PhenixFIN Corp (PFX) 2018 Q1 法說會逐字稿

Welcome, and thank you for joining the Medley Capital Corporation's Fiscal First Quarter 2018 Conference Call. The company would like to remind everyone that today's call is being recorded.

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

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 statement other than the statement of historical fact may constitute a forward-looking statement.

Please note that the company's actual results could differ from -- 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 first quarter 2018 investor presentation is available in the Investor Relations section and the Events/Investor presentation section of the company's website.

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

Thank you, operator, and welcome, everyone, to Medley Capital Corporation's quarterly earnings call. This morning we announced our financial results for the quarter ended December 31: reported net investment income of $0.13 and net asset value per share of $7.71. Our Board of Directors approved a dividend of $0.16 per share for the quarter ended December 31, which will be payable on March 23 to shareholders of record on February 21.

I'd like to begin today discussing the existing portfolio. As I've mentioned on previous calls, 2017 was a challenging year which we focused on resolving legacy assets and repositioning the portfolio. This past December quarter finished up this challenging year as we focused on resolving where possible and transitioning where appropriate the remaining legacy positions. I think as a reminder, our legacy portfolio generally consists of loans we made to smaller non-sponsored borrowers and included certain subordinate positions.

In early 2015, that strategy shifted at MCC to focus primarily on larger sponsor-backed companies, a strategy which continues to benefit from the broader Medley platform that also pursues that strategy. Today, we have 10 borrowers remaining in the legacy portfolio. We characterized the remaining assets in 2 buckets.

The first bucket includes 5 of these 10 borrowers and represents approximately 13% of total assets. These 5 positions had internal credit ratings of a 1, 2 or 3 at quarter-end, and these are applied to positions that are performing ahead of, consistent with, in the case of 2, or slightly below underwriting plans, respectively, and that will be for #3. And while these 5 legacy positions are part of our pre-2015 vintage, this 13% bucket is currently performing well and we expect that trend to continue in 2018.

The remaining 5 borrowers, the second bucket of these legacy assets represent, now, 7.4% of total assets at the quarter-end, and these carried internal credit ratings of either a 4 or a 5. At quarter-end, these 5 positions were marked substantially below par with an average mark now of above 37.

During the December quarter, 3 of these legacy position names in this second bucket were marked lower and accounted for the bulk of our approximately $39 million markdown in the portfolio. We continue to work hard on the legacy portfolio and do expect to resolve a majority of these positions during 2018.

Turning now to investing. During the quarter, we invested $83 million, the majority of which were first lien senior secured loans to sponsor-backed borrowers. And of this origination, $34 million was deployed in our SBIC. Following the quarter-end, I'm pleased to report that we raised just over $120 million of unsecured bonds by institutional and retail buyers. The proceeds of this offering were used to refinance our term loan.

At Medley, across our platform, we continue to raise capital from institutional and retail channels, and MCC continues to benefit from the origination and resources of the broader platform.

I would like to make one comment, which is that originations that we have made post-2014 have produced no non-accruals and continue to generate consistent performance. As we follow through with our continued migration to the larger sponsor-backed borrowers and complete the roll off of our legacy portfolio over the coming quarters, we're cautiously optimistic about the future for Medley Capital Corporation.

I would like to turn the call over now to Rick, our Chief Financial Officer, to review the financial results for the quarter.

Thank you, Brook. For the 3 months ended December 31, the company reported net investment income of $7.2 million or $0.13 per share and a net loss of $32 million or $0.59 per share. The net asset value per share was $7.71 at December 31, and that's compared to $8.45 at September 30.

For the quarter, total investment income was $20.6 million and was comprised of $17.4 million of interest income, $1.8 million of fee income and $1.4 million of dividend income. For the quarter, total operating expenses were $13.3 million and consisted of $4.1 million in base management fees, $6.8 million in interest and financing expenses and $2.4 million in other operating expenses.

For the quarter, the company reported net unrealized depreciation of $39 million. As Brook mentioned, the net loss was primarily the result of 3 borrowers in our legacy (technical difficulty).

As of December 31, the company's total debt outstanding equaled approximately $476 million, including $47 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 0.76x at December 31.

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

Thanks, Rick, and thank you all for your time today. As I mentioned, the past few years have been challenging, but we are encouraged by the performance we've seen on all assets originated after our strategy shift which began in 2015. We have work left to resolve the remaining legacy assets, which we intend to complete in 2018. However, we believe the bulk of the issues related to our legacy assets are behind us. As some and -- or most of you know, we are substantial shareholders of MCC. Our team remains hard at work and is committed to the success of MCC in the years ahead.

Operator, we can now open the call for questions.

(Operator Instructions) And our first question comes from the line of Jonathan Bock from Wells Fargo Securities.

Brook, I'd like to start just given the decline in NAV and the fairly solitary credit environment that we're experiencing, are there any implications as it relates to remaining or keeping your SBIC license?

None that I'm aware of.

Question. Are any of the loans that have experienced difficulties pledged to the SBIC facility?

We do have some portion, but it's not a significant portion.

Okay. Just in light of the performance of those assets, that's always a question that we want to dive into. And then the next question relates to just overall looking at book deterioration, et cetera. Can you explain why institutional trust should be imparted upon your ability to run this fund in light of the performance relative to peers?

Yes, I'm not really sure that's a question. Is it Jonathan?

So then, perhaps, maybe what we could do is flip back. Do you believe that in light of the difficulties in generating client returns that have been experienced, does it make sense to consider a strategic alternative? And if so, have you considered them?

Well, let me sort of step back and go to a little bit of altitude. I think as you're well aware, we have about well over $5 billion of assets. And the performance in returns for our institutional clients have been consistent, and our continued growth in assets is a function of the performance there.

In the case of MCC, which as I mentioned in the prepared remarks, it clearly has been a challenge for us dealing with the legacy portfolio largely constrained, as I mentioned, to smaller borrowers and subordinate positions that were, in fact, made years ago. We can't rewind the clock there. Mistakes were made (technical difficulty) on the way we've become substantial shareholders.

So I think what I would say is, other than the fact that we're not doing the strategy that did not work in the past, over 80% of our assets now are pointed -- actually, I should say that it's probably over 90% considering the bulk of MCC's assets are pointed to senior first lien sponsor-backed borrowers. And that has been and will continue to be a consistent performer, but we expect that to be the case.

So we're committed to the future. We have significant position now. We like the stock where it is, and we're confident that we're at or near turning the corner. So hopefully, that's helpful.

That is, actually. It's honest and appreciated. Then the last question I'd ask is, so you mentioned that you're shareholders of MCC. Is that in any way done through margin?

No.

Our next question comes from the line of Kyle Joseph from Jefferies.

Just first one, in terms of tax changes, can you outline sort of any impact you've seen on demand for credit, portfolio company growth as well as any changes to credit performance?

Sure. At this point, it's a little bit early to see direct impact, but it's a topic that we've discussed. I don't know, Dean, if you want to make a few comments on how we're thinking about that. It would be helpful.

I'll say in terms of the sponsor-backed borrowers, we're not really seeing any change in their behavior with this new -- I assume you're referring to the 30% of EBITDA deduction that they maxed out. We're not seeing any change in behavior in that regard. In terms of how we model, obviously, we're starting to throw it into our free cash flow model and thinking about it that way.

Got it. And then just in terms of yield, can you give a sense for yields on originations versus repayment? And give us a sense if you've seen any relief as rates have ticked up kind of post 12/31?

Sure. In terms of the originations, the all-in yield was about 9.88 for the quarter, and then on the repayment the yield was just about 11. So a slight decline in our overall weighted average yield for the portfolio.

Got it. And just, I know it's still early and rates really have only started to go back up this year. But can you give us a sense for sort of your outlook for 2018?

So just to clarify, Kyle, the outlook on what topic?

Just on yields, portfolio yields. Just specifically portfolio yields, sorry.

With respect to what we're seeing to date, yields have been generally flat. We've seen tightening. Let's leave aside the last few days, obviously, in the liquid markets on balance. If the risk of environment continues, our expectation is that would likely feed-through.

At this point, we haven't seen -- it's too short a period of time to see the impact, but there's a lot of capital out there. We are seeing interesting opportunities. But quarter-over-quarter, we're generally seeing flat all-in yields. And just to be a little bit more granular, that's been a combination of LIBOR kind of grinding a little higher and spreads probably grinding a little lower on the margin.

(Operator Instructions) And our next question comes from the line of Christopher Testa from National Securities.

(technical difficulty) continued struggles with asset quality and obviously, NAV declines. Has there been any revisiting by the board towards the issue of fees and kind of bringing those down potentially more in line with peers in the sector?

Chris, we have not revisited that dialogue. We looked at it and we have, in the past, as you know, we did make a fee change going back 2 years related to the look back on our part 1 incentive fees. So that was implemented. There have been no further discussions on that topic.

Okay. And just seeing where spreads are, obviously, it's a challenging environment, especially, I'm sure more challenging as you guys keep moving up market. What's your inclination towards implementing a pretty significant buyback program, seeing where the stock is trading today in roughly 63% of NAV? It just seems that that would be the best allocation of capital. So just curious how you guys are thinking about that.

We are always evaluating the appropriate utilization of capital at the firm, and share repurchase is obviously included in that. At our current leverage levels, it does not feel that it's appropriate to repurchase shares. However, we may revisit that in the quarters ahead.

Okay. And of the 5 legacy investments that you said are in the 4 or 5 buckets, how many of those are already on non-accrual status?

All 5 of them, Chris, are on non-accrual.

(Operator Instructions) Our next question comes from the line of David Miyazaki from Confluence Investment. Sorry about that. Our next question comes from the line of David Jordan from Jordan Capital.

It seems we're having some difficulties. And that concludes our session for today. I would now like to pass over the call to Mr. Brook for any ending remarks.

Thank you, operator. As I said in the prepared remarks, we believe the bulk of our issues related (technical difficulty) us. We do look forward to a time in the near future when we confirm to all of you that the transition is complete. And thank you for your continued support.

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