Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company or BDC)
Reporting Period: Quarterly period ended June 30, 2013 (Six months ended June 30, 2013)
Business Overview: The Company is an externally managed, non-diversified closed-end investment company focused on generating current income through debt and equity investments in middle-market and lower-middle-market (LMM) companies. As of June 30, 2013, the portfolio consisted entirely of first-lien secured debt investments across 32 portfolio companies. The Company is in the process of raising capital through a public offering and intends to elect Regulated Investment Company (RIC) status for tax purposes.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2013 | Three Months Ended June 30, 2013 |
|---|---|---|
| Total Portfolio Investments (Fair Value) | $29.76 million | $29.76 million |
| Net Investment Income | $398,000 | $297,000 |
| Net Realized Gain | $4,000 | $4,000 |
| Net Unrealized Appreciation (Depreciation) | $138,000 | ($69,000) |
| Net Increase in Net Assets from Operations | $540,000 | $232,000 |
| Net Asset Value (NAV) per Share | $8.83 | $8.83 |
| Total Assets | $35.97 million | $35.97 million |
| Total Liabilities | $14.71 million | $14.71 million |
| Cash and Cash Equivalents | $2.35 million | $2.35 million |
| Debt Outstanding (Credit Facility) | $10.00 million | $10.00 million |
| Stockholder Distributions Declared | $0.35 per share | $0.18 per share |
Material Changes vs. Prior Period
- Portfolio Growth: Portfolio investments at fair value increased from $16.13 million at December 31, 2012, to $29.76 million at June 30, 2013, an increase of approximately 84%. This growth was driven by the investment of $19.8 million in new portfolio companies, offset by $6.4 million in repayments and sales.
- Investment Composition: The portfolio shifted to 100% first-lien secured debt. Previously, the portfolio included second-lien debt (9.5% of fair value at year-end 2012). The number of portfolio companies increased from 17 to 32.
- Operating Expenses: Total expenses (net of waivers) increased to $553,000 for the six months ended June 30, 2013, compared to $215,000 for the same period in 2012. This increase is attributed to the costs of operating a public company, including legal, audit, and insurance costs.
- Net Income: Net investment income for the six months ended June 30, 2013, was $398,000, a decrease from $610,000 in the prior year period, despite higher interest income ($951,000 vs. $825,000), due to significantly higher operating expenses.
- Debt Utilization: Borrowings under the Credit Facility increased from $7.0 million at December 31, 2012, to $10.0 million at June 30, 2013.
Guidance, Outlook, and Risks
- Outlook: Management expects further increases in investment income as the portfolio base grows and investments are held for full periods. The Company intends to continue funding investments through the public offering and its Credit Facility.
- Distributions: The Company declared a distribution of $0.00191781 per share per day for the period July 1, 2013, through September 30, 2013, representing an annualized yield of 7.0% based on the $10.00 offering price. Distributions may be funded by net investment income, fee waivers, or return of capital.
- Fee Waivers: Under a Conditional Fee Waiver Agreement, the Advisers waived base management fees ($202,000) and internal administrative expenses ($455,000) for the six months ended June 30, 2013, to support distributions. These waivers may be subject to repayment within three years if cumulative net assets exceed cumulative distributions.
- Risks:
- Interest Rate Risk: Approximately 92% of the portfolio contains floating interest rates. A 1% increase in rates would increase interest income by ~$3,000 but increase interest expense on the $10 million credit facility by ~$100,000.
- Liquidity: The Company relies on the public offering and a $15 million revolving credit facility (with $5 million available) for liquidity. There is no assurance that capital will be available in the future.
- Valuation: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs and management judgment for fair value determination.
- Subsequent Event: On July 23, 2013, the Company sold a portfolio investment (UniTek Global Services, Inc.) for approximately $1.54 million, realizing a gain over its June 30 fair value of $1.41 million.
Investor Verification Checklist
- Fee Waiver Sustainability: Verify the terms of the Conditional Fee Waiver Agreement and the likelihood of fee recapture if the Company's cumulative net assets exceed distributions.
- Distribution Sources: Confirm the tax characterization of distributions (ordinary income vs. return of capital), as a portion of distributions may be funded by fee waivers or capital.
- Portfolio Concentration: Review the top 10 portfolio holdings to assess concentration risk, noting the largest single investment represents approximately 7% of the portfolio.
- Credit Facility Covenants: Monitor compliance with asset coverage (3.1 to 1.0) and interest coverage (3.8 to 1.0) ratios to ensure no default risk on the $10 million debt facility.
- Offering Progress: Track the pace of capital raising under the $1.5 billion registration statement, as investment activity is directly tied to capital availability.