MSC Income Fund, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing; the provided text does not give a separate fourth-quarter income statement. MSC Income Fund is an externally managed business development company (BDC) investing mainly in secured debt of U.S. middle-market companies and debt and equity of lower-middle-market companies. Its adviser is an affiliate of Main Street Capital Corporation.
Key financial and portfolio metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Total investment income | $103.8 million | $90.1 million |
| Net investment income | $52.9 million; $0.66 per share | $53.4 million; $0.67 per share |
| Net increase in net assets from operations | $45.6 million; $0.57 per share | $73.6 million; $0.92 per share |
| Total return on investments | 9.1% | 17.9% |
| Net asset value (NAV) per share, year-end | $7.61 | $7.68 |
| Cash and cash equivalents, year-end | $21.3 million | $25.8 million |
| Total borrowings, year-end | $471.7 million | $504.2 million |
Net investment income was 8.65% of average NAV in 2022, versus 8.99% in 2021; total expenses, including income taxes, were 8.60% of average NAV, versus 6.51%. The 2022 expense ratio reflects expense waivers; excluding waivers, total expenses were 9.33% of average NAV.
At year-end, total assets were $1.107 billion and net assets were $609.7 million. The investment portfolio was valued at $1.068 billion, compared with cost of $1.060 billion. BDC asset coverage was 229%. The company reported $168.3 million of unused capacity under its credit facilities, subject to borrowing-base and leverage limits. Operating activities provided $76.7 million of cash; financing activities used $81.2 million, resulting in a $4.5 million decrease in cash.
The portfolio included 70 Private Loan, 48 lower-middle-market and 21 middle-market companies, plus four Other Portfolio investments. First-lien debt represented 88.5% of the combined Private Loan, lower-middle-market and middle-market portfolio at cost. Seven investments were on non-accrual at year-end, representing 0.8% of portfolio fair value and 4.8% of cost; the prior-year figures were four investments, 0.7% and 2.8%, respectively.
Material changes versus 2021
- Investment income rose 15%, led by a 25% increase in interest income, reflecting higher average debt investments and higher floating reference rates. Dividend income fell 41%, partly because of lower less-consistent or non-recurring dividends.
- Expenses net of waivers increased 38%, mainly due to higher borrowing costs, management fees and incentive fees. Interest expense rose 69% as floating rates and average debt balances increased.
- Net investment income declined 1%, while net increase in net assets from operations fell 38%. The latter reflected a swing from $25.1 million of unrealized appreciation in 2021 to $1.7 million of net unrealized depreciation in 2022, alongside higher realized losses.
- Year-end NAV per share decreased from $7.68 to $7.61. Dividends paid or accrued increased from $0.53 to $0.65 per share; 2022 distributions included $0.795 per share for tax purposes, including accrued amounts.
- Floating-rate debt investments increased their income potential as rates rose, but borrowing costs also increased. At year-end, 81% of debt investments at cost were floating rate, 93% of those subject to contractual floors; 32% of debt obligations bore fixed rates.
Outlook, commentary and risks
The filing provides no earnings or investment-return guidance. Management said it expects to fund investments and operations with cash, operating cash flows, investment repayments and sales, and available credit-facility borrowings. It highlighted inflation, labor and supply-chain pressures affecting portfolio companies, and warned that prolonged effects could weaken earnings, debt-service capacity, distributions and investment values. Management also noted ongoing capital-markets disruption and economic uncertainty.
Key risks include borrower defaults and rising debt-service burdens, illiquid holdings, uncertain Level 3 fair-value estimates, leverage and covenant constraints, and limited access to new equity capital. All portfolio investments were classified as Level 3 at year-end, making valuations dependent on significant unobservable inputs. The independent auditor issued an unqualified opinion on the financial statements and identified investment fair value as a critical audit matter; it did not audit internal control over financial reporting. The company reported effective disclosure controls and management assessed internal controls as effective.
Other notable items: the company reported $67.5 million of unfunded investment commitments and a $1.6 million income-tax provision, including estimated excise tax and taxes related to taxable subsidiaries. PIK interest accounted for 2.5% of investment income and cumulative dividends not paid currently in cash accounted for 0.6%. The common stock has no established public market; quarterly repurchases are limited and may not meet all requests. Subsequent to year-end, the board declared a $0.175-per-share quarterly dividend payable May 1, 2023.
Important facts for investors to verify
- Review portfolio credit quality and the drivers behind the increase in non-accrual investments, including expected recovery values.
- Assess the valuation assumptions and sensitivities for the Level 3 portfolio, especially recovery rates, discount rates and equity multiples.
- Check whether investment income growth from higher floating rates continues to exceed the increase in funding costs and expenses.
- Confirm liquidity and covenant headroom after considering $67.5 million of unfunded commitments, scheduled debt maturities and restricted facility availability.
- Compare recurring cash income and taxable income with distributions; verify the estimated $20.7 million of undistributed taxable income carried into 2023 and the tax characterization of distributions.
- Consider the practical limits on liquidity for shareholders: the stock is unlisted, and repurchases are subject to program limits and board discretion.