Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company or BDC)
Reporting Period: Quarterly period ended June 30, 2018 (Six months ended June 30, 2018)
Business Overview: The Company is an externally managed, non-diversified closed-end management investment company. Its primary objective is to generate current income through debt and equity investments in lower middle market (LMM) and middle market companies. The portfolio consists of secured and unsecured debt, equity, and warrants.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $54.1 million | $50.9 million |
| Net Investment Income | $29.6 million | $30.2 million |
| Net Realized Gain (Loss) | $(10.9) million | $2.6 million |
| Net Change in Unrealized Appreciation | $9.1 million | $(2.1) million |
| Net Increase in Net Assets from Operations | $27.8 million | $30.7 million |
| Net Asset Value (NAV) per Share | $8.15 | $8.22 |
| Total Portfolio Investments (Fair Value) | $1,103.8 million | $1,049.4 million |
| Weighted Average Effective Yield | 9.2% | 8.5% |
| Cash and Cash Equivalents | $37.6 million | $32.9 million |
| Total Credit Facilities Outstanding | $504.0 million | $430.0 million |
| Asset Coverage Ratio | 216% | 236% |
Material Changes vs. Prior Period
- Investment Income: Increased by approximately $3.2 million (6.3%) compared to the prior year period, driven by portfolio growth and an increase in the weighted average effective yield from 8.5% to 9.2%.
- Realized Gains/Losses: The Company reported a net realized loss of $10.9 million, a significant decline from the $2.6 million net realized gain in the prior year. This was primarily due to sales and repayments of investments.
- Unrealized Appreciation: Net change in unrealized appreciation improved significantly to $9.1 million (gain) from a $2.1 million loss in the prior year.
- Expenses: Total expenses (net of waivers) increased to $24.3 million from $20.6 million. This increase was primarily due to higher interest expense ($2.9 million increase) and higher base management fees ($1.0 million increase) resulting from increased average borrowings and gross assets.
- Leverage: Borrowings under credit facilities increased by $74.0 million to $504.0 million. The TIAA Credit Facility was fully utilized ($120.0 million), while $66.0 million remained available under the Deutsche Bank Credit Facility.
Guidance, Outlook, Risks, and Unusual Items
- Fee Waivers: The Advisers waived all subordinated incentive fees on income ($154,000 for the six months) and all internal administrative services expenses ($1.4 million). These waivers are conditional and subject to potential reimbursement within three years if certain performance metrics are met.
- Non-Accrual Status: As of June 30, 2018, six debt investments in four portfolio companies were on non-accrual status, representing approximately 0.8% of the total portfolio at fair value. This is an increase from four investments in three companies at the end of 2017.
- Distributions: The Company declared distributions of $0.18 per share for the quarter ended June 30, 2018. Distributions may be funded from sources other than net realized income, including borrowings and offering proceeds.
- Share Repurchases: The Company repurchased approximately 2.4 million shares for $19.6 million during the six-month period. A new tender offer for approximately 1.0 million shares was filed in July 2018.
- Market Risk: The Company is exposed to interest rate risk. Approximately 88.8% of the debt portfolio contains floating interest rates. A 100 basis point increase in interest rates would result in an estimated net increase in net investment income of $3.8 million.
- Unfunded Commitments: The Company had approximately $51.0 million in outstanding unfunded loan and capital commitments as of June 30, 2018.
Key Facts for Investor Verification
- NAV Stability: Verify the stability of the $8.15 NAV per share amidst the $10.9 million realized loss and the increase in leverage.
- Asset Coverage: Confirm the 216% asset coverage ratio remains compliant with the 1940 Act requirements (minimum 200%) given the high level of borrowings ($504 million).
- Non-Accrual Trends: Monitor the increase in non-accrual investments (from 0.2% to 0.8% of portfolio) and the specific portfolio companies involved (e.g., Cenveo, Clarius BIGS, Datacom, IronGate Energy Services).
- Fee Waiver Sustainability: Assess the likelihood of the Advisers continuing to waive incentive fees and administrative expenses, and the potential for future reimbursement of previously waived fees.
- Distribution Coverage: Verify the sources of distributions, noting that a portion may represent a return of capital rather than earnings from operations.