PhenixFIN Corp (PFX) 2017 Q4 法說會逐字稿

Welcome and thank you for joining the Medley Capital Corporation's Fiscal Fourth Quarter 2017 Conference Call. The company would 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 for the call will be available by using the telephone numbers and PIN provided in the company's earning release. (Operator Instructions)

Participating on the call from Medley Capital Corporation are Brook Taube, CEO; Rick Allorto, CFO; Sam Anderson, Head of Capital Markets; and Dean Crowe, Head of Investing.

Before we begin, the company would like to call your attention to the customary safe harbor disclosure in the company's 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 statements other than statements 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 the company's most recent filings with the SEC.

The company does not undertake to update their forward-looking statements unless required by law. To obtain copies of the company's latest SEC filings and press release, please visit the company's website at www.medleycapitalcorp.com.

In addition, the company's fiscal fourth quarter 2017 investor presentation is available in the Investor Relations section in the events/investor presentation section on the company's website.

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

Thank you very much, and welcome, everyone, to MCC's quarterly call. This morning we announced the financial results for the quarter ended September 30. NAV was $8.45 and net investment income was $0.16 per share. As announced on November 2, our Board of Directors approved a dividend of $0.16. The dividend will be payable on December 22 to shareholders of record on November 22.

Turning to investing. During the quarter, we invested $58 million. The bulk of this origination was in 7 direct loans. These loans were senior, secured and sponsor backed, with an average EBITDA of $36.4 million. The origination volume this quarter is a reflection of our continued migration of the portfolio to larger sponsor-backed borrowers.

Across the platform here at Medley, we continue to raise capital, that's from both institutional and retail channels, and this increasing scale has allowed for our continued migration to the larger borrowers, larger loan sizes and commitments. And MCC benefits directly from this platform growth in that it can access this high quality, larger deal flow at its target investment size. We do expect this trend will continue in 2018.

During the past quarter, we did see an increase in deal volume, and this trend really has carried over into calendar Q4. Our quarter-on-quarter average yields, this would be on our closed deals, was generally unchanged, and this appears to be consistent with what we've seen in the broader middle-market. During the quarter, we're looking at the entire volume of deals that we reviewed, there was a modest increase in total leverage, and I would say on balance, more permissiveness with respect to structure. These trends have been directionally the same, looking back, since the beginning of 2017.

Throughout 2017, we have seen increased supply of capital being provided to borrowers. However, we continue to find attractive investment opportunities in our target markets.

Overall, our loan portfolio at MCC remains diversified, consisting of approximately 84% senior secured loans to 64 portfolio companies and that covers 20 industries. We continue to be diversified geographically as well across the U.S.

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

Thank you, Brook. For the 3 months ended September 30, the company reported net investment income of $8.6 million or $0.16 per share and a net loss of $12.2 million or $0.22 per share. The net asset value per share was $8.45 at September 30 compared to $8.84 at June 30. For the quarter, total investment income was $22.1 million and was comprised of $18.8 million of interest income, $1.8 million of fee income and $1.5 million of dividend income.

For the quarter, total operating expenses were $13.5 million and consisted of $4.3 million in net base management fees, $7.2 million in the interest and financing expenses and $2 million in professional fees, administrator expenses and general and administrative expenses.

For the quarter, the company reported net unrealized depreciation of $8.7 million and a net realized loss from investments of $11.7 million.

Turning now to the full year results. For the year ended September 30, the company reported net investment income of $36.4 million or $0.67 per share and a net loss of $15.1 million or $0.28 per share.

For the year, total investment income was $96.3 million and was comprised of $85.5 million of interest income, $6.6 million of fee income and $4.2 million of dividend income.

Total operating expenses, net of management and incentive fee waivers were $59.6 million, consisting of $18.6 million in net base management and incentive fees, $31.4 million in interest and financing expenses and $9.6 million in professional fees, administrator expense and general and administrative expenses.

For the year, the company reported net unrealized appreciation of $21.6 million and a net realized loss from investments of $73.1 million.

As of September 30, the company's total debt outstanding equaled approximately $497 million, including $68 million outstanding on the revolving credit facility, $102 million of term loan payable, $177 million in notes payable and $150 million of SBA debentures. The company's debt-to-equity ratio excluding SBIC debt was 0.74x at September 30.

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

Thanks, Rick, and thanks, everyone, for the time today. We continue to work hard on our legacy portfolio. As I've mentioned in the past several quarters, our expectation is that 2017 would be a transition year for this part of the portfolio, as we continue to work through certain of these legacy positions and focus on this migration of the new origination towards the larger borrower set.

Also, as I've mentioned, certain legacy assets have been restructured. In these cases, we have meaningful equity positions in some of these companies. While it is premature to discuss upside in any of this equity, there are certain instances where we're beginning to become more optimistic. And to reiterate, MCC continues to benefit from the growing and expanding investment capabilities here as our platform expands, and that's going to continue in 2018 and beyond.

Operator, we can now open the call for questions.

(Operator Instructions) And our first question comes from the line of Mickey Schleien of Ladenburg.

Brook, at a high level, it seems that the middle market is moving toward equilibrium, and spread compression has somewhat dissipated. What's your outlook for this trend to hold going into next year?

Thanks -- I think we have seen in the data, which would be spread and volume that there has been some stability -- it's irrefutable that competition is rising. And I think, if you just look at the number of people that are providing capital and the scale that people have, it's rising. There are two dynamics that seem to be occurring in the market. The large players are getting bigger, and they're raising a lot of money. That doesn't mean they're going to all move to larger deal flow, but I think the general trend is for big platforms to look for bigger deals. That seems to leave the -- our target market size, which has been and continues to be in the $50 million to $100 million loan size, and that would be, let's call it, $10 million to $40 million of EBITDA as an opportunity. Big players getting bigger, and it's harder for smaller folks to raise enough money to compete at the $100 million ticket size. So we'll see how it develops. It's hard to argue that competition is not increasing, but there seems to be some stability. This quarter, we're continuing to find opportunities and we'll see how that develops in 2018.

And just one follow-up question. I know it's a little bit early to perhaps ask this, but I'd like to understand what your view is on the potential impact for demand for debt capital should Congress limit the amount of deductions that businesses may take for interest expense.

Sure. Look, we're trying to analyze this to the extent that we can. It feels to me like we're going to have to wait and see what comes through. At a high level, I just want to reiterate, the loan capital and the lending business is still a valuable and important source of capital for corporate America. And on balance, this is not the most expensive piece. So I think the idea that on margin, taxes may impact the cost of capital that may flow through at a high level to corporations, I don't think it necessarily squeezes out the demand or even the scale required on the loan side. We'll have to wait and see, but this will remain an important, and we think growing set -- subset of the capital that is provided to corporate America.

And just one housekeeping item, maybe for Rick. Which deals generated this quarter's realized loss?

Sure. The realized loss this quarter was primarily related to the realization for Lydell, and that was partially offset by a gain associated with the equity investment in Dream Finders.

And our next question comes from the line of Casey Alexander of Compass Point Research.

First of all, I was wondering, your commentary regarding the trend of deal flow, which is encouraging, would you suggest that, that would give you an opportunity to kind of eat into some of the $100 million in cash that you have on the balance sheet in Q4?

Sure, Casey. We expect to deploy the cash, again, about 70% of that is in the SBIC, which has some additional requirements in terms of the type of deal. We would expect to eat into that, to use your term, in -- as we look to finish 2014 -- 2017 and into 2018.

Okay, okay, great. Secondly, I'm glad to hear that you're feeling some encouragement towards the temper of some of your legacy investments. I'm sort of wondering, without getting into specific names, kind of what are the signposts that you're seeing? Is it oil price deck? Or is it M&A activity? Or direct outreach regarding specific names? Kind of what are the signposts that you're seeing that's making you a little bit more encouraged?

Thanks. I just want to reiterate, I think I did say it's too early to talk about upside, but we're beginning to sort of feel more optimistic that some cases might become valuable. The signposts are not related specifically to a commodity or the overall GDP, they're idiosyncratic and related to a borrower. But to give some color, this would be a situation where EBITDA came off substantially, but still significantly positive, stabilized, it's doing better and we're seeing opportunities on the top line that if they come through, would meaningfully increase EBITDA. So this is more about what's possible and directional changes still need to execute. But in a normal business, on the loan side, we wouldn't have upside and it's encouraging that in situations where we were the liquidity provider, restructured sensibly and we have upside if that turn happens. So I think, it happened before in our history. It will happen again. And at some point here, we'll be -- we look forward to reporting good news. Again, I don't have a timing on when that's going to be, but does that help you? Answered your question?

No. That's really helpful. That's great color.

Our next question is from the line of Christopher Testa of National Securities.

Brook, just in terms of the originations and obviously, moving more upmarket, just curious if you can kind of give us some color on how much of the deal flow that you've closed on is now co-invested across the platform? And where do you kind of see the sweet spot for the average EBITDA kind of ending up for Medley?

Thanks, Chris. We -- I'd say, by and large, we do co-invest, specifically on the MCC positions because that position hold size is, use a number $10 million to $15 million, just an example, that would be a small piece of a deal. So by definition, we will have invested in another vehicle, which is larger at Medley. So I would call that a co-invest. As I mentioned, the average deal size on closed deals this quarter was $36.4 million EBITDA. That's going to move around a little bit. I'd say the range is going to be on a low end, $10 million to $15 million, and on the high end, probably $40 million. That would exclude our growing liquid credit business, where you'll see larger borrowers at the Medley platform. So on the direct side where MCC is consuming, you're looking at, kind of that $10 million, $15 million to $40 million. And this period, it was on the middle to higher end of that range.

Got it. That's helpful. And just kind of staying with that theme as you lend money to larger borrowers, and you just mentioned growing out the liquid platform at Medley, has that made it easier to source deals that are good for the joint venture?

Yes. On balance, I'd say as the platform grows and we add high quality investment capability. We've expanded the dragnet. I look back over the last year or 2, I would say there's not been a substantial increase in either our -- the universe we're looking at or the overall ability to originate. But like most places with growing investment disciplines and growing team and growing capability on the margin, it certainly has helped us.

Got it. I know that obviously, the commentary surrounding the originations has been positive, which is great for the quarter, but just curious how you're kind of weighing this versus the potential to reauthorize repurchases here just given where the stock's trading.

Yes, it's a good question. We have not reauthorized. As I've said in the past, it's something that we might consider. I would not rule it out, but that has not been reauthorized at this point.

Okay. And just last one for me, just a little housekeeping item. Should we expect kind of the run rate for professional fees to kind of stay at the level of this quarter?

Hi, this is Rick. Yes, you should.

And that does conclude today's Q&A session. I would like to turn the call back over to Mr. Brook Taube for any closing remarks.

Thank you all very much for joining today. On behalf of our whole team we want to send our best wishes for the holiday season and look forward to speaking again in early 2018. Thanks very much.

Ladies and gentlemen, thank you for your participation in today's conference, this does conclude the program. You may now disconnect. Everyone, have a great day.