Medley Capital: Insider Purchases
Here is another development in a story the BDC Reporter “broke” back in February 2017, but which has received zero attention elsewhere in the financial press: the ever increasing purchases of Medley Capital’s stock by Seth and Brook Taube, the managers of the BDC and the owners of the Investment Advisor to that same BDC. The constant Form 4 insider filings by the Taube Brothers, even as the BDC’s results and stock price have fallen, have given some investors confidence.
With the latest Form 4 (see above), the total shares held has increased to about 3.1mn shares. That’s out of a total of 54,474,211.
However, 2.9mn shares of the shares held by the Taubes are through a special purpose entity which they manage for an investor group, and does not represent a personal purchase by either of the two key insiders. In fact, if we are right, 25% of the capital employed for the purchase of MCC’s stock comes from Medley Management, Inc., the publicly owned parent of the BDC which serves as the Investment Adviser and is part of a complex investment scheme that includes client of Fortress Investment. The sum of what we were able to determine from the public record is summarized in this article from February 3rd.
The crux of the matter is that the Fortress investors have to be paid an 8% Preferred Return, drawn from the BDC’s distributions. However – and this may account for the new purchases which may be aimed at dollar cost averaging the vehicle’s holdings – MCC has just had to reduce its distribution from $0.22 a quarter to $0.16. Hitting that 8% Preferred Return just got harder and could get harder still as a further drop in the distribution is not out of the question in a scheme that has a 7 year duration.
The BDC Reporter does not have the skills to fully unravel what’s going on with this strange investment vehicle and we are not aware of any public discussion of the subject by the parties involved. We suggest anyone interested undertake their own analysis. However, we remain concerned – assuming we understand how the scheme works – that a trigger point may occur at some point where several million shares of MCC get dumped into the market at the same time should the arrangement be in default and get unwound. MCC’s daily average volume is 350,000 shares. The sudden sale of nearly 3mn shares could result in a very large drop in an already depressed share price.
Medley Management investors could face the loss of their portion of the investment (which is subordinated ) as could the Fortress investors, notwithstanding their superior status in the scheme.