Business Context and Reporting Period
Company: CM Finance Inc (CMFN)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2017
Business Overview: CM Finance is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC). It invests primarily in the debt (unitranche, first lien, second lien) and related equity of privately held U.S. middle-market companies. The company is managed by CM Investment Partners LLC.
Key Financial Metrics
| Metric | 2017 (FY) | 2016 (FY) |
|---|---|---|
| Total Investment Income | $31.0 million | $35.6 million |
| Net Investment Income | $15.7 million | $19.9 million |
| Net Increase in Net Assets from Operations | $23.6 million | $(9.3) million |
| Net Asset Value (NAV) per Share | $12.41 | $11.90 |
| Portfolio Fair Value | $254.9 million | $272.1 million |
| Weighted Average Yield (Debt) | 9.73% | 9.80% |
| Total Debt Outstanding | $102.0 million | $132.5 million |
| Cash and Cash Equivalents | $10.6 million | $18.4 million |
| Asset Coverage Ratio | 2.67x | 2.23x |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately $4.6 million (13%) compared to 2016. This was primarily due to the repayment of higher-yielding portfolio companies, a higher percentage of uninvested cash, and one investment being placed on non-accrual status.
- Net Investment Income Decrease: Net investment income dropped to $15.7 million from $19.9 million, driven by the reduction in investment income.
- Realized Losses: The company recorded a net realized loss of $11.8 million in 2017, compared to a net realized gain of $0.3 million in 2016. The loss was primarily attributed to the restructuring of U.S. Well Services, LLC and AAR Intermediate Holdings LLC.
- Unrealized Appreciation: The company recorded a net change in unrealized appreciation of $19.7 million in 2017, a significant improvement from the $29.5 million unrealized depreciation recorded in 2016. This was driven by fair value increases in Caelus Energy Alaska 03, LLC and PR Wireless, Inc.
- Debt Reduction: Total debt outstanding decreased from $132.5 million to $102.0 million as the company repaid the UBS Revolving Financing and had no outstanding balance on the Citi Revolving Financing as of period end.
- Portfolio Composition: The portfolio shifted slightly, with First Lien investments comprising 49.9% and Second Lien investments 49.7% of the portfolio at fair value. Industry exposure increased in Business Services (16.7%) and Entertainment/Leisure (15.0%).
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus on credit quality and investment discipline. The company generated $40.7 million in cash from operating activities. The Adviser voluntarily waived $249,071 of incentive fees for the period.
Recent Developments (Post-Period):
- Invested $17.5 million in a new portfolio company and received $14.8 million in repayments/sales proceeds between July and September 2017.
- Restructured the investment in Bird Electric Enterprises, LLC, eliminating $15 million of principal in exchange for preferred equity units.
- Declared a quarterly distribution of $0.25 per share for the quarter ended September 30, 2017.
- Dismissed Ernst & Young LLP as independent auditor and appointed RSM US LLP.
Risks and Contingencies:
- Interest Rate Risk: 95.2% of debt investments bear floating rates. A 1% increase in rates would increase net interest income by approximately 7.3%.
- Credit Risk: One investment (Bird Electric Enterprises) was on non-accrual status, representing approximately 3.0% of the portfolio at fair value.
- Liquidity: The company relies on its $102 million Term Financing (due 2019) and a $50 million Revolving Credit Facility (currently undrawn) for liquidity.
- Regulatory: As a BDC, the company must maintain a 200% asset coverage ratio to issue senior securities or make distributions. The current ratio is 2.67x.
Key Facts for Investor Verification
- Dividend Sustainability: Verify the source of the $0.25 quarterly distribution declared in August 2017 against the $15.7 million net investment income for the fiscal year to assess coverage.
- Non-Accrual Assets: Monitor the status of the Bird Electric Enterprises investment (approx. 3% of portfolio) and the impact of its recent restructuring on future cash flows.
- Fee Waivers: Confirm whether the Adviser's voluntary waiver of $249,071 in incentive fees is a one-time event or indicative of future fee structures.
- Portfolio Yield: Track the weighted average yield (9.73%) to ensure it remains sufficient to cover the cost of debt (approx. 4.10% weighted average) and operating expenses.
- Asset Coverage: Verify the 2.67x asset coverage ratio remains above the 2.0x regulatory threshold to maintain distribution flexibility.