Business Context and Reporting Period
Company: HMS Income Fund, Inc. (MSC Income Fund, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2018
Business Overview: An externally managed, non-diversified closed-end management investment company operating as a Business Development Company (BDC). The Company invests primarily in illiquid debt and equity securities of lower middle market (LMM) and middle market companies. It is managed by HMS Adviser LP with MSC Adviser I, LLC (a subsidiary of Main Street Capital Corporation) serving as the sub-adviser.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2017 |
|---|---|---|---|
| Total Investment Income | $30.9 million | $85.0 million | $76.2 million |
| Net Investment Income | $17.8 million | $47.4 million | $43.2 million |
| Net Realized Gain (Loss) | $(8.9) million | $(19.8) million | $3.4 million |
| Net Change in Unrealized Appreciation | $14.9 million | $24.0 million | $(7.2) million |
| Net Increase in Net Assets from Operations | $23.8 million | $51.6 million | $39.4 million |
| Earnings Per Share (Basic & Diluted) | $0.30 | $0.65 | $0.51 |
| Net Asset Value (NAV) per Share | $8.28 | $8.28 | $8.16 |
| Total Portfolio Investments (Fair Value) | $1,130.3 million | $1,130.3 million | $1,049.4 million |
| Cash and Cash Equivalents | $23.7 million | $23.7 million | $45.8 million |
| Total Borrowings (Credit Facilities) | $510.0 million | $510.0 million | $430.0 million |
| Weighted Average Effective Yield | 9.2% | 9.2% | 8.5% |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased by 22% for the nine months ended September 30, 2018, compared to the prior year period. This was driven by portfolio growth (average portfolio size increased from $1.02 billion to $1.09 billion) and an increase in the weighted average effective yield from 8.5% to 9.2%.
- Expense Increases: Total expenses (net of waivers) rose to $37.6 million for the nine months ended September 30, 2018, from $32.9 million in the prior year. The increase was primarily due to higher interest expense ($4.5 million increase) resulting from increased average borrowings and higher borrowing costs, and increased base management fees.
- Realized Losses: The Company reported a net realized loss of $19.8 million for the nine months ended September 30, 2018, contrasting with a net realized gain of $3.4 million in the same period in 2017. This shift was influenced by portfolio sales and repayments.
- Unrealized Appreciation: Significant unrealized appreciation of $24.0 million was recorded for the nine months ended September 30, 2018, compared to unrealized depreciation of $7.2 million in the prior year period.
- Leverage: Total borrowings increased from $430.0 million at December 31, 2017, to $510.0 million at September 30, 2018. The TIAA Credit Facility was fully utilized ($120.0 million), while $60.0 million remained available under the Deutsche Bank Credit Facility.
Guidance, Outlook, Risks, and Unusual Items
- Fee Waivers: The Advisers waived subordinated incentive fees on income of approximately $3.4 million and internal administrative services expenses of approximately $2.0 million for the nine months ended September 30, 2018. These waivers are conditional and may be subject to reimbursement in future periods if certain performance thresholds are met.
- Non-Accrual Status: As of September 30, 2018, five debt investments in three portfolio companies were on non-accrual status, representing approximately 0.3% of the total portfolio at fair value. The Company ceased accruing interest on these investments.
- Distributions: The Company declared distributions of $0.17 per share for the quarter ended September 30, 2018. Distributions for the nine months ended September 30, 2018, were funded by net realized income (58.2%), fee waivers (8.2%), and distributions in excess of net realized income (33.6%).
- Share Repurchases: The Company repurchased approximately 3.37 million shares for $27.6 million during the nine months ended September 30, 2018. A new tender offer for approximately 825,530 shares was filed on October 10, 2018.
- Market Risk: The Company is exposed to interest rate risk. Approximately 88.3% of its debt portfolio contains floating interest rates. A 100 basis point increase in interest rates would result in an approximate net increase in net investment income of $3.7 million, while a 100 basis point decrease would result in a net decrease of $3.7 million.
- Unfunded Commitments: The Company had $39.9 million in outstanding unfunded loan and capital commitments as of September 30, 2018.
Key Facts for Investor Verification
- Asset Coverage Ratio: Verify the Company's compliance with the 1940 Act asset coverage requirements (200% as of the filing date, though legislation allows for 150% with approval). The ratio was 218% as of September 30, 2018.
- Fee Waiver Reimbursement: Monitor the conditions under which the $3.4 million in waived incentive fees and $2.0 million in waived administrative expenses may be required to be repaid to the Advisers.
- Non-Accrual Portfolio Quality: Review the specific portfolio companies on non-accrual status and the Company's strategy for managing these distressed assets.
- Realized Losses: Investigate the specific transactions contributing to the $19.8 million net realized loss to understand if they were strategic exits or forced sales.
- Liquidity Position: Confirm the availability of the $60.0 million under the Deutsche Bank Credit Facility and the Company's ability to meet its $39.9 million in unfunded commitments.