Preview of Medley Capital: Middle Market Lender at Discount to NAV

This article is authored by MOI Global instructor Jim Roumell, president of Roumell Asset Management, based in Chevy Chase, Maryland. Jim is an instructor at Best Ideas 2018, the fully online conference featuring more than one hundred expert instructors from the MOI Global membership community.

MCC is a closed end fund that has elected to be regulated as a business development company (“BDC”) under the 40 ACT. MCC is externally managed by MCC Advisors, pursuant to a management agreement. MCC Advisors is controlled by Medley Management Inc., a publicly traded asset management firm, which in turn is controlled by Medley Group LLC, an entity wholly-owned by the Taube brothers (more on corporate structure below).

MCC’s objective is to generate current income and capital appreciation by lending to privately-held middle market companies ($25 million to $250 million enterprise value), primarily through directly originated transactions. The portfolio generally consists of senior secured first lien term loans and senior secured second lien term loans.

Key statistics and peer comparisons as of Sept 30, 2017 ($ in millions)

Investment positives

Discount to NAV – MCC trades at a large discount to NAV. As shown above and discussed in detail in the valuation section below, MCC’s stock currently trades at a 36% discount to reported NAV. I apply certain incremental losses to arrive at a base and stress case NAV. MCC currently trades at a 32% and 29% discount to my base case and stress case NAV’s, respectively. Even if we assume there is a 10% permanent BDC discount, it appears MCC shares are undervalued on an NAV basis.

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