Analysis: MCC (and below MDLQ + MDLX)
$5.11 (stale NAV). Assume Sierra buys MCC for 70% of that. (fair because MCC is even worse state than before the first deal and MCC loses at least 5% declines to NAV per quarter - lots of non-accrual loans still). No way anybody gonna pay more than that. 80% would be too much. So if we stick to 70%, then if sierra traded at NAV - MCC would trade equal price of $3.57 per share. If Sierra trades 70% of NAV then MCC trading price = $2.5. Tack on the settlement fund value which is taubes way of paying MCC for their asset management contract. Lets call it 20% value to MCC shareholders. $3 is top trading value MCC will get - IF A MERGER HAPPENS. And most likely one will happen because taubes control all 3 companies and merger is in the best interests of MCC and MDLY for sure 100%. Without mergers, MCC NAV keeps dropping. June 30 numbers will be given to the bidders who will offer something stupid like 60% of NAV to give themselves margin of safety etc. Remember MCC bled out like 27% nav year over year and nobody wants to step in front of that train.
Then if you look at Sierra. Whats to say that MDLY doesn't just leverage sierra up to replace the lost fee income if they stick MCC into a liquidating trust anyways? SIerra is under-leveraged and MDLY hasn't fully deployed their institutional capital.
Whats the best deal right now? Well if you look at the math - MDLQ and MDLX are a better deal with more upside. MCX is the best deal if you want MCC bonds and a good yield, but MDLY bonds have most upside overall and still will pay interest payments. MCC pays NOTHING. Even if merger proceeds, which it should since taubes control all, then it could take as much as 6 months to close from here.
Frontfour signed a standstill agreement which prohibits them from voting against MDLYs interest and probably from terminating the contract with between MCC and MDLY. Additionally, Seth taube and the original directors are still in power and can veto. Besides that, MDLY controls much of the vote at MCC.
MCC will still get a good deal. bottom line. They will get 70% NAV + some settlement money worth up to 20% value to MCC shareholders. $5.11 * 0.70 = $3.57. $3.57 * 1.20 = $4.28. $4.28 * 0.70 (to compute if sierra trades at 70% of NAV post ipo) = $3. Of course sierra could trade lower or higher. But Trading value to MCC is probably gonna be approximately $3 in my opinion. May take up to 6 months to get there (to get mergers finalized). MCC bonds and MDLY bonds probably will recover to par well before MCC gets there.
One risk to consider for $MCC is that management could request approval to issue shares at a discount to NAV. management could easily get approvals since they already proved to us that they can get seth taube back on board despite being shown to be in breach of fiduciary duty and ISS recommending nexpoint nominees. So MDLY could convince enough MCC shareholders to allow for their large majority voting power to pass such approvals. Once they get the approval - they can use it to issue equity so that minimum equity stays above the 275M required at MCC. This would protect the company from default at the cost of diluting shareholders NAV to some degree. I wouldn't rule out an equity offering at MCC to save the company from defaulting on this technical covenant which would cross-default their american bonds. If they don't go this route, its because they completed the mergers or found enough assets to sell at MCC to repay the Israeli bondholders. $120M of israeli bondholder debt will not be very easy. They would need to liquidate their best performing assets near par, when they already have been busy doing that to repay the SBIC completely as of May 10th. Simply getting a waiver from Israeli bondholders is not likely because MCC does not generate much income and bond investors most likely want their money back. So this technical default will be used by bondholders against MCC as a tool to protect themselves from potential losses down the road if MCC doesn't merge.
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(The above information is not from a company, medley capital or otherwise and is completely and entirely the opinions + projections of William Packer based on his theories, observations and beliefs)
Disclosure: I am/we are long MCC, MDLQ, MDLX, MCX, MCV.