Medley Capital's (MCC) CEO Brook Taube on Q3 2017 Results - Earnings Call Transcript

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About: Medley Capital (MCC)
by: SA Transcripts

Medley Capital Corporation (NYSE:MCC) Q3 2017 Earnings Conference Call August 9, 2017 10:00 AM ET

Executives

Samuel Anderson - Head of Capital Markets & Risk Management

Brook Taube - Chairman & CEO

Richard Allorto - Secretary & CFO

Analysts

Jonathan Bock - Wells Fargo Securities

Operator

Welcome and thank you for joining the Medley Capital Corporation's Fiscal Third 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 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 be host this morning's conference call. Mr. Anderson, you may begin.

Samuel Anderson

Thank you, operator. Good morning, everyone, and thank you for joining us today for our Fiscal Third 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 uncertainty. 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 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 of the Events/Investor Presentations Section of the company's website.

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

Brook Taube

Thank you, Sam, and welcome everybody to Medley Capital Corporation's quarterly call. This morning we announced our financial results for the quarter ending June 30 and reported net investment income per share of $0.18 and net asset value per share of $8.84. As we announced in our press release, the Board of Directors approved a dividend of $0.16 per share for the quarter ended June 30 and this dividend will be paid on September 22 to shareholders of record on August 23.

Turning to the investing side of the business; during the period we received net repayments of $43.6 million, this consisted of repayments on six direct loans and I was offset by origination of four new direct loans. We also deployed capital in support of existing portfolio investments. We continue to focus our new origination on first lien floating rate loans in larger sponsor backed borrowers. Today the loan portfolio remains diversified and consists of approximately 85% senior secured loans and that's across 60 portfolio companies and over 20 industries. In addition, we're well diversified geographically across the United States.

As of June 30, 7.7% of the portfolio was on non-accrual. We continue to work hard on our legacy positions that have been restructured. In overtime we have the opportunity to turn these investments into earning assets with potentially equity appreciation. This may provide upside to both NII and NAV in the future.

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

Richard Allorto

Thank you, Brook. For the three months ended June 30, the company reported net investment income of $9.6 million or $0.18 per share and a net income of $3 million or $0.06 per share. The net asset value per share was $8.84 at June 30 compared to $8.94 at March 31. For the quarter, total investment income was $23.7 million, and was comprised of $20.7 million of interest income, $1.9 million of fee income, and $1.1 million of dividend income.

For the quarter, total operating expenses net of management fee waivers were $14.1 million, consisting of $4.4 million in net base management fees, $7.3 million in interest and financing expenses, and $2.4 million in professional fees and administrative expenses. For the quarter, the company reported net unrealized appreciation of $47.7 million and a net realized loss from investments of $55.1 million. As of June 30, the company's total debt outstanding equaled approximately $527 million, including $26 million outstanding on a revolving credit facility, $174 million of term loan payable, $177 million in notes payable, and $150 million of SBA debentures. The company's debt equity ratio, excluding SBIC debt was 0.77 times at June 30.

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

Brook Taube

Thanks, Rick, and we'd all like to thank you for your time today. We continue to make meaningful progress on our legacy portfolio names. The new origination is in high quality, senior secured floating rate loans that are backed by high quality sponsors. The team remains hard at work on the portfolio in positioning the company for long-term success.

Operator, we can now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we have a question from the line of Carl Joseph [ph] with Jefferies. Your line is now open.

Unidentified Analyst

Good morning, thanks for taking my questions. On the investment activity in the quarter, we're just trying to get a little better sense for yields on the repayments as well as yields on new investments and kind of broader year outlook for the yield overall?

Brook Taube

It's Brook, sorry. Generally on the new investments we're at first lien floating rate and these are trending towards larger borrower, so you see these in the LIBOR plus 5%, 6%, 7%. We do still get 4% in some cases although that's becoming more of a challenge along with other terms in deals. I'm going to quickly grab the information on the portfolio rolled off, so I'm going to come back to you on the exact yield but the expectations is that those were slightly higher. In terms of market opportunity, what we're seeing I think would be consistent with what most people have said and are saying which is 'pressure due to competition on spread as well as increasing permissiveness on structure'. At this point we are still maintaining covenance in all of the deals but at a higher levels it's clearly becoming more aggressive in structure and I think that's increasing as well, even more so on the liquid side. I think as you are aware, our investment platform has expanded substantially, so we have a very significant view both from the smaller middle market, middle market and then broadly syndicated now, we're seeing a lot more tightening and permissiveness in the liquid markets than we are in the direct launch but it is pretty big. I'll just grab the number; it's about 11% all-in yield on the assets that we've paid.

Unidentified Analyst

Got it. And then on the repayments, is that being driven mostly by refi's, M&A or a combination of both?

Brook Taube

A combination of both.

Unidentified Analyst

Okay. And then just I didn't have the time to go through the whole queue but your non-accruals came down in the quarter, can you kind of give us a sense where some of the written-offs -- were some of the sold, are you seeing any recoveries in there?

Brook Taube

Sure. Our non-accruals decreased from 10 borrowers down to 6, this is a result of the restructuring in URT and the liquidation of prestige and the write-off of SX [ph].

Unidentified Analyst

Got it and I'll take a look at the queue for some more details but thanks very much for answering my question.

Operator

And I'm showing no further questions at this time. So with that -- our next question comes from the line of Jonathan Bock with Wells Fargo Securities. Your line is now open.

Jonathan Bock

Good morning and thank you for taking my questions. Brook, can you talk about the size and the scale of the Medley platform; I'm just curious now with CRO as well as the SMAs and others that you've managed, what's the total amount non-CLO of AUM that you as an entity effectively manage?

Brook Taube

When you say -- we have some exposure in part of our business as CLOs, I think you're referring to CLOs under management, is that correct?

Jonathan Bock

Correct.

Brook Taube

So we do not -- we are not a CLO manager, so that's correct as you know. Our total AUM is approaching $5.5 billion at the firm.

Jonathan Bock

Got it, great. And so if you were going to count the number of senior deal originators excluding yourself and Seth and Chris; how many senior deal guys do you have effectively pounding the pay that for that $5 billion in capital?

Brook Taube

At a high level today at the firm Jonathan, there is over 40 investment professionals, that's generally focused on origination and deal side of our business. To a certain portion our allocated now to be more liquid and total return strategies we have, as well as the growing CLO opportunity business but the whole firm is focused on partnering with corporate borrowers and the number is in the mid-40s now.

Jonathan Bock

Perfect. So it's a total 40 but not necessarily a breakout; I mean do you have a breakout between like senior MD and then support staff?

Brook Taube

Yes, I'm not going to get into the detailed breakout, other than just say we would look just like any of the top tier credit managers on the street; so we don't have a differentiation in terms of how we're approaching the market based upon our knowledge of the market.

Jonathan Bock

Got it. Then the next question is, if we look at the Medley incentive fee, with a deep amount of respect and appreciation for the fee waiver that was instituted as the means to bunch of shareholders first. I guess the question kind of bags if portfolio realized or unrealized losses or performance remains fairly but where it's been recently given the losses, you could arguably forecast out a very low incentive fee and I'm curious as the manager to compensate your folks, as well as yourselves, how do you think about that incentive fee and whether or not it's caused you to lose people or focus on other areas of your business to perhaps grow to offset that lost income?

Brook Taube

I think I understand the question Jonathan. Is it -- are we profitable or not as a firm to compensate our people at market or higher so that they remain interested as staying at Medley, is that the question?

Jonathan Bock

Yes, that's fine.

Brook Taube

The answer is yes, and we're adding talent that give you looked on the press release is where the senior people from other large credit shops. I think the attractiveness of our platform that's expanding both size and focus and as well as the long-term opportunity in the market that we see, I'd say the data or the only relevant data point is that the high quality folks should join the platform. I would say that's my measure of success and it's measurable, it's public and we're pleased with the expansion of the investment capability and all of the human capital that's coming to the platform. So that is not a constraint, I don't see it being one; we're actively at work. We have the intention of those coming back on, can't predict exactly when but they will come on and that will be attractive and valuable contribution to the profitability of the firm.

Jonathan Bock

Thank you for taking the questions.

Brook Taube

Thanks, Jonathan.

Operator

And I'm showing no further questions at this time. So with that I'd like to turn the call back over to CEO, Brook Taube, for closing remarks.

Brook Taube

Great. I thank you all very much for your time. Enjoy the rest of your summer; we look forward to speaking with you on the call and in a few months this fall. Take care.

Operator

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