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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome and thank you for joining Medley Capital Corporation's Fiscal Second Quarter 2018 Conference. 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, Brook Taube, CEO; Rick Allorto, CFO; Dean Crowe, Head of Investing; and Sam Anderson, Head of Capital Market. 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 risk 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 the company's most recent filings with the SEC. The company does not undertake to update 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 second quarter 2008 (sic) [ 2018 ] investor presentation is available in the Investor Relations section in the Events/Investor Presentation section of the company's website.
I would now like to turn the conference to your host, Mr. Brook Taube. Please, go ahead.
Thank you, operator, and welcome, everyone, to Medley Capital Corporations quarterly call. This morning we announced our financial results for the quarter ended March 31, and we reported net investment income per share of $0.07 and net asset value per share of $7.02. Our Board of Directors approved a dividend of $0.10 per share for the quarter ended March 31. This dividend will be payable on June 21 to shareholders of record on June 6.
I'd like to begin today by discussing our legacy portfolio, the period's unrealized loss and the dividend. We are continuing to reposition the portfolio. There's a priority focus on legacy assets, and this includes generating liquidity from these assets where it's available and otherwise repositioning certain of the assets for long-term success.
During the first quarter, as we moved toward this liquidity and resolution on the legacy assets, underlying performance on certain of the positions continue to deteriorate and our expectations for recovery, in some instances, declined further. The combined impact of this on the overall portfolio from legacy assets was a decline of 2.6%. That's a 2.6% decline on the portfolio, and that led to a $0.31 or approximately 4% impact on the NAV per share in the quarter.
During the period, we also had negative mark-to-market adjustments on 2 energy and extraction-related positions originated prior to 2015. And while these companies may benefit from developing positive news in their respective sectors, their underlying performance did decline during the period.
As we have communicated in the prior few quarters, our expectation was that the repositioning of our legacy assets would be complete in this calendar year, 2018. While it's premature to suggest the process is nearing completion, our expectation continues to be that this repositioning will be complete by the end of this year, if not sooner.
We did make progress on this front during the first calendar quarter. And I am happy to report that post quarter end, we received repayments on 2 meaningful legacy positions, totaling approximately $75 million. These positions were both repaid at par.
Pro forma, for these repayments, legacy assets now comprise just over 11% or approximately $90 million of the fair market value of our portfolio. That's down from 20% at 12/31. Breaking down this 11.2%, 4.7% consists of assets with an internal rating of a 1, 2 or 3, and the remaining approximately 6.5% are rated a 4 or a 5. The positions rated 4 or 5 are currently marked at approximately 28% of par as of the quarter end.
Turning to the dividend. During the period, the dividend that was paid was in excess of NII by $0.09 per share and this contributed, partially, to the reduction in NAV per share during the period. We have looked at the potential earning power of the portfolio, looking forward, taking into account continued liquidity from legacy assets and disciplined redeployment of cash. And it's with this lens that the dividend approved by the board was $0.10 per share. As we complete the repositioning of the portfolio throughout 2018 and look into 2019, we have targeted a dividend that has the potential to be covered by NII, over time. Turning now to investing. During the quarter, we invested approximately $20 million, the majority of which was to either support our existing portfolio company, and to certain extent, into the senior loan joint venture. At Medley across the platform, we continue to raise capital from institutional and retail channels. And MCC will benefit, over time, from the origination pipeline and the resources of the broader platform. Our team remains hard at work on each and every asset at MCC, and we look forward to completing this important repositioning process in the next few quarters. I'd like to turn the call over now to Rick Allorto, our Chief Financial Officer, to review the financial results.
Thank you, Brook. For the 3 months ended March 31, the company reported net investment income of $3.6 million or $0.07 per share and a net loss of $28.8 million or $0.53 per share. The net asset value per share was $7.02 at March 31, compared to $7.71 at December 31. For the quarter, total investment income was $17 million and was comprised of $14.3 million of interest income, $0.5 million of fee income and $2.2 million of dividend income.
For the quarter, total operating expenses net of the onetime waiver on base management fees were $13.4 million and consisted of $3.4 million in base management fees, $7.5 million in interest and financing expenses and $2.5 million in professional fees, administrator and general administrative expenses.
As of March 31, the company's total debt outstanding equaled approximately $447 million. This included $12 million outstanding on the revolving credit facility, $285 million in notes payable and $150 million of SBA debentures. The company's debt-to-equity ratio excluding SBIC debt was 0.75x at March 31.
During the period, the company raised 121 million of unsecured bonds via institutional retail investors. The proceeds of this offering were used to refinance our term loan and prepay a portion of our 2023 unsecured bonds. That concludes my financial review.
I will now turn the call back over to Brook.
Thank you, Rick, and thank you, all, for your time today. The team remains hard at work. We remain substantial shareholders and are committed to the success of MCC in the years ahead.
We can now open the lines for questions.
[Operator Instructions] Our first question comes from the line of Kyle Joseph from Jefferies.
So given the progress you guys have made on reducing the legacy assets, are you -- do you think we're at the point where we're going to start to see some NOI stabilization or do you think you need to get all the way through that process?
Thanks for the question, Kyle. I think it's -- we're going to not comment on expected forward NII. We have not done that in the past. We did spend a decent amount of time looking at what we expect the portfolio can generate, over time, as we finish the repositioning and deploy the capital with sensible blends on balance sheet, liquidity, et cetera. That was the lens we used for the dividend. Our hope and expectation is that we're able to cover the dividend with NII, over time, looking into 2019, and that's the plan.
That's helpful. And then just yields under a little bit of pressure in the quarter. Can you talk about how much that is from legacy rotation or was there some impact from the -- look like a couple of more investments went on non-accrual?
Kyle, this is Rick. The majority is associated with the new additions on the non-accrual.
Okay. That's helpful. And then -- sorry, I haven't had time to totally go through the queue. Can you give us a sense for inflows and outflows on non-accruals?
Sure. The 4 new names for non-accrual were Access Media, Dynamic Energy, Oxford Mining and The Plastics Group, and Velocity Pooling was removed due to its restructuring.
And our next question comes from the line of Casey Alexander from Compass Point.
The 2 investments that were repaid in the second quarter at par, can you tell me where those were marked at the end of the first quarter?
Sure. Casey, give me one second. Casey, they were -- I don't have it right in front of me. They were marked at 99 to par.
Both of them?
Yes.
Our next question comes from the line of Jonathan Bock from Wells Fargo.
Brook, first, you were talking about substantial share ownership between kind of management. Would you be able to describe just the amounts owned and how you've been purchasing just given the stock price decline over the last, let's say, 2 years?
Yes. I don't have the exact numbers, Jonathan. I think they were all pretty public and were filed in the typical form for -- let me get back to you on those numbers. They are public and I can tally them up. I don't have them right here.
Okay. Well -- I mean, clearly, I think, you mentioned it's sizeable, it's substantial. Can you talk to us about a special purpose entity that, that's gone with you and another investor at the MDLY level that was funded by another investor as well as yourself used to purchase Medley stock? Can you walk us through about maybe $40 million worth of share ownership there and how that works?
Sure. We're in a partnership, it's long dated. I think, it's kind of in the 10-year range. This was set up as a partnership where we have ownership and control over the long term. It was a way for us to actually increase our exposure and ownership. We -- I don't have the exact share price, but I think our average purchase price is substantially higher. It's probably in the -- with a $6 handle on it. We like to stock them, we continue to like it. We expect to hold it over the long term, and that reflects our interest in the yield and the position in the company.
Got it. And so what are the amounts owned by yourself and the amounts owned by the other investment partner of that $40 million in stock?
Yes. So we own 100% of that at the management company.
Okay. So I'm -- maybe I'm -- all right. So then what will -- the question is, given the stocks decline, how should we look at the potential for either a margin call or a forced liquidation of those shares given the extent of the stock price decline today? How does that work? And walk us through the potential risk. Just given the decline, you'd assume that the stock is collateral for that loan and/or partnership.
Yes. It is a partnership. There is no risk of margin. That's a financing that will last for the entire 10-year duration I described.
Okay. Okay. So then, also, let's just walk through the balance sheet today. So kind of trying to get a sense of the debt-to-equity and how you're operating under the current debt-to-equity constraints today. So Brook, have you been in discussions with your lenders? And how are they looking at the fact that, I believe, now we're above 1:1 debt-to-equity?
Yes. Jonathan, if you exclude the SBIC debt, at the quarter end it was 0.75x. Including the SBIC debt, it is slightly above 1:1.
Sorry. So now that you have it, is there a discussion with your lenders that as just economic leverage continues to increase as a result of the decline -- rather I should have asked it this way, now, all of a sudden, you're finding a bit more, we'll call it, restrictive points on the part of your lenders relative to your borrowing basis, et cetera, today?
We are in constant discussion with our lenders, Jonathan, and today we're not finding any restrictions currently within the borrowing base.
Got it. So if there's no restrictions in a certain level of cash and/or prepayments that are coming off the portfolio, I think Brook mentioned too, can you explain why you would not be repurchasing stock at these levels if, I think, everyone's agreed that this is a good time to buy?
Yes. Thanks, Jonathan. We had a substantial share repurchase program that expired. I think, it was the end of last year. We're always evaluating the appropriate utilization of our capital, and I would include share repurchase in that. Let's say at our current leverage levels, while we're continuing to look at the completion of this repositioning, we do not expect to renew it. We may revisit that in the quarters ahead.
And our next question comes from Christopher Testa from National Securities.
Just curious, Brook, you had mentioned a couple mark-to-market losses, excuse me, on energy and extraction positions. Are these currently ranked 4 or 5 and watch-listed?
Chris, yes, they are.
Okay. Got it. And shifting gears a bit and just looking at, obviously, the 4 new non-accruals, and these things just continue to snowball, what seems to be, in your opinion, kind of the recurring theme across the non-accruals? I mean, obviously, there might be some sort of legacy component at certain couple of years of issuance, but I mean what's, I guess, the real failure behind the scenes in terms of why so many of these continue to go sour? I mean, you guys have, obviously, looked at this and evaluated this, you talked about changing underwriting criteria years ago, but these names continue to pop up. So just curious kind of what you found going through those internally?
Yes. It's a great question. And clearly, the challenges we face are significant. As we've moved to the repositioning and the purpose to get liquidity, we have suggested that's important and we're going to roll out of legacy. Addressing specifically the issues that we've had and changes we've made, and I want to reiterate a little bit, I suppose, that beginning in the early part of 2015, we narrowed the origination, really, to larger and sponsor-backed borrowers. At that time, it was origination that the firm had done. And historically, that was not new but it was a narrowing, and that's become largely the focus of our efforts since that time. We also made personnel changes and enhancements, I would say, to underwriting and restructuring capabilities. So as we kind of look now at that 2015, '16, '17 and through this year, we have seen consistent performance that's in this sort of larger sponsor-backed investments that's consistent with historical performance, before that date that we're doing elsewhere. And it's also shown through, although it's hard -- necessarily to see, as we're talking about the issues that we've -- right now, at MCC, this is shown through on the MCC assets that we've originated, that are in line with this since 2015. So I'd say, we will complete this repositioning of the legacy portfolio this year. And our expectation is the portfolio performance, then from the non-legacy and then overall is going to reflect the changes that we made, and that will appear in 2019 and beyond.
Okay. Got it. And looking at your non-accruals of roughly, I think, $82.5 million of fair value, and you had stated that the legacy investments are $90 million at fair value of the portfolio, are those legacy investments you listed inclusive of the current non-accruals?
Certainly, the majority of the legacy assets are included in that non-accrual.
Got it. So the $90 million includes the $82.5 million or so on non-accrual at fair value. So there is an additional, let's call it, $7.5 million or so that's not a non-accrual, that's a legacy investment.
Correct.
Got it. Okay. And just curious, too, I mean, again, as the trend has been starkly negative the past few years, has this given the board any more inclination towards potentially lowering the base fee specifically, as a lot of peers in this space who have had, quite frankly, better performance have theirs lower than yours?
So this is Brook, Chris. During the period, I think, if you didn't see it, we did waive a certain portion of the management fee. And this waiver represents a substantial portion of the management fees that would have been -- otherwise have been earned on the group characterized as legacy. So if you looked at our legacy pool today, that amount is basically equivalent to all the fees on that, $90 million bucket you're referring to. And look, the process of repositioning, specifically, the legacy is definitely taking longer. To acknowledge this, we elected, as management, to unilaterally waive the fees. And our hope is that this is viewed in the kind of constructive and positive manner in which it was intended. It was a onetime waiver this period and we'll revisit the decision, obviously, in the quarters ahead.
Thank you. And I'd like to turn the conference back to your host, Mr. Brook Taube, for closing remarks.
Thank you very much for your time today. As I mentioned in the earlier remarks, we're hard at work on each asset. We have the intention to complete the repositioning. We really do appreciate the continued support and look forward to turn of the portfolio this year and then constructive 2019 and beyond. Thanks again.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everybody, have a great day.