Sierra Income to acquire MCC and MDLY

The combined vehicle’s pro forma assets would be close to $2bn, according to an investor presentation.

Sierra Income Corporation is set to purchase Medley Capital Corporation (MCC) and Medley Management (MDLY), a move that MCC’s management believes would be accretive to the firm’s earnings following its reported $0.49-a-share second quarter loss.

The combination would result in Sierra becoming a publicly traded entity on the New York Stock Exchange and would diversify MCC’s portfolio, management said, which comes as MCC has experienced credit issues in its portfolio, though it has seen improvement.

For compensation, MCC shareholders will receive 0.805 shares of Sierra common stock per MCC share held. MDLY unitholders and MDLY class A common stockholders would each receive a $3.44-a-share cash consideration and 0.3836 shares of Sierra common stock per share. Unitholders and Class A common stockholders would receive special cash dividends of $0.65-a-share and $0.35-a-share, respectively.

MCC’s stock popped on the news, rising to a Friday close of $3.59 after finishing Thursday at $3.39 a share. MDLY shares climbed even higher; the stock closed on Thursday priced at $3.50-a-share and ended Friday at $5.35.

At $1.1 billion of total assets, Sierra is larger than MCC, which has $634.87 million in total assets, according to BDC Collateral. Post-merger, the firm would have close to $2 billion in total assets – a figure that also includes those of private fund manager MDLY. MDLY would operate as a portfolio company of the BDC, management said on a conference call. It would be the second largest internally managed BDC after Main Street Capital Corporation.

The merger’s pro forma net asset value per share would be $7.73, as of 30 June. A combined portfolio would consist of 76 percent first lien and 12 percent second lien debt, along with 8 percent equity and 4 percent unsecured debt, according to investor materials. Eighty-three percent of the book would be deals backed by private equity sponsors and 17 percent would be positions not backed by a private equity firm.

MCC, as of 30 June, had 9.96 percent at fair value, or $63.21 million, of its book on non-accrual, Thomson Reuters BDC Collateral showed, which is a notable decrease from the $82.5 million reported at the end of the first quarter. MCC’s non-accruals at cost as of 30 June were 22.64 percent, or $170.25 million. Sierra’s non-accruals are much lower, standing at 4.18 percent to 8.51 percent at fair value and at cost, respectively.

MCC reported a $0.49-a-share loss in the second quarter – an increase from the first quarter’s $0.53-a-share loss and down from the $0.06-a-share gain from 30 June, 2017, according to BDC Collateral. MCC posted a $6.43 net asset value per share, down from the $7.02 reported as of 31 March and $8.84 as of the second quarter last year.

For its part, Sierra posted a $0.05-a-share loss in the second quarter, down from the $0.01-a-share loss reported as of 31 March and $0.08-a-share gain compared to 30 June, 2017. The firm’s net asset value per share stood at $7.27, down from $7.49 as of 31 March and $8.02 as of the second quarter of last year.