Business Context and Reporting Period
HMS Income Fund, Inc. (the "Company") is an externally managed, non-diversified closed-end investment company operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The Company invests primarily in debt and equity securities of lower middle market and middle market companies. This report covers the quarterly period ended March 31, 2016.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net Investment Income | $12.24 million | $6.33 million |
| Net Increase (Decrease) in Net Assets from Operations | ($2.67 million) | $10.19 million |
| Net Asset Value (NAV) per Share | $7.67 | $8.57 |
| Total Portfolio Investments (Fair Value) | $857.83 million | $659.87 million |
| Total Assets | $904.36 million | $683.87 million |
| Total Liabilities | $408.68 million | $331.39 million |
| Notes Payable (Debt) | $395.00 million | $316.86 million |
| Cash and Cash Equivalents | $20.51 million | $23.91 million |
| Weighted Average Shares Outstanding | 63.23 million | 36.27 million |
| Distributions Declared per Share | $0.17 | $0.17 |
Material Changes vs. Prior Period
- Operating Results: The Company reported a net decrease in net assets from operations of $2.67 million for Q1 2016, compared to a net increase of $10.19 million in Q1 2015. This decline was primarily driven by net unrealized depreciation of $14.26 million, attributed to broad price declines in high-yield bond and leveraged loan markets and the impact of declining oil prices on the energy sector.
- Investment Income: Total interest, fee, and dividend income increased to $21.26 million from $11.79 million year-over-year, reflecting portfolio growth from capital raises and increased borrowings.
- Expenses: Total expenses (net of waivers) rose to $9.02 million from $5.47 million. Increases were driven by higher management fees ($4.99 million vs. $3.37 million) and interest expense ($3.71 million vs. $1.98 million) due to higher average borrowings ($387.5 million vs. $223.4 million).
- Portfolio Composition: The portfolio grew to $857.83 million at fair value. The weighted average effective yield decreased slightly to 8.2% from 8.5% in the prior year.
- Asset Quality: As of March 31, 2016, three debt investments in two portfolio companies were on non-accrual status, representing approximately 0.2% of the total portfolio at fair value.
Guidance, Outlook, and Risks
- Capital Raising: The Company's initial offering terminated in December 2015. A new registration statement became effective in January 2016, allowing for the sale of up to $1.5 billion in shares. As of March 31, 2016, approximately $20.6 million had been raised under this new offering.
- Distributions: The Company declared a distribution of $0.17 per share for the quarter. Distributions are calculated daily at a rate of $0.00191781 per share. The Company may fund distributions from sources other than net realized income, including borrowings and offering proceeds.
- Fee Waivers: The Advisers waived subordinated incentive fees of $493,000 and administrative services expenses of $533,000 for the quarter. These waivers are subject to potential reimbursement in future periods if operating expense ratios and distribution rates meet specific thresholds.
- Market Risks: The Company is exposed to interest rate risk, credit risk, and liquidity risk. Approximately 85.3% of debt investments contain floating interest rates, many with floors between 1.0% and 1.5%. The Company has not entered into interest rate hedging arrangements.
- Subsequent Events: Between April 1 and May 12, 2016, the Company raised an additional $15.5 million and increased its public offering price to $8.80 per share.
Investor Verification Checklist
- Non-Accrual Status: Verify the specific portfolio companies on non-accrual status (Energy & Exploration Partners, LLC and Clarius BIGS, LLC) and the Company's recovery strategy.
- Unrealized Depreciation: Review the specific drivers of the $14.26 million unrealized loss, particularly the exposure to the oil and gas sector.
- Fee Waiver Reimbursement: Monitor future quarters for potential reimbursement of the $493,000 incentive fee waiver and $533,000 administrative expense waiver.
- Asset Coverage Ratio: Confirm the Company maintains the required 200% asset coverage ratio under the 1940 Act to sustain its current borrowing levels ($395 million outstanding).
- Offering Progress: Track the pace of capital raises under the new $1.5 billion registration statement to assess future investment deployment capabilities.