Business Context and Reporting Period
Company: Investcorp Credit Management BDC, Inc. (ICMB)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2022
Business Overview: ICMB is a closed-end, externally managed business development company (BDC) regulated under the Investment Company Act of 1940. Its primary objective is to maximize total return through current income and capital appreciation by investing in debt and related equity of privately held middle-market companies. The company is advised by CM Investment Partners LLC, a subsidiary of Investcorp.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 |
|---|---|---|
| Total Assets | $253.45 million | $246.39 million |
| Total Investments (Fair Value) | $239.18 million | $245.32 million |
| Net Assets | $93.01 million | $100.67 million |
| Net Asset Value (NAV) Per Share | $6.47 | $7.00 |
| Total Investment Income | $6.30 million | $6.48 million |
| Net Investment Income | $2.34 million | $2.53 million |
| Net Increase in Net Assets from Operations | $1.66 million | $3.29 million |
| Earnings Per Share (Basic/Diluted) | $0.12 | $0.23 |
| Total Debt Outstanding | $154.50 million | $164.57 million |
| Asset Coverage Ratio | 1.60x | 1.61x |
| Cash and Restricted Cash | $7.44 million | $16.32 million |
Material Changes vs. Prior Period
- Investment Income Decline: Total investment income decreased by approximately 2.8% to $6.30 million, primarily due to a reduction in assets under management, partially offset by increased payment-in-kind (PIK) interest and other fee income.
- Net Investment Income Reduction: Net investment income fell to $2.34 million from $2.53 million year-over-year. This was driven by lower investment income and higher interest expenses associated with the Capital One Revolving Financing, though partially mitigated by a write-off of deferred income-based incentive fees.
- Unrealized Depreciation: The company recorded a net change in unrealized depreciation of $678,597 for the quarter, compared to a negligible depreciation of $2,855 in the prior year. This decline was largely attributed to decreases in the value of investments in Bioplan USA, Inc. and Arborworks Acquisition LLC.
- Debt Utilization: Borrowings under the Capital One Revolving Financing increased to $89.5 million from $84.0 million at the end of the prior fiscal quarter. Total borrowings decreased year-over-year as the company repaid its previous Term Financing and Revolving Financing with UBS in late 2021.
- Portfolio Composition: The portfolio consists of 37 portfolio companies. First lien debt investments represent 91.79% of the portfolio at fair value, while equity, warrants, and other investments represent 8.21%.
Guidance, Outlook, and Risks
- Dividend Declaration: On November 11, 2022, the Board declared a distribution of $0.13 per share for the quarter ended December 31, 2022, plus a supplemental distribution of $0.02 per share, totaling $0.15 per share. This is payable on January 10, 2023.
- Liquidity Position: As of September 30, 2022, the company held $1.0 million in unrestricted cash, $6.5 million in restricted cash, and had approximately $25.5 million of remaining capacity under its Capital One Revolving Financing. Management believes current cash and anticipated cash flows are adequate for daily operations and unfunded commitments.
- Asset Quality: The company utilizes a five-level investment rating system. As of September 30, 2022, 79.1% of the portfolio (by fair value) was rated 1 or 2 (performing above or within expectations). Investments rated 4 or 5 (workout status) represented 3.8% of the portfolio.
- Interest Rate Risk: Approximately 99.6% of the debt portfolio bears floating interest rates. Management estimates that a 1.00% increase in interest rates would increase net interest income by approximately 8.71%, assuming current floors and financing arrangements remain constant.
- COVID-19 and Economic Environment: The company continues to monitor the impact of the pandemic, inflation, and rising interest rates on portfolio companies. There is a risk that certain portfolio companies may experience financial distress or default, potentially leading to reduced interest payments or permanent impairments.
Investor Verification Checklist
- Fee Waivers: Verify the sustainability of the $94,146 base management fee waiver and the $147,145 write-off of deferred income-based incentive fees, as these are voluntary and not guaranteed in future periods.
- Unrealized Losses: Review the specific valuation methodologies and inputs used for the significant unrealized depreciation recorded in Bioplan USA, Inc. and Arborworks Acquisition LLC.
- Debt Covenants: Confirm compliance with the 150% asset coverage ratio requirement under the 1940 Act, which stood at 160.2% as of September 30, 2022.
- Unfunded Commitments: Assess the $11.1 million in unfunded commitments to portfolio companies and the company's ability to fund these from existing liquidity or borrowing capacity.
- Tax Status: Monitor the company's ability to maintain Regulated Investment Company (RIC) status by distributing at least 90% of its investment company taxable income to avoid corporate-level taxation.