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.
Reporting Period: Quarterly period ended September 30, 2015 (unaudited).
Objective: Maximize total return through current income and capital appreciation by investing in debt and equity of privately held lower middle-market companies.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 |
|---|---|---|
| Total Investment Income | $9.87 million | $7.86 million |
| Net Investment Income | $4.87 million | $4.61 million |
| Net Realized Gains (Losses) | $0.20 million | ($0.12 million) |
| Net Change in Unrealized Appreciation (Depreciation) | ($4.90 million) | $0.10 million |
| Net Increase in Net Assets from Operations | $0.17 million | $4.59 million |
| Earnings Per Share (Basic & Diluted) | $0.01 | $0.34 |
| Net Asset Value (NAV) Per Share | $13.65 | $14.65 |
| Total Assets | $353.35 million | $360.46 million (June 30, 2015) |
| Total Debt Outstanding | $151.43 million | $123.49 million (Q3 2014) |
| Cash and Restricted Cash | $25.62 million | $24.97 million (June 30, 2015) |
| Asset Coverage Ratio | 2.23x | 2.62x (Q3 2014) |
Material Changes vs. Prior Period
- Performance Decline: Net increase in net assets from operations dropped significantly from $4.59 million in Q3 2014 to $0.17 million in Q3 2015. This was primarily driven by a $4.90 million net unrealized depreciation on investments, compared to a $0.10 million unrealized gain in the prior year.
- Portfolio Valuation: The decline in unrealized value was attributed to decreases in the fair value of investments in AP NMT Acquisitions, AAR Intermediate Holdings, Caelus Energy, AM General, and Trident.
- Expense Growth: Total expenses increased to $5.00 million from $3.25 million (net of waivers) in the prior year, driven by higher base and incentive management fees and increased interest expense due to higher leverage.
- Distributions: Distributions declared per share increased to $0.7769 in Q3 2015 from $0.3375 in Q3 2014. The Q3 2015 distribution included a special dividend component, with 41% of the total distribution sourced from net realized gains.
- Leverage: Total notes payable increased to $151.43 million (Term Loan: $102.0M; Revolver: $49.4M) compared to $123.49 million in the prior year period.
Outlook, Risks, and Management Commentary
- Portfolio Composition: As of September 30, 2015, the portfolio consisted of 23 companies. 91.2% of debt investments were rated "2" (performing within expectations), while 8.8% were rated "3" (performing below expectations but no loss expected).
- Industry Concentration Risk: The entertainment and leisure sector represents 16.45% of the portfolio. Management highlighted risks related to technological changes and regulation in this sector.
- Dividend Policy: The Company intends to distribute between 90% and 100% of annual taxable income to maintain Regulated Investment Company (RIC) status. The Board declared a quarterly distribution of $0.3469 per share for the quarter ended December 31, 2015.
- Subsequent Events: Between September 30, 2015, and November 9, 2015, the Company invested $10.0 million in new and existing portfolio companies and received $5.0 million in repayments/sales proceeds.
- Market Risk: 82.5% of debt investments bear floating interest rates. A 1.00% increase in interest rates is estimated to decrease net interest income by approximately 0.6% due to interest rate floors on assets.
Investor Verification Checklist
- Unrealized Loss Drivers: Verify the specific credit events or market conditions causing the $4.90 million unrealized depreciation in key holdings (AP NMT, AAR, Caelus, AM General, Trident).
- Distribution Sustainability: Confirm the source of the $0.7769 per share distribution, noting that a significant portion ($4.37 million) was funded by realized capital gains rather than net investment income.
- Asset Coverage Ratio: Monitor the decline in the asset coverage ratio from 2.62x to 2.23x and its impact on the Company's ability to borrow or distribute under BDC regulations.
- Fee Waivers: Review the status of the Adviser's fee waivers intended to support specific dividend yields (9.375% for 2015) and whether they were fully utilized in this quarter.
- Portfolio Ratings: Track the 8.8% of the portfolio rated "3" to assess potential future downgrades or credit losses.