Business Context and Reporting Period
Company: Investcorp Credit Management BDC, Inc. (ICMB)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended March 31, 2020
Business Overview: ICMB is a closed-end, externally managed business development company (BDC) regulated under the Investment Company Act of 1940. It invests primarily in debt and related equity of privately held middle-market companies. The company changed its name from CM Finance Inc. in August 2019 following an acquisition of its investment adviser by Investcorp.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2020 | Nine Months Ended Mar 31, 2020 | Net Assets (Mar 31, 2020) |
|---|---|---|---|
| Total Investment Income | $8.83 million | $26.82 million | $113.05 million |
| Net Investment Income | $3.44 million | $10.73 million | |
| Net Realized & Unrealized Gain/(Loss) | ($27.69 million) | ($32.92 million) | |
| Net Increase/(Decrease) in Net Assets | ($24.24 million) | ($22.18 million) | |
| Net Asset Value (NAV) Per Share | $8.15 | $8.15 | Debt Outstanding: $185.05 million |
| Earnings Per Share (Basic/Diluted) | ($1.76) | ($1.62) | Asset Coverage Ratio: 1.61x |
| Distributions Per Share | $0.25 | $0.75 | Cash & Restricted Cash: $32.11 million |
Material Changes vs. Prior Period
- Portfolio Valuation: Total investments at fair value decreased to $274.9 million from $306.4 million at June 30, 2019. This decline was driven primarily by a net unrealized depreciation of $20.0 million for the quarter and $25.3 million for the nine-month period.
- COVID-19 Impact: Management attributed the significant unrealized losses to widening credit spreads and market volatility caused by the COVID-19 pandemic. Specific portfolio companies negatively impacted included 1888 Industrial Services, 4L Technologies, Bioplan USA, and Fusion Connect.
- Realized Losses: Net realized losses were $7.7 million for the quarter, primarily due to the restructuring of Fusion Connect, Inc. and 4L Technologies, Inc. This compares to $22.6 million in realized losses for the same period in 2019 (driven by a write-off of Trident USA Health Services).
- Expense Growth: Total expenses increased to $5.45 million for the quarter (from $5.32 million in 2019) and $16.09 million for the nine months (from $15.74 million in 2019), largely due to increased interest expense on the 2023 Notes.
- NAV Decline: NAV per share dropped to $8.15 from $10.51 at the end of the prior fiscal year (June 30, 2019).
Guidance, Outlook, Risks, and Unusual Items
- Dividend Reduction: On May 7, 2020, the Board declared a reduced distribution of $0.15 per share for the quarter ending June 30, 2020, plus a supplemental distribution of $0.03 per share. This is a significant reduction from the $0.25 per share quarterly distribution maintained in prior periods.
- Debt Management: The company decided not to exercise an option to increase its Term Financing by $53.0 million. Instead, on April 15, 2020, it repaid $20.0 million of the Term Financing.
- Share Repurchase Program: The $5.0 million share repurchase program expired on May 1, 2020. The company repurchased 84,841 shares for a total cost of $748,709 during the program's life.
- Risk Factors: The filing highlights severe risks related to the COVID-19 pandemic, including potential borrower defaults, increased difficulty in refinancing, and further declines in asset valuations. The company also notes risks associated with the phase-out of LIBOR by the end of 2021.
- Unusual Items: The company recorded significant unrealized depreciation due to market-wide credit spread widening. Additionally, the company waived $63,797 of base management fees and $336,971 of income-based incentive fees for the nine-month period.
Investor Verification Checklist
- Dividend Sustainability: Verify the company's ability to maintain distributions given the reduction to $0.15 per share and the significant unrealized losses in the portfolio.
- Portfolio Credit Quality: Review the specific status of high-concentration portfolio companies (e.g., 1888 Industrial Services, Fusion Connect) and their exposure to the energy and hospitality sectors.
- Liquidity Position: Confirm the adequacy of the $32.1 million cash balance (including restricted cash) against upcoming debt maturities and unfunded commitments of $8.9 million.
- NAV vs. Market Price: Note the widening discount between the NAV of $8.15 and the market price of $2.46 (as of period end), reflecting market sentiment regarding the BDC sector and pandemic risks.
- LIBOR Transition: Assess the impact of the impending LIBOR phase-out on the company's floating-rate debt portfolio and financing costs.