What happened?
Medley Capital (PFX -1.61%) may take the honors for posting one of the worst quarterly performances in the entire BDC industry. The company earned net investment income (operating income) of $0.28 per share but reported net income of -$0.70 for the fourth quarter.

Medley's weakness is primarily related to a growing number of credit problems in the portfolio. Notably, the company's net asset value fell $0.99, from $11.00 to $10.01 per share this quarter.

Does it matter?
Absolutely.

I've written about some of the problem credits in Medley's portfolio in the past, noting that typically a company that gets marked down will be again in future quarters. That's exactly what's happening at Medley Capital.

All but one of the problem credits identified in calendar Q3 were written down again in calendar Q4. The only investment that wasn't written down was Calloway Laboratories, which couldn't possibly fall in value because it was already marked to zero.

The table below shows how fair values changed on its previously identified problem credits.

If there is any consolation, it's that this quarter may have been a "kitchen sink" quarter, in which Medley was particularly conservative in marking the book and identifying problems, resulting in unrealized capital losses that may be later reversed. Medley Capital revised its fee agreement, which takes effect on Jan. 1. The company has an economic incentive to sink this quarter so as to flush out the marks before capital losses begin to affect the income earned by the external manager, Medley Management (MDLY).

An analyst did ask, somewhat indirectly, on the company's conference call if this was what happened this quarter. They say no. But incentives being what they are, it pays to approach any BDC with some cynicism. After all, we're talking about highly illiquid investments held in "black box" investment vehicles.

Alas, the market is giving Medley plenty of breathing room. With the stock trading at $5.70 at the time of writing, Medley Capital trades at a steep 43% discount to book value. The market is underwriting the stock such that Medley's underwriting can prove to be much worse.