The BDC merger that’s become a marathon

A new bid has stirred the pot ahead of a shareholder vote on the disparate offers to reorganise Medley’s publicly traded BDC.

The battle over the fate of Medley Capital Corporation (MCC) and Medley Management (MDLY) continues, and a fresh face means yet another choice for shareholders.

Marathon Asset Management made an 11th-hour bid for MCC, which comes after NexPoint Advisors in early February made an offer to counter the MCC management-backed proposal that would fold MCC into Sierra Income Corporation (SIC) and make MDLY a subsidiary of SIC. (Thanks for hanging with us through the alphabet soup that is US mid-market lending.)

While we aren’t taking a specific side on any given offer, it is good to see a contest after MCC failed to receive any binding offers when it shopped the investment vehicles through a process ending in the middle of last year.

With NexPoint and Marathon bids on the table, shareholders have credible – or at least achievable – options for those aggrieved by the management-backed internalisation transaction, particularly after multiple quarters of declining net asset value per share, losses and a double-digit percentage of loans on non-accrual at cost.

The latest offer would see MCC and SIC, which didn’t respond to requests for comment for this column, sever their advisory relationship with MDLY and join forces with Marathon.

The bidder plans to lower the BDCs’ management fees to 1.25 percent rather than the 1.75 percent it currently charges and cut the performance fees from 20 percent to 17.5 percent. In addition, Marathon proposes buying back 3 percent of outstanding shares at book value, which would be distributed to shareholders as a special dividend.

NexPoint said its offer will save or create $225 million in value for MCC shareholders, which would be achieved through cutting fees, a cash payment and share purchases, among other measures. For its part, MCC calls these claims inaccurate.

The path from August’s announcement of management’s plan to internalise the business development companies to the Friday shareholder vote has been tumultuous, to say the least.

Multiple event-driven hedge funds came forward to vociferously oppose the plan, and the proxy advisory firm Institutional Shareholder Services came out against the management-backed merger after initially supporting it. MCC received backing from another proxy advisor, Egan-Jones Rating Company.

Casey Alexander, a BDC analyst at Compass Point Research & Trading, said late last year: “We understand it has been a very rough road for MCC shareholders. But we have not spoken to any other BDC management team that has expressed interest in acquiring MCC as it is currently situated. It’s easy to say, ‘Sell it’, but it takes two to make a deal.”

MCC shareholders now have that option: they can make a deal. MCC is changing course, and the good news is that shareholders have multiple options on the menu.

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