Business Context and Reporting Period
Company: Runway Growth Credit Fund Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarterly period ended September 30, 2019 (Form 10-Q)
Overview: The Company is an externally managed, non-diversified closed-end investment company focused on lending to and investing in small, fast-growing U.S. companies, primarily in technology, life sciences, and healthcare sectors. As of September 30, 2019, the Company held investments in 25 portfolio companies and one U.S. Treasury Bill.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | Net Assets (Sep 30, 2019) |
|---|---|---|---|
| Total Investment Income | $11,834,485 | $40,380,803 | - |
| Net Investment Income | $7,504,743 | $26,948,778 | - |
| Net Increase in Net Assets from Operations | $4,721,354 | $19,171,066 | - |
| Net Asset Value (NAV) per Share | $14.52 | $14.52 | $295,070,551 |
| Total Investments at Fair Value | - | - | $417,709,795 |
| Debt Outstanding (Credit Facilities) | - | - | $65,000,000 |
| Cash and Cash Equivalents | - | - | $2,668,355 |
| Unfunded Loan Commitments | - | - | $35,875,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income for the nine months ended September 30, 2019, increased to $40.4 million from $13.3 million in the prior year period, driven by capital deployment and a larger investment portfolio.
- Expense Increase: Total operating expenses rose to $13.4 million (nine months 2019) from $5.9 million (nine months 2018). This increase was primarily due to higher incentive fees ($6.3 million vs. $0.5 million), increased overhead allocation, and professional fees associated with portfolio activity.
- Unrealized Depreciation: The Company recorded a net change in unrealized depreciation of $8.3 million for the nine months ended September 30, 2019, compared to $0.3 million in the prior year. This was primarily driven by a decrease in the fair value of the senior secured loan to Aginity, Inc.
- Portfolio Expansion: Total investments at fair value grew from $304.2 million at December 31, 2018, to $417.7 million at September 30, 2019. The portfolio now consists of 81.4% Senior Secured Term Loans, 4.1% Warrants, and 14.4% U.S. Treasury Bills.
Guidance, Outlook, Risks, and Unusual Items
- Asset Quality Concerns: As of September 30, 2019, the Company placed two loans to Aginity, Inc. (aggregate principal $8.6 million) on non-accrual status. The fair value of these loans was $4.4 million, representing a significant unrealized loss.
- LIBOR Transition Risk: The Company notes that 100% of its debt portfolio investments bear interest at variable rates based on LIBOR. The phase-out of LIBOR by the end of 2021 poses a risk to future interest income and may require renegotiation of loan agreements.
- Subsequent Events:
- Mobius Imaging Exit: On October 21, 2019, Mobius Imaging, LLC was sold to Stryker. The Company prepaid its $15.5 million loan and received $1.9 million in warrant termination proceeds, totaling $18.1 million.
- Capital Raise: On October 15, 2019, the Company closed a sale of 1,666,667 shares for $25 million under its Second Private Offering.
- Dividends: The Company declared dividends of $31.9 million for the nine months ended September 30, 2019. A special dividend declared on September 27, 2019, was paid on November 12, 2019.
Investor Verification Checklist
- Aginity, Inc. Exposure: Verify the current status of the Aginity, Inc. loans on non-accrual status and the potential for further write-downs or restructuring.
- LIBOR Hedging Strategy: Confirm management's specific plans to mitigate the risk of LIBOR phase-out on the variable-rate loan portfolio.
- Unfunded Commitments: Assess the liquidity required to fund the $35.9 million in unfunded loan commitments to portfolio companies.
- Valuation Methodology: Review the Level 3 fair value inputs (discount rates, volatility) used for the $357.7 million in private portfolio investments, particularly given the recent unrealized depreciation.
- Debt Covenants: Ensure compliance with the Credit Agreement covenants, specifically the tangible net worth and asset coverage ratio requirements, given the recent unrealized losses.