© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 the Medley Capital Corporation's Fiscal Third Quarter 2018 Conference Call. The company would 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 of -- 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. [Operator Instructions] Participating on today's call from Medley Capital Corporation are Brook Taube, CEO; Rick Allorto, CFO; Dean Crowe, Head of Investing; and Sam Anderson, Head of Capital Markets. 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 statement information. Today's conference call may also include forward-looking statements and projections, which are subject to risk and uncertainties. Any statement other than a statement of historic 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 their forward-looking statements unless required by law. To obtain 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 third quarter 2018 investor presentation is available in the Investor Relations section and the Events/Investor presentation section of the company's website. I would now like to turn the call over to Mr. Brook Taube.
Thank you, operator, and welcome, everybody, to MCC's quarterly earnings call. Last night, we announced an important strategic transaction involving MCC. I will talk specifically about that in the prepared remarks. But first I would like to do a quick review of the quarterly results for MCC.
This morning we reported a net asset value of $6.43. The Board of Directors approved a dividend of $0.10 per share and that's for the quarter ended June 30. The dividend will be payable on September 20 to shareholders of record on September 5. The dividend was held constant at $0.10 for the quarter, and I'd just like to point out that the payment in excess of NII this quarter contributed to over 1% of the decline in the NAV. 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. On the investing front during the quarter, we invested approximately $30 million, of which $13 million went towards new loans in our SBIC portfolio and the remainder was to support existing portfolio companies. Importantly, nonaccruals declined during the quarter from $82.5 million to $63.2 million, over 23% decline quarter-over-quarter, and the legacy assets now comprise 10.9%; that's down from 20% at the 3/31 quarter end. I will point out that of this 10.9% that we've referred to as the legacy portfolio, 4.8% of that consists of assets that are internally rated 1, 2 or 3, so just under half, and the remaining 6.1% are rated a 4 or 5 on an internal scale. The positions that are rated 4 or 5 are currently marked at approximately 29% of par at the 6/30 quarter end. We do continue to reposition the portfolio with the priority on stabilizing and generating liquidity on these legacy assets. It does include liquidity from asset sales where they're available and otherwise repositioning certain of these for long-term success. The team remains hard at work on each and every asset and we intend to complete the repositioning by the end of this calendar year 2018. Before I get to comments about the strategic transaction, I'd like to turn the call to Rick to briefly review the financial results.
Thank you, Brook. For the 3 months ended June 30, the company reported net investment income of $0.9 million or $0.02 per share and net loss of $26.7 million or $0.49 per share. The net asset value per share was $6.43 at June 30, compared to $7.02 at March 31. Net investment income per share was $0.02, which included a onetime write-off of interest receivable. Excluding the write-off, net investment income was $0.04. For the quarter, total investment income was $13.9 million and was comprised of $11.2 million of interest income, $0.8 million of fee income and $1.9 million of dividend income. For the quarter, total operating expenses were $13 million, consisting of $3.5 million in base management fees, $6.8 million in interest and financing expenses and $2.7 million in professional fees, administrator and general and administrative expenses. As of June 30, the company's total debt outstanding equaled $436.6 million including $1.5 million outstanding on the revolving credit facility, $285.1 million in notes payable and $150 million of SBA debentures. The company's debt-to-equity ratio excluding SBIC debt was 0.79x at June 30. That concludes my financial review. I'll now turn the call back over to Brook.
Thanks, Rick. And for those of you who joined the 9 a.m. merger overview call this morning, some of this information may be redundant. Last night, we announced that MCC had entered into a definitive agreement to merge with and into Sierra Income Corporation, and that's part of a business combination that will also include Sierra's acquisition of Medley's asset management business, MDLY. The transaction is subject to approval by Sierra, MCC and MDLY shareholders, regulators and certain other customary closing conditions. We do hope and expect that this will close by the end of 2019 or early -- excuse me, at the end of 2018 or early in 2019. As consideration in the merger, MCC's shareholders will receive $0.805 shares of Sierra and the combined entity will be known as Sierra Income Corporation. Sierra is expected to be the second-largest internally managed and seventh-largest publicly traded BDC in the market. This is an exciting and transformative opportunity for MCC as well as the overall shareholders on SIC and MDLY. The combined company will have over $5 billion of assets under management and that will include the $2 billion of internally managed assets on balance sheet. These numbers are based upon reported financial information for Sierra, MCC and MDLY as of the June 30 quarter end, and given effect for the pro forma. We are excited about the combination and we believe they bring potential to bring meaningful benefits to all the stakeholders. And I'll comment at a high level. First, we do expect increased liquidity for shareholders of Sierra. Sierra is public and not traded at the moment but with the consummation of this transaction, Sierra will be listed so there will be traded shares for Sierra. MCC shareholders will have a larger, more liquid share we believe, as well as MDLY. This does increase the scale of the business and the public listing will again occur simultaneous with the close of the transaction on the New York Stock Exchange. Second, we believe the combination will be accretive to the earnings of both Sierra and MCC. This comes from certain operational efficiencies and reduction in duplicative costs. There will be more detail on this in the proxies that we expect to file within this -- few weeks. Third, we expect the combination of the businesses will strengthen the balance sheet meaningfully and result in improved portfolio diversification versus the current MCC portfolio. This larger and more diversified balance sheet may also enable broader access to the capital markets and give us the potential over time to lower borrowing costs. As part of the transaction, Sierra will operate Medley's existing asset management business as a wholly owned subsidiary that is the contemplation and we expect that, that will continue to grow and that has the ability to drive growth in NII and NAV of the combined entity over time. Our expectation is that the combination of the scale, portfolio diversification and growth of the asset management business will enable Sierra to trade in line with its internally managed BDC peers. Again, we are excited about bringing together these three complementary businesses. This will create the second-largest internally managed BDC and the seventh-largest BDC in the market today. We appreciate the continued support, and we can now open the call for questions.
[Operator Instructions] And our first question comes from Kyle Joseph from Jefferies.
Just want to think about or get a sense for how you guys are thinking about the businesses. Are you going to sort of continue running MCC as an independent company up until the transaction closes or are you trying to get ahead of it and potentially think about the combined portfolio overall?
That's a good question, Kyle. We run these businesses independently and that's from -- thinking about portfolio management, risk management, balance sheet management, et cetera, but we also do think about holistically how the business is run. The MCC portfolio has been migrating and all of the origination from 2015 and beyond we've consistently said has been focused on larger borrowers, floating-rate assets, sponsor-backed. That had been a prior focus of SIC. So those portfolios and strategies and approach have continued to converge. I think it is fair to say that we're going to continue to look at these independently because we have to. We are -- again, we're required to get approval from the SEC. We're required to get shareholder approval. So we do expect given how transformative and beneficial we believe this is -- that this is likely but it's not certain. So we will operate them independently but it's a very fair question. We're going to have our eye on how they will look combined on a parallel path over the next several months.
Got it. And then one last one for me. Assuming the merger closes, have you guys -- you can tell me to wait for the proxies if that's the right answer. But just thoughts on the run rate dividend of the combined entities?
Let me answer the question by saying as -- what we said on the deal call. The dividends are going to stay in place as planned during the next several months. There's no plan to change the dividend policy. As it relates to the combined entity, we obviously will continue to expect to pay a dividend. That policy is likely to be reviewed by the board as it comes together in anticipation of the combined entity. So it will be premature for me to tell you what the board is going to -- how the board is going to view the combined entity. But we will intend to pay a dividend that we think we can meet or exceed with NII over time and that's the plan that we've used historically.
[Operator Instructions] And I'm showing no further questions at this time. I would now like to turn the call back to Mr. Brook Taube, CEO, for any further remarks.
Thank you, operator, and we appreciate the continued support. As I mentioned at the outset, this is an exciting and transformative opportunity for the 3 entities. For MCC, this is a significant step in the right direction in terms of portfolio diversification and scale. The pro forma combined earnings of the entity will be substantially accretive versus MCC's current earnings. We think the benefit of the larger-scale positioning in the market is a terrific upside. We look forward to talking to you in the next quarter and wish everybody the best. Thank you very much for the continued support.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.