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Medley Capital: Changes To Internally Managed Structure

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NEWS

On November 20, 2020 Medley Capital (MCC)  issued a press release announcing that on November 18, 2020 its Board of Directors had approved adoption of an internalized management structure effective January 1, 2021.

“The new management structure will replace the current Investment Management and Administration Agreements with MCC Advisors LLC, which expire on December 31, 2020”.

Furthermore, David Lorber – an independent Director of the BDC – has been appointed Interim Chief Executive Officer.

In an MCC SEC filing, we learned that Mr Lorber’s salary will be $425,000 per annum with a 100% discretionary bonus.

Also joining the BDC as Chief Financial Officer is former Alcentra Capital officer Ellida McMillan.

Her salary is fixed at $300,000, with a potential bonus of $200,000.

Both individuals begin in their roles on January 1, 2021.

Mr. Lorber and Ms. McMillan are in the process of assembling the internalized management team, that will be responsible for the day-to-day management and operations of the Company, under the oversight of the Board.  The Company has thus far engaged a senior investment professional with significant credit experience to serve as the lead portfolio strategist, who will work closely with Mr. Lorber.  The Company has also retained US Bancorp Fund Services, LLC to serve as the Company’s fund accountant and administrator, and is in the process of retaining Alaric Compliance Services, LLC, an officer of which would serve as the Company’s Chief Compliance Officer”.

The following quotes were included in the press release from the new Interim CEO and “Lead Independent Director”:

Mr. Lorber said: “I am excited to lead the Company in this new phase as we move forward and look to generate value creatively and efficiently.”

Arthur Ainsberg, the Company’s Lead Independent Director added: “We believe our streamlined internalized structure will increase our flexibility to continue to seek to maximize shareholder value.”

Separately, Medley Management (MDLY) – the current external manager of MCC – announced in a filing the termination of its management contract with the BDC.

The following statistics were published:

 “The Company’s [MDLY] investment advisory relationship with MCC represented approximately 18%, 25% and 29% of the Company’s total management fees for the nine months ended September 30, 2020 and years ended December 31, 2019 and 2018, respectively. As of September 30, 2020, MCC represented approximately 9% of the Company’s AUM and 18% of the Company’s fee earning AUM”.


ANALYSIS

Known And Unknowns

This monumental change in the management of the troubled BDC was a surprise to the BDC Reporter and not previously mooted by MDLY.

Despite two filings and a press release much remains unclear.

The BDC has not scheduled – as usually done in these situations – a conference call with analysts and investors to discuss the actions taken and the way forward.

Although MCC has not yet reported its quarterly and fiscal year end results – which end in September – no date has been set for disclosure.

Certain

We do know that the external management contract with MDLY will terminate at year end.

Last quarter (June 2020), MCC recorded $1,317,223 in Management Fees paid to its manager, and no Incentive Fees.

Thanks to a reimbursement agreement with MDLY intended to keep costs down, MCC was credited with ($349,427) by its manager.

That brought its net direct compensation costs to $967,796, which annualizes to $3,871,184.

Maybe. Maybe Not. 

Given that we don’t know how many other professionals may be hired – and at what cost – and what premises might be used to house them or the cost of the other arrangements mentioned with US Bancorp and Alaric – it’s impossible to determine if an internally managed MCC will derive any cost benefit from the change.

The press release said the following on the subject:

“The new, simplified and streamlined structure is expected to lead to reduced operating costs/expenses for the Company in 2021, although there can be no assurance of the anticipated savings”.

So Many Questions

There are a host of unknowns that may or may become clearer in the weeks ahead:

  1. Who made the critical decision to break away from the management of MDLY ?
  2. Was any payment made to the soon-to-be-former manager to facilitate the divorce ?
  3. What is the relationship between the Interim CEO – and former “independent director”
  4. What is the current ownership of MCC by Mr Lorber ? As of the Proxy, he held 3.1% of the BDC’s common stock, more than any other director or officer.
  5. What has happened to the reported initiative to find a buyer for the BDC ?
  6. If the BDC, or its assets are not for sale, in which direction does the new management seek to steer the business ?

Pro-Forma Analysis

Regarding the latter here is the financial situation of MCC in a nutshell as of June 2020 and rolling forward to today:

As of the IIQ 2020, the BDC had $251mn in portfolio assets at FMV and $52mn in cash, offset by $151mn in unsecured debt in two Baby Bonds (MCV and MCX).

Subsequently the BDC has sold the assets in its joint venture, which between proceeds received ($41mn) and realized loss likely to be booked ($6mn) should bring investment assets to $204mn and cash to $93mn.

On November 20, 2020 MCC repaid in full the $74mn due on MCX, which was going to mature early in 2021. MCV does not mature till 2023.

On a pro-forma basis – and assuming no other changes – cash should be $19mn, investments (as we’ve seen) $204mn, or $223mn in total versus remaining debt of $78mn.

Net assets would be $145mn.

Left Over

There are – by our count – 42 remaining companies in the portfolio, of which 24 are underperforming.

According to MCC:  “At June 30, 2020, certain investments in nine portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $16.4 million, or 6.6% of the fair value of our portfolio

Another $80mn of the portfolio consists of non-income producing equity investments at FMV with a cost of $53mn.

Netting out non performing and non income producing assets leaves $135mn in performing loan investments.


VIEWS

Can We Talk ?

We are constantly amazed by the twists and turns the MCC saga has taken since first MDLY sought to merge the BDC with Sierra Income and itself back in August 2018.

At that point MCC had $730mn in cash and portfolio assets; an SBIC license, three unsecured debt issues and a Revolver (which was inexplicably terminated in September 2018).

A little over two years later, assets have dropped by 70% and the SBIC has bolted; and two of the unsecured debt issues have been repaid (but not before much pushing and shoving to get repaid by the Israeli note holders).

There have been “activist” investors coming along to save the day only to make a pact with MDLY; several reported attempts to sell or merge the business and many fatuous comments about “maximizing shareholder value“.

Clearly this is no way to run a railroad, or a BDC, and shareholders have borne the brunt of the ineptitude and greed of the principals.

The BDC is not paying a dividend and had to undertake a 1 for 20 reverse stock split in July.

MCC’s stock price has dropped as much as (90%) since August 2018 and is currently (70%) behind.

No Inside Scoop

As our analysis above suggests we do not have a handle on what’s happening behind the walls and on the Zoom calls of the BDC and have no idea what happens next.

On paper, the BDC has the resources at this stage – despite a terrible credit track record – to comfortably repay its remaining Baby Bond well before maturity.

Whether that will happen or not is unknown.

Far more doubtful is whether MCC at its current size and absent any additional funding – whether internally managed or otherwise – can effectively operate in the competitive-as-ever leveraged loan market and generate a return to shareholders.

At some point this BDC telenovela will be forced by harsh market realities to come to an end.

The BDC Reporter, though, is not bold enough to guess at the outcome or the timing.

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