MSC INCOME FUND, INC. quarterly report, Q1 FY2015

Business Context and Reporting Period

Company: HMS Income Fund, Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarter ended March 31, 2015
Business Model: Externally managed closed-end fund investing primarily in debt and equity securities of lower middle market and middle market companies to generate current income and capital appreciation.

Key Financial Metrics

Metric Q1 2015 Q1 2014
Net Investment Income $6.33 million $0.82 million
Net Increase in Net Assets from Operations $10.19 million $1.12 million
Net Asset Value (NAV) per Share $8.57 $8.86
Total Portfolio Investments (Fair Value) $659.87 million $141.22 million
Total Assets $696.92 million $147.67 million
Total Liabilities $344.44 million $64.59 million
Notes Payable (Debt) $264.00 million $20.75 million
Cash and Cash Equivalents $23.91 million $17.55 million
Weighted Average Shares Outstanding 36.27 million 7.39 million
Distributions Declared per Share $0.17 $0.17

Material Changes vs. Prior Period

  • Portfolio Growth: Total portfolio investments increased by approximately 366% (from $141.2 million to $659.9 million) driven by significant capital raising and deployment of borrowings.
  • Revenue Surge: Net investment income increased 668% to $6.33 million, primarily due to the expanded asset base and higher average borrowings ($223.4 million vs. $20.8 million).
  • Expense Increase: Total expenses (net of waivers) rose to $5.47 million from $0.84 million, reflecting higher management fees, interest expense, and administrative costs associated with the larger portfolio.
  • Debt Utilization: Notes payable increased to $264.0 million as the Company fully drew its $105.0 million Syndicated Credit Facility and utilized $159.0 million of its HMS Funding Facility.
  • Unrealized Gains: Net unrealized appreciation was $3.84 million, compared to $0.23 million in the prior year, driven by improvements in high yield bond and leveraged loan markets.

Guidance, Outlook, Risks, and Unusual Items

  • Outlook: Management expects further increases in investment income due to a growing base of portfolio investments. The weighted average effective annual yield on the portfolio increased to 8.5%.
  • Fee Waivers: The Adviser waived subordinated incentive fees of $358,000 and administrative services expenses of $437,000 for the quarter. The fee waiver agreement was extended through December 31, 2015.
  • Asset Quality: Two investments in one portfolio company (Clarius BIGS, LLC) totaling $4.4 million principal were placed on non-accrual status due to default. These represent approximately 0.3% of the total portfolio at fair value.
  • Subsequent Events:
    • Public offering price increased to $9.90 per share effective May 7, 2015.
    • HMS Funding Facility borrowing capacity increased to $225 million on May 5, 2015.
    • Filed a tender offer to repurchase approximately 578,585 shares at NAV.
  • Risks: Significant exposure to interest rate fluctuations (81.3% of debt portfolio has floating rates). A 1% increase in rates would increase interest income by ~$0.75 million but increase interest expense by ~$2.6 million.

Investor Verification Checklist

  • Capital Deployment: Verify the pace of investment of the $98.9 million raised in Q1 2015 and subsequent $32.6 million raised in April 2015.
  • Asset Coverage Ratio: Confirm the BDC asset coverage ratio remains above the 200% regulatory minimum (reported at 222% including unfunded commitments).
  • Non-Accrual Status: Monitor the recovery efforts and potential impairment charges related to the Clarius BIGS, LLC default.
  • Distribution Sustainability: Assess the source of distributions; 96% of Q1 2015 distributions were funded by net realized income, but the Company notes distributions may exceed earnings in early stages.
  • Fee Waiver Expiration: Note that the Adviser's fee waiver is currently extended only through December 31, 2015, which could impact future expense ratios.