PhenixFIN Corporation: A Diversified BDC Navigating Market Volatility

Published on September 24, 2024 | Ticker: PFX

PhenixFIN Corporation (NASDAQ:PFX) is an internally-managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940. The company's investment objective is to generate current income and capital appreciation primarily through making loans, private equity or other investments in privately-held companies.

Business Overview

PhenixFIN's portfolio generally consists of senior secured first lien term loans, senior secured second lien term loans, senior secured bonds, preferred equity and common equity. The company may also make debt, equity or other investments in publicly-traded companies, including investments in other BDCs, closed-end funds or REITs. As of March 31, 2024, PhenixFIN's investment portfolio had a fair market value of approximately $220.0 million.

During the six months ended March 31, 2024, the company received proceeds from sale and settlements of investments of $45.6 million, including principal proceeds, and invested $30.8 million. The company's income-bearing investment portfolio based upon cost represented 84.0% of its total portfolio, of which 57.6% bore interest based on floating rates, 16.8% bore interest at fixed rates, and 25.6% were income-producing equity investments.

PhenixFIN's portfolio is diversified across various industries, with the largest exposures being in the Services: Business (20.5%), Hotel, Gaming & Leisure (12.1%), and Real Estate (17.9%) sectors as of March 31, 2024. Geographically, the company's investments are primarily concentrated in the Northeast (38.7%), Southeast (28.0%), and Midwest (16.5%) regions of the United States.

Financials

For the six months ended March 31, 2024, PhenixFIN reported total investment income of $10.4 million, of which $6.4 million was attributable to portfolio interest, $3.7 million was attributable to dividend income, $0.1 million was attributable to fee and other income, and $0.2 million was attributable to interest on cash and cash equivalents. The company's net investment income for the period was $2.3 million.

PhenixFIN's net realized and unrealized gains on investments for the six months ended March 31, 2024 were $7.6 million, resulting in a net increase in net assets from operations of $9.9 million. This compares to a net increase in net assets from operations of $10.7 million for the six months ended March 31, 2023.

The company's annual net income for the fiscal year ended September 30, 2023 was $26.9 million, with annual revenue of $35.0 million and annual operating cash flow and free cash flow of -$20.7 million. PhenixFIN has not provided any specific guidance or outlook for the current fiscal year.

Liquidity

PhenixFIN's balance sheet remains strong, with $19.1 million in cash and cash equivalents as of March 31, 2024. The company's asset coverage ratio, a key metric for BDCs, was 279.5% as of March 31, 2024, well above the minimum requirement of 200% under the Investment Company Act of 1940.

The company's debt profile includes a $62.5 million revolving credit facility, which was amended in February 2024 to increase the available borrowing capacity, and $57.5 million in 5.25% unsecured notes due 2028. As of March 31, 2024, PhenixFIN had $84.4 million in total debt outstanding, with a weighted average interest rate of 6.3%.

Recent Developments

PhenixFIN's investment portfolio is actively managed, with the company's Chief Financial Officer serving as the Valuation Designee responsible for determining the fair value of the company's investments under the oversight of its Board of Directors. As of March 31, 2024, approximately 68.7% of the company's investments were valued using significant unobservable inputs (Level 3 assets under the fair value hierarchy).

Risks and Challenges

The company's investment strategy and portfolio composition expose it to various risks, including credit risk, liquidity risk, and interest rate risk. PhenixFIN's investments in privately-held companies also carry inherent risks, such as limited information, lack of liquidity, and potential for losses. Additionally, the company's significant exposure to the Services: Business sector, which includes its investment in an asset-based lending business, subjects it to risks associated with that industry.

PhenixFIN has internalized its management and investment functions, which has resulted in the company bearing the costs and expenses of its operations and transactions. While this structure may provide potential benefits, it also exposes the company to risks associated with managing its operations internally, including the ability to attract and retain qualified personnel.

Conclusion

Overall, PhenixFIN Corporation is a diversified BDC that has navigated the recent market volatility relatively well, maintaining a strong balance sheet and investment portfolio. However, the company's exposure to various risks, including those associated with its internalized management structure and significant investment in the asset-based lending business, warrant close monitoring by investors. As the company continues to execute its investment strategy, its ability to generate consistent income and capital appreciation will be crucial in delivering value to its shareholders.

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