Business Context and Reporting Period
Company: CM Finance Inc (formerly CM Finance LLC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2014
Business Overview: CM Finance Inc is a closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940. The Company completed its Initial Public Offering (IPO) on February 5, 2014, and merged with CM Finance LLC. Its investment objective is to generate current income and capital appreciation primarily through senior secured loans, mezzanine debt, and equity investments in middle-market companies.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2014 | Nine Months Ended Mar 31, 2014 | As of Mar 31, 2014 |
|---|---|---|---|
| Total Investment Income | $5.53 million | $14.53 million | - |
| Net Investment Income | $4.15 million | $11.39 million | - |
| Net Increase in Net Assets from Operations | $5.70 million | $11.28 million | - |
| Earnings Per Share (Basic & Diluted) | $0.15 | $0.15 (period since IPO) | - |
| Net Asset Value (NAV) Per Share | - | - | $14.63 |
| Total Assets | - | - | $318.94 million |
| Total Net Assets | - | - | $199.94 million |
| Total Debt Outstanding | - | - | $111.52 million |
| Cash and Restricted Cash | - | - | $88.11 million |
| Asset Coverage Ratio | - | - | 2.79x |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio grew significantly from $119.2 million (fair value) as of June 30, 2013, to $227.0 million as of March 31, 2014. This expansion was driven by the IPO proceeds and new investment activity totaling approximately $190.1 million in the nine-month period.
- Revenue Increase: Total investment income for the nine months ended March 31, 2014, increased to $14.53 million from $3.53 million in the comparable prior period, reflecting the larger asset base.
- Expense Structure: Total expenses for the nine months ended March 31, 2014, rose to $3.60 million (gross) from $156,579 in the prior period. This increase is primarily due to interest expense on the Financing Facility and higher operating costs associated with the public company structure. However, the Investment Manager waived $455,934 in base management fees for the quarter to support dividend yield targets.
- Capital Structure: The Company transitioned from a private LLC to a public BDC. It issued 13,666,666 shares of common stock and utilized a $76.5 million term loan and a $50.0 million revolving credit facility (with $35.0 million drawn) to finance its portfolio.
Guidance, Outlook, and Risks
- Dividend Policy: The Company declared a quarterly dividend of $0.1812 per share for the period ended March 31, 2014. The Investment Manager has agreed to waive fees through 2016 to support annualized dividend yields of 9.0% (2014), 9.25% (2015), and 9.375% (2016).
- Tax Status: The Company intends to elect to be treated as a Regulated Investment Company (RIC) under Subchapter M of the Internal Revenue Code to avoid corporate-level taxes on distributed income.
- Portfolio Composition: As of March 31, 2014, the portfolio consisted of 19 companies. 89.1% of debt investments bore floating interest rates. The weighted average yield was approximately 10.17%.
- Asset Quality: All debt investments in the portfolio were rated "2" (performing within expectations) as of March 31, 2014. There were no investments rated 3, 4, or 5 (underperforming or in workout).
- Risks: Key risks include interest rate fluctuations (89.1% of the portfolio is floating rate), credit risk associated with leveraged middle-market companies, and liquidity risk due to the illiquid nature of private debt investments. The Company is also subject to BDC asset coverage requirements which may limit distributions.
Investor Verification Checklist
- Fee Waivers: Verify the duration and conditions of the management fee waivers intended to support the 9%+ dividend yield, as these are temporary measures.
- Debt Covenants: Review the terms of the $126.5 million Financing Facility (Term + Revolver) with UBS, specifically the asset coverage ratios and restrictions on distributions.
- Valuation Methodology: Confirm that the fair value of Level 3 assets (100% of the portfolio) is determined in good faith by the Board, as these valuations rely on unobservable inputs and models.
- Concentration Risk: Note that the largest single investment (Trident USA Health Services) represents 10% of net assets, and the top three industries (Telecommunications, Healthcare, Oil & Gas) comprise over 44% of the portfolio.
- PIK Interest: Assess the impact of Payment-in-Kind (PIK) interest, which was $1.23 million for the nine-month period, as this increases the loan balance without providing immediate cash flow.