Business Context and Reporting Period
Company: CM Finance Inc (CMFN), a closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940.
Reporting Period: Quarterly report (Form 10-Q) for the period ended March 31, 2019.
Investment Strategy: The Company invests primarily in debt and related equity of privately held middle-market companies, focusing on unitranche, first lien, and second lien loans to fund acquisitions, growth, or refinancing.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2019 | Nine Months Ended Mar 31, 2019 |
|---|---|---|
| Total Investment Income | $8.72 million | $26.28 million |
| Net Investment Income | $3.40 million | $10.53 million |
| Net Realized Gain/(Loss) | ($22.55 million) | ($22.74 million) |
| Net Change in Unrealized Appreciation | $17.79 million | $2.89 million |
| Net Increase/(Decrease) in Net Assets | ($1.36 million) | ($9.31 million) |
| Earnings Per Share (Basic/Diluted) | ($0.10) | ($0.68) |
| Net Asset Value (NAV) Per Share | $11.14 | $11.14 |
| Total Assets | $319.58 million | $319.58 million |
| Total Liabilities | $167.90 million | $167.90 million |
| Total Net Assets | $151.69 million | $151.69 million |
| Cash and Restricted Cash | $10.67 million | $10.67 million |
| Notes Payable (Gross) | $140.50 million | $140.50 million |
| Asset Coverage Ratio | 2.08x | 2.08x |
Material Changes vs. Prior Comparable Period
- Net Income Decline: The Company reported a net decrease in net assets of $1.36 million for the three months ended March 31, 2019, compared to a net increase of $4.09 million in the same period in 2018. This was primarily driven by a significant net realized loss of $22.55 million in the current quarter versus a loss of only $0.24 million in the prior year.
- Realized Losses: The substantial realized loss in the current period was primarily due to the write-off of the investment in Trident USA Health Services, LLC.
- Unrealized Gains: Conversely, the Company recorded a net change in unrealized appreciation of $17.79 million for the quarter, compared to $0.60 million in the prior year, largely offsetting the realized loss due to the write-off of Trident USA Health Services, LLC and accretion on certain investments.
- Expense Increase: Total expenses increased to $5.68 million (net of waivers: $5.32 million) for the three months ended March 31, 2019, from $4.94 million in the prior year, driven by higher interest expenses due to increased LIBOR rates and interest payments on the 2023 Notes.
- Portfolio Composition: The portfolio shifted from 52.1% first lien and 43.3% second lien investments at June 30, 2018, to 75.9% first lien and 19.9% second lien investments at March 31, 2019.
Guidance, Outlook, and Risks
- Dividend Policy: The Company declared a quarterly distribution of $0.25 per share for the quarter ended March 31, 2019. On May 1, 2019, the Board declared a distribution of $0.25 per share for the quarter ended June 30, 2019.
- Share Repurchase Program: The Board extended the discretionary repurchase program of up to $5.0 million of common stock until May 1, 2020. During the nine months ended March 31, 2019, the Company repurchased 42,214 shares for approximately $358,531.
- Asset Coverage: The Company's asset coverage ratio was 2.08x as of March 31, 2019, well above the 150% requirement under the 1940 Act (modified by the Small Business Credit Availability Act).
- Key Risks:
- Credit Risk: Exposure to the failure of portfolio companies to make payments. One investment, Fusion Connect Inc., was on non-accrual status as of March 31, 2019.
- Interest Rate Risk: 94.6% of debt investments bear floating rates. A 1.00% increase in interest rates would increase net interest income by approximately 8.9%.
- Liquidity: The Company relies on cash flows from operations, borrowings under its $50 million revolving facility (with $46 million capacity remaining), and potential future offerings to meet liquidity needs.
- Unusual Items: The $22.55 million realized loss was an unusual item driven by the specific write-off of Trident USA Health Services, LLC.
Investor Verification Checklist
- Trident USA Health Services Write-off: Verify the details and impact of the $22.55 million realized loss attributed to the write-off of Trident USA Health Services, LLC.
- Non-Accrual Status: Review the status and valuation of Fusion Connect Inc., the only investment on non-accrual status (approx. 3.08% of portfolio).
- Debt Maturities: Confirm the repayment schedule for the $102 million Term Financing (due Dec 2020) and the $34.5 million 2023 Notes.
- Fee Waivers: Note that the Adviser waived $362,478 of incentive fees for the quarter; verify if this waiver is permanent or temporary.
- Unfunded Commitments: Review the $0.88 million in unfunded commitments to portfolio companies (1888 Industrial Services and PR Wireless).