in the best interest of shareholders and the value of the Company going forward was one [where] we're comfortable.

Thank you very much for that. That clarifies that name and thank you very much for taking my questions.

Thanks, Joe.

Thank you. Our next question comes from the line of Mickey Schleien with Ladenburg, your line is open. Please go ahead.

Good morning, Brook and Rick. I wanted to start with a high level question. Brook, I'm interested to hear what your thoughts on how sponsors behaved last calendar quarter and going into this year, given all the uncertainty we're confronting in regards to regulation or taxes or the economy's trajectory.

Have they accelerated their deal flow? Are they holding back? Any color you could provide would be helpful.

Sure. Thanks, Mickey. I would say two or three things. Clearly dry powder for these folks is at or near an all time high.

So our expectation is that deal flow will continue. We did see as the year ended and turning into 2017 more activity than the same time in the prior year. Obviously the end of 2015, early 2016, we had different challenges given markets and volatility, so I'm not sure the year-over-year comparison is the right one -- but it was up year over year.

The general sense is that people are getting more positive, I would say post election. It feels like people are being more constructive and looking forward with respect to GDP, regulatory environment and tax. In terms of concerns they have, which we share, prices are high.

So looking at opportunities to buy is challenging in some cases. However, I think the average PE sponsor is still in their minds finding opportunities that are attractive for them. And we are supporting that.

With respect to taxes, I think who knows? There's a couple things obviously formulating in Congress and at a high level, the collective you hear as well as most of our sponsor partners is that the combination of lower taxes with potentially reduction in interest deductibility that on balance, that's going to be a neutral to slightly positive for the average corporate.

Again, that's speculating at this point. Does that touch all of your questions?

Yes, that's really helpful. I wanted to get a little more granular now. Can you tell me of the $102 million in cash, how much is in the SBIC?

Sure, Mickey, this is Rick. Substantially all of that cash is in the SBIC at year end.

So Brook, last quarter was -- previous quarter was a similar situation. I would like to understand, what's precluding MCC from putting that money to work, because it obviously making the balance sheet less efficient.

We intend to put it to work in the next couple of quarters, Mickey. I would say there has been no headwind to it other than finding the right opportunities to put the capital to work. So I would expect that, that capital will be to work in the next several quarters.

Okay. That's good to hear. Touching on the SLF, I noticed that you injected more equity instead of letting the leverage run up a little bit toward a more optimal level. Have you changed your target leverage on the SLF?

No we have not changed the target leverage.

So then why inject more equity?

It's just a condition of getting that portfolio fully ramped.

Okay. So Rick, can you remind me what the target leverage is?

2 to 1.

2 to 1. Also, it's paying out only about 40% of net income and the dividend actually declined quarter to quarter. Can you walk us through that, Rick?

The dividend from the JV up to the BDC is a function of actual cash receipts. Ultimately it should just be a timing difference, and as we ramp we would expect it to increase.

And so do we -- for modeling can we expect something like a 90% payout? I know you need to reserve for working capital but down the road, would that be a reasonable number?

Yes.

Okay. And lastly, a couple of questions, what deal generated the net realized loss, and what's the outlook for repurchase of shares?

Sure. Regarding the realized loss, that was primarily driven via a restructuring of our investment in disc electronic.

Okay. That's what I thought.

Yes.

Brook, maybe you didn't, MCC didn't buy any shares during the quarter. Is that just because of the leverage or you didn't think it was a good risk reward or can you give us some color on that?

The former, it was based upon our target leverage.

That's it for me. I appreciate your time. Thank you.

Thanks, Mickey.

Thank you and our next question comes from the line of Kyle Joseph with Jefferies, your line is open, please go ahead.

Thanks for taking my questions. I know you have a slide on interest rate sensitivity in your presentation, but I just want to get a refresher on where most of your LIBOR floors are now that LIBOR is over 1, should we start to see some of the benefit for, the net NII.

Yes, substantially all of the asset floors are right around 1%.

Okay. Then just hoping for a little bit more color on some of the origination and repayment activity in the quarter. I know you guys did roughly about $40 million of both.

Yes, originations, we had $40 million in the -- sorry, $41 million, and repayments were $40 million. What specific color were you looking for, Kyle?

Industry, asset class, particularly on the origination side.

Sure. We have four deals, three were sponsored one was nonsponsored. One was against -- it was a retail financial play, this was in the pawn space with a sponsor we know and have worked with in the past.

We did a deal called PATH Medical, this a provider of fully integrated acute trauma treatment, so kind of health services. This is generally in Florida but large EBITDA borrower, low leverage at closing.

One was a sales and marketing impact sales and sales and marketing business, mid-teens EBITDA, sponsor backed, sensible leverage. And then we had another small remittance company where we participated in the loan that was attractive financing and low leverage.

All right. Appreciate the color, and thanks for answering my questions.

Thanks, Kyle.

Thank you, and our next question comes from the line of Christopher Nolan with FBR and Company, your line is open. Please go ahead.

Thanks for taking my questions. SafeWorks, LLC and [Cannery] Acquisition Corps appear to be sold in the quarter, what was the realized price that you got above or below your carrying value?

They were both at our carrying value. There was no realized loss associated with those repayments.

Got you. And looking at the nonaccruals, it looks like in general that the fair values for the nonaccruals are mostly seem to be up modestly from the last quarter. Is there something systemic going on in terms of that would drive valuations up just modestly, are they priced on some sort of market rate?

The bulk of this, as we have indicated, we spent a lot of time, Chris, focused on our nonaccruals and as I think I've said on prior calls, our intention is to stabilize existing assets and then look to turn and create value from some of them. The underlying valuation as you are well aware is done by third parties, and is based upon the fundamentals of each credit. To the extent that these very modest movements would reflect underlying credit performance, I would hesitate to say that we see that as a signal of direction at this point, but using the same process on balance there was a modest improvement.

Great. And then spillover income, Rick, how much spillover income is there?

$6.7 million. But, Chris, just to clarify, that number is from an excise tax per perspective, which is different from the distribution -- (multiple speakers).

Great. Okay. Thanks for the clarification.

Thanks, Chris.

Thank you, and our next question comes from the line of Casey Alexander from Compass Point Research and Training. Your line is open. Please go ahead.

Good morning, most of my questions have been asked and answered but I would like to ask if in the opportunities that you're originating during the quarter, are those opportunities that are being originated solely for Medley Capital, or are those being co-invested across the Medley platform?

Thanks, Casey. Yes, I think we indicated that MCC is going to benefit from the fact that the balance of our platform continues to grow pretty significantly. This is a quarter, for example, where we're able to benefit from the broader growth, so these were co-invests.

They weren't substantial size as you can see, but again, it allows us to be in a position to selectively put capital to work and leverage the fact that the firm is growing.

Okay. Then my follow up question to that is in looking through those opportunities which are larger opportunities, has that retarded your effort a little bit to create the type of SBA eligible opportunities that would fit for the Medley Capital SBA portion of the portfolio?

It's a good question. The short answer is no, it does not.

Okay. All right. That's all of my questions. Thank you.

Okay. Thanks, Casey.

Yes.

Thank you, and I'm showing no further questions, and I would like to turn the conference back over to Mr. Brook Taube for any closing remarks.

Thank you all very much for the time today. We look forward to speaking with you on the next call. Take care.

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