NexPoint Advisors Proposes Merger Transaction to Sierra Income Corporation and Medley Capital Corporation Boards, Offers $225 Million of Net Value in Favor of Stockholders Over Existing Proposal
NexPoint Announces Recent Submissions of Management Proposals to Special Committees of the Sierra Income Corporation and Medley Capital Corporation Boards of Directors
DALLAS, February 1, 2019 – NexPoint Advisors, L.P. (“NexPoint“) announced today its recent submissions of management proposals related to the merger of Medley Capital Corporation (“MCC”; NYSE:MCC; TASE:MCC), a closed-end investment company that is regulated as a business development company (“BDC”), into Sierra Income Corporation (“Sierra”) a non-traded BDC that, along with MCC, is controlled by Medley Management Inc. (“MDLY”; NYSE:MDLY). Both the Sierra Board of Directors (“Sierra Board”) and the MCC Board of Directors (“MCC Board”) have fiduciary responsibilities to act in the best interest of their respective stockholders; however, they have each separately advanced a proposed merger with MDLY that enriches and entrenches woefully underperforming MDLY management at the expense of stockholders (the “Merger Transaction”).
The Merger Transaction merges MCC into Sierra to form a post-merger entity (the “Surviving Company”) structured as a publicly traded BDC. The more problematic component of the Merger Transaction, however, is the merger of MDLY into a subsidiary of the Surviving Company (the “MDLY Merger”). NexPoint therefore offers what it believes is a clearly superior competing proposal (the “NexPoint Merger Proposal”), which: (i) retains the merger of MCC into Sierra; (ii) eliminates the value destruction, underperformance and impediments to closing that come with the MDLY Merger; and (iii) replaces MDLY and its troubling underperformance by establishing a new investment advisory agreement between the Surviving Company and NexPoint, a proven manager with a strong track record of delivering value to investors in the BDC and closed-end fund space.
NexPoint submitted a proposal to the Special Committee of the MCC Board (the “MCC Special Committee”) on Thursday, January 24, 2019, seeking consideration ahead of the February 8, 2019 special stockholder meeting on the Merger Transaction. Counsel to the MCC Special Committee has failed to respond to or even acknowledge receipt of NexPoint’s proposal, even with numerous follow-up attempts by NexPoint. Despite the MCC Special Committee’s apparent disregard for its duty, NexPoint submitted the NexPoint Merger Proposal to the MCC Special Committee, as well as the Special Committee of the Sierra Board (“Sierra Special Committee”) on January 31, 2019.
The MDLY Merger currently being pursued siphons to MDLY approximately $125 million of cash from Sierra and MCC upon closing; the NexPoint Merger Proposal, on the other hand, not only ensures that Sierra and MCC retain this cash, but also includes added consideration in favor of Sierra and MCC stockholders of over $100 million. Under the NexPoint Merger Proposal, this results in net cumulative post-merger value in favor of Sierra and MCC stockholders of over $225 million.
The following chart provides an overview of both the flaws presented by the MDLY Merger within the Merger Transaction and the merits of the NexPoint Merger Proposal.
Additional details of the NexPoint Merger Proposal and its stockholder benefits are included below.
The NexPoint Merger Proposal:
1.Offers a streamlined transaction with a high likelihood of completion.
NexPoint proposes a streamlined and simplified merger of MCC into Sierra that excludes the MDLY Merger. By excluding MDLY and preventing its continued management, the NexPoint Merger Proposal eliminates a number of issues that plague the Merger Transaction. In fact, NexPoint believes these issues jeopardize the likelihood that the Merger Transaction, as currently contemplated, would ever be consummated. The NexPoint Merger Proposal eliminates these issues in the following ways:
a) Prevents the diversion of cash to MDLY management
By eliminating the MDLY Merger, the Special Committees and the Boards ensure that MDLY management does not profit from its underperformance at stockholders’ expense. The NexPoint Merger Proposal not only ensures the Surviving Company retains the full $125 million of cash consideration that would otherwise be directed to MDLY, but it also includes an additional $25 million cash payment to the Surviving Company for the benefit of stockholders.
b) Rejects the MDLY Merger and unreasonable forecasts from MDLY that created a baseless premium to MDLY’s value
Under the NexPoint Merger Proposal, Sierra and MCC would each receive proportionate shares in the Surviving Company based on their respective pre-merger net asset values (“NAVs”), rather than having value inappropriately diverted to MDLY at a more then 100% premium due to MDLY’s unreasonable forecasts.
c) Does not require exemptive relief from the SEC
With the externalization of management through an investment advisory agreement with NexPoint, SEC exemptive relief under Section 12(d)(3) with respect to a controlling position in an investment adviser is no longer necessary. NexPoint believes the requested relief is conflicted and unprecedented, and therefore it is highly unlikely that such relief could be obtained under the original Merger Transaction.
d) Removes the conflicts inherent in the MDLY Merger
The NexPoint Merger Proposal eliminates the conflicts of interest inherent in the MDLY Merger component of the Merger Transaction, which rewards and entrenches underperforming management at a premium. By eliminating MDLY from the merger and instead awarding the investment advisory agreement to an investment advisor with a proven track record of outperformance, the NexPoint Merger Proposal prevents undue enrichment to undeserving management at the stockholders’ expense.
2. Provides a practical externalization plan with a compelling fee structure, cost savings and a share repurchase program.
Under the NexPoint Merger Proposal, the Surviving Company would enter into an investment advisory agreement with NexPoint structured to provide reduced costs and other stockholder benefits. These include:
a) Savings to stockholders of at least $9 million annually over existing internal management fee
Under the NexPoint Merger Proposal, the Surviving Company would enter into an investment advisory agreement with NexPoint, pursuant to which NexPoint would receive an annualized management fee of only 1.25% on the gross assets of the Surviving Company. This fee arrangement represents aggregate annual savings of at least $9 million, consisting of approximately $5.3 million of savings to Sierra stockholders and $3.7 million of savings to MCC stockholders over the current fee arrangement (based on assets as of September 30, 2018). These savings would inure directly to the benefit of the Surviving Company’s stockholders, and may help eliminate any discount that could otherwise be applicable to trading in the Surviving Company’s shares once listing and trading commences. NexPoint is willing to lock in this management fee for a period of three years, with the expectation that the Surviving Company Board would revisit the management fee determination at the conclusion of that three-year period.
b) A $25 million payment from NexPoint to the Surviving Company
Upon the completion and in consideration of the externalization, NexPoint would make a $25 million payment to the Surviving Company. This payment would inure directly to the benefit of Surviving Company stockholders, would represent the equivalent of a 6.1% increase of $0.18 on MCC’s per share market value of $2.95 and a 3.6% increase of $0.26 on a per share value of $7.05, and would be divided proportionally based upon the former MCC assets and the former Sierra assets.
c) Purchases of at least $50 million of Surviving Company shares
NexPoint and its affiliates would agree to purchase a minimum of $5 million of the Surviving Company’s shares per quarter over the next five quarters (either in the open market or from the Surviving Company). In addition, NexPoint would make an additional $25 million of such purchases to the extent of incentive fees received from the Surviving Company. Any such purchases would from the Surviving Company not only increase available capital to the Surviving Company, but also reduce the need for external financing.
3. Includes a number of stockholder benefits and seeks to mitigate any risks that the Surviving Company shares trade at a discount.
The NexPoint Merger Proposal not only offers stockholders benefits in the form of reduced fees and cost savings, but it also deliberately seeks to reduce the risk that share of the Surviving Company trade at a discount following the transaction. Specifically, the NexPoint Merger Proposal:
a) Provides net cumulative post-merger consideration of over $225 million that inures directly to the benefit of stockholders
This is including $25 million of immediate cash and over $27 million of aggregate fee savings over at least the next three years, together with up to $50 million of stock purchases that will benefit stockholders.
b) Offers unprecedented stockholder loyalty program
To promote loyalty and long-term alignment of interests among stockholders, NexPoint offers an incentive to investors that buy and hold shares of its advised funds for a period of at least twelve months through its Stockholder Loyalty Program. NexPoint and its affiliates have successfully implemented this Program on several other funds, and believes it would assist in closing any discount that may otherwise be applicable to trading in the Company’s shares post-merger.
c) Replaces underperforming management with leading NexPoint management
MDLY management has a history of underperformance, with MCC’s total return ranking last among all BDCs in the Wells Fargo BDC Index. Additionally, in the 12 months leading up to the announcement of the Merger Transaction, MCC produced a -39% return, which is -53% below the BDC average during such period. Also under MDLY management, Sierra’s total stockholder return has consistently been well below the non-traded BDC median (as of September 30, 2018).
In contrast, NexPoint has demonstrated outperformance as a manager. The NexPoint Strategic Opportunities Fund (“NHF”; NYSE:NHF), a publicly traded closed-end fund advised by NexPoint, has returned a cumulative 181% through September 30, 2018, while Sierra is only up 28.0% during the same time period. In 2015, NHF completed the spin-off of NexPoint Residential Trust, Inc. (“NXRT”; NYSE:NXRT), a publicly traded REIT. Investors that held their NHF and NXRT shares through and after the spin-off have experienced a combined 263% return since April 17, 2012, the date Sierra commenced operations, outperforming all U.S. listed closed-end funds during that time period. Further, NexPoint Capital, Inc., the NexPoint-advised non-traded BDC, has returned 24.5% since inception, while the Wells Fargo BDC Index returned only 7.5% in that time period.
In light of these facts, NexPoint urges the MCC and Sierra Boards to take action in the best interest of their stockholders and: convene a meeting to consider the NexPoint Merger Proposal; conduct necessary diligence to evaluate the terms of the NexPoint advisory agreement; and adjourn the special stockholder meeting currently scheduled for February 8, 2019, and inform stockholders that a competing offer has been received from NexPoint that is currently being evaluated.
To reinforce its position, NexPoint has expressly communicated to the MCC and Sierra Special Committees its willingness to consider any other terms or assets that the MCC or Sierra Boards may determine are necessary or advisable in order to proceed with the NexPoint Merger Proposal.
About NexPoint Advisors, L.P.
NexPoint, together with its affiliates, is a multibillion-dollar global alternative investment manager founded in 1993 by Jim Dondero and Mark Okada. A pioneer in the leveraged loan market, the firm has evolved over 25 years, building on its credit expertise and value-based approach to expand into other asset classes. Today, NexPoint and its affiliates operate a diverse investment platform, serving both institutional and retail investors worldwide. In addition to high yield credit, the firm’s investment capabilities include public equities, real estate, private equity and special situations, structured credit, and sector- and region-specific verticals built around specialized teams.
Cautionary Statement Regarding Forward-Looking Statements; Not a Proxy Solicitation
These materials may contain forward-looking statements. All statements contained herein that are not clearly historical in nature or that necessarily depend on future events are forward-looking, and the words “anticipate,” “believe,” “expect,” “potential,” “opportunity,” “estimate,” “plan” and similar expressions are generally intended to identify forward-looking statements. The projected results and statements contained in these materials that are not historical facts are based on current expectations and speak only as of the date of such materials, and involve risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such projected results and statements. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of NexPoint. Although NexPoint believes that the assumptions underlying the projected results or forward-looking statements included in these materials are reasonable as of the date of such materials, any of the assumptions could be inaccurate and therefore, there can be no assurance that the projected results or forward-looking statements included herein will prove to be accurate. In light of the significant uncertainties inherent in the projected results and forward-looking statements included herein, the inclusion of such information should not be regarded as a representation as to future results or that the objectives and strategic initiatives expressed or implied by such projected results and forward-looking statements will be achieved. NexPoint will not undertake and specifically declines any obligation to disclose the results of any revisions that may be made to any projected results or forward-looking statements herein to reflect events or circumstances after the date of such projected results or statements or to reflect the occurrence of anticipated or unanticipated events.
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These materials are provided for information purposes only, and are not intended to be, nor should they be construed as, an offer to sell or the solicitation of an offer to buy any security. These materials do not recommend the purchase or sale of any security.
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Past performance does not guarantee future results. Performance during the time period shown is limited and may not reflect the performance in different economic and market cycles. There can be no assurance that similar performance will be experienced. Value determination based on the following: (i) aggregate cash per share from Sierra to MDLY of $4.09, as disclosed in Sierra’s Prospectus Supplement dated December 21, 2018 (the “Prospectus Supplement”); MDLY Class A shares outstanding of 5,693,814, as disclosed in MDLY’s 10-Q filed November 14, 2018; plus an additional 24,839,302 MDLY shares to be issued immediately preceding the MDLY Merger, resulting in total MDLY shares of 30,533,116 eligible to receive the $4.09 per share cash from Sierra and total cash to MDLY stockholders of $124,880,444. Shockingly, the number of additional MDLY shares to be issued in connection with the MDLY Merger is buried on page 237 of the Prospectus Supplement.