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 report (Form 10-Q) for the period ended December 31, 2014.
Overview: The Company invests primarily in debt and related equity of privately held lower middle-market companies. As of December 31, 2014, the Company had 13,666,666 shares of common stock outstanding. The portfolio consists of 25 portfolio companies, with a weighted average yield of 11.95% at fair value.
Key Financial Metrics
| Metric | Six Months Ended Dec 31, 2014 | Three Months Ended Dec 31, 2014 |
|---|---|---|
| Total Assets | $356.3 million | $356.3 million |
| Total Net Assets | $203.7 million | $203.7 million |
| Net Asset Value (NAV) per Share | $14.90 | $14.90 |
| Total Investment Income | $17.1 million | $9.2 million |
| Net Investment Income | $9.2 million | $4.6 million |
| Net Increase in Net Assets from Operations | $12.7 million | $8.1 million |
| Earnings Per Share (EPS) | $0.93 | $0.59 |
| Dividends Declared Per Share | $0.6750 | $0.3375 |
| Total Debt Outstanding | $141.4 million | $141.4 million |
| Cash and Restricted Cash | $33.0 million | $33.0 million |
| Asset Coverage Ratio | 2.44x | 2.44x |
Material Changes vs. Prior Period
- Portfolio Growth: Total investment portfolio fair value increased to $316.1 million as of December 31, 2014, from $273.7 million as of June 30, 2014. This growth was driven by $104.1 million in new and existing investments during the six-month period.
- Revenue Increase: Total investment income for the six months ended December 31, 2014, rose to $17.1 million from $9.0 million in the comparable 2013 period, primarily due to portfolio expansion.
- Expense Increase: Total expenses increased to $7.8 million for the six months ended December 31, 2014, compared to $1.8 million in the prior year period. This increase is attributed to base and incentive management fees, interest expense on additional borrowings, and operating costs associated with being a public company.
- Realized Gains: The Company recorded a net realized gain of $920,475 for the six months ended December 31, 2014, contrasting with a net realized loss of $1.1 million in the same period in 2013.
- Unrealized Appreciation: Net change in unrealized appreciation was $2.5 million for the six months ended December 31, 2014, compared to a depreciation of $578,951 in the prior year period.
Guidance, Outlook, and Risks
- Dividend Policy: The Investment Manager has agreed to waive fees to support an annualized dividend yield of 9.0% for 2014, 9.25% for 2015, and 9.375% for 2016, based on the IPO price. The Company intends to distribute at least 90% of its investment company taxable income to maintain Regulated Investment Company (RIC) status.
- Liquidity: As of December 31, 2014, the Company held $28.6 million in cash and $4.4 million in restricted cash. It also had approximately $10.6 million of capacity remaining under its $50.0 million revolving credit facility.
- Financing: The Company utilizes a $102.0 million term facility and a $50.0 million revolving facility with UBS. The term facility bears interest at LIBOR + 2.75%, and the revolver bears a fixed rate of 2.00% on drawn amounts.
- Risks: Key risks include credit risk associated with leveraged middle-market companies, interest rate risk (90.7% of debt investments are floating rate), and liquidity risk due to the illiquid nature of private debt investments. The Company also faces risks related to its ability to maintain RIC and BDC status.
- Unfunded Commitments: The Company held approximately $5.3 million in unfunded commitments to two portfolio companies as of December 31, 2014.
Investor Verification Checklist
- Fee Waivers: Verify the extent of management fee waivers required to maintain the targeted dividend yield and the impact on net investment income.
- Asset Coverage: Confirm the Asset Coverage Ratio remains above the 200% threshold required for BDCs under the Investment Company Act of 1940.
- Portfolio Concentration: Review the top 10 portfolio companies, which represent a significant portion of the portfolio, to assess concentration risk.
- Derivative Exposure: Examine the Total Return Swaps (TRS) and embedded derivatives used to finance a portion of the portfolio, noting the counterparty risk with UBS.
- Unrealized Gains: Assess the sustainability of the $4.6 million in net unrealized appreciation, as this is subject to market volatility and may not be realized.
- Debt Maturity: Review the maturity profile of the $141.4 million in debt obligations to ensure adequate refinancing capacity.