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 December 31, 2016 (unaudited).
Investment Strategy: The Company invests primarily in debt and related equity of privately held lower 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 Dec 31, 2016 | Six Months Ended Dec 31, 2016 |
|---|---|---|
| Total Investment Income | $9.15 million | $16.74 million |
| Net Investment Income | $4.87 million | $8.84 million |
| Net Increase in Net Assets from Operations | $8.55 million | $12.86 million |
| Net Asset Value (NAV) Per Share | $12.13 | $12.13 |
| Total Assets | $307.96 million | $307.96 million |
| Total Liabilities | $141.91 million | $141.91 million |
| Notes Payable (Net) | $115.55 million | $115.55 million |
| Cash and Restricted Cash | $54.36 million | $54.36 million |
| Portfolio Fair Value | $245.40 million | $245.40 million |
Material Changes vs. Prior Period
- Investment Income: Decreased to $9.15 million for the three months ended Dec 31, 2016, from $9.96 million in the prior year period. This decline was primarily due to the repayment of portfolio companies with higher yields and two investments placed on non-accrual status.
- Net Investment Income: Decreased to $4.87 million (Q4 2016) from $6.32 million (Q4 2015), driven by lower investment income and an increase in income-based incentive fees.
- Unrealized Gains/Losses: The Company recorded a net change in unrealized appreciation of $3.64 million for the quarter, a significant improvement from the $21.82 million unrealized depreciation recorded in the same period in 2015.
- Debt Structure: The $50 million UBS Revolving Financing expired on December 5, 2016. Concurrently, the Company entered into a new $50 million Senior Secured Revolving Credit Facility with Citibank, with $14.33 million outstanding as of period end.
- Portfolio Composition: The portfolio decreased in fair value from $272.1 million (June 30, 2016) to $245.4 million (Dec 31, 2016), reflecting sales and repayments exceeding new originations.
Guidance, Outlook, and Risks
- Dividend Policy: The Company declared a quarterly distribution of $0.3516 per share for the fourth quarter of 2016. The Adviser has agreed to waive fees to support an annualized dividend yield of 9.375% for 2016.
- Liquidity: As of December 31, 2016, the Company held $26.6 million in unrestricted cash, $27.8 million in restricted cash, and had approximately $35.7 million of remaining capacity under the new Citibank revolving facility.
- Asset Quality: Two investments were on non-accrual status, representing approximately 5.1% of the portfolio at fair value. The weighted average total yield of debt and income-producing securities was 9.79%.
- Market Risk: 95.4% of debt investments bear floating interest rates. A 1.00% increase in interest rates is estimated to increase net interest income by approximately 5.8%.
- Subsequent Events: Between December 31, 2016, and February 6, 2017, the Company invested $22.3 million in new and existing portfolio companies. A restructuring of U.S. Well Services resulted in a $2.9 million reduction of principal.
Investor Verification Checklist
- Non-Accrual Status: Verify the specific portfolio companies placed on non-accrual and the likelihood of recovery or principal loss.
- Fee Waivers: Confirm the duration and terms of the Adviser's fee waivers intended to support the dividend yield.
- Financing Covenants: Review the asset coverage ratio (2.43x) and covenants in the new Citibank facility to ensure compliance for future distributions.
- Valuation Methodology: Note that 100% of the portfolio is classified as Level 3 (unobservable inputs); review the sensitivity of fair values to changes in market yields.
- Unfunded Commitments: Confirm the $752,475 unfunded commitment to AAR Intermediate Holdings, LLC, and the Company's liquidity to meet it.