Company Overview

PhenixFIN Corporation (PFXNZ) is an internally-managed, non-diversified closed-end management investment company that operates as a business development company (BDC). 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.

Established in 2011, PhenixFIN has undergone a remarkable transformation, evolving from an externally-managed structure to an internalized management approach in 2021. This strategic shift has allowed the company to exercise greater control over its operations and investment decisions, positioning it to navigate the dynamic market landscape with increased agility. Originally incorporated in Delaware as Medley Capital Corporation, the company completed its initial public offering on January 20, 2011, and commenced operations at that time. The transition to internal management was completed on January 1, 2021, with the company's activities now managed by senior professionals and supervised by its board of directors, the majority of whom are independent.

Historical Challenges and Milestones

PhenixFIN has faced various challenges throughout its history, including navigating market volatility and disruptions caused by the COVID-19 pandemic and the Russian invasion of Ukraine in 2022. Despite these obstacles, the company has achieved several significant milestones. In 2021, PhenixFIN completed an underwritten public offering of $57.5 million in aggregate principal amount of 5.25% Notes due 2028, which began trading on the Nasdaq Global Market. The following year, the company expanded its credit facility to provide additional liquidity and financing options. PhenixFIN has also been active in share repurchases, buying back over 700,000 shares through the end of 2024.

Investment Portfolio and Risk Management

One of PhenixFIN's key strengths lies in its diversified investment portfolio, which spans a range of industries, including services, real estate, insurance, and construction, among others. As of December 31, 2024, the company's investment portfolio had a fair market value of approximately $300.1 million, with a weighted average yield of 13.3% on debt and other income-producing investments.

The company's prudent risk management approach is evident in its investment rating system, which categorizes each investment on a scale of 1 to 5, based on its performance and risk profile. As of December 31, 2024, 90.6% of the company's portfolio was rated 2 or better, indicating investments that are performing within or above expectations.

The investment portfolio is primarily composed of senior secured first lien term loans (43.4% of total fair value), senior secured notes (3.6%), fund investments (0.5%), and equity/warrants (52.5%). As of December 31, 2024, 56.6% of the income-bearing investment portfolio bore interest based on floating rates, such as SOFR or LIBOR, while 14.0% bore interest at fixed rates and 25.4% were income-producing equity investments.

Financials

PhenixFIN's financial position has remained stable, with a net asset value (NAV) of $162.8 million, or $80.59 per share, as of December 31, 2024. This represents a 2.4% increase from the previous quarter, underscoring the company's ability to generate value for its shareholders.

For the most recent quarter, PhenixFIN reported revenue of $3.77 billion and net income of $2.46 million. The company's debt-to-equity ratio stands at 0, indicating a strong balance sheet with no long-term debt relative to equity.

During the three months ended December 31, 2024, PhenixFIN recorded $1.17 million in net realized gains on its investment portfolio, primarily due to gains on the sale of its investments in PHH Mortgage Corp. and Chimera Investment Corp. The company also recognized $0.33 million in net unrealized depreciation on its investments, primarily due to reversals of unrealized gains and losses on certain portfolio companies.

Liquidity

The company's liquidity position is also noteworthy, with $7.2 million in cash and cash equivalents as of December 31, 2024. This, combined with the available capacity under its $87.5 million revolving credit facility, provides PhenixFIN with the flexibility to capitalize on investment opportunities as they arise. The company has $3.5 million undrawn on its revolving credit facility.

PhenixFIN's current ratio and quick ratio both stand at 2.09, indicating a strong ability to meet short-term obligations. The company also has $57.5 million of 5.25% Notes due 2028 outstanding, as well as a $1.66 million 5.25% Promissory Note due 2028.

Strategic Acquisition

In October 2024, PhenixFIN made a strategic move by completing the acquisition of approximately 80% of the equity of The National Security Group, Inc. (NSG), an Alabama-based insurance holding company. This acquisition diversifies PhenixFIN's business model, allowing the company to leverage its expertise in asset management by managing a portion of NSG's investment assets.

Investment Portfolio and Composition

As of December 31, 2024, PhenixFIN's investment portfolio had a fair market value of approximately $300.10 million, up from $227.90 million as of September 30, 2024. The portfolio is diversified across various industries, with the largest exposures in the Services Business (17.6%), Insurance (16.2%), and Real Estate (14.3%) sectors.

The weighted average yield on PhenixFIN's debt and other income-producing investments was 13.3% as of December 31, 2024, up from 12.3% as of September 30, 2024. This increase in yield was primarily driven by rising interest rates, as the Federal Reserve has been raising short-term interest rates in response to elevated inflation.

Investment Performance and Credit Quality

In terms of credit quality, as of December 31, 2024, 90.6% of the company's investments were rated "2" on its internal rating scale, indicating investments performing within expectations. However, 5.4% of the portfolio was rated "4", meaning investments performing below expectations with increased risk, and 0.5% was rated "5", indicating investments performing substantially below expectations with substantial risk.

Financing and Liquidity

PhenixFIN's liquidity position remained strong, with $7.2 million in cash and cash equivalents as of December 31, 2024, down from $67.6 million as of September 30, 2024. The decrease in cash was primarily due to $100.9 million in new investments made during the quarter, offset by $30.0 million in proceeds from the sale and settlement of investments.

The company has a $87.5 million revolving credit facility, of which $84.0 million was outstanding as of December 31, 2024. The facility bears interest at a monthly rate of Term SOFR plus 2.90%.

Resilience and Future Outlook

Despite the challenges posed by the ongoing pandemic and broader market volatility, PhenixFIN has demonstrated its resilience. The company's investment in NSG, combined with its prudent risk management and diversified portfolio, has positioned it to weather the storm and capitalize on new opportunities as they emerge.

Looking ahead, PhenixFIN remains committed to its investment strategy, focusing on making loans, private equity, and other investments in privately-held companies. The company's management team continues to monitor market conditions closely and remains poised to adapt its approach as needed to deliver sustainable growth and value for its shareholders.

Conclusion

In conclusion, PhenixFIN Corporation (PFXNZ) has emerged as a resilient and adaptable player in the BDC landscape. Through its diversified investment portfolio, prudent risk management, and strategic acquisitions, the company has positioned itself to navigate the challenges of the current market environment and capitalize on future growth opportunities. As PhenixFIN continues to execute on its investment objectives, it remains well-positioned to deliver long-term value for its shareholders.