Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarter and six months ended June 30, 2015
Business Model: Externally managed closed-end fund investing primarily in debt and equity securities of middle market and lower middle market companies. The fund is advised by HMS Adviser LP and sub-advised by MSC Adviser I, LLC (an affiliate of Main Street Capital Corporation).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|
| Total Portfolio Investments (Fair Value) | $754.2 million | $248.7 million |
| Net Investment Income | $15.1 million | $2.7 million |
| Net Increase in Net Assets from Operations | $23.1 million | $3.1 million |
| Net Asset Value (NAV) per Share | $8.69 | $8.85 |
| Total Distributions Declared per Share | $0.35 | $0.35 |
| Weighted Average Effective Yield | 8.5% | 7.1% |
| Total Borrowings (Notes Payable) | $303.0 million | $182.9 million (Dec 31, 2014) |
| Cash and Cash Equivalents | $17.2 million | $12.3 million |
Material Changes vs. Prior Period
- Portfolio Growth: The portfolio fair value increased by approximately 203% year-over-year, driven by significant capital raising ($178.8 million in proceeds) and increased leverage. The number of portfolio investments grew by 16 (14.7%) compared to the prior year-end.
- Revenue Expansion: Total investment income surged from $4.9 million to $27.2 million, primarily due to the larger asset base and higher weighted average yield (8.5% vs. 7.1%).
- Expense Increase: Total expenses (net of waivers) rose from $2.2 million to $12.1 million. This was driven by a $5.9 million increase in management/incentive fees and a $3.8 million increase in interest expense due to higher average borrowings ($250.0 million vs. $41.5 million).
- Fee Waivers: The Adviser waived subordinated incentive fees of $1.3 million for the six months ended June 30, 2015. Administrative services expenses of $0.9 million were also waived.
- Asset Quality: Two investments in Clarius BIGS, LLC (approx. 0.3% of portfolio) were placed on non-accrual status due to default, representing a deterioration from the prior period where no investments were in default.
Guidance, Outlook, and Risks
- Outlook: Management expects further increases in investment income due to a growing portfolio base. The fund anticipates funding future investments through existing cash, capital raised from the ongoing public offering, and borrowings under credit facilities.
- Liquidity: As of June 30, 2015, the fund had $157.0 million of remaining capacity available under its Credit Facilities (Capital One and Deutsche Bank), subject to asset coverage ratios. The asset coverage ratio was 230%.
- Distributions: Distributions are declared daily ($0.00191781 per share per day). The fund may fund distributions from sources other than net realized income, including offering proceeds and borrowings, which may result in a return of capital for tax purposes.
- Risks:
- Interest Rate Risk: Approximately 83.6% of debt investments have floating rates. While most have floors (1.0%–1.5%), rising rates could increase borrowing costs faster than investment income if the spread narrows.
- Credit Risk: Investments in lower middle market companies carry higher risk of default. The fund holds unsecured and second-lien debt which is subordinated to senior claims.
- Concentration: The largest single investment represented 2.5% of the portfolio fair value.
Investor Verification Checklist
- Capital Raise Status: Verify the current status of the public offering and the ability to deploy the $178.8 million raised in the first half of 2015.
- Fee Waiver Expiration: Confirm the terms of the fee waiver agreement, which is extended through December 31, 2015, and the conditions under which previously waived fees might be reimbursed.
- Non-Accrual Assets: Monitor the recovery status of the Clarius BIGS, LLC investments ($4.4 million principal) currently on non-accrual.
- Debt Covenants: Review compliance with the 200% asset coverage ratio requirement under the 1940 Act, which limits future borrowing capacity.
- Distribution Sources: Analyze the tax characterization of distributions (ordinary income vs. return of capital) based on the fund's taxable income estimates.