Business Context and Reporting Period
Company: Investcorp Credit Management BDC, Inc. (formerly CM Finance Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: December 31, 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 senior secured first and second lien debt, unitranche loans, and mezzanine debt of privately held middle-market companies. On August 30, 2019, Investcorp Credit Management US LLC acquired a majority interest in the Company's adviser, and the Company changed its name.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2019 |
|---|---|---|
| Total Investment Income | $9.43 million | $17.99 million |
| Net Investment Income | $3.76 million | $7.29 million |
| Net Increase in Net Assets from Operations | $2.97 million | $2.06 million |
| Net Asset Value (NAV) Per Share | $10.15 | $10.15 |
| Total Assets | $339.27 million | $339.27 million |
| Total Debt (Notes Payable) | $173.38 million | $173.38 million |
| Cash and Restricted Cash | $26.13 million | $26.13 million |
| Asset Coverage Ratio | 1.80x | 1.80x |
Material Changes vs. Prior Period
- Investment Income: Increased to $9.43 million for the three months ended Dec 31, 2019, from $9.30 million in the prior year period, driven primarily by higher payment-in-kind (PIK) interest income ($1.45 million vs. $0.54 million).
- Expenses: Total expenses rose to $6.07 million (three months) from $5.58 million, largely due to increased interest expense on the 2023 Notes and higher professional fees.
- Unrealized Gains/Losses: The Company recorded a net unrealized depreciation of $0.81 million for the quarter, a significant improvement compared to the $13.18 million unrealized depreciation recorded in the same period in 2018.
- Debt Structure: The Company issued an additional $16.88 million in 6.125% Notes due 2023 during the period, increasing total notes payable from $165.5 million (June 30, 2019) to $173.4 million (Dec 31, 2019).
- Portfolio Composition: The portfolio consists of 35 portfolio companies. First lien investments represent 82.6% of the portfolio at fair value, while second lien investments represent 13.7%.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the increase in investment income was offset by higher expenses. The Company maintained its quarterly distribution of $0.25 per share.
- Outlook: The Company intends to continue investing in middle-market companies to maximize total return. It has $30.0 million of capacity remaining under its revolving credit facility and $7.6 million in unfunded commitments to portfolio companies.
- Risks and Contingencies:
- LIBOR Transition: The Company faces uncertainty regarding the phase-out of LIBOR by the end of 2021, which may require renegotiating credit agreements and could impact returns.
- Credit Quality: One investment, Fusion Connect, Inc., is on non-accrual status (approx. 2.5% of portfolio). Additionally, 3.6% of the portfolio is rated "5" (substantially below expectations, loss of principal expected) and 2.8% is rated "4" (substantially below expectations, loss of return expected).
- Liquidity: The Company relies on its financing facilities and cash flows from operations to meet liquidity needs, including debt service and distributions.
- Unusual Items: The Company waived $0.58 million in base management fees and $0.34 million in income-based incentive fees for the quarter.
Investor Verification Checklist
- Non-Accrual Status: Verify the status and potential recovery value of the Fusion Connect, Inc. investment, which is classified as non-accrual.
- LIBOR Exposure: Assess the impact of the LIBOR phase-out on the Company's floating-rate portfolio (96.9% of debt investments) and financing costs.
- Fee Waivers: Monitor the sustainability of management fee waivers, which reduced expenses by approximately $0.92 million for the quarter.
- Debt Maturities: Review the maturity schedule of the $122 million Term Financing (due Dec 2021) and the $51.4 million 2023 Notes.
- Unfunded Commitments: Confirm the Company's liquidity position relative to its $7.6 million in unfunded commitments to portfolio companies.