Business Context and Reporting Period
Company: Investcorp Credit Management BDC, Inc. (CM Finance Inc)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended March 31, 2015
Business Overview: The Company is a closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940. It invests primarily in debt and related equity of privately held lower middle-market companies. The Company elected to be treated as a Regulated Investment Company (RIC) for tax purposes.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2015 | Nine Months Ended Mar 31, 2015 | As of Mar 31, 2015 |
|---|---|---|---|
| Total Investment Income | $8.33 million | $25.40 million | - |
| Net Investment Income | $4.74 million | $13.97 million | - |
| Net Increase/(Decrease) in Net Assets from Operations | ($1.91 million) | $10.77 million | - |
| Net Asset Value (NAV) Per Share | - | - | $14.42 |
| Total Assets | - | - | $349.07 million |
| Total Liabilities | - | - | $152.05 million |
| Total Net Assets | - | - | $197.02 million |
| Cash and Restricted Cash | - | - | $19.37 million |
| Debt Outstanding (Notes Payable) | - | - | $128.29 million |
| Asset Coverage Ratio | - | - | 2.54x |
| Distributions Declared Per Share | $0.3469 | $1.0219 | - |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew from $273.7 million (June 30, 2014) to $311.9 million (March 31, 2015) at fair value. This was driven by $141.4 million in new and existing investments during the nine-month period.
- Revenue Increase: Total investment income increased 50% to $8.33 million for the quarter and 75% to $25.40 million for the nine months compared to the prior year periods, primarily due to portfolio expansion.
- Expense Increase: Total expenses rose significantly to $3.30 million (quarter) and $12.61 million (nine months) compared to $1.84 million and $3.60 million in the prior year periods. This increase is attributed to higher management fees, interest expense on increased borrowings, and operating costs associated with public company status.
- Net Realized Losses: The Company recorded a net realized loss of $2.23 million for the quarter and $1.31 million for the nine months ended March 31, 2015, compared to net realized gains in the prior year periods. The quarter's loss was primarily due to the sale of the Bennu Oil & Gas, LLC investment.
- Unrealized Depreciation: A net change in unrealized depreciation of $4.42 million was recorded for the quarter, largely driven by declines in the fair value of Virgin America, Inc. and Caelus Energy Alaska 03 LLC.
- Debt Utilization: Term loan debt increased from $76.5 million to $102.0 million, and the revolving credit facility draw increased from $9.1 million to $26.3 million.
Guidance, Outlook, and Risks
- Dividend Policy: The Investment Manager has agreed to permanently waive portions of base and incentive fees for 2014, 2015, and 2016 to support annualized dividend yields of 9.0%, 9.25%, and 9.375%, respectively, based on the IPO price.
- Recent Distribution: On May 6, 2015, the Board declared a second-quarter distribution of $0.3469 per share, payable July 5, 2015.
- Liquidity: The Company maintains $14.3 million in cash and $5.1 million in restricted cash. It has approximately $23.7 million of remaining capacity under its revolving credit facility.
- Unfunded Commitments: As of March 31, 2015, the Company held unfunded commitments of approximately $9.3 million to four portfolio companies.
- Asset Quality: 95.2% of the debt portfolio is rated "2" (performing within expectations). 2.8% is rated "3" (below expectations, closer monitoring required), and 2.0% is rated "4" (substantially below expectations, workout status). No investments were rated "5" (expected loss of principal).
- Interest Rate Risk: 87.6% of debt investments bear floating interest rates. A 1.00% increase in interest rates would decrease net interest income by approximately 0.4%, while a 2.00% increase would increase net interest income by approximately 6.3%.
- Regulatory Risks: The Company must maintain RIC status by distributing at least 90% of taxable income. Financing covenants may restrict distributions if asset coverage ratios are not met.
Investor Verification Checklist
- Fee Waivers: Verify the extent of fee waivers applied in the current period to support the dividend yield and the remaining duration of these waivers (through 2016).
- Portfolio Valuation: Review the fair value methodology for Level 3 assets, which constitute the vast majority of the portfolio, and assess the impact of the unrealized depreciation on Virgin America and Caelus Energy.
- Asset Coverage: Monitor the Asset Coverage Ratio (currently 2.54x) to ensure compliance with BDC regulations and financing covenants, especially given the high leverage.
- Unfunded Commitments: Assess the liquidity impact of the $9.3 million in unfunded commitments and the Company's ability to fund them without additional capital raises.
- Realized Losses: Investigate the specific circumstances surrounding the realized loss on the Bennu Oil & Gas sale and any potential future impairments in the "Rating 4" portfolio segment.