Business Context and Reporting Period
Company: CM Finance Inc (CMFN), a closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940 and treated as a Regulated Investment Company (RIC) for tax purposes.
Reporting Period: Quarterly period ended March 31, 2018 (Nine months ended March 31, 2018).
Investment Strategy: Maximizes total return through current income and capital appreciation by investing in debt and related equity of privately held middle-market companies, primarily via unitranche, first lien, and second lien loans.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2018 | Nine Months Ended Mar 31, 2018 | As of Mar 31, 2018 |
|---|---|---|---|
| Total Investment Income | $8.67 million | $23.85 million | — |
| Net Investment Income | $3.73 million | $10.44 million | — |
| Net Increase in Net Assets from Operations | $4.09 million | $12.09 million | — |
| Net Asset Value (NAV) Per Share | — | — | $12.55 |
| Total Assets | — | — | $322.06 million |
| Total Net Assets | — | — | $171.79 million |
| Total Debt (Notes Payable) | — | — | $125.38 million |
| Asset Coverage Ratio | — | — | 2.37x |
| Cash and Restricted Cash | — | — | $9.35 million |
| Portfolio Yield (Weighted Avg) | — | — | 11.12% (Debt/Income Producing) |
Material Changes vs. Prior Comparable Period
- Investment Income: Increased to $8.67 million for the three months ended March 31, 2018, from $7.08 million in the prior year period, driven by the purchase of portfolio companies with higher yields.
- Expenses: Total expenses rose to $4.94 million (Q1 2018) from $3.70 million (Q1 2017), primarily due to higher income-based incentive fees and interest expenses related to increased borrowings.
- Net Investment Income: Increased to $3.73 million (Q1 2018) from $3.42 million (Q1 2017).
- Realized Gains/Losses: Net realized loss was $0.24 million for the three months ended March 31, 2018, compared to a $1.11 million loss in the prior year period.
- Unrealized Appreciation: Net change in unrealized appreciation was $0.60 million for the three months ended March 31, 2018, a decrease from $3.68 million in the prior year period.
- Debt Utilization: The company utilized its new $50 million revolving credit facility with UBS, with $23.38 million outstanding as of March 31, 2018, compared to no borrowings on the prior revolving facility at June 30, 2017.
Guidance, Outlook, and Risks
- Share Repurchase Program: On May 2, 2018, the Board authorized a discretionary share repurchase program of up to $5.0 million over 12 months.
- Leverage Capacity: The Board approved modified asset coverage requirements under the Small Business Credit Availability Act, allowing the asset coverage ratio to decrease from 200% to 150%, effective May 2, 2019.
- Distributions: A quarterly distribution of $0.25 per share was declared for the quarter ended March 31, 2018, payable July 5, 2018.
- Portfolio Quality: As of March 31, 2018, 85.05% of the portfolio was rated "2" (performing within expectations), while 9.03% was rated "3" (below expectations, closer monitoring required). No investments were on non-accrual status.
- Risks: Key risks include interest rate fluctuations (97.8% of debt investments are floating rate), credit risk of portfolio companies, and the impact of leverage on net asset value volatility.
Investor Verification Checklist
- Fee Waivers: Verify the status of the incentive fee waiver; the Adviser waived fees in 2016 to support a 9.375% yield but has not contractually agreed to waive fees for 2018 or thereafter.
- PIK Interest: Confirm the portion of investment income derived from Payment-In-Kind (PIK) interest, which is accrued but not yet received in cash ($1.32 million in Q1 2018).
- Unfunded Commitments: Review the $3.26 million in unfunded commitments to four portfolio companies and the company's liquidity to meet these obligations.
- Derivative Exposure: Assess the impact of Total Return Swaps (TRS) and embedded derivatives, which had a net fair value of zero but represent significant notional exposure ($152 million).
- Non-Qualifying Assets: Note that 14.51% of total assets were non-qualifying assets as of March 31, 2018, approaching the 30% limit for BDCs.