NEWS

On May 24, 2019 NexPoint Advisors (NexPoint) issued a press release indicating two independent proxy firms had weighed in on the upcoming Medley Capital (MCC) shareholder vote on 2 Board members.

ANALYSIS

The BDC Reporter has annotated the press release with analysis and commentary.

Our annotations are in bold italic.

“Leading proxy advisory firms both support removal of incumbent directors Seth Taube and Arthur Ainsberg from MCC board

DALLAS, May 24, 2019 /PRNewswire/ — NexPoint Advisors, L.P. (“NexPoint”) announced today that Institutional Shareholder Services (“ISS”) and Glass Lewis, two leading independent proxy advisory firms, both issued reports recommending that stockholders of Medley Capital Corporation (“MCC”) (MCC) vote FOR NexPoint’s independent director nominees at the June 4, 2019 annual meeting of stockholders (the “Annual Meeting”). In their proxy analyses, both ISS and Glass Lewis found sufficient reason to support the removal of the two incumbent directors, Seth Taubeand Arthur Ainsberg, who are up for re-election.

The following provides summaries of the respective reports. To vote in accordance with the recommendations from ISS and Glass Lewis, MCC stockholders should DISCARD any WHITE proxy card, and vote FOR Stephen A. Mongillo and Mark T. Goglia, NexPoint’s nominees, using their BLUE proxy card.

Visit www.MedleyCapitalVote.com to learn more about NexPoint’s nominees and to access additional information ahead of the Annual Meeting.

BDCR Notes: As has happened on prior occasions when the proxy firms are being used to support arguments made by either NexPoint or MCC, the full text is not provided – only selected highlights. There may be legal or commercial reasons involved, but from a transparency standpoint that’s unsatisfying.

ISS Report on MCC

In summary, ISS concluded:

• That “further change at the board level is warranted” as a result of “inferior shareholder returns during the incumbents’ tenure,” “troubling operating performance,” and “the Delaware Memorandum Opinion that found the company’s nominees breached their fiduciary duties”; and
• That NexPoint “has presented a compelling case that…its nominees are the best option available to achieve that change.”

ISS raised specific issues about the financial situation at MCC, noting:

• The fact that the “[proxy] contest has an element of urgency because net asset values have declined”;
• The threat that if “net asset value is below [a $275 million] threshold for two consecutive quarters…[outstanding] notes could be accelerated, creating substantial distress for the company”;

BDCR Notes: ISS is referring obliquely to one of the three unsecured notes issued by MCC and placed in Israel. We discussed the risk of default in an article on May 12, 2019. 

• The presence of other “worrying trends in the company’s operating performance.”

BDCR Notes: We’re disappointed that ISS and – as we’ll see – Glass Lewis, did not mention the strange case of MCC’s SBIC license, a subject we’ve covered extensively but which which still begs numerous questions, and should raise great concerns about MCC’s stewardship. For example, what did MCC do to incur the wrath of the SBA and the pulling of its very important SBIC license and the need to repay $135mn of debentures in a matter of weeks ? To our knowledge, this is the first time a BDC has ever had an SBIC license pulled. What actions were taken, if any, to remediate the situation with the SBA ? After all an SBIC license allows for borrowing large amounts of unsecured debt for a very long period and on favorable terms. The loss of the license has permanently – and irrevocably under MCC’s leadership – deprived MCC shareholders of a major source of value. 

We believe shareholders need to know more about why the manager at MCC in charge of the SBA program has parted ways and is suing the BDC and – possibly – being sued in return. The firing and the lawsuit(s) were announced several weeks ago, but no mention is made by the ISS or Glass Lewis of this subject. However, it is the shareholders of MCC who will be on the hook for any settlement that might occur, even if the BDC is under new management. Moreover, the details of the dispute might help shareholders – trying to decide for what and whom to vote – in making up their minds. 

ISS expressed concerns about the MCC director nominees, including:

• Their “conflicted and underperforming investment management” as well as their role in “oversee[ing] negative total shareholder returns”; and
• The fact that the “nominees appear to have participated in a ‘stonewalling’ response to [NexPoint].”

In its support for NexPoint’s nominees, ISS noted:

• That NexPoint has “specifically and intentionally selected unaffiliated nominees so that they will act solely in the best interests of all MCC stockholders to evaluate competing strategic alternative options”; and
• That “ISS’ engagement with the [NexPoint] nominees suggests that their independence is credible.”

BDCR Notes: The BDC Reporter – despite any impression to the contrary – did not fall off the turnip truck yesterday. It’s hard to believe that the NexPoint Board nominees- if elected – will serve as disinterested parties and will not favor its NexPoint sponsors. One of the weaknesses of s0-called “shareholder activism” is the amount of self interest involved where the dissidents are concerned. We’ve already seen how FrontFour – which began by bashing and then suing the Medley companies – has arrived at an initial memorandum of understanding with them which involves voting as a bloc. (Admittedly that arrangement has not yet been formalized to our knowledge, leaving one more loose end to be resolved).

Nor is it necessarily a Good Thing – should the new Board members be elected and the Medley merger not happen – that the BDC begin from scratch what should have occurred last year – a full fledged search for a new Investment Advisor. Under other conditions that would be the right course, but with MCC’s balance sheet shrinking fast; the potential default on a portion of its debt  and with the endless uncertainty about what will happen next, getting to a resolution ASAP seems like the best way forward. That would hand the Investment Advisory contract to NexPoint. Given the terms of the proposed NexPoint deal, we’d suggest that’s the best way forward for MCC shareholders. If this imbroglio goes into the fall or later, who knows what will be left of the business ? We’d rather NexPoint’s directors not hide their light under a bushel and make clear that a vote for them is a vote to have NexPoint become the Investment Advisor as soon as practical. 

Perfection is the enemy of the good in this complex situation. 

Glass Lewis Report on MCC

In summary, Glass Lewis concluded that:

• “NexPoint has made a compelling argument in favor of removing and replacing the directors up for election at the 2019 annual meeting”; and
• The “Delaware Decision provides sufficient evidence that the corporate governance at MCC is fundamentally broken and speaks to a clear need to overhaul the board.”

Glass Lewis highlighted broad issues with the current board, along with more specific concerns about MCC’s director nominees, including:

• The “appalling conduct by MCC directors,” which the Delaware opinion “describes at considerable length”;

BDCR Notes:  Just the fact that the behavior of the existing directors was “appalling” should be enough reason for MCC shareholders to vote for new directors.

• That “MCC’s board structure raises concerns about its objectivity and independence as well as its ability to perform its proper oversight”;
• The “evidence that Arthur Ainsberg has failed to represent the best interests of MCC shareholders,” specifically noting his “fail[ure] to understand that the prior sale process for MDLY did not ‘effectively’ shop MCC,” which Glass Lewis described as “an egregious error for the chairman of a special committee tasked with seeking the best alternative for shareholders”; and
• “[T]hat removing Seth Taube from the board is warranted given his status as an affiliate,” specifically noting that his removal would help “ensure that shareholder interests are placed above all else.”

Glass Lewis conveyed its support of NexPoint’s nominees with its views that the nominees:

• “[A]re qualified to serve on the MCC board, with considerable professional experience and relevant skills”;
• “[A]re not affiliated with NexPoint, and [Glass Lewis] see[s] no reason to doubt their independence or objectivity”; and
• “[W]ould represent the interests of all shareholders in accordance with their fiduciary duty if elected to the board.”

About NexPoint Advisors, L.P.  

NexPoint Advisors, L.P. (together with its affiliates “NexPoint”) is an SEC-registered investment adviser to a suite of alternative investment vehicles, including a closed-end fund, a business development company, and an interval fund, among others. An affiliate of Highland Capital Management, L.P., NexPoint is part of a multibillion-dollar investment platform that serves both retail and institutional investors worldwide. NexPoint’s investment capabilities include high-yield credit, real estate, public equities, private equity and special situations, structured credit, and sector- and region-specific verticals build around specialized teams. For more information visit www.nexpointfunds.com.

Important Information 

NexPoint Advisors, L.P. (“NexPoint”) has filed a definitive proxy statement with the Securities and Exchange Commission (the “SEC”) together with the other participants named therein to be used to solicit (the “Solicitation”) proxies for, among other matters, the election of its slate of director nominees at the Annual Meeting of Stockholders (the “Annual Meeting”) of Medley Capital Corporation (the “Company”) expected to take place on June 4, 2019.  Stockholders are advised to read the definitive proxy statement and any other documents related to the Solicitation because they contain important information, including information relating to the participants in the Solicitation. These materials and other materials filed by the participants with the SEC in connection with the Solicitation are available at no charge on the SEC’s website at www.sec.gov. In addition, the participants in the Solicitation will provide copies of the definitive proxy statement without charge, upon request. Requests for copies should be directed to the participants’ proxy solicitor.

VIEWS

One More Brick In The Wall

This is just one more piece in a very large jigsaw puzzle surrounding the fate of MCC and its related companies.

Nothing brought up by the two proxy firms has not been previously revealed or discussed.

We wonder if any shareholder – institutional or individual – will be moved one way or another.

At this point, we expect that any shareholder intending to vote has made up their mind.

Behind The Scenes

Much more important will be whatever MCC, Sierra Income, Medley Management and FrontFour agree upon, or not.

If those parties agree on some sort of deal – and get to keep control of the Board –  the MCC shareholders are likely to be at the losing end.

Bottom Line

We have a Board vote coming up on June 4 while multiple uncertainties remain.

However, to cut the Gordian knot voting for the NexPoint nominees – with an eye on the firm becoming the new Investment Advisor is probably the alternative to create the best long term value for shareholders.

Should the MCC insiders maintain Board control the chances of further “appalling” developments will be much higher.