Medley Capital's (MCC) CEO Brook Taube on Q3 2016 Results - Earnings Call Transcript

| About: Medley Capital (MCC)

Medley Capital Corporation (NYSE:MCC)

Q3 2016 Earnings Conference Call

August 09, 2016 10:00 AM ET

Executives

Sam Anderson - Head of Capital Markets and Risk Management

Brook Taube - Chief Executive Officer

Rick Allorto - Chief Financial Officer

Analysts

Kyle Joseph - Jefferies

Jonathan Bock - Wells Fargo

Ryan Lynch - KBW

Christopher Testa - National Securities

Mickey Schleien - Ladenburg

Operator

Welcome and thank you for joining the Medley Capital Corporation’s Fiscal Third Quarter 2016 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 earnings press release. At this time, all participants are in a listen-only mode, but will be prompted for a question-and-answer session following the prepared remarks.

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.

Sam Anderson

Thank you, Operator. Good morning everyone and thank you for joining us today for our fiscal third quarter 2016 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 the 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 and press release, please visit our website at www.medleycapitalcorp.com. In addition, our fiscal third quarter 2016 investor presentation is available in the Investor Relations section in the Events/Investor Presentations section of our company’s website.

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

Brook Taube

Thanks, Sam. And welcome everyone to MCC’s quarterly conference call. Today we announced our financial results for the quarter ending June 30th. We reported net asset value per share of $9.76, net income per share of $0.26 and net investment income per share of $0.20. As announced in our press release, the Board of Directors approved a dividend of $0.22 per share for the quarter-ended June 30th. This dividend will be payable on September 23rd to shareholders of record on August 24th.

Based upon our current leverage and limited repayments during the period we did not repurchase shares under our existing buyback program. Since inception we have repurchased just under 4 million shares for a total of approximately $32 million, leaving us with $18 million remaining in the approved program. We do intend to complete the full share repurchase program in the quarters ahead.

Turning now to our earnings and dividend, net income for the period was $0.26 per share driven by portfolio appreciation, net investment income was $0.20 per share for the period and lower than prior period due to several factors that are affecting us, and many of our peers in the industry. These drivers impacting NII include, refinancing and repayment of higher yielding assets, lower yields available on new investments, declining leverage at MCC, reduced fee income due to our limited origination activity and reduced income from certain loans that we placed on non-accrual. Based upon the above mentioned factors, we adjusted our dividend through reflecting NII level, we expect to earn on average overtime.

We ended this quarter, this most recent quarter with leverage at 0.69 times, which is consistent with the prior quarter and down from 0.78 times at the calendar yearend. During the period we did receive repayments of 12 million and invested approximately 12 million to support existing portfolio investments. And at MCC no new loans were originated during the quarter.

Turning now to the portfolio and credit, net asset value was stable quarter-over-quarter, and portfolio values increase modestly. Our loan portfolio today is diversified and consist of approximately 89% senior secured loan across 63 portfolio companies in over 20 industries. In addition we are well diversified geographically across the United States.

Quick update on energy exposure is currently limited to four positions and represents approximately 5% of the portfolio. Specifically these four borrowers are service providers across multiple geographies both domestically and globally. During the period we have seen modest positive trends in performance although the sector clearly remains under pressure.

As of June 30st, 6.6% of the portfolio was on non-accruals, I would like to note that we have supported and restructured certain investments to focus on future growth and upside potential. And as part of these restructurings we now have equity ownerships. Overtime, 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.

Before turning the call over to Rick, I would like to comment briefly on a new initiative we have at our management company. During the past quarter, we established a partnership with one of our large institutional partners that will allow our management company that MDLY to be a long term investor in our existing and future investment vehicles including MCC. We all assisted MCC as an attractive investment opportunity at the current discounted levels and we intend to be a meaningful buyer of MCC stock at our management company in the quarters ahead.

I’d like to turn the call over now to Rick to review the financial results.

Rick Allorto

Thank you Brook. For the three months ended June 30th, the company reported net investment income of $11 million or $0.20 per share, and net income of $14 million or $0.26 per share. The net asset value per share was $9.76 at June 30th, compared to $9.80 at March 31st. During the period the fair market value over our assets increased, excluding the difference between dividend paid and net investment income for the period, our NAV would have increased to $9.86.

For the quarter, total investment income was 28.4 million, and was comprised of 27.8 million of interest income and 600,000 of fee income. Total operating expenses net of management and incentive fee waivers were 17.5 million consisting of 7.6 million in net based management and incentive fees, 7.7 million in interest and financing expenses, and 2.2 million in professional fees, administrator expenses, and general and administrative expenses.

For the quarter the company reported net unrealized depreciation of 32.3 million and a net realized loss from investments of 29.2 million. As of June 30th, the company’s total debt outstanding equaled approximately 530 million, including 28 million outstanding on the revolving credit facility, a 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 0.69 times at June 30th.

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

Brook Taube

Thanks, Rick, and again thank you all for your time today. We remain hard at work on the portfolio and we're pleased that asset value has improved during the quarter. As I stated previously we have the intention to complete the approved amount in the company's current share repurchase program in the quarters ahead. And in addition to that share repurchase program, our management company intends to begin buying MCC stock with the opening of our trading window.

Finally I'm pleased to announce that Dean Crow has recently promoted to Head of Investing at Medley. Dean has been the Senior Portfolio Manager for CR Income Corporation; our Public Non-Traded BDC where he's done a great job overseeing strong performance over many year. Dean will take on the additional role of Senior Portfolio Manager for MCC. We look forward to his involvement and contribution in the years ahead.

Operator, we can now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Kyle Joseph of Jefferies. Sir, your line is now open.

Kyle Joseph

Was just hoping to get a little sense of the performance of your portfolio companies, and you guys commented on energy improving a little bit but sort of ex-energy what are you seeing in terms of EBITDA and a revenue in EBITDA growth trends from your portfolio company?

Brook Taube

I'd say on balance we're seeing flattish revenues in EBITDA. If you had to take these exact numbers it’s hard to wait on average, Kyle, slightly positive but if you wanted to see a trend that was favorable you'd have to see mid -- low to mid single-digits on revenues in EBITDA. So, I'd say on balance we're seeing performance that’s soft, but slightly positive if you try to aggregate or weight the average for that portfolio.

Kyle Joseph

And then just a follow-up, mid-deal [ph] flow and repayments in the second quarter were pretty light, we are seeing that across every BDC, just want to see your -- if anything change in this third quarter or this the calendar year third quarter and your outlook for deal further ahead, both repayments and new transactions?

Brook Taube

Sure. I think let me to take the two separate once, repayments we expect higher, we’ve already experience achieved [ph] this quarter, so we have capital coming in. At a high level those yield at a slight premiums in the portfolio average yield, which is to be expected. From a market perspective, we are starting to see volumes pick up, there has been a couple of factors we’ve noticed, pricing is tighter than six to nine months ago that’s not unexpected given where we were in Q4 and Q1. And it's overall, there has been a kind of opting quality trade that we witnessed.

So we are expecting this. We are seeing volume pick up that relates to -- some of relates to overall refinancing, it also relates to activity we are seeing with sponsors as well as companies in general. Does that answer to question Kyle?

Operator

Thank you. And our next question comes from the line of Jonathan Bock with Wells Fargo. Sir, your line is now open.

Jonathan Bock

One small modeling question I wanted to just try to understand. So we saw roughly a 140,000, let's say like management fee waiver all that went into this quarter, was there some form of kind of claw back on fees not received in the prior quarter et cetera, what really was that number just to make sure we were getting it right, because we know you’ve intuited a new fee structure, everything is kind of good on that point. But what are we missing it's just a technical point there?

Brook Taube

Sure Jonathan. The change management fee structure was executed through a waiver and for financial reporting purposes we are showing it on a gross basis, calculated “the old way” and the new way is mathematically showing up to that waiver.

Jonathan Bock

Okay, okay thank you. And then getting back to business, so one, greatly appreciate the alignment in order to originate high quality senior secured assets that’s the right thing to do and it's a very good move, and prudent one. And then the initial question is relates to credit quality gets between sponsored and non-sponsored, there was a peer that has not done very well, that will likely need to reduce their dividend that has some unsponsored deals that haven't done too well.

And I know Brook you have also at times focused on that the non-sponsored community and my question would be how are you looking at the risk award sponsored, non-sponsored today? And so you have a preference between the two given many of the folks problems has been non-sponsored transaction?

Brook Taube

Sure, I think I understand the questions Jon, let me take a crack and then you can circle back if we didn’t get it. The bulk, the disproportionate majority of origination and opportunity that we are seeing today are sponsored driven.

Jonathan Bock

Okay.

Brook Taube

There is a couple factors driving that you alluded to them larger deals, the firm now has over 5 billion of assets under management. So we are increasingly relevant at scale to larger situation that are sponsored back. There are non-sponsored deal that we would asses are reasonable and high quality, we haven't done much of that recently. We are looking carefully at it. We would expect the majority or the disproportion majority to be sponsor related going forward and at a high level I think you're well aware those come with on margin lower all-in yields. Does that answer the question?

Operator

Thank you. And our next question comes from the line of Ryan Lynch of KBW. Sir, your line is now open.

Ryan Lynch

I just first wanted to hop into the dividend. So, get some more color around that, so, the dividend reduced down to $0.22 per share, how should we view that dividend going forward because in light of this quarter, NII was $0.20 per share, so, at first look, it looks like that dividend is still going to be tough to be supported by earnings based on this quarter's earnings run rate. So what are we missing, why did you guys choose the $0.22 level and how are earnings going to cover more than cover that dividend based on a $0.20 number this quarter?

Brook Taube

Considering all the factors that we know today, we set the dividend at a level that we expects, approximate average NII as we look at the current portfolio over time. And we did take into several factors when assessing the level, it includes the target leverage, overall risk profile, we included normalized fee income and then an assessment of what we would call normalized repayments in that origination. Additionally share buybacks and then the impact potentially of fee waiver as was alluded to previously. So, looking at the constellation of all of these factors, our assessment of the average earnings power of the portfolio as we look at it today on average was how we chose the current dividend.

Operator

Thank you. And our next question comes from the line of KC Alexander [ph] of Compass Point Research. Your line is now open.

Unidentified Analyst

I certainly liked the idea that you intend to continue to repurchase the stock because we think that's very shareholder friendly. But I also understand that you've to balance that with deleveraging. So, strategically kind of how do you look at that and for instance in an effort to sort of manage leverage down at the same point in time that you're allocating some money to repurchase stock, can you do things such as small partial calls against MCQ which I think is currently callable as a way of managing your leverage down alongside of repurchasing the stock, strategically how do you look at that?

Brook Taube

The short answer to the MCQ question is yes we can, and I think we're looking at it, if I'm not mistaken the way you're suggesting which is will balance build [ph] the share repurchase as well as the fund repurchases over time.

Unidentified Analyst

And secondly the suggestion that you're looking at much more in the way of sponsored deals as opposed to non-sponsored now, is that a qualitative decision or a quantitative decision and by that what I mean is, is the non-sponsored channel not showing you the credit quality and covenant protection that you think you need which is leading you to sponsored channel or why -- how have you gotten there because in the past you guys have been so strong in the non-sponsored channel?

Brook Taube

Sure. At a high level case it really relates to scale as we passed through 5 billion of assets with open fund raising channels at Medley including institutional managed account, private funds as well as sierra and a newly launching sierra product. We have significantly increased the scale of our capability and the non-sponsored channel if you think about it was, generally speaking smaller deals and lower volume.

So higher volumes, more capital allows us to just be more relevant to the sponsored community, it has been an important part of what we have done for the last several years it's been the disproportion in majority. So it's -- we are not ruling out the non-sponsored, it's just as we scaled the business, it's becoming less and less critical and even less and less of the driver factor to support the scale that we are going to need.

Christopher Testa

So it has more to do with the core investment privileges across the entire Medley platform and non-sponsored doesn’t really fit that capability?

Brook Taube

That’s correct.

Christopher Testa

Okay great thanks. I appreciate to taking my questions.

Operator

Thank you. And our next question comes from the line of Christopher Testa of National Securities. Your line is now open.

Christopher Testa

Just with the buyback program, we have the 18 million remaining but you also have the management company purchasing shares. Just do you intend to renew the repurchase program once it's exhausted or should we be looking at MDLY purchasing the shares as kind of replacement for that?

Brook Taube

There is not -- they are not a replacement, they a separate programs. As I mentioned the decision to purchase stock by the company MCC will be based upon liquidity and leverage, as we get more liquidity we will continue to be a buyer. We expect to complete that in the next several quarters. What the future holds after that I am [unwilling] to comment at this point. But I have said in the past that I would not rule up further repurchases but at this point we are going to stick with completing the Company's repurchase again that will be a separate program from the management Company's purchases.

Christopher Testa

Okay great. And just with regards to your comments on the NII impacted by the lower yields available on new investments relative to the yields on what was repaying, are you seeing these lower yields is that a function of just more of a firstly lien focus, doing more sponsored origination which tend to have lower yield or just general spread compression?

Brook Taube

I think it's all of the above Chris.

Christopher Testa

Okay.

Brook Taube

We are seeing both sponsored compression as well as increasing focus on first lien so hit the nail on the head of the three factors driving.

Christopher Testa

Okay. And you mentioned overtime turning some restructured investments in which you have equity into income producing, are there any particular companies have been restructured where you anticipate that might occur in the future?

Brook Taube

Well I -- we are optimistic that any of them could go that route. At this point it would be pre-mature based upon what we are seeing to tell you which one we thought. But we are hard at work at each of them. As I mentioned for example in energy we seeing modest, positive trends, but we are going to watch carefully We're optimistic that one or more of these will be positive, but at this time premature to comment on the specific credit.

Christopher Testa

And last one from me, just I know you had mentioned some of the new ticking over portfolio management at Medley from Sierra. I was just wondering if there have been or whether you anticipate any further management changes, changes to origination infrastructure, anything like that just given how asset quality has kind of been shaky over the past year or so?

Brook Taube

I’m not sure I entirely understand the question, but --.

Christopher Testa

Basically is there a change in how you're going to be viewing underwriting or are you going to be changing up people within your organization in effort to kind of bolster your credit quality going forward?

Brook Taube

Okay, great. No, there's no substantial changes, we've increased -- the firm has grown substantially in the last year. We now have 88 people. We have significant growth on the other 80 plus percent of our business that does have a general increased focused on senior and first lien and sponsor that related to the strategies that they pursue, have been performing very well.

Dean, who's shepherding that at Sierra, he's been with the firm for years. So, this is not a change, it's an acknowledgement of his performance as well as the trajectory we're on and the growth of the firm and we're adding people on a quarterly basis. So, the team is growing, the capability is growing, there's no wholesale change, there is just an enhancement and we're lucky to benefit from the performance we got out of Dean as well as his team and the whole team in general.

Operator

Thank you. And our next question comes from the line of Mickey Schleien of Ladenburg.

Mickey Schleien

Since this has already been asked I’m just [indiscernible] along.

Operator

Your line is open.

Mickey Schleien

Brook I apologize of the questions already been asked, I’m just juggling a lot of calls, can you comment on your outlook for activity in the second half of the year, it's been relatively slow across the industry and we have a number of uncertainties whether it’s the Fed or the elections or Brexit et cetera, just curious what your thoughts are high level on that issue?

Brook Taube

Sure, I'll take a quick crack, I think we've said before that you all should not count on us to predict the future. But I'll give you some thoughts on what we've seen here and coming out of the second quarter and into the second half of '16. In Q2 there was a continuation for sure of just a positive sentiment coming out of that Q1, middle of Q1 lows; spreads tightened, that would be public as well as private; we saw rallies of course in the equity markets.

But off the back of that we began to see an increase in our pipeline of opportunities. Our expectations is that we're going to be able to convert this increased pipeline into investments that we'll fund during the second half year of 2016. At a high level pricing on this is kind of 50 basis points to 75 basis points tighter if not more than what we saw nine to 12 months ago. And I'd say the only other comment that I would make at a high level is there's clearly been a flight to quality and we saw that with first liens outperforming secondly lien, and at one time and what we’re seeing now of that what we are seeing now on the secondly it's pressure go perhaps even wider than they were a year ago. So I mentioned this, I think our idea is that this up and quality trade has continued is continued already into the second half and we continue to see a pipeline growing, we have to convert it, but we would expect to do that in this quarter and next quarter.

Mickey Schleien

And Brook, just one modeling question, on your floating rate investments which LIBOR rate do you usually refer to as in one month, three months, what's typical in your deals?

Rick Allorto

Mickey, it is at the election of the borrower, one and three months are the most common.

Mickey Schleien

Okay, appreciate that Rick. Thanks for your time this morning.

Rick Allorto

Thanks Mickey.

Operator

And I am showing no further questions in the queue at this time.

Brook Taube

Great, well thank you all for joining. We look forward to speaking to you again next quarter. And as usual feel free to reach out, if you have any specific follow up questions. Thanks very much.

Operator

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

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