Runway Growth Finance Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are with Q3 and the first nine months of 2021, as applicable. Runway is an externally managed business development company (BDC) investing principally in loans to growth-stage companies. Its objective is current income, supplemented by capital appreciation.
Financial and portfolio highlights
| Metric | Q3 2022 / September 30, 2022 | Comparable period / December 31, 2021 |
|---|---|---|
| Investment income | $27.3 million for the quarter; $71.7 million for nine months | $18.6 million and $53.8 million, respectively, in 2021 |
| Net investment income | $14.5 million for the quarter ($0.36/share); $41.4 million for nine months ($1.01/share) | $10.7 million ($0.32/share); $33.6 million ($1.04/share) |
| Net increase in assets from operations | $11.7 million for the quarter ($0.29/share); $13.8 million for nine months ($0.33/share) | $10.2 million ($0.31/share); $26.3 million ($0.81/share) |
| Operating expenses | $12.8 million for the quarter; $30.3 million for nine months | $7.9 million and $20.2 million, respectively |
| Net assets / NAV per share | $573.7 million / $14.12 | $606.2 million / $14.65 |
| Investments at fair value | $910.2 million | $729.5 million |
| Debt | $345.5 million principal; $336.5 million carrying value, net of deferred costs | $81.0 million principal; $79.5 million carrying value |
| Cash and cash equivalents | $5.8 million | $4.7 million |
- Q3 NAV-based total return was negative 0.14%; the nine-month return was negative 3.62%. NAV per share fell 3.6% from year-end 2021.
- For the nine months, operating cash flow was negative $164.1 million, primarily reflecting investment purchases; financing activities provided $165.2 million. Cash ended the period $1.1 million higher at $5.8 million.
- Operating expenses were 6.95% of average net assets for Q3 and 6.33% for the first nine months, versus 4.82% and 5.18% in 2021, respectively. These ratios include incentive fees.
- The portfolio was concentrated in senior secured term loans. Health care technology, application software, and internet software and services were the largest industry exposures by fair value.
Changes versus comparable periods
- Q3 investment income rose 47% year over year, and net investment income rose 35%, reflecting a larger invested portfolio and higher market rates. Higher interest expense, management fees, incentive fees, and financing costs partly offset the income growth.
- For the first nine months, investment income increased 33%, but net increase in assets from operations declined to $13.8 million from $26.3 million. The main factors were greater unrealized depreciation and higher operating expenses; net investment income per share also decreased to $1.01 from $1.04.
- Net unrealized depreciation was $28.6 million for the first nine months of 2022, compared with $3.2 million in 2021. Management attributed the 2022 decrease primarily to Pivot3, Brilliant Earth, and Coginiti investments.
- Borrowings increased substantially, including issuance of $80.5 million of 7.50% notes due 2027 and $20 million of private 7.00% notes due 2027. The credit facility had $425 million of total commitments and $175 million drawn at period-end.
- The company repurchased 744,756 shares for $9.3 million under a $25 million repurchase program. Dividends declared and paid for the nine months totaled $37.0 million.
Outlook, risks, contingencies, and unusual items
- Management said cash and credit-facility availability were sufficient to cover $329.3 million of unfunded loan commitments at September 30. Many commitments depend on portfolio-company milestones; actual availability is also subject to facility and borrowing-base terms.
- After quarter-end, the company declared a $0.36-per-share dividend and funded investments of $20 million to Nalu Medical, $44 million to Brivo Systems, and $5 million to Allurion. Fidelis Cybersecurity repaid $6 million plus a $0.6 million final payment fee.
- Pivot3 was the sole loan on non-accrual at quarter-end, with $19.2 million aggregate funded principal valued at $4.5 million. Its fair value had fallen materially; the company reported it as 0.5% of the investment portfolio. The filing says $3.1 million of interest would have accrued absent non-accrual treatment.
- Approximately 4.4% of Q3 investment income and 8.8% of nine-month investment income was non-cash payment-in-kind (PIK) interest. Such income may not be collected in cash when accrued but can affect required distributions.
- Management reported 97% of debt investments, at cost, bore variable rates, while elsewhere the filing says approximately 69% of debt investments were LIBOR-based. Higher rates can support loan income but also raise borrowing costs and may strain borrowers. The filing discusses LIBOR transition risk and active consideration of replacement benchmarks.
- Most investments were Level 3 fair-value assets ($895.9 million), requiring significant judgment and unobservable valuation inputs. The filing cautions that estimated values may differ materially from realizable market values.
- Other disclosed risks include inflation, economic downturn, Russia’s invasion of Ukraine, market volatility, portfolio-company payment and valuation risk, leverage, liquidity, and maintaining BDC and regulated investment company status. No material legal proceedings or defaults on senior securities were reported.
- No numerical earnings or portfolio guidance was provided. The filing states results for the interim period are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Pivot3’s credit recovery, non-accrual status, and further portfolio markdowns change materially after quarter-end.
- Whether the $329.3 million of unfunded commitments can be met while maintaining adequate liquidity and complying with credit-facility borrowing-base and covenant requirements.
- The sustainability of investment income and dividends, especially the share supported by PIK accruals rather than cash collections.
- How rising rates, LIBOR replacement, and increased funding costs affect net investment income, portfolio-company credit quality, and debt service.
- The assumptions behind Level 3 valuations, NAV, and the reported portfolio concentration and credit ratings.
- The filing’s rate-exposure disclosures: it reports both 69% of debt investments as LIBOR-based and 97% as variable-rate, measures that describe different exposures but merit confirmation.