Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company or BDC)
Reporting Period: Quarter and nine months ended September 30, 2019
Overview: The Company is an externally managed, non-diversified closed-end management investment company. Its primary objective is to generate current income through debt and equity investments in lower middle market (LMM) and middle market companies. The Company is managed by HMS Adviser LP, with MSC Adviser I, LLC (a subsidiary of Main Street Capital Corporation) serving as the sub-adviser.
Key Financial Metrics
| Metric | Q3 2019 (3 Months) | Q3 2018 (3 Months) | YTD 2019 (9 Months) | YTD 2018 (9 Months) |
|---|---|---|---|---|
| Total Investment Income | $27.8 million | $30.2 million | $85.6 million | $81.1 million |
| Net Investment Income | $13.9 million | $17.1 million | $41.7 million | $43.5 million |
| Net Realized Gain (Loss) | $(11.1) million | $(8.2) million | $(18.0) million | $(15.9) million |
| Net Change in Unrealized Appreciation | $2.9 million | $14.9 million | $12.7 million | $24.0 million |
| Net Increase in Net Assets from Operations | $5.8 million | $23.8 million | $36.4 million | $51.6 million |
| Earnings Per Share (Basic & Diluted) | $0.07 | $0.30 | $0.46 | $0.65 |
| Net Asset Value (NAV) per Share | $7.90 | $8.28 | $7.90 | $8.28 |
| Total Portfolio Investments (Fair Value) | $1,053.5 million (as of Sept 30, 2019) | |||
| Cash and Cash Equivalents | $21.1 million (as of Sept 30, 2019) | |||
| Total Borrowings (Credit Facilities) | $458.0 million (as of Sept 30, 2019) |
Material Changes vs. Prior Period
- Investment Income: For the nine months ended September 30, 2019, total investment income increased by approximately $4.5 million compared to the prior year period. This was driven by a $3.2 million increase in dividend income (due to improved performance of LMM equity investments) and a $2.2 million increase in interest income.
- Expenses: Total expenses (net of waivers) increased by approximately $6.3 million year-over-year for the nine-month period. This increase was primarily due to a $3.9 million rise in incentive fees (which were not waived in 2019, whereas $2.5 million was waived in 2018) and a $2.1 million increase in interest expense due to higher average borrowings.
- Realized Losses: Net realized losses increased to $18.0 million for the nine months ended September 30, 2019, compared to $15.9 million in the prior year period.
- Unrealized Appreciation: Net unrealized appreciation decreased significantly to $12.7 million for the nine months ended September 30, 2019, compared to $24.0 million in the prior year period.
- Portfolio Composition: The portfolio decreased by approximately $65.4 million on a cost basis during the nine months ended September 30, 2019, due to repayments and sales exceeding new investments.
Guidance, Outlook, Risks, and Unusual Items
- Fee Waivers: For the nine months ended September 30, 2019, the Advisers earned but did not waive a subordinated incentive fee on income of $3.9 million. In contrast, for the same period in 2018, the Advisers waived $2.5 million of such fees. The Advisers also waived internal administrative services expenses of approximately $2.2 million for the nine months ended September 30, 2019.
- Non-Accrual Status: As of September 30, 2019, seven debt investments in four portfolio companies were on non-accrual status, representing approximately 1.4% of the total investment portfolio at fair value. This is an increase from 0.4% as of December 31, 2018.
- Liquidity and Capital Resources: The Company had $112.0 million available under its Deutsche Bank Credit Facility and no availability under its TIAA Credit Facility as of September 30, 2019. The Company maintains sufficient cash and available borrowings to fund its $39.7 million in outstanding unfunded commitments.
- Distributions: The Company declared distributions of $0.17 per share for the quarter ended September 30, 2019. Distributions may exceed earnings and may include a return of capital for tax purposes.
- Market Risk: The Company is subject to interest rate risk. Approximately 89.3% of its debt investments contain floating interest rates. A hypothetical 100 basis point increase in interest rates would result in a net increase in net investment income of approximately $3.7 million.
- HMS-ORIX Liquidation: The Company's investment in HMS-ORIX SLF LLC was fully liquidated on September 26, 2019, following a merger of its loan portfolio into Mariner CLO 7, Ltd.
Important Facts for Investor Verification
- Asset Coverage Ratio: Verify the Company's compliance with the 200% asset coverage requirement under the 1940 Act, which was 235% as of September 30, 2019.
- Fee Waiver Reimbursement: Monitor the potential for reimbursement of previously waived fees to the Advisers, which is subject to board approval and specific operating expense ratio and distribution rate conditions.
- Non-Accrual Investments: Review the specific portfolio companies on non-accrual status and the Company's strategy for managing these credit deteriorations.
- Distribution Sources: Confirm the sources of distributions, as a portion may be funded from sources other than net realized income, including borrowings and fee waivers.
- Portfolio Yield: Note the weighted average effective annual yield on the portfolio decreased slightly to 9.0% as of September 30, 2019, from 9.5% as of December 31, 2018.