Business Context and Reporting Period
Company: Investcorp Credit Management BDC, Inc. (formerly CM Finance Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2019
Business Overview: A closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940. The Company invests primarily in debt and related equity of privately held middle-market companies. On August 30, 2019, the Company changed its name and entered into a New Advisory Agreement following the acquisition of a majority interest in its adviser by Investcorp.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 |
|---|---|---|
| Total Investment Income | $8,558,434 | $8,254,890 |
| Net Investment Income | $3,534,410 | $3,409,496 |
| Net Realized Gain/(Loss) | $31,073 | $(258,192) |
| Net Unrealized Depreciation | $(4,472,035) | $(1,723,263) |
| Net Increase/(Decrease) in Net Assets from Operations | $(906,552) | $1,428,041 |
| Net Asset Value (NAV) per Share | $10.19 | $12.41 |
| Market Value per Share | $6.65 | $8.60 |
| Total Debt Outstanding | $175,547,551 | $148,343,470 |
| Asset Coverage Ratio | 1.79x | 2.14x |
| Cash and Restricted Cash | $10,832,094 | $4,123,016 |
Material Changes vs. Prior Period
- Operating Results: The Company reported a net decrease in net assets of $0.9 million for Q3 2019, compared to a net increase of $1.4 million in Q3 2018. This decline was driven primarily by a significant increase in net unrealized depreciation ($4.5 million vs. $1.7 million in the prior year), offsetting a slight increase in Net Investment Income.
- Portfolio Valuation: Total investments at fair value decreased from $306.4 million (June 30, 2019) to $302.2 million (September 30, 2019). Notable unrealized losses were recorded for 4L Technologies Inc., Premiere Global Services, Inc., 1888 Industrial Services LLC, and Exela Intermedia LLC.
- Debt and Leverage: Total debt increased by approximately $27.2 million year-over-year due to the utilization of the revolving credit facility (increased from $11.0 million to $19.0 million) and the maintenance of the $122.0 million term loan. The Asset Coverage Ratio declined from 2.14x to 1.79x.
- Expense Ratios: The ratio of total expenses to average net assets increased to 14.36% (annualized) from 11.40% in the prior year, largely due to higher interest expenses and professional fees.
Guidance, Outlook, and Risks
- Advisory Agreement: Effective August 30, 2019, the Company entered a New Advisory Agreement with CM Investment Partners LLC (majority-owned by Investcorp). The base management fee remains 1.75% of gross assets. No income-based incentive fee was payable for Q3 2019 due to the total return requirement.
- Capital Markets Activity: Subsequent to the period end (October 18, 2019), the Company closed a public offering of $15 million in additional 6.125% notes due 2023, with an additional $1.875 million purchased via over-allotment, raising approximately $16.4 million in net proceeds.
- Dividends: The Board declared a quarterly distribution of $0.25 per share for the quarter ended September 30, 2019. A subsequent distribution of $0.25 per share was declared on November 6, 2019, for the quarter ended December 31, 2019.
- Risks and Contingencies:
- LIBOR Transition: The Company faces uncertainty regarding the phase-out of LIBOR by the end of 2021, which may require renegotiation of credit agreements.
- Asset Quality: As of September 30, 2019, one investment (Fusion Connect Inc.) was on non-accrual status, representing approximately 3.5% of the portfolio. Additionally, 21.6% of the portfolio was rated "3" (performing below expectations) and 2.7% was rated "4" (substantially below expectations).
- Liquidity: The Company maintains unfunded commitments of $6.2 million as of September 30, 2019.
Investor Verification Checklist
- Unrealized Losses: Verify the specific valuation methodologies and market data used to determine the $4.5 million unrealized depreciation, particularly for the largest detractors (4L Technologies, Premiere Global, 1888 Industrial).
- Non-Accrual Status: Review the status and recovery prospects of the Fusion Connect Inc. investment, which is classified as non-accrual.
- Debt Covenants: Confirm compliance with the 150% asset coverage ratio requirement under the 1940 Act and specific covenants in the UBS financing facilities and 2023 Notes.
- LIBOR Exposure: Assess the Company's strategy for transitioning floating-rate loans away from LIBOR as the benchmark is phased out.
- Fee Waivers: Note that $44,183 of base management fees were waived in Q3 2019; verify if this is a recurring practice or a one-time adjustment.