Business Context and Reporting Period
Company: CM Finance Inc (CMFN)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Business Overview: CM Finance Inc 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 to fund organic growth, acquisitions, and refinancings. The company is advised by CM Investment Partners LLC.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 |
|---|---|---|
| Total Assets | $311.2 million | $296.0 million (June 30, 2017) |
| Net Assets | $169.7 million | $169.9 million (June 30, 2017) |
| Net Asset Value (NAV) Per Share | $12.39 | $12.41 (June 30, 2017) |
| Total Investment Income | $6.73 million | $7.58 million |
| Net Investment Income | $3.02 million | $3.97 million |
| Net Increase in Net Assets from Operations | $3.14 million | $4.30 million |
| Net Investment Income Per Share | $0.22 | $0.29 |
| Total Debt Outstanding | $129.3 million | $102.0 million (June 30, 2017) |
| Cash and Restricted Cash | $30.7 million | $33.3 million (June 30, 2017) |
| Asset Coverage Ratio | 2.31x | 2.39x (Q3 2016) |
Material Changes vs. Prior Period
- Revenue Decline: Total investment income decreased by approximately 11% to $6.73 million from $7.58 million in the prior year quarter. This was primarily due to the repayment of portfolio companies with higher yields and a higher percentage of uninvested cash during the quarter.
- Expense Increase: Total expenses rose to $3.71 million from $3.61 million, driven largely by increased interest expenses related to new borrowings.
- Net Income Reduction: Net investment income fell to $3.02 million from $3.97 million year-over-year.
- Realized Losses: The company recorded a net realized loss of $7.38 million, primarily attributed to the restructuring of Bird Electric Enterprises, LLC. This contrasts with a $8.03 million realized loss in the prior year quarter.
- Unrealized Gains: A net change in unrealized appreciation of $7.50 million was recorded, offsetting the realized losses and contributing to a net increase in net assets from operations of $3.14 million.
- Debt Utilization: The company drew $27.3 million on its Citi Revolving Credit Facility, increasing total debt from $102.0 million at the end of the previous quarter to $129.3 million.
Guidance, Outlook, and Risks
- Portfolio Activity: During the quarter, the company invested approximately $46.9 million in three new portfolio companies. As of September 30, 2017, the portfolio consisted of 23 companies with a weighted average yield of 10.67% on debt and income-producing securities.
- Liquidity: The company maintains $14.5 million in unrestricted cash and $16.1 million in restricted cash. It has approximately $22.7 million of remaining capacity under its Citi Revolving Financing.
- Distributions: The Board declared a quarterly distribution of $0.25 per share for the quarter ended September 30, 2017. A subsequent distribution of $0.25 per share was declared on November 7, 2017, for the quarter ended December 31, 2017.
- Asset Quality: One investment (Bird Electric Enterprises, LLC) was on non-accrual status, representing approximately 2.8% of the portfolio at fair value. The majority of the portfolio (84.9%) held an Investment Rating of 2 (performing within expectations).
- Risks: Key risks include interest rate fluctuations (91.7% of debt investments are floating rate), credit risk associated with leveraged middle-market companies, and the ability to maintain Regulated Investment Company (RIC) status to avoid corporate-level taxation.
Investor Verification Checklist
- Debt Covenants: Verify the impact of the increased debt load ($129.3M) on the Asset Coverage Ratio (2.31x) and compliance with BDC leverage limits.
- Restructuring Impact: Assess the long-term implications of the Bird Electric Enterprises, LLC restructuring on future cash flows and realized losses.
- Yield Sustainability: Confirm the weighted average yield of 10.67% is sustainable given the repayment of higher-yielding assets and the current interest rate environment.
- Unfunded Commitments: Review the $2.3 million in unfunded commitments and the company's liquidity position to meet these obligations.
- Fee Waivers: Note that the Adviser waived incentive fees for 2016 to support dividend yield but has not contractually agreed to waive fees for 2017 or thereafter.