Business Context and Reporting Period
Company: CM Finance Inc (Investcorp Credit Management BDC, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2016
Business Overview: A closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940. The Company invests primarily in debt and related equity of privately held lower middle-market companies to fund acquisitions, growth, or refinancing.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2016 | Nine Months Ended Mar 31, 2016 | As of Mar 31, 2016 |
|---|---|---|---|
| Total Investment Income | $7.94 million | $27.77 million | — |
| Net Investment Income | $4.27 million | $15.45 million | — |
| Net Increase (Decrease) in Net Assets | $1.90 million | $(13.33) million | — |
| Net Asset Value (NAV) Per Share | — | — | $11.96 |
| Total Assets | — | — | $320.36 million |
| Total Liabilities | — | — | $156.80 million |
| Total Net Assets | — | — | $163.56 million |
| Notes Payable (Gross) | — | — | $141.52 million |
| Cash and Restricted Cash | — | — | $32.20 million |
| Asset Coverage Ratio | — | — | 2.16x |
Material Changes vs. Prior Comparable Period
- Net Asset Value Decline: NAV per share decreased from $14.41 as of June 30, 2015, to $11.96 as of March 31, 2016. This decline was driven primarily by a net change in unrealized depreciation of $29.07 million over the nine-month period.
- Investment Portfolio Valuation: The fair value of the investment portfolio decreased from $330.32 million (June 30, 2015) to $276.51 million (March 31, 2016). Significant declines in fair value were noted for investments in Bird Electric Enterprises, LLC, AAR Intermediate Holdings, LLC, and YRC Worldwide, Inc.
- Non-Accrual Status: Two investments were placed on non-accrual status as of March 31, 2016, contributing to a decrease in investment income for the quarter compared to the prior year.
- Debt Levels: Total Notes Payable decreased slightly from $150.85 million (June 30, 2015) to $141.52 million (March 31, 2016), primarily due to repayments on the revolving credit facility.
- Realized Gains/Losses: The Company recorded a net realized gain of $0.28 million for the nine months ended March 31, 2016, compared to a net realized loss of $1.31 million in the prior year period.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management attributes the decrease in net investment income for the quarter to two investments on non-accrual status. The significant unrealized depreciation is attributed to declines in the fair value of specific portfolio companies.
- Distributions: The Board declared a quarterly distribution of $0.3516 per share for the quarter ending June 30, 2016. The Company intends to maintain its status as a Regulated Investment Company (RIC) by distributing at least 90% of its taxable income.
- Fee Waivers: The Adviser has agreed to permanently waive portions of the incentive fee for 2016 to support an annualized dividend yield of 9.375% based on the IPO price. No incentive fees were incurred for the three months ended March 31, 2016.
- Risks and Contingencies:
- Credit Risk: The Company is exposed to credit risk due to its strategy of investing in leveraged companies. Two investments are currently on non-accrual.
- Valuation Risk: All investments are classified as Level 3 fair value measurements, relying on unobservable inputs and management judgment, which introduces subjectivity.
- Liquidity: The Company relies on its Financing Facility (Term and Revolving) with UBS. The Revolving Facility expires on December 4, 2016.
- Unusual Items: The Company recorded a net change in unrealized depreciation of $29.07 million for the nine months ended March 31, 2016, which significantly impacted the net decrease in net assets.
Important Facts for Investor Verification
- Non-Accrual Assets: Verify the specific identity and recovery prospects of the two investments placed on non-accrual status (AAR Intermediate Holdings, LLC and Bird Electric Enterprises, LLC are noted in the schedule as non-accrual).
- Derivative Exposure: Confirm the impact of the Total Return Swaps (TRS) and embedded derivatives, which had a net fair value of zero but significant gross exposure ($8.75 million assets/liabilities each).
- Debt Maturity: Note the maturity of the $50.0 million Revolving Financing facility on December 4, 2016, and the Company's ability to refinance or repay.
- NAV vs. Market Price: The market value per share at the end of the period was $8.40, trading at a significant discount to the NAV of $11.96.
- Fee Waiver Sustainability: Assess the long-term sustainability of the dividend yield given the permanent fee waivers and the current unrealized losses in the portfolio.