PhenixFIN Corporation (NASDAQ:PFX) is a 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 and History
PhenixFIN was originally incorporated in Delaware in 2010 and completed its initial public offering in January 2011. Through December 2020, the company was externally managed, but since January 2021, it has operated under an internalized management structure. This transition to internal management has allowed the company's activities to be managed by senior professionals and supervised by its board of directors, the majority of whom are independent.
Over the years, PhenixFIN has built a diverse portfolio of investments, including senior secured first lien term loans, senior secured second lien term loans, senior secured bonds, preferred equity, and common equity. The company's investment strategy focuses on pursuing opportunities in the middle market, targeting companies with enterprise or asset values between $25 million and $250 million. PhenixFIN generally seeks to make investment sizes ranging from $10 million to $50 million.
As of December 31, 2024, PhenixFIN's investment portfolio had a fair market value of approximately $300.1 million, spread across 75 portfolio companies. The portfolio is diversified across various industries, with the largest concentrations in services business (17.6%), insurance (16.2%), and real estate (14.3%). Geographically, the investments are primarily located in the Northeast (36.4%), Southeast (34.9%), and West (12.5%) regions of the United States.
In 2021, PhenixFIN entered the unsecured notes market, issuing $57.5 million of 5.25% Notes due 2028. This move expanded the company's financing options and provided additional capital for investments. Furthermore, in 2022, the company demonstrated its commitment to shareholder value by expanding its share repurchase program from $15 million to $25 million, and later to $35 million.
Financials
For the fiscal year ended September 30, 2024, PhenixFIN reported total investment income of $28.6 million and net income of $18.6 million. The company's net asset value (NAV) per share grew by 12% year-over-year, from $70.75 per share as of September 30, 2023, to $79.37 per share as of September 30, 2024.
The company's annual operating cash flow and free cash flow for the most recent fiscal year were both $16.1 million. For the most recent quarter, PhenixFIN reported revenue of $3.8 billion and net income of $2.5 million.
As of December 31, 2024, senior secured first lien term loans comprised 43.4% of the total portfolio by fair value. The weighted average yield on the company's debt and other income-producing investments was 13.3%. During the three months ended December 31, 2024, the company received $30 million in proceeds from the sale and settlement of investments and invested $100.9 million in new investments. PhenixFIN recognized $1.2 million in net realized gains on investments during the quarter, primarily due to a $0.8 million realized gain on PHH Mortgage Corp. and a $0.3 million realized gain on Chimera Investment Corp.
For the three months ended December 31, 2024, the company's investment income totaled $6.2 million, of which $3.8 million was attributable to portfolio interest, $2.1 million was attributable to dividend income, and the remainder was attributable to fee and other income. Total operating expenses for the quarter were $4.6 million, resulting in net investment income of $1.6 million.
Liquidity
As of December 31, 2024, PhenixFIN had $7.2 million in cash and cash equivalents and $141.7 million in total debt, primarily consisting of a $84.0 million outstanding balance on its revolving credit facility and $59.2 million in unsecured notes. The company's asset coverage ratio, a key metric for BDCs, was 213.7% as of December 31, 2024, well above the minimum requirement of 150% under the Investment Company Act.
PhenixFIN's debt-to-equity ratio stands at 0.85, with total debt of $135.7 million and total equity of $160.3 million. The company had $67.6 million in cash and cash equivalents as of September 30, 2024. The revolving credit facility was amended in February 2024 to increase the size to $62.5 million, and then again in August 2024 to increase it to $87.5 million. As of December 31, 2024, the company had $84 million outstanding on this $87.5 million facility.
The company's current ratio and quick ratio are both 1187.9, indicating strong short-term liquidity.
Investment Portfolio Performance
As of December 31, 2024, 90.6% of the portfolio (by fair value) was rated as a '2' on the company's internal rating scale, indicating that the investments were performing within expectations with neutral or favorable risks compared to the time of origination. The remaining 9.4% of the portfolio was rated as a '3' or below, indicating underperformance or increased risk.
Navigating Market Challenges
PhenixFIN's portfolio and financial performance have been impacted by various market events in recent years. The COVID-19 pandemic and the Russian invasion of Ukraine in 2022 both caused significant market volatility and disruptions, which affected the operations and valuations of some of the company's portfolio companies.
However, PhenixFIN has demonstrated resilience in navigating these challenges. The company's diversified investment portfolio, conservative leverage profile, and disciplined underwriting approach have helped mitigate the impact of market disruptions. Additionally, PhenixFIN's internalized management structure has provided the flexibility to quickly adapt to changing market conditions and implement strategic initiatives.
One such initiative was the company's acquisition of approximately 80% of the equity of The National Security Group, Inc. (NSG), an Alabama-based insurance holding company, in October 2024. This transaction diversified PhenixFIN's business model and provided exposure to the insurance industry, which has historically exhibited less correlation to broader market movements.
Risks and Outlook
As a BDC, PhenixFIN is subject to various risks, including market, credit, and regulatory risks. The company's investments in lower-rated and unrated debt securities expose it to higher levels of credit risk, and changes in interest rates could impact the cost of the company's borrowings and the yields on its investments.
Furthermore, as a RIC (regulated investment company) under the Internal Revenue Code, PhenixFIN must meet certain distribution requirements to maintain its tax status, which could limit its ability to retain earnings for growth and investment.
Despite these risks, PhenixFIN's management team remains cautiously optimistic about the company's outlook. The recent expansion of its credit facility to $87.5 million, completed in August 2024, has provided additional financial flexibility to pursue new investment opportunities and support its portfolio companies as needed.
Additionally, the integration of NSG into PhenixFIN's operations is expected to enhance the company's diversification and risk profile, potentially opening up new avenues for growth and value creation. The company's management has expressed confidence in its ability to navigate the current market environment and continue delivering value to its shareholders.
Conclusion
PhenixFIN Corporation has established itself as a well-diversified BDC with a proven track record of navigating market challenges. Its internalized management structure, conservative leverage profile, and strategic initiatives, such as the acquisition of NSG, have positioned the company to capitalize on future opportunities while mitigating risks. As PhenixFIN continues to execute its investment strategy and explore new avenues for growth, it remains a compelling investment proposition for investors seeking exposure to the middle-market lending space.