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 report (Form 10-Q) for the period ended December 31, 2017 (Six months ended December 31, 2017).
Investment Strategy: The Company invests primarily in debt and related equity of privately held middle-market companies, focusing on unitranche, first lien, and second lien loans to fund growth, acquisitions, and refinancings.
Key Financial Metrics
| Metric | Six Months Ended Dec 31, 2017 | Six Months Ended Dec 31, 2016 |
|---|---|---|
| Total Investment Income | $15,178,183 | $16,736,940 |
| Net Investment Income | $6,703,304 | $8,842,815 |
| Net Realized Gain/(Loss) | $(7,380,690) | $(7,988,787) |
| Net Change in Unrealized Appreciation | $8,672,249 | $12,005,027 |
| Net Increase in Net Assets from Operations | $7,994,863 | $12,859,055 |
| Net Asset Value (NAV) per Share | $12.50 | $12.13 |
| Total Assets | $299,085,220 | $296,033,878 (June 30, 2017) |
| Total Debt Outstanding | $119,830,000 | $116,332,649 |
| Cash and Restricted Cash | $7,120,984 | $33,262,874 (June 30, 2017) |
| Asset Coverage Ratio | 2.46x | 2.43x |
Material Changes vs. Prior Period
- Revenue Decline: Net investment income decreased by approximately 24% year-over-year (from $8.84M to $6.70M) primarily due to the repayment of portfolio companies with higher yields and an increase in interest expense related to borrowings.
- Portfolio Growth: The investment portfolio grew from $254.9 million at fair value as of June 30, 2017, to $286.5 million as of December 31, 2017. The Company made investments in five new portfolio companies totaling approximately $62.7 million during the six-month period.
- Debt Structure Changes: The Company terminated its $50 million Citi Revolving Financing on December 8, 2017. Concurrently, it entered into a new $50 million revolving facility with UBS (2017 UBS Revolving Financing), with $17.8 million drawn as of period end. The $102 million Term Financing with UBS remained fully drawn.
- Unrealized Gains: The Company recorded a net change in unrealized appreciation of $8.67 million, significantly offsetting a net realized loss of $7.38 million, resulting in a positive net increase in net assets from operations.
- Asset Quality: As of December 31, 2017, the Company had no investments on non-accrual status, an improvement from June 30, 2017, when one investment (3.00% of portfolio) was on non-accrual.
Guidance, Outlook, and Risks
- Dividend Policy: The Board declared a quarterly distribution of $0.25 per share for the quarter ended December 31, 2017, payable April 5, 2018. The Company intends to distribute between 90% and 100% of annual taxable income to maintain RIC status.
- Fee Waivers: The Adviser waived incentive fees for the calendar year ended December 31, 2016 to support a 9.375% annualized dividend yield. No contractual fee waivers are in place for 2017 or thereafter.
- Liquidity: The Company holds $5.4 million in unrestricted cash and has approximately $32.2 million of remaining capacity under the 2017 UBS Revolving Financing. Liquidity needs include debt service, unfunded commitments ($3.8 million), and distributions.
- Market Risk: 96.2% of debt investments bear floating interest rates. A 1.00% increase in interest rates is estimated to increase net interest income by approximately 8.1%.
- Valuation Risk: All investments are classified as Level 3 fair value measurements, relying on unobservable inputs and management judgment, which introduces subjectivity to the reported asset values.
Investor Verification Checklist
- Debt Covenants: Verify the impact of the new UBS revolving facility terms and the termination of the Citi facility on future borrowing capacity and interest rate exposure.
- Portfolio Concentration: Review the top 10 portfolio companies, which represent a significant portion of the portfolio (e.g., American Gaming Systems at 11.98% and Caelus Energy Alaska at 13.37%).
- Realized Losses: Investigate the drivers of the $7.38 million net realized loss to understand if it stems from distressed asset sales or strategic portfolio rebalancing.
- Unfunded Commitments: Confirm the Company's ability to fund the $3.8 million in unfunded commitments without diluting shareholders or breaching asset coverage ratios.
- NAV vs. Market Price: Note the significant discount of the market price ($8.15) to the NAV ($12.50) as of period end and monitor management's commentary on this spread.