Business Context and Reporting Period
Company: Investcorp Credit Management BDC, Inc. (formerly CM Finance Inc)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended June 30, 2019
Business Overview: The Company is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. It invests primarily in the debt of U.S. middle-market companies, focusing on unitranche loans, standalone first and second lien loans, and selectively in unsecured debt and equity. The Company is managed by CM Investment Partners LLC, which was acquired by Investcorp Credit Management US LLC in August 2019.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total Investment Income | $34.4 million | $40.8 million |
| Net Investment Income | $13.5 million | $19.0 million |
| Net Increase (Decrease) in Net Assets from Operations | ($14.5 million) | $15.6 million |
| Net Asset Value (NAV) per Share | $10.51 | $12.57 |
| Total Assets | $336.9 million | $314.5 million |
| Total Liabilities | $193.9 million | $143.0 million |
| Total Net Assets | $143.1 million | $171.5 million |
| Portfolio Fair Value | $306.4 million | $293.6 million |
| Weighted Average Yield (at cost) | 10.25% | 11.12% |
| Asset Coverage Ratio | 186.5% | Filing text does not provide a clear value |
Debt and Liquidity: As of June 30, 2019, the Company had $122.0 million outstanding under its Term Financing and $11.0 million under its Revolving Financing. Additionally, $34.5 million of 6.125% Notes due 2023 were outstanding. Cash and cash equivalents totaled $19.7 million.
Material Changes vs. Prior Period
- Operating Results: Net investment income decreased by approximately $5.5 million (29%) compared to 2018. This decline was primarily driven by a reduction in dividend income received from wholly-owned subsidiaries (Bird Electric Blocker, LLC and U.S. Well Services Blocker, LLC).
- Realized Losses: The Company recorded a net realized loss of $22.0 million in 2019, compared to $9.9 million in 2018. The 2019 loss was primarily due to the write-off of Trident USA Health Services, LLC.
- Unrealized Depreciation: The Company recorded a net change in unrealized depreciation of $6.1 million in 2019, reversing the $6.5 million unrealized appreciation recorded in 2018. This was driven by fair value decreases in several portfolio companies, including 4L Technologies Inc. and Fusion Connect Inc.
- Portfolio Composition: The portfolio grew to 33 companies in 2019 from 25 in 2018. First lien investments increased to 77.7% of the portfolio (from 52.1%), while second lien investments decreased to 18.7% (from 43.3%).
- Financing Facilities: The Term Financing was increased by $20.0 million to $122.0 million in June 2019. The Revolving Financing was reduced from $50.0 million to $30.0 million.
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus on credit quality and investment discipline. The Company amended its Term Financing to increase capacity and extended the maturity of its Revolving Financing. The acquisition of the Adviser by Investcorp is expected to bring enhanced capabilities and resources.
Unusual Items: The significant realized loss in 2019 was driven by the specific write-off of Trident USA Health Services, LLC. Additionally, the Company had one investment on non-accrual status as of June 30, 2019, representing approximately 3.0% of the portfolio.
Risks and Contingencies:
- Asset Quality: 22.0% of the portfolio was rated "3" (performing below expectations) and 2.9% was rated "4" (substantially below expectations) as of June 30, 2019, an increase from the prior year.
- Leverage: The Company operates with significant leverage. A decline in asset values could sharply reduce net asset value due to the fixed claims of lenders.
- Interest Rate Risk: 96.8% of debt investments bear floating interest rates. While rising rates generally increase net interest income, they also increase borrowing costs.
- LIBOR Transition: The phase-out of LIBOR by the end of 2021 creates uncertainty regarding future interest rate benchmarks for loans extending beyond that date.
Key Facts for Investor Verification
- Write-off Impact: Verify the specific details and recovery potential regarding the $22.0 million realized loss attributed to Trident USA Health Services, LLC.
- Asset Coverage: Confirm the current asset coverage ratio (186.5% as of June 30, 2019) to ensure compliance with the 150% requirement under the Small Business Credit Availability Act and the ability to make distributions.
- Non-Accrual Status: Monitor the status of the investment on non-accrual (approx. 3.0% of portfolio) and the 22.0% of the portfolio rated "3" for potential future credit deterioration.
- Adviser Transition: Assess the impact of the Investcorp acquisition of the Adviser on investment strategy, fee structures, and operational continuity.
- Debt Maturities: Review the maturity schedule of the Term Financing (due Dec 2021) and Revolving Financing (due Dec 2020) to evaluate refinancing risks.