Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarter and six months ended June 30, 2017
Business Overview: The Company invests primarily in debt and equity securities of lower middle market and middle market companies. It is externally managed by HMS Adviser LP and MSC Adviser I, LLC (Main Street Capital Corporation affiliate). As of June 30, 2017, the Company held 183 investments in 127 companies with a portfolio fair value of approximately $1.045 billion.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2017) | Amount (in thousands) |
|---|---|
| Total Investment Income | $50,912 |
| Net Investment Income | $30,206 |
| Net Realized Gain (Loss) | $2,635 |
| Net Unrealized Appreciation (Depreciation) | $(2,115) |
| Net Increase in Net Assets from Operations | $30,726 |
| Total Assets | $1,102,242 |
| Total Liabilities | $462,241 |
| Net Assets | $640,001 |
| Notes Payable (Debt) | $417,000 |
| Cash and Cash Equivalents | $32,905 |
| Net Asset Value (NAV) per Share | $8.22 |
| Distributions Declared per Share | $0.35 |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased to $50.9 million for the six months ended June 30, 2017, compared to $42.5 million in the prior year period. This was driven by portfolio growth from capital raising and borrowings, as well as accelerated accretion of original issue discounts.
- Expense Increases: Total expenses (net of waivers) rose to $20.6 million from $18.1 million year-over-year. Increases were attributed to higher base management fees, increased interest expense due to higher average borrowings and rates, and higher amortization of offering costs.
- Realized Gains vs. Losses: The Company reported a net realized gain of $2.6 million for the six months ended June 30, 2017, contrasting with a net realized loss of $10.0 million in the same period in 2016. The current period gain was primarily due to the exit of a Private Loan equity investment.
- Portfolio Yield: The weighted average effective annual yield on the portfolio decreased slightly from 8.9% as of December 31, 2016, to 8.5% as of June 30, 2017.
- Non-Accrual Status: As of June 30, 2017, four debt investments in three portfolio companies were on non-accrual status, representing approximately 0.3% of the total portfolio at fair value.
Guidance, Outlook, and Risks
- Offering Status: The Company's continuous public offering was extended to September 30, 2017. As of June 30, 2017, approximately $153.9 million had been raised in the current offering.
- Liquidity and Leverage: The Company maintains $32.9 million in cash and $78.0 million in available borrowing capacity under its credit facilities. The asset coverage ratio was 239% as of June 30, 2017, well above the 200% regulatory requirement.
- Fee Waivers: The Advisers waived subordinated incentive fees of approximately $2.3 million and administrative services expenses of approximately $1.5 million for the six months ended June 30, 2017. These waivers are subject to potential reimbursement in future periods if specific operating expense and distribution thresholds are met.
- Interest Rate Risk: Approximately 84.3% of the debt portfolio contains floating interest rates. While floors on these rates minimize downside risk, rising interest rates will increase the Company's borrowing costs, potentially reducing net investment income.
- Subsequent Events: Between July 1 and August 11, 2017, the Company raised $8.1 million, funded $76.0 million in investments, and received $45.5 million in repayments. Additionally, the Company filed a tender offer to repurchase approximately 1.76 million shares.
Investor Verification Checklist
- Distribution Sustainability: Verify the source of distributions, noting that the Company may fund distributions from sources other than net realized income, including offering proceeds and borrowings.
- Fee Waiver Reimbursement Risk: Review the conditions under which the $3.8 million in waived fees (incentive and administrative) for the period could be reimbursed to the Advisers in future periods.
- Portfolio Concentration: Assess the impact of the four investments on non-accrual status and the concentration of the portfolio in specific industries (e.g., Commercial Services, Hotels/Restaurants, Media).
- Leverage Utilization: Monitor the utilization of the $417 million in outstanding debt and the impact of rising interest rates on the spread between investment yield and borrowing costs.
- Offering Closure: Confirm the final closing date and total capital raised from the continuous offering, which was targeted for closure around September 30, 2017.