Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarterly period ended June 30, 2012 (Six months ended June 30, 2012)
Status: The Company completed a merger with HMS Income LLC on May 31, 2012. As of June 30, 2012, the Company had not conducted its initial public offering closing, though the SEC declared the registration statement effective on June 4, 2012. The Company focuses on debt and equity investments in middle-market and lower-middle-market companies.
Key Financial Metrics
| Metric (in thousands, except per share) | Six Months Ended June 30, 2012 | Three Months Ended June 30, 2012 |
|---|---|---|
| Total Assets | $19,027 | $19,027 (Balance Sheet) |
| Portfolio Investments (Fair Value) | $16,307 | $16,307 (Balance Sheet) |
| Net Investment Income | $610 | $271 |
| Net Increase in Net Assets from Operations | $763 | $269 |
| Net Cash Provided by Operating Activities | $607 | Filing text does not provide clear value |
| Cash and Cash Equivalents | $472 | $472 (Balance Sheet) |
| Total Debt Outstanding | $7,000 | $7,000 (Balance Sheet) |
| Net Asset Value (NAV) per Share | $9.01 | $9.01 (Balance Sheet) |
| Distributions Declared per Share | $0.59 | $0.59 (Balance Sheet) |
| Weighted Average Shares Outstanding | 1,123,157 | 1,123,157 |
Material Changes vs. Prior Period
- Merger Transaction: On May 31, 2012, HMS Income LLC merged into HMS Income Fund, Inc. Membership units were converted to common stock (1,111,111 units to 1,123,157 shares).
- Debt Restructuring: The Company retired a $7.5 million term loan facility with Main Street Capital Corporation and entered into a new $15 million senior secured revolving credit facility with Capital One, borrowing $7.0 million initially.
- Portfolio Composition: The portfolio fair value decreased slightly from $16,387 (Dec 31, 2011) to $16,307 (June 30, 2012). The Company sold three LMM investments to Main Street and acquired three new LMM investments from Main Street during the period.
- Unrealized Gains: The Company recorded net unrealized appreciation of $153,000 for the six months ended June 30, 2012, compared to a net unrealized depreciation of $(36,000) at year-end 2011.
Guidance, Outlook, and Risks
- Outlook: The Company expects to fund future investments through the initial public offering (IPO), existing cash, and the Capital One credit facility. It anticipates increasing interest income as the capital base grows.
- Distributions: The Company declared distributions for July through September 2012 at a rate of $0.00191781 per share per day, representing an annualized yield of 7% based on the $10.00 offering price.
- Fee Waivers: Advisers waived base management fees ($31,000), subordinated incentive fees ($18,000), and administrative services expenses ($25,000) for the quarter to avoid distributions representing a return of capital.
- Risks:
- Interest Rate Risk: Approximately 73% of the portfolio contains variable interest rates. A 1% change in rates would impact interest income by ~$117,000 and interest expense by ~$70,000.
- Liquidity: The Company has $472,000 in cash and $2.5 million in available debt financing capacity (limited by BDC asset coverage ratios).
- Valuation: Investments are valued at fair value using unobservable inputs (Level 3) for LMM investments, involving significant management judgment.
Investor Verification Checklist
- Offering Status: Verify the status of the IPO and whether the initial closing has occurred post-filing, as the Company had not closed as of June 30, 2012.
- Debt Covenants: Confirm continued compliance with the Capital One credit facility covenants (Interest Coverage Ratio of 2.0:1, Asset Coverage Ratio of 2.0:1).
- Portfolio Quality: Review the internal rating system for LMM investments; as of June 30, 2012, the weighted average rating was 2.2 (out of 5), with no non-accrual assets.
- Related Party Transactions: Monitor the $1.69 million in deferred offering costs owed to affiliates and the terms of the fee waiver agreement.
- Subsequent Events: Note the sale of Academy, Ltd. and National Healing Corporation investments and the purchase of Waupaca Foundry and Universal Fiber Systems investments occurring after June 30, 2012.