Business Context and Reporting Period
Company: CM Finance Inc (CMFN), a closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940 and treated as a Regulated Investment Company (RIC).
Reporting Period: Quarterly period ended September 30, 2018 (unaudited).
Investment Strategy: The Company invests primarily in debt and related equity of privately held middle-market companies, focusing on unitranche, first lien, and second lien loans to fund acquisitions, growth, or refinancing.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 |
|---|---|---|
| Total Investment Income | $8,254,890 | $6,728,410 |
| Net Investment Income | $3,409,496 | $3,016,176 |
| Net Realized Gain/(Loss) | $(258,192) | $(7,380,690) |
| Net Change in Unrealized Appreciation/(Depreciation) | $(1,723,263) | $7,500,231 |
| Net Increase in Net Assets from Operations | $1,428,041 | $3,135,717 |
| Earnings Per Share (Basic & Diluted) | $0.10 | $0.23 |
| Net Asset Value (NAV) Per Share | $12.41 | $12.57 (Prior Qtr) |
| Total Assets | $341,444,404 | $314,534,581 (Prior Qtr) |
| Total Debt (Notes Payable, net) | $145,601,826 | $117,869,229 (Prior Qtr) |
| Cash and Restricted Cash | $4,123,016 | $8,326,714 (Prior Qtr) |
| Asset Coverage Ratio | 2.14x | 2.31x (Q3 2017) |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by approximately 22.7% year-over-year, driven by the deployment of cash into new portfolio investments.
- Expense Increase: Total expenses rose to $4.87 million from $3.71 million, primarily due to higher interest expenses resulting from increased LIBOR rates and the issuance of new 6.125% Notes due 2023.
- Portfolio Valuation: The Company recorded a net unrealized depreciation of $1.72 million, contrasting with a $7.50 million unrealized appreciation in the prior year. This was attributed to valuation decreases and accretion of certain investments.
- Debt Structure: The Company issued $34.5 million in 6.125% Notes due 2023 in July 2018. Total notes payable increased significantly from the prior quarter due to this issuance and revolver activity.
- Realized Losses: Net realized losses were significantly lower in Q3 2018 ($0.26 million) compared to Q3 2017 ($7.38 million), which was impacted by a restructuring of a portfolio company in the prior year.
Guidance, Outlook, and Risks
- Dividend Policy: The Board declared a quarterly distribution of $0.25 per share for the quarter ended September 30, 2018, and a subsequent distribution of $0.25 per share for the quarter ended December 31, 2018. The Company intends to distribute between 90% and 100% of annual taxable income to maintain RIC status.
- Share Repurchases: Under a $5.0 million program authorized in May 2018, the Company repurchased 11,215 shares for $101,195 during the quarter at a weighted average price of $8.97, representing a 27.7% discount to the prior quarter's NAV.
- Liquidity: As of September 30, 2018, the Company held $2.7 million in unrestricted cash, $1.4 million in restricted cash, and had approximately $38.1 million of remaining capacity under its 2017 UBS Revolving Financing.
- Interest Rate Sensitivity: With 98.2% of debt investments bearing floating rates, a 1.00% increase in interest rates is estimated to increase net interest income by approximately 8.8%.
- Risks: Key risks include the credit quality of portfolio companies, the ability to service debt obligations, reliance on the investment adviser, and the impact of general economic conditions on middle-market companies. The Company noted no material legal proceedings.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the 200% asset coverage ratio required by the 1940 Act (reducing to 150% in May 2019) and specific covenants in the 2023 Notes indenture.
- Portfolio Concentration: Review the top 10 portfolio companies, which represent a significant portion of the portfolio, including American Gaming Systems (12.01%) and Montreign Operating Company (7.15%).
- Unfunded Commitments: Confirm the $2.46 million in unfunded commitments to three portfolio companies and the associated liquidity requirements.
- Valuation Methodology: Note that 100% of investments are classified as Level 3 (unobservable inputs), requiring significant management judgment and board approval for fair value.
- Fee Waivers: Monitor the Adviser's fee waiver history; while $22,000 was waived in Q3 2018, the Adviser has not contractually agreed to waive fees for 2017 or thereafter to support specific dividend yields.