Friday, May 9, 2014

MCC: May 2014 Report

Summary and Recommendations

Medley Capital (MCC) has been near the top of my BDC rankings for a while and is currently a component in two of my suggested portfolios (High-Yield and Value & Growth).  Due to the research in this report I have downgraded MCC to a 'Hold'.  My key concerns are related to yield compression in the industry that might impact the company more than other BDCs due to having a much higher than average portfolio yield, especially given its higher amounts of senior secured debt investments.

At this point I will be looking for yield direction on the recent earnings calls with other BDCs for an indication of overall market trends.  In upcoming articles I will use this information to assess repayment risk for each BDC but I do believe that there is little chance for MCC to increase dividends even if its portfolio yield rises (see page 7).  On the latest call with MCC the CEO stated “So it will be interesting I think to watch here some of the volatility in the market as to whether this is the annual or every 18 month kind of risk-off market where we see yields come back to us. Some of the market volume and the risk-off that we see pretty frequently ends up driving higher yield, I’m not predicting that, but we’re going to watch carefully here. We raised capital and we feel very good about our pipeline that was right in front of us and that’s the reason we raised. So I’d say as we look here today it remains an attractive opportunity to be providing senior secured credit in the market.”

MCC is currently my highest ranked BDC with a regular dividend yield of over 10%.  Historically MCC has had adequate dividend coverage but the growth has leveled off with only one dividend increase since 2012.  I have adjusted the profit and return rankings to reflect the new projections in this report but I have not adjusted the risk rank at this point.  Please watch for this in upcoming articles. One of the key advantages that MCC has over most BDCs is $106 million in SBA borrowing capacity that is excluded from regulatory leverage ratios.  However the company has been slow to utilize this cheap source of capital but mentions it on each of the earnings calls.

I have reduced my price targets for MCC closer to the total return pricing and I would suggest that investors hold off on purchasing shares until I have assessed its repayment risk impacts over the coming weeks.

This report includes updated projections, recommendations, pricing, rankings, total return and earnings estimates for dividend sustainability including the best and worst case scenarios along with the potential impacts to dividend growth. It also includes an interest rate sensitivity analysis that discusses the potential impacts to income and expenses if interest rates begin to rise with a side by side comparison to other BDCs.  There is a new section covering the potential impacts from being excluded from the Russell 2000.

This report is not publicly available, will not be published on Seeking Alpha. If you would like to become a premium subscriber please visit “Premium Subscriber”.

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