Medley LLC – Alternative Asset Management Firm Files for Chapter 11 after Dramatic Fall in FEAUM (Assets Under Management) leaves it Unable to Service Bond Debt

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March 8, 2021 – Medley LLC (“Medley” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, case number 20-10526  The Debtor, an alternative asset management firm "offering yield solutions to retail and institutional investors," is represented by Eric J Monzo of Morris James LLP. Further board-authorized engagements include (i) Lowenstein Sandler LLP as general bankruptcy counsel, (ii) Eversheds Sutherland as special counsel, (iii) B. Riley Securities, Inc. as investment banker and financial advisors and (iv) Kurtzman Carson Consultants LLC as claims agent. 

The Debtor's lead petition notes between 1 and 50 creditors, estimated assets of $5.4mn and estimated liabilities of $140.8mn. Documents filed with the Court list the Debtor's three largest unsecured creditors as (i) U.S. Bank National Association (as Trustee for the Debtor's $69.0mn of 7.25% Unsecured Notes Due January 30, 2024, the "2024 Notes"), (ii) U.S. Bank National Association (as Trustee for the Debtor's $53.6mn of 6.875% Unsecured Notes Due August 15, 2026, the “2026 Notes”) and (iii) NYSE Market (DE), Inc. Intercontinental Exchange ($70k [listing fees?] claim). The 2024 Notes and 2026 Notes trade on the NYSE under the symbols MDLQ and MDLX, respectively.

As of the Petition date, the Debtor has approximately $1.3bn in Fee Earning Assets Under Management (“FEAUM”).The Company generated approximately $31.7mn in revenue in 2020. The Debtor's 2020 FEAUM reflects a $1.5bn drop over two years.

The Debtor is 98.39% owned by Medley Management Inc (NYSE:MDLY, "Parent" or "Medley Management"), with the Debtor being Medley Management Inc.’s only material asset.

On January 11th, the Debtor announced that it had engaged B. Riley as its investment banking advisor to assist in analyzing various strategic financial alternatives to address its capital structure, including strategic and financing alternatives to restructure its indebtedness and other contractual obligations.

On February 16th (8-K here), the Debtor failed to make an approximately $0.9mn quarterly interest payment then due in respect of the 2026 Notes and elected to avail itself of a 30-day grace period (through March 18, 2021) in order to delay an event of default on those notes.

On February 1st (8-K here), the Debtor failed to make a $1.3mn quarterly interest payment due on February 1, 2021 in respect of the “2024 Notes” and elected to trigger a 30 grace period that to avoid an event of default through March 3rd.

Plan Overview

The Debtors have filed solicitation versions of their Plan and Disclosure Statement. The Disclosure Statement provides:

"On or before the Effective Date, the Debtor or the Reorganized Debtor, as applicable, shall enter into, and shall take any actions as may be necessary or appropriate to effect the Restructuring Transactions. The actions to implement the Restructuring Transactions may include: 

(1) the execution and delivery of appropriate agreements or other documents of merger, amalgamation, consolidation, restructuring, conversion, disposition, transfer, arrangement, continuance, dissolution, sale, purchase, or liquidation containing terms that are consistent with the terms of the Plan, and that satisfy the applicable requirements of applicable law and any other terms to which the applicable Entities may agree; 

(2) the execution and delivery of appropriate instruments of transfer, assignment, assumption, or delegation of any asset, property, right, liability, debt, or obligation on terms consistent with the terms of the Plan and having other terms for which the applicable parties agree; 

(3) the filing of appropriate certificates or articles of incorporation, formation, reincorporation, merger, consolidation, conversion, amalgamation, arrangement, continuance, or dissolution pursuant to applicable state or provincial law; and 

(4) all other actions that the applicable Entities determine to be necessary, including making filings or recordings that may be required by applicable law in connection with the Plan. The Confirmation Order shall, and shall be deemed to, pursuant to sections 363 and 1123 of the Bankruptcy Code, authorize, among other things, all actions as may be necessary or appropriate to effect any transaction described in, contemplated by, or necessary to effectuate the Plan.

On the Effective Date, the Managing Member shall remain unaffected from a control perspective, and the Reorganized Debtor shall adopt the Organizational Documents (subject to any technical modification necessary). The Reorganized Debtor shall be authorized to adopt any other agreements, documents, and instruments and to take any other actions contemplated under the Plan as necessary to consummate the Plan. Cash payments to be made pursuant to the Plan will be made by the Debtor or Reorganized Debtor, as applicable. The Debtor and Reorganized Debtor will be entitled to transfer funds between and among themselves as they determine to be necessary or appropriate to enable the Debtor or Reorganized Debtor, as applicable, to satisfy its obligations under the Plan. Except as set forth herein, any changes in intercompany account balances resulting from such transfers will be accounted for and settled in accordance with the Debtor’s historical
intercompany account settlement practices and will not violate the terms of the Plan.

Sources of Consideration for Plan Distributions: The Debtor and the Reorganized Debtor, as applicable, shall fund distributions under the Plan with: (1) Cash on hand, including Cash from operations; (2) proceeds of the [$1.0mn] Promissory Note; (3) the issuance of MDLY Stock; (4) the [$100k] General Unsecured Claims Pool; and (5) the [$100k] Rejecting Noteholder Pool."

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):

  • Class 1 (“Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
  • Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
  • Class 3 (“Notes Claims”) is impaired and entitled to vote on the Plan. Estimated aggregated claims are $122.6mn and estimated recovery is 22.4%/16.8%/5% (depending on a crditor's choice of treatment in (i) to (iii) below. On the Effective Date, each holder of an Allowed Notes Claim shall receive: (i) If such holder votes to accept the Plan: 0.600 shares of newly issued MDLY Stock for each $25 principal amount of 2024 Notes and/or 2026 Notes held by such holder; (ii) If such holder does not take any action and does not vote on the Plan: 0.450 shares of newly issued MDLY Stock for each $25 principal amount of 2024 Notes and/or 2026 Notes held by such holder; or (iii) If such holder elects to Opt-Out of the Third Party Release contained in Article VIII of the Plan and/or votes to reject the Plan, the lesser of: (x) 0.134 shares of newly issued MDLY Stock for each $25 principal amount of 2024 Notes and/or 2026 Notes held by such holder; or (y) a pro rata share of the Rejecting Noteholder Pool.
  • Class 4 (“Strategic Claim”) is impaired and entitled to vote on the Plan. The claim is estimated to be $7.7mn and recover 60.3%. The holder of the Allowed Strategic Claim shall receive: (i) 218,182 shares of newly issued MDLY Stock; (ii) $350,000 in Cash on the Effective Date or as soon as practicable thereafter; and (iii) a secured promissory note, the form of which will be negotiated between the parties prior to the Confirmation Hearing, which provides for 10 consecutive quarterly payments of $225,000 in Cash, commencing on the last Business Day of the first full calendar quarter following the Effective Date.
  • Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. Each holder of an Allowed General Unsecured Claim shall receive, at the option of the Debtor: (i) the lesser of: the amount of its Allowed General Unsecured Claim in Cash; or its pro rata share of the General Unsecured Claims Pool (ie $100k); or (ii) Reinstatement.
  • Class 6 (“Intercompany Claims”) is unimpaired/impaired, presumed to accept/reject and not entitled to vote on the Plan.
  • Class 7 (“Interests”) is unimpaired/impaired, presumed to accept/reject and not entitled to vote on the Plan.

Events Leading to the Chapter 11 Filing

The Debtor's Disclosure Statement provides: "As of December 31, 2018, the Company had approximately $2,800,000,000 in FEAUM, and total revenues of approximately $56,500,000. During 2018 and 2019, the Company pursued a number of strategic transactions, including the contemplated tri-party mergers with Medley Capital Corporation (‘MCC’) and Sierra Income Corporation (‘Sierra, and collectively with the Company and MCC, the ‘Merger Parties’), which were clients of Advisors at the time.

After the Merger Parties executed a merger agreement, in February 2019, stockholders commenced a stockholder class action against MCC in the Delaware Chancery Court which was resolved in December 2019. The Merger Parties continued to pursue the merger transaction while the litigation was pending. No merger transaction ultimately occurred. At the same time, a reduction in leverage and declines in fund values at the Company’s permanent capital vehicles (Sierra and MCC), as well as investment realizations and changes in fund values at the Company’s long-dated private funds and separately managed accounts resulted in further declines in FEAUM. By December 31, 2019, the Company’s FEAUM was $2,100,000,000 and revenues were approximately $48,800,000, a decline of 23.2% and 13.6%, respectively. The Company experienced significant additional FEAUM declines in 2020. The COVID-19 pandemic contributed to a material decline in FEAUM in the first half of 2020. Further, as noted above, on November 18, 2020, the board of directors of MCC Advisors’ client, MCC, approved the adoption of an internalized management structure effective January 1, 2021. 

As a result, the MCC Advisors’ IMA and administrative agreement with MCC expired on December 31, 2020, resulting in the loss of this client. These factors contributed to an approximate 38% annual decline (2020 vs. 2019) in the Company’s FEAUM to approximately $1,300,000,000.These factors resulted in a liquidity strain that adversely impacted the Debtor’s ability to service the interest obligations owing on the Notes. As a result, on January 7, 2021, the Company engaged B. Riley Securities Inc. (the Debtor’s proposed investment banker and financial advisor) to assist in analyzing various strategic financial alternatives to address its capital structure, including restructuring the capital structure and other contractual obligations, with a particularized focus on the Notes Claims. The Debtor considered a number of alternatives, including an out-of-court exchange offer of debt for cash, debt for debt, debt for equity, or a combination thereof. However, the Debtor ultimately determined that due to the retail nature of the bonds, an out-of-court restructuring would be largely unworkable and ultimately pivoted to the proposed reorganization of the Notes Claims pursuant to the Bankruptcy Code."

Medley Management's stock performance graph (see 10-K):

Key Documents

The following documents were attached to the Disclosure Statement:

  • Exhibit A: Plan of Reorganization 
  • Exhibit B: Liquidation Analysis (not yet filed)
  • Exhibit C: Valuation Analysis (not yet filed)
  • Exhibit D: Debtor’s 10-K 
  • Exhibit E: Medley Management’s 10-K

About the Debtor

The Debtor, founded in 2006, operates an alternative asset management firm offering yield solutions to retail and institutional investors. The Company focuses its business on credit-related investment strategies, historically originating senior secured loans to private middle market companies in the United States that have revenues between $50 million and $1 billion. As of the Petition Date, the Debtor has approximately $1.3 billion in Fee Earning Assets Under Management (“FEAUM”).The Company generated approximately $31,700,000 in revenue in 2020 and the Debtor had approximately $5,422,369 in assets and, as discussed more fully below, approximately $140,752,116 in liabilities as of the end of 2020.

About Medley Management

Medley Management Inc. was incorporated as a Delaware corporation on June 13, 2014, and its sole asset is a controlling equity interest in Medley LLC. Pursuant to the Reorganization consummated in connection with Medley Management Inc.’s IPO, Medley Management Inc. became a holding corporation and the sole managing member of Medley LLC, operating and controlling all of the business and affairs of Medley LLC and, through Medley LLC and its subsidiaries, conducts its business.

Group Corporate Structure Chart (sourced from 2019 10-K)

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