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Medley Capital Corp's (MCC) 1st Quarter Earnings Wrap Up

|About: MDLY, Includes: PFX
Summary

Net Asset Value (NAV) rose $0.08 to $4.05 per share from prior quarter.

Net Investment Income of $0.06 per share.

Net realized and unrealized gain/(loss) on investments of $1.1mm.

First tranche of reimbursement from litigation insurance realized.

Outstanding debt reduced by 19% or $47mm. Debt/Assets ratio = 0.47.

Before I begin, the company's earnings release 8K and 10Q can be found through the links below:

8K:

http://www.medleycapitalcorp.com/static-files/1879ff6d-f762-4b89-bc47-50b343b9d92d

10Q:

http://www.medleycapitalcorp.com/node/11746/html

Based on my conversations with Medley management.  Both the final merger proxy and exemptive relief request are still pending SEC approval. The company has responded to all questions regarding changes to required disclosures and the ball is in the SEC's court.   They expect approvals but cannot predict timing.  Approvals could come at any moment.

The Delaware Court Settlement was approved in December.   The settlement funds would be paid in the form of cash and stock would be paid to MCC shareholders upon completion of merger.  The final proxy will determine the record date and merger vote date.

It is my expectation that MCC will NOT remain an independent entity.  However, 1st quarter results allowed me to establish a price range on the sale of company to a third-party asset manager.  Based on Go-Shop results, the stand alone valuation of MCC if sold ranges from $2.99 to $3.41 per share.  This does not include the $0.31 per share cash dividend each bidder agreed to pay.

The post-merger valuation is based on the NAV of Sierra Income Corp of $6.03 per share as of September 30, 2019.  The conversion rate is 0.66x plus settlement fund.  Below is my price targets post-merger for MCC:

Expected Trading Range of Combined Company (% discount to NAV) 60% of NAV 70% of NAV 80% of NAV 90% of NAV
MCC Post-Merger Price $2.39 $2.79 $3.18 $3.58

*assumes 0.66x conversion

Approved Settlement Fund
$0.31 / Share Dividend $0.31 $0.31 $0.31 $0.31
Stock Compensation $0.33 $0.39 $0.44 $0.50
Post-Merger MCC Share Price $3.03 $3.48 $3.93 $4.38

Total Return potential from closing price of $2.10 on 02/11/2020

+44% +67% +87% +109%

It is encouraging to see the improvement of MCC's loan portfolio in the 1st quarter.  The non-accrual percentage of total investments was 4.70%.  However, with the pending sale of NVTN LLC (Dick's Last Resort) in current quarter, non-accruals will be cut in half assuming all other credits stay the same.

Estimating Post Merger Sustainable Monthly Dividend Rate

Sierra Income Corp. announced their stand alone monthly dividend of $0.035 per share for the 1st quarter of 2020.  Post merger I would expect that dividend rate to climb based on these factors:

  • Both MCC and Sierra are holding over 20% of assets in cash.  This cash can put to work in interest earning assets.  
  • Expect refinance of debt of combined company at reduced cost of capital.  With combined company leverage ratio below 60%, I would expect management to refinance all debt at an investment grade cost of capital with a 5 to 7 year maturity.
  • Expense savings from combined company operations and elimination of merger related expenses
  • Room to increase leverage and grow portfolio

Given these assumptions, I would expect the pro-forma dividend for MCC shareholders to be around $0.35 to $0.40 annually or 16 - 19% yield at current price of $2.10.  

Disclosure: I am/we are long MCC.

Additional disclosure: The Common Stock reported herein by Glacier Point Advisors, in its capacity as investment adviser, is owned by clients who have granted discretionary authority to dispose of or direct the disposition of the shares. Those clients have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such securities.