MCC cuts dividend, adds portfolio manager after challenging quarter

Medley’s BDC cut its dividend after a quarter that saw a sharp decrease in net repayments and no new originations.

Medley Capital Corporation (MCC) has cut its dividend, a move caused by a combination of the efforts to reduce leverage and a lack of new originations that suppressed net investment income during the third fiscal quarter.

Speaking Tuesday (8 August) on the firm's quarterly earnings call, MCC chief financial officer Richard Allorto announced a dividend of $0.22 per share, down from the $0.30 the firm posted last quarter. According to chief executive officer and chairman Brook Taube, the dividend's current premium to investment income reflects the firm's expectations for average net investment income going forward.

That figure was determined by an internal calculation that included expectations of “normalised” fee income, repayments, and originations in addition to fee waivers and future stock buybacks, amoung other factors.

Allorto revealed net investment income fell from the $0.26 per share ($14.6 million) reported in May to $0.20 per share ($11 million) last quarter. Executives also said refinancings played a role in the drop in net investment income that led to the dividend cut, but did not provide additional details when asked.

The firm's net asset value declined slightly from the $9.80 per share that MCC, the BDC of Medley Management (MDLY), reported at the end of last quarter to $9.76 in the three months ending 30 June. The value of MCC's total assets increased slightly from $1.03 billion to $1.04 billion.

Leverage as of 30 June stood at 0.69x, essentially stable from last quarter but well below the 0.78x figure reported at the end of 2015.

Net repayments fell from the $68.8 million reported last quarter to just $400,000 in the three months ending on 30 June, with $12.1 in repayments and exits during the period offset by roughly equivalent investments into existing portfolio investments, according to Taube.

The firm did not repurchase any stock last quarter, but said that it has $18 million remaining under its existing repurchasing plan that it expects to complete in the quarters ahead. In addition, Taube said that a new partnership with an institutional investor will allow the parent company MDLY to become a “meaningful buyer” of the BDC's stock at current discounted levels.

MCC reported its current portfolio consists of 63 investments across 20 industries and various regions of the United States. The firm's four energy investments, concentrated in service providers with exposure to both US and global markets, constitute 5 percent of the overall portfolio and have shown modest improvements of late, according to Taube. The decent performance runs contrary to many other BDCs, which have struggled with their energy exposure.

MCC did not report any new originations after reporting $47.5 million in the second quarter of last year. In response to a question from Christopher Testa, an analyst at National Securities, about whether the lack of originations would lead to any additional personnel changes at the firm, Taube indicated that the lack of originations last quarter was in part a function of the firm's increased focus on senior first lien sponsored transactions.

Nonaccruals represent 6.6 percent of the overall portfolio as of 30 June, according to Taube, with unspecified investments added to the list last quarter. He declined to detail any specific restructurings, but did say that MCC had obtained equity ownerships in certain unspecified companies, which the firm expects will help it produce income from these investments in the future.

It was also announced on the call that Dean Crow, currently chief operating officer and senior portfolio manager of Medley's non-traded BDC Sierra Income Corporation and senior managing director and head of investing at Medley, will assume an additional role as portfolio manager at MCC.

Echoing peers' comments about recent developments in the market, Taube discussed the recent “flight to quality” and said that MCC's increasing focus on sponsored, as opposed to unsponsored, transactions would continue as a function of the firm's growing relevance to the higher end of the market.