Medallion Financial: Stock and Notes Down
Both Medallion Financial‘s stock (MFIN) and its Unsecured Notes (MFINL) are down on the day.
MFIN is down “only” just -3.4% on moderate volumes. There have been much higher intra-day drops and volume in recent months.
However, at the current level MFIN is at its lowest level in years and breaking below the $3.26 recent lowest point.
The post-earnings release rally is now just a distant memory, with Medallion having lost a quarter of its market cap since November 8th.
A week ago…
Even more disturbing is that holders of the Unsecured Notes are beginning to panic.
MFINL has dropped -12.6% at time of writing (12:49 p.m. EST).
The price of the Notes-which came out at $25.00-is now at $19.33.
Volume is 4x the normal level.
We have been invested in the publicly traded Notes of several BDCs in recent years that have experienced severe problems.
Our experience has been that the innate protections of the BDC format (200% asset coverage, diversification, etc.) have been a major boon.
Even as some BDC common stocks reached bottom-of-the-barrel prices, the Notes market value barely budged.
Anybody with a minute to spare might want to graph on the same page the price action over the years of both stock and notes for:
KCAP Financial (KCAP & KAP)
Full Circle Capital (FULL & FULLL).
That was the logic that caused us to invest a small amount a few months ago in MFINL.
However, when we read the latest 10-Q, we realized that there is a risk that if Medallion Financial really stumbles, the Notes may not be safe.
We are worried the regulators might grab the key asset: Medallion Bank. That would be done to protect the institution.
The hodge-podge of remaining non-bank entities mostly have non-recourse or recourse secured financing against them.
Moreover, most of the assets in these entities are medallion loans, whose value is in free-fall.
Management appears to have pawned and borrowed every asset they can already.
Soon we may get a litany of shareholder lawsuits as well.
We swallowed hard and sold out of MFINL on Friday at $21.98, taking our lumps.
Of course, Medallion’s management may yet find a way to get out of this cleft stick.
Maybe a buyer will come along for Medallion Bank and pay a sufficient premium to make everybody happy.
Maybe the value of medallions in New York and Chicago will stabilize, or all the personal guarantees Medallion holds will make defaulters pay up.
However, we have been spooked by the absence of any candor from the management team, and the opaque financial reporting involved.
Hard to be brave on the front lines when headquarters goes on radio silence in the midst of battle.
So we de-camped. Allowable in investing, less so in wartime.