Medley Capital Corporation (MCC), a $1.2 billion business development company (BDC), is reducing its management and incentive fees, as well as increasing its share repurchase plans. The moves are intended to bolster performance and sweeten terms for the firm’s shareholders, which has been trading below book value for some time and recently experienced credit losses.
Brook Taube, Medley’s chief executive, said on the firm’s earnings call on Friday (4 December) that the firm’s base management fee would drop to 1.5 percent from 2 percent on assets above $1 billion. MCC will lower its incentive fee to 17.5 percent from 20 percent over a 6 percent hurdle rate. The firm is also restructuring its fees to include netting, which takes into account realized and unrealized losses, with a three-year look back beginning 1 January.
MCC management also said it has repurchased 1.4 million shares at a weighted average price of $8.35, bringing the total volume purchased to 2.4 million since the firm announced its $30 million share repurchase plan in February. On 3 December, the board also authorised increasing the stock buyback programme to $50 million and extended it to the end of 2016.
In its third quarter earnings report, MCC also reported net unrealised depreciation of $26.8 million and a net realised loss from investments of $60.9 million. Non-accruing assets made up about 2 percent of Medley’s portfolio at quarter-end.
The structural changes prompted Wells Fargo senior analyst Jonathan Bock to issue a positive report on Medley Capital, raising Wells Fargo’s rating of the BDC to “outperform” and a buy. “The company took a proactive and prudent step to align incentive fees and lower costs and we believe this is appropriate for MCC shareholders.”
The BDC was trading at 0.69x of net asset value (NAV) as of Friday and Bock said the changes will help lift the BDC to a more average price to book discount. “We believe MCC should trade between 0.75x to 0.85x NAV, as proactive shareholder reforms bring valuation closer to the group average,” he wrote.
In its financials, Medley reported that net investment income (NII) had dropped to $17.5 million in the third quarter this year from $20.4 million in the same quarter last year. That income covered the firm’s dividend, which was declared at 30 cents per share, while NII stood at 31 cents per share.
Medley’s assets also decreased year-on-year, from $1.32 billion in the third quarter of 2014 to $1.26 billion in the third quarter of 2015.