MSC Income Fund, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 15, 2024. MSC Income Fund is an externally managed business development company (BDC) investing primarily in secured debt and equity of middle-market and lower-middle-market businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable / prior date |
|---|---|---|
| Investment income | $34.0 | $31.0 in Q1 2023; up 9% |
| Net investment income | $14.5; $0.18 per share | $14.1; $0.18 per share in Q1 2023 |
| Net realized gain (loss) | $(1.9) | $3.4 gain in Q1 2023 |
| Net unrealized appreciation (depreciation) | $(1.1) | $(4.1) in Q1 2023 |
| Net increase from operations | $10.6; $0.13 per share | $12.2; $0.15 per share in Q1 2023 |
| Net asset value (NAV) | $618.5; $7.72 per share | $622.3; $7.77 per share at December 31, 2023 |
| Portfolio investments at fair value | $1,116 | $1,093 at December 31, 2023 |
| Cash and cash equivalents | $24.6 | $30.8 at December 31, 2023 |
| Total debt outstanding | $504.7 | $485.7 at December 31, 2023 |
| Net cash from operating activities | $(11.6) | $16.5 provided in Q1 2023 |
Interest expense rose 15% to $9.5 million, mainly from higher average borrowings and rates on floating-rate facilities. Total expenses after waivers increased 15% to $19.4 million. The Adviser waived $2.1 million of internal administrative services expenses; waivers are permanent and not subject to later reimbursement. Q1 operating results include $1.7 million more in less-consistent or non-recurring fee income, primarily from refinancing and prepayments.
Portfolio, liquidity and capital
- At March 31, the Private Loan portfolio had fair value of $631.4 million, the lower-middle-market portfolio $391.6 million, the Middle Market portfolio $68.4 million, and Other Portfolio investments $24.6 million. The company has been de-emphasizing its Middle Market strategy.
- Weighted-average annual effective yields were 13.0% for Private Loan, 13.0% for lower-middle-market and 13.4% for Middle Market debt investments, excluding loans on non-accrual. These portfolio yields are not shareholder returns.
- Management reported $24.6 million of cash and $110.3 million of unused Credit Facility capacity, subject to borrowing-base, leverage and covenant limits. The BDC asset coverage ratio was 223%; the stated statutory minimum is generally 200%, subject to conditions for a lower threshold.
- Debt comprised $275.7 million under the SPV Facility, $79.0 million under the Corporate Facility and $150.0 million of Series A Notes. The revolving facilities bear floating rates; the Series A Notes carry a fixed 4.04% coupon and mature in October 2026. The Corporate and SPV facility rates were 7.83% and 8.33%, respectively, at quarter-end. The company reported covenant compliance.
- Unfunded investment commitments totaled $78.8 million, including $69.1 million of loan commitments and $9.7 million of equity commitments. Management expects to fund commitments from cash, operating cash flows and facility borrowings.
- Cash used in operations primarily reflected $75.7 million of new investment funding, partly offset by $52.1 million from investment sales, repayments and returns of capital. Financing activities included $19.0 million net Credit Facility borrowings, $9.5 million of dividends paid and $6.5 million of share repurchases.
Changes, distributions and outlook
- Investment income increased by $2.9 million year over year, mainly due to higher dividends and fee income; interest income was nearly unchanged. Fee income included a $1.7 million increase from refinancing and prepayment activity.
- Net investment income increased 3%, but net increase from operations declined 13% year over year, reflecting a shift from realized gains to realized losses, partly offset by less unrealized depreciation.
- Non-accrual investments were 0.7% of portfolio fair value and 3.6% of cost, compared with 1.1% and 4.0% at December 31, 2023. Management cautions that portfolio-company results and valuation changes may vary with economic conditions.
- The company paid or accrued dividends of $0.185 per share for Q1 2024, compared with $0.175 in Q1 2023. On May 13, 2024, the Board declared a $0.18-per-share dividend payable August 1, 2024. The filing provides no earnings or investment-return guidance.
- After quarter-end, the company sold $2.5 million of shares to Main Street through the DRIP and repurchased 536,330 shares for $4.2 million at $7.78 per share. The Board also approved a related future repurchase offer.
Risks, contingencies and unusual items
- All $1.116 billion of portfolio investments were classified as Level 3, relying on significant unobservable valuation inputs. Management notes that actual realizations may differ materially from estimated fair values.
- Interest-rate changes affect both investment income and floating-rate borrowing costs. At March 31, 78% of debt investments at cost were floating-rate, 95% of which had contractual rate floors; 30% of debt obligations were fixed-rate. The company had no interest-rate hedges. Its sensitivity analysis estimates that a 100-basis-point rate decrease would reduce annualized net investment income by about $0.4 million after incentive-fee effects; a 100-basis-point increase would raise it by about $2.6 million.
- PIK interest, which is accrued but not currently received in cash, represented 4.5% of Q1 investment income, versus 3.8% a year earlier. RIC distribution requirements may require distributions of taxable income before related cash is collected.
- Portfolio companies face risks from inflation, labor and supply-chain costs, economic weakness and their ability to service debt. The filing identifies no material change to previously disclosed risk factors. Management did not expect current litigation to materially affect results, while noting outcomes cannot be assured.
- The Adviser is wholly owned by Main Street and allocates certain co-investment opportunities among affiliated funds and clients, creating a potential allocation conflict; the filing describes policies and independent-board oversight to address it.
Important facts for investors to verify
- Whether the $0.18 quarterly dividend is supported by recurring cash income, given $0.19 per share of Q1 distributions versus $0.18 per share of net investment income and the presence of PIK income.
- Performance and credit quality of non-accrual and significantly marked-down investments, including whether reported fair values are ultimately realized.
- Availability of facility capacity after borrowing-base and covenant limits, and the company’s ability to meet $78.8 million of unfunded commitments while managing debt maturities.
- How higher financing costs, benchmark-rate movements and portfolio-company performance affect net investment income and NAV.
- The durability of elevated fee income from refinancing and prepayments and the effect of share repurchases, DRIP issuances and related-party share sales on NAV per share.