Please ensure Javascript is enabled for purposes of website accessibility

Instant Analysis: Medley Capital's Weak 4Q

By Jordan Wathen - Feb 10, 2016 at 10:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The high-yield BDC reported a bad quarter. A red herring or a sign of problems to come?

What happened?
Medley Capital
(MCC 2.04%) 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Medley Capital Corporation Stock Quote
Medley Capital Corporation
MCC
$36.36 (2.04%) $0.73
Medley Management Inc. Stock Quote
Medley Management Inc.
MDLY

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.