Runway Growth Finance Corp. — Q2 2022 Form 10-Q
Business context and reporting period. Runway Growth Finance Corp. is an externally managed business development company (BDC) and regulated investment company (RIC), primarily lending to growth-oriented private companies. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods unless noted.
Key financial metrics
| Metric | Q2 2022 / June 30, 2022 | Comparable period / prior year-end |
|---|---|---|
| Investment income | $25.2 million for Q2; $44.4 million for six months | $18.7 million and $35.2 million, respectively, in 2021 |
| Net investment income (NII) | $14.5 million for Q2; $26.9 million for six months; $0.35 and $0.65 per share | $11.3 million and $22.8 million; $0.35 and $0.71 per share |
| Net result from operations | Q2 loss of $0.8 million ($0.02 per share); six-month income of $2.0 million ($0.05 per share) | Q2 income of $6.7 million ($0.21 per share); six-month income of $16.1 million ($0.50 per share) |
| Investment valuation changes | Q2 unrealized depreciation of $16.2 million; six-month depreciation of $25.4 million | Q2 depreciation of $0.03 million; six-month depreciation of $1.9 million |
| Assets, net assets and NAV | Total assets $818.4 million; net assets $579.4 million; NAV $14.14 per share | At Dec. 31, 2021: net assets $606.2 million; NAV $14.65 per share |
| Portfolio and liquidity | Investments at fair value $807.7 million; cash $6.8 million; unfunded loan commitments $274.3 million | Investments $729.5 million and cash $4.7 million at Dec. 31, 2021; commitments $187.0 million |
| Debt | $163.0 million credit-facility borrowings and $70.0 million 2026 Senior Notes; $233.0 million principal outstanding | $61.0 million and $20.0 million, respectively; $81.0 million total principal |
| Cash flow, six months | Operating cash used $73.0 million; financing cash provided $75.1 million; cash increased $2.1 million | Operating cash provided $22.4 million; financing cash used $36.3 million; cash decreased $14.0 million |
| Expenses and returns | Operating expenses $10.7 million in Q2 and $17.5 million for six months. Net operating expenses were 5.37% and 5.01% of average net assets, respectively | $7.4 million and $12.3 million; expense ratios 4.39% and 4.40% |
Portfolio indicators. Debt investments had a dollar-weighted annualized yield of 15.11% for Q2 and 13.44% for the first half, versus 15.25% and 14.11% in 2021. Senior secured term loans represented 94.0% of the investment portfolio by fair value. The largest industry exposures by fair value were application software (33.87% of net assets), healthcare technology (27.71%) and internet software and services (21.91%). The portfolio was valued at 139.4% of net assets, reflecting the use of leverage.
Material changes versus prior periods
- Investment income rose 34% in Q2 and 26% for the first half, primarily from a larger invested portfolio, deployment of capital, prepayments and higher market interest rates.
- NII increased in dollars, but six-month NII per share declined to $0.65 from $0.71. Operating expenses increased, including management and incentive fees, interest expense and debt financing fees.
- Investment fair value increased to $807.7 million from $729.5 million at year-end, while net unrealized depreciation and losses on control investments weighed on results. NAV per share declined from $14.65 to $14.14.
- The company funded $233.5 million of cash investment purchases in the first half and received $94.1 million from sales or repayments, excluding Treasury-bill activity. It expanded its portfolio to 43 companies from 39 at year-end.
- Principal debt outstanding increased by $152 million. The credit facility commitment was increased to $280 million in June, following an April amendment that raised the commitment to $225 million, extended the revolving period and maturity, and shifted the facility’s reference rate to SOFR.
- The company repurchased 413,492 shares for $5.3 million under its $25 million repurchase program. It paid $23.6 million of dividends in the first half; part was distributed through the dividend reinvestment plan.
Outlook, risks and unusual items
- No formal earnings or portfolio guidance was provided. Management said it expects continued use of the credit facility and potentially other debt financing to support portfolio growth. It stated that cash and credit availability were sufficient to cover unfunded commitments at June 30, 2022.
- Credit deterioration: Pivot3 Holdings was the sole non-accrual loan at June 30, with $19.2 million funded principal valued at $5.5 million. The loan represented 0.7% of the investment portfolio by fair value; the filing reports 0.95% of net assets in the MD&A. At year-end, six Mojix loans and one Pivot3 loan were on non-accrual. The company recorded substantial depreciation on Pivot3 and other portfolio holdings.
- Valuation and income quality: $793.9 million, or nearly all investments, were Level 3 fair value assets relying on significant unobservable inputs. PIK interest and dividend income represented 14.7% of Q2 investment income and 11.5% for the first half; this income is generally noncash until collected.
- Funding and leverage: Unfunded loan commitments were $274.3 million, up from $187.0 million at year-end and subject in some cases to borrower milestones. Borrowings are subject to borrowing-base limits, asset coverage and other covenants. The company reported no outstanding reverse repurchase agreements at June 30.
- Rate and market exposure: 98% of debt investments by cost bore floating rates, subject to floors. The filing estimates that a 200-basis-point rate increase could raise annual investment income by up to $15.3 million, while a decrease could lower it by up to $10.4 million. Actual results also depend on borrowing costs, rate floors, cash caps and portfolio performance. Management cited inflation, interest-rate volatility, economic conditions, COVID-19 and the Russia-Ukraine conflict as risks.
- Post-period financing and events: On July 28, 2022, the company issued $80.5 million of 7.50% notes due 2027, receiving $78.1 million net of underwriting fees before expenses. It declared a $0.33-per-share dividend and, on July 29, refinanced FiscalNote exposure, including a $10 million prepayment and a new $65 million investment. These events occurred after the reporting date.
- The filing reports no material legal proceedings and no material changes to previously disclosed risk factors other than the stated risk relating to Russia’s invasion of Ukraine. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Pivot3 can repay or otherwise support its carrying value, and the status and recovery prospects of other stressed or non-accrual investments.
- How the board’s Level 3 valuation assumptions, including discount rates and portfolio-company forecasts, support reported fair values and NAV.
- Whether available liquidity and borrowing-base capacity can meet the $274.3 million of unfunded commitments while maintaining credit-facility covenants.
- The cash collectability of PIK and deferred income, dividend coverage by recurring cash earnings, and the effect of incentive fees on distributable income.
- The effect of the $80.5 million 2027 notes and ongoing floating-rate borrowings on interest expense, leverage and asset coverage; confirm the facility’s SOFR terms and applicable rate.
- The filing’s portfolio and earnings sensitivity to higher rates, inflation, economic stress and concentration in technology-related borrowers.