Runway Growth Finance Corp. — Q3 2023 Form 10-Q
Business context and period. Runway Growth Finance is an externally managed business development company (BDC) and regulated investment company (RIC) that primarily lends to high-growth companies. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are to December 31, 2022 unless noted. Dollar amounts below are in millions except per-share data.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $43.8 | $27.0 | $125.0 | $71.3 |
| Operating expenses | $21.7 | $12.5 | $65.0 | $29.9 |
| Net investment income (NII) | $22.0 ($0.54/share) | $14.5 ($0.36/share) | $60.0 ($1.48/share) | $41.4 ($1.01/share) |
| Net realized and unrealized investment gain (loss) | ($7.2) | ($2.8) | ($10.8) | ($27.7) |
| Net increase in net assets from operations | $14.8 ($0.37/share) | $11.7 ($0.29/share) | $49.1 ($1.21/share) | $13.8 ($0.33/share) |
- Q3 investment income increased 62% year over year, while expenses rose 73%; NII increased 52%. For the nine-month period, investment income rose 75%, expenses rose 118%, and NII rose 45%. Management attributed higher income mainly to portfolio deployment and rising market rates, and higher expenses mainly to debt costs, incentive fees and management fees.
- As a simple measure, NII was about 50% of investment income in Q3 2023 versus 54% a year earlier, and about 48% for the first nine months versus 58% in 2022. This is not a company-reported operating margin.
- Investment income included non-recurring items of $5.6 million in Q3 and $9.0 million year to date, including accelerated discount accretion, prepayment fees and amendment fees. Non-cash PIK interest represented 11.9% of Q3 investment income and 12.3% year to date, compared with 4.4% and 8.9% in 2022.
- At September 30, total assets were $1,034.2 million, investments at fair value were $1,010.9 million, and net assets were $570.5 million. NAV was $14.08 per share, down from $14.22 at year-end 2022 and $14.12 at September 2022.
- Principal debt outstanding was $450.3 million, down from $559.3 million at year-end; this comprised $203.0 million under the secured, floating-rate credit facility and $247.3 million of fixed-rate unsecured notes. Debt carrying value, net of deferred issuance costs, was $441.0 million. Q3 weighted-average cost of debt was 8.33%, versus 6.75% a year earlier; nine-month cost was 8.15% versus 6.55%.
- Cash and cash equivalents were $14.9 million. Reported available liquidity was $311.9 million, including approximately $297.0 million of credit-facility capacity subject to borrowing-base limits. Asset coverage was 227%, compared with 203% at year-end.
- Operating activities provided $174.1 million of cash in the first nine months, versus $164.1 million used in 2022; financing activities used $164.9 million, versus $165.2 million provided in 2022. Cash increased $9.2 million to $14.9 million.
- The company declared and paid $18.2 million of distributions in Q3 and $54.7 million year to date. The 2023 distributions included ordinary and supplemental amounts; year-to-date distributions were $1.35 per share versus NII of $1.48 per share.
Material changes and portfolio condition
- Portfolio fair value fell to $1,010.9 million from $1,126.3 million at year-end. During the first nine months, Runway funded $105.5 million of investments and received $225.7 million in loan prepayments and $7.0 million in scheduled principal payments.
- The portfolio remained concentrated: healthcare technology was 35.9% and application software 30.7% of investments at fair value. The five largest debt investments were 38.5% of debt-investment fair value, up from 30.0% at year-end.
- Debt ratings weakened: investments rated 3–5 represented 18.0% of the total portfolio at fair value, versus 7.8% at year-end. One Pivot3 loan was on non-accrual, with $18.0 million cost basis and $11.6 million fair value; $6.3 million of cumulative interest and discount accretion was not recognized as income.
- Most portfolio investments are Level 3 fair-value estimates: $998.4 million at quarter-end. Investment fair value was $33.9 million below cost. The company states these valuations rely on unobservable inputs and may differ materially from realizable values.
Outlook, risks and unusual items
- No specific earnings or investment guidance was provided. Management stated it believed liquidity was sufficient for near-term capital requirements and intended to continue investing and making quarterly distributions, subject to board discretion and available funds.
- After quarter-end, the board declared a $0.40 ordinary and $0.06 supplemental distribution per share for November payment, and approved a new share-repurchase program of up to $25.0 million. The filing also reports additional investments and a $24.5 million partial Brivo loan prepayment after September 30.
- Key risks include portfolio-company credit deterioration and defaults, economic weakness, leverage and refinancing exposure, rising borrowing costs, illiquid investments and uncertain fair values, and the ability to maintain BDC and RIC status. All performing debt investments bore variable rates; a hypothetical 200-basis-point increase was estimated to increase annual investment income by up to $18.7 million, while a decrease could reduce it by up to $17.8 million. Floating-rate borrowing costs can offset asset-income benefits.
- Unfunded portfolio loan commitments totaled $203.5 million, of which approximately $75.1 million was eligible to be drawn based on milestones. These commitments are generally conditional and may expire undrawn. Non-qualifying assets were 13.13% of total assets; BDC rules limit the company’s ability to acquire additional non-qualifying assets if qualifying-asset requirements are not met.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The company and adviser reported no material legal proceedings.
Important facts for investors to verify
- Whether the higher share of loans rated 3–5, portfolio concentrations, and Pivot3’s non-accrual status have changed since September 30.
- How much reported investment income and NII depends on PIK accruals and non-recurring fees, and whether accrued income is ultimately collected in cash.
- Credit-facility availability under borrowing-base conditions, debt costs and maturities, asset coverage, and capacity to fund eligible commitments and distributions.
- Whether fair values for the predominantly Level 3 portfolio remain supportable given company performance and market conditions.
- The sustainability of distributions relative to taxable income, cash collections and NII, and any subsequent use of the new repurchase authorization.