Business Context and Reporting Period
Company: Runway Growth Credit Fund Inc. (a Maryland corporation and Business Development Company)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2020
Overview: The Company is an externally managed, non-diversified closed-end investment company that invests primarily in senior secured term loans, preferred stock, and warrants of small, fast-growing private companies in the United States. The Company is managed by Runway Growth Capital LLC (RGC).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total Investment Income | $26,621,912 | $28,546,319 |
| Net Investment Income | $17,517,427 | $19,444,035 |
| Net Realized Gain (Loss) | ($6,513,405) | $493,308 |
| Net Unrealized Appreciation (Depreciation) | $4,317,510 | ($5,487,631) |
| Net Increase in Net Assets from Operations | $15,321,532 | $14,449,712 |
| Net Asset Value (NAV) per Share | $14.41 | $14.76 |
| Total Net Assets | $388,254,058 | $292,336,240 |
| Cash and Cash Equivalents | $3,005,639 | $14,326,032 |
| Debt Outstanding (Credit Facilities) | $25,000,000 | $61,000,000 |
| Reverse Repurchase Agreements | $44,773,302 | $74,593,802 |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately 6.7% year-over-year. This was primarily due to a reduction in prepayment fees and end-of-term payments received, which management attributes to the disruption in capital markets and M&A activity caused by the COVID-19 pandemic.
- Realized Losses: The Company reported a net realized loss of $6.5 million for the six months ended June 30, 2020, compared to a gain of $0.5 million in the prior year. The loss was primarily driven by a write-down on the senior secured loan to Aginity, Inc.
- Unrealized Gains: Net unrealized appreciation increased by $4.3 million, contrasting with a depreciation of $5.5 million in the prior year. This improvement was driven by increases in the fair value of investments in MTBC, Inc. (preferred stock and warrants) and Hercules Capital, Inc. (common stock).
- Debt Reduction: Outstanding debt under the Credit Agreement decreased significantly from $61 million to $25 million as the Company repaid $83 million during the period.
- Cash Position: Cash and cash equivalents dropped from approximately $45.8 million to $3.0 million, largely due to the purchase of new portfolio investments ($100.5 million) and U.S. Treasury Bills ($95.0 million).
Guidance, Outlook, and Risks
- COVID-19 Impact: Management highlights that the pandemic has created material uncertainty regarding the fair value of portfolio investments. While valuations as of June 30, 2020, incorporated pandemic-related variables, future write-downs or unrealized losses are possible as the economic impact evolves.
- Asset Quality: As of June 30, 2020, three loans to Mojix, Inc. (aggregate fair value $9.6 million) were on non-accrual status. The Company notes that the pandemic has had limited impact on overall investment rankings to date, but monitoring is ongoing.
- LIBOR Transition: The Company faces interest rate risk related to the potential discontinuation of LIBOR after 2021. Most debt investments are variable-rate based on LIBOR or Prime. The transition to alternative reference rates (e.g., SOFR) may require renegotiation of terms and could impact net investment income.
- Dividends: The Company declared a dividend of $0.36 per share on August 5, 2020. Distributions are generally paid from income generated by the portfolio, but the Company may utilize spillover dividends or incur excise taxes to preserve cash if necessary.
- Recent Activity: Subsequent to the reporting period, the Company funded a $40 million investment in Porch.com, Inc. and received a $3 million prepayment from Ouster, Inc.
Investor Verification Checklist
- Non-Accrual Status: Verify the current status and recovery prospects of the Mojix, Inc. loans ($9.6 million fair value) which are on non-accrual.
- Valuation Sensitivity: Assess the sensitivity of Level 3 asset valuations (approx. $407 million) to changes in discount rates and credit spreads given the ongoing economic volatility.
- Liquidity Position: Confirm the Company's ability to meet unfunded loan commitments ($45.8 million) given the low cash balance ($3.0 million) and reliance on capital drawdowns or credit facility availability.
- LIBOR Exposure: Review the Company's specific transition plan for replacing LIBOR in its loan agreements and credit facilities post-2021.
- Realized Loss Drivers: Investigate the specific circumstances surrounding the realized loss on Aginity, Inc. to understand if it represents an isolated event or a broader trend in the portfolio.