Medley puts leverage over portfolio size

Medley’s stock continued to trade at a discount as the management expressed a strong commitment to following through on its share repurchases.

Medley Capital Corporation continued to shrink its portfolio for the three months ending 30 September, the firm reported Thursday, a decision management said was based on prioritising concerns over leverage and executing its share buyback programme.

The New York-based business development company reported its fourth fiscal quarter earnings, posting a net asset value of $9.49 a share, a year-on-year decline from its $11 a share at the same time last year. The decrease in NAV per share is the third straight fiscal year that figure has fallen and also the third year its share price, which stood at $7.63 at Medley’s fiscal year-end, has traded at a discount to NAV.

For the quarter and year-end, Medley listed a net investment income of 23 cents a share and 97 cents a share, respectively. Medley will pay a quarterly dividend of 22 cents a share, bringing total dividend payments made to $1.12 for its fiscal year.

These figures are both a year-on-year decline from net investment income for both the three months and year ending 30 September 2015 of 31 cents a share and $1.27 a share, respectively. In that quarter, Medley paid a 30 cents-per-share dividend, while its dividend payments totaled $1.27, letting its net investment income fully cover its dividend.

From 30 September 2015 to 30 September 2016, the firm shrunk its portfolio by $233.14 million. CEO Brook Taube said on Friday’s earnings call the move was aimed at putting its leverage levels and share buyback programme first.

The firm’s leverage levels, 0.69x, are at the higher end of the 0.6x to 0.7x range preferred by the firm. The current share repurchase programme consists of buying back $50 million in stock by the end of 2017; so far Medley has bought back $34.08 million.

He also said the company doesn’t want to take on extra risk to get extra yield.

“The backdrop has also been one where it hasn’t been exciting to go and reach for lower yields that are higher risk,” Taube said.

Of the roughly $100 million in available cash, $70 million is in the firm’s SBIC Programme, which is conducted through the US Small Business Administration (SBA) and invests both private money and capital guaranteed by the SBA to make investments. The remaining $30 million is on the firm’s balance sheet.

The cash helped boost Medley’s total assets to $1.03 billion as of 30 September compared to $1.24 billion at the same time last year. Specifically, cash and cash equivalents stood at $104.49 million, up from $15.71 million.

Management said Medley expects to deploy the money in the SBIC fund, while the on-balance-sheet cash will likely be put toward the share buyback programme and its senior loan join venture.

The firm also did not report any new originations this quarter, the second straight quarter it has done so. Some 27.1 percent of Medley’s investments are underperforming, as rated on a 1 to 5 scale with a 3 or higher explained as performing below expectations. On most of those investments, however, losses on principal, interest or dividend are not anticipated.

When asked about their valuation process, Medley declined to comment beyond the regulatory filing, which noted that valuation methods can include comparisons of financial ratios, earnings and discounted cashflows.

Medley Capital Corporation is a BDC externally managed by Medley Management. The firm mainly invests in first-lien senior secured and second-lien senior secured loans.