PhenixFIN Corp (PFX) 2017 Q2 法說會逐字稿

Welcome, and thank you for joining the Medley Capital Corporation's Fiscal Second Quarter 2017 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 earning press release. (Operator Instructions)

And now, I would like to introduce Sam Anderson, Medley's Head of Capital Markets and Risk Management, who will be hosting 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 second quarter 2017 earnings conference call.

I'm joined today by Brook Taube, our CEO; Rick Allorto, our CFO; and Dean Crowe, our Head of Investing.

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 any 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 fiscal second quarter 2017 investor presentation is available in 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 Medley Capital Corporation's Quarterly Call.

This morning we announced our financial results for the quarter ending March 31.

We reported net investment income per share of $0.15 and net asset value per share of $8.94.

Excluding a one-time charge related to the early termination of certain debt facilities, the net investment income was $0.17 per share.

As announced in our press release this morning, the Board of Directors approved a dividend of $0.16 per share for the quarter ended March 31.

This dividend will be payable on June 23 to shareholders of record on May 24.

During the quarter, we issued approximately $40 million of 6 1/8% notes that are due in 2023. Proceeds from this offering were used for the redemption of all of the outstanding 7 1/8% notes that were due in 2019.

During the quarter, we also proactively reduced the size of our revolving credit facility, that was from $343 million to $200 million. And the purpose of the reduction was to rightsize the commitment, and that was given the current portfolio size, our expectation on originations, and it was also to reduce the total borrowing cost of the company.

I am pleased to announce that during the quarter, we increased our JV facility by $100 million and that is to a total of $200 million now in total capacity, and we expect to utilize this additional capacity in the coming quarters.

Turning now to investing. During the quarter, we received repayments of $35 million and invested $58 million in new opportunities and in support of our existing portfolio investments.

We continue to focus new origination on larger borrowers and first lien opportunities.

The loan portfolio today remains diversified. It consists of approximately 89% senior secured loans across 64 companies and that's in 20 industries.

We are also diversified geographically across the U.S.

As of March 31, 9.9% of the portfolio was on nonaccrual. Some of the nonaccrual positions have been restructured and that's resulted in certain equity ownership.

Over time, we have the opportunity to turn these investments into earning assets with the potential for equity appreciation, which may provide upside to both NII and NAV in the future.

I'd like to turn the call now over to Rick Allorto, our Chief Financial Officer, to review the financial results.

Thank you, Brook. For the 3 months ended March 31, the company reported net investment income of $8 million or $0.15 per share and a net loss of $12.2 million or $0.22 per share.

As Brook previously mentioned, net investment income was $0.17 per share, excluding the one-time charge.

The net asset value per share was $8.94 at March 31, compared to $9.39 at December 31.

For the quarter, total investment income was $24.4 million, and was comprised of $21.8 million of interest income, $1.5 million of fee income and $1.1 million of dividend income.

For the quarter, total operating expenses, net of management and incentive fee waivers, were $16.3 million, consisting of $4.5 million in net-based management and incentive fees $9.1 million in interest and financing expenses and $2.7 million in professional fees, administrator and general and administrative expenses.

Included in the $9.1 million of interest and financing expense was a one-time charge of $1.3 million, related to the voluntary reduction of the size of our revolving credit facility.

On a pro forma basis, we expect the reduction of the revolver to result in an annual cost savings of $1.4 million.

For the quarter, the company reported net unrealized depreciation of $19.8 million and a net realized gain from investments of $10,000.

As of March 31, the company's total debt outstanding equaled approximately $535 million, including $34 million outstanding on the revolving credit facility, $174 million of term loan payable, $177 million in notes payable and $150 million of SBA debentures.

Excluding -- the company's debt-to-equity ratio, excluding SBIC debt, was 0.77x at March 31.

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

Thanks, Rick, and thanks everybody for the time today.

In closing, we remain hard at work on the existing portfolio, and we're all focused here at positioning the company for long-term success.

Operator, we can open the call for questions.

(Operator Instructions) And our first question comes from Mickey Schleien with Ladenburg.

Just one big picture sort of question. Now that earnings season has progressed, I've seen many BDC portfolios shrink this quarter with refinancing. It would seem that, on an overall basis, the sector has not been taken out by other BDCs, but potentially some other players. I'm just curious, if you could give us some background on who you feel is providing capital today apart from BDCs? And what's your outlook for Medley's net investments for the balance of the year?

Thanks, Mickey. What we're seeing is increased competition in the middle market. To give you some color, the first quarter of this year was active for Medley across our platform. Our AUM is increasing and it's largely coming on the private side in other retail channels. So I think there is a significant increase in capital availability in the market that's not necessarily coming through the listed BDCs. So we have seen an uptick in activity. At Medley, we are witnessing an uptick in activity as well as increased competition. So I think you're correct in assuming that the large part of that increase in competition in capital is coming through other channels.

And our next question comes from Jonathan Bock with Wells Fargo Securities.

Can you talk about, in light of the dividend reduction, we've actually seen some managers choose to support their dividend yield through incentive fee waivers. And Brook, I was curious just -- what was going through your -- you and the board's view of not being willing to do that at this point in time. Clearly there's a reason, I'd just be curious what that is?

So, Jonathan, let me just clarify. The question is -- and maybe there's a confusion. We have a full waiver of our incentive fee this period.

So in terms of base -- or effectively, when it comes to the dividend reduction, just the overall willingness to try and actually plug the gap. Now granted there's losses, et cetera, I'm just curious, when you looked at it, is it just -- there was nothing else one could give within the external management company in order to support the dividend. And like I said, I completely understand it. I was just curious as to, some folks have tried to support it as best they could without going for a reduction. Curious as to why this quarter decided to be the reason you let the issue drop?

I still -- I just want to make sure I clarify. So I would say our support as a percentage of the fees, which was our full incentive fee, is probably the largest as a percent. As it relates to the overall dividend -- the dividend -- the earnings have been below that dividend for several periods and the source of that is a couple. One is, certain parts of the portfolio we've restructured, that's resulted in nonaccrual. We expect to reposition those assets. And the second is, again, a decline in overall yields and overall portfolio size. So we have been affected by that. It's been pending. I think what we indicated is, we do not intend to overpay the net investment income through the dividend. So the dividend decision by the board and all of us related to the sustainable NII. And in terms of the fee support, I'll stick with what I think I've said, which is I think our percentage support has been and will continue to be on a percentage basis, kind of the top of the group, and we will continue, obviously, to do that. We've made that sort of permanent.

I understood and appreciate that, Brook. And then, just the last question is, there are a few external management contracts that are out in the market today. I'm curious as to whether or not you believe the Medley Complex would be a potential acquirer of any of those contracts? That's all my questions.

Thanks, Jonathan. I'm not in a position to comment on that question at this point in time. But we are aware of what's happening in the market.

And our next question comes from Casey Alexander with Compass Point.

A couple of maintenance things. Could you -- Rick, could you repeat what the total originations were versus total repays for the quarter?

Sure. One second, Casey.

While you're looking that up, I'm also going to ask what percentage of the portfolio is currently floating rate versus fixed rate?

Sure. So your first question. During the quarter, we deployed $58 million of capital and we had $35 million in repayments.

Okay. And floating rate versus fixed?

Floating rate, sure, Casey, is 83.4% is floating rate.

Okay. And is it safe to say that without the cost of reducing the size of the line of credit and also the cost of the accelerated fees on the bond call, that ex those net investment income this quarter, probably would have covered the new dividend level. Is that fair to say?

Yes.

And our next question comes from Ryan Lynch with KBW.

Obviously, over the past few years, you guys have struggled with some credit issues, nonaccruals, write-downs in the portfolio. I assume that you guys have taken a very hard look at your credit investment philosophy, your underwriting, your monitoring processes, over the last several years and probably even more recently with the recent credit issue. So I just wanted to know, can you provide any sort of color of, as you guys have looked at these processes, what have you been able to identify, is there any sort of deficiencies and what sort of changes or steps are you guys looking to make to improve the underwriting and monitoring process?

Thanks, Ryan, and it's a good question. We have spent a lot of time on this. I think as folks are aware, MCC is an important part of our business, but it's less than 20% of our assets. The remaining portion, which is focused largely on first lien floating rate and larger borrowers, has performed substantially better. We have looked at this issue carefully. I would say to you that this is -- at this point, the legacy portfolio that we're working through, will look different going forward and look a lot more like that 80-plus percent of our assets that have performed substantially better. That's the focus. The changes we have made relate to deal size, sourcing, as well as certain changes in personnel that have occurred. And I'm pleased, obviously, with the performance and addition of Dean from his role, otherwise at Medley, to now portfolio management responsibility at Medley Capital Corporation.

Okay. And then you mentioned on the call some of your, I guess, probably nonaccruals are in the process of restructuring. Can you provide which names that are nonaccrual currently that you guys are hoping to or are in the process of restructuring currently?

At this point, we don't have any that are in process, we have restructured, I'd say it's complete. We have ended up with equity ownership in certain portions. I will reiterate what I think I said last call which is, there are several that are beginning to show positive signs, and we do have equity upside and we're working hard and will continue to support those with the intention of creating value. Others, we intend to either liquidate or create or maximize what value we have there. So I'd say it's hard to predict exactly what happens with something that's a nonaccrual that has had restructuring. But in the cases where it was balance sheet-related, it was appropriate to restructure and position the company for long-term success. We've done that and we're hard at work at creating long-term value.

Okay. Then when I look at your balance sheet. I mean, you guys have about $83 million of cash on the balance sheet. If I remember correctly, I believe that a lot of that is in SBIC facility. So from as far as capital deployment standpoint and looking at leverage, total's at like 107%, regulatory is at 77% and then you have that $83 million-or-so of cash, which I think's large in the SBIC. I mean, should we expect any portfolio growth from here on out? Or are you guys pretty much set or can you guys actually deploy some of that cash?

Ryan, this is Rick. $76 million of that $83 million is in the SBIC, and we do intend to deploy that capital over the coming quarters.

Okay. And then just one modeling question, I guess. When I look at the calendar, second quarter, assuming that there's no changes in the portfolio values, no gains or losses, my model shows that you guys are going to have a reduced incentive fee, maybe of about 1/4 of what you guys would normally get. Does that look in the ballpark that that's correct?

Yes. That's correct.

Thank you, and that does conclude our Q&A session today. I would like to turn the call back to Brook Taube for any further remarks.

Thank you all for joining today. As always, we remain available for follow-up questions. And I look forward to speaking with you on the next call. Thank you.

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