SEC Filing Summary: HMS Income Fund, Inc. (10-K)
Business Context and Reporting Period
Company: HMS Income Fund, Inc. (HMS Income Fund)
Reporting Period: Fiscal year ended December 31, 2017
Structure: Externally managed, non-diversified closed-end management investment company organized as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC).
Strategy: Primary objective is to generate current income through debt and equity investments in Lower Middle Market (LMM) and Middle Market companies. Secondary objective is long-term capital appreciation. The portfolio consists of secured and unsecured debt, equity, and warrants. The Company co-invests with Main Street Capital Corporation affiliates and manages a joint venture, HMS-ORIX, with ORIX Funds Corp.
Capital Markets Status: The Company closed its public offering to new investors on September 30, 2017. There is no established public market for its shares; liquidity is provided via a quarterly share repurchase program.
Key Financial Metrics (Year Ended Dec 31, 2017)
| Metric | 2017 Value | 2016 Value |
|---|---|---|
| Total Portfolio Investments (Fair Value) | $1,049.4 million | $989.2 million |
| Total Assets | $1,119.1 million | $1,033.6 million |
| Total Liabilities | $471.3 million | $435.7 million |
| Net Assets (NAV) | $647.8 million | $597.8 million |
| NAV Per Share | $8.15 | $8.15 |
| Total Investment Income | $103.7 million | $89.4 million |
| Net Investment Income | $58.7 million | $51.3 million |
| Net Realized Gain (Loss) | ($4.4 million) | ($22.9 million) |
| Net Change in Unrealized Appreciation (Depreciation) | ($1.7 million) | $38.2 million |
| Net Increase in Net Assets from Operations | $52.6 million | $66.6 million |
| Weighted Average Effective Yield (Total Portfolio) | 8.9% | 8.9% |
| Debt Outstanding (Credit Facilities) | $430.0 million | $413.0 million |
| Cash and Cash Equivalents | $45.8 million | $23.7 million |
| Distributions Declared Per Share | $0.70 | $0.70 |
Material Changes vs. Prior Period
- Portfolio Growth: Total portfolio fair value increased by approximately 6.1% ($60.2 million) from 2016 to 2017, driven by new investment purchases of $551.8 million offset by sales and repayments of $525.0 million.
- Income Growth: Total investment income rose 16.0% to $103.7 million, primarily due to portfolio growth and increased accretion of unearned income ($15.1 million in 2017 vs. $11.9 million in 2016).
- Expense Increase: Net expenses increased to $44.3 million from $37.8 million, driven by higher interest expense ($18.3 million vs. $15.1 million) and increased management fees due to higher average gross assets.
- Realized Losses: Net realized losses narrowed significantly to $4.4 million in 2017 compared to $22.9 million in 2016. The 2016 losses were largely driven by restructurings in the oil and gas sector. 2017 losses were primarily related to exits/restructurings in the oil and gas sector, partially offset by gains on equity exits.
- Unrealized Performance: The portfolio experienced a net unrealized depreciation of $1.7 million in 2017, a reversal from the $38.2 million unrealized appreciation recorded in 2016.
- Capital Structure: The Company closed its public offering to new investors in September 2017, raising approximately $184.1 million in the offering (including reinvested distributions) through year-end.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management intends to continue employing leverage (up to 50% of assets) to enhance returns. The Company expects to fund future investments through existing cash, borrowings, and the distribution reinvestment plan.
- Share Repurchase Program: The Company maintains a quarterly repurchase program allowing stockholders to sell up to 2.5% of outstanding shares per quarter at NAV. In Q4 2017, the Company repurchased 1.1 million shares at an average price of $8.10.
- Key Risks:
- Interest Rate Risk: Approximately 87.2% of the debt portfolio contains floating rates. Rising rates increase interest income but also increase borrowing costs. A 100 basis point increase in rates would increase net investment income by approximately $4.3 million.
- Liquidity Risk: Investments are primarily illiquid private securities. There is no public market for the Company's stock.
- Valuation Risk: The majority of the portfolio (Level 3 assets) is valued using unobservable inputs (e.g., discounted cash flows, broker quotes), introducing subjectivity.
- Concentration Risk: While diversified, the portfolio has exposure to specific industries (e.g., Commercial Services, Hotels/Restaurants) and geographic regions (Midwest, Southwest).
- Adviser Dependency: The Company relies entirely on HMS Adviser LP and MSC Adviser I, LLC (Main Street Capital) for investment management.
- Unusual Items:
- Non-Accrual Status: As of Dec 31, 2017, four debt investments in three portfolio companies were on non-accrual status, representing 0.2% of the portfolio at fair value.
- Fee Waivers: The Advisers waived approximately $3.0 million in incentive fees and $3.0 million in internal administrative expenses during 2017.
- Tax Legislation: The "Tax Cuts and Jobs Act" was enacted in December 2017, reducing the corporate tax rate. The Company accounted for the effects as of year-end, though the impact on RIC status and distributions remains subject to monitoring.
Investor Verification Checklist
- NAV Accuracy: Verify the fair value of Level 3 assets (100% of portfolio) given the reliance on unobservable inputs and the recent shift from unrealized appreciation to depreciation.
- Asset Coverage Ratio: Confirm the Company maintains the required 200% asset coverage ratio under the 1940 Act to continue paying distributions and issuing debt (reported at 236% as of Dec 31, 2017).
- Distribution Sustainability: Assess whether the $0.70 per share distribution is fully covered by Net Investment Income ($0.76 per share) or if it relies on capital gains or borrowings.
- Portfolio Quality: Review the specific details of the four non-accrual investments and the $4.4 million realized losses to understand credit deterioration trends.
- Leverage Costs: Monitor the cost of funds on the EverBank and Deutsche Bank credit facilities, as rising rates will compress the spread between borrowing costs and portfolio yields.
- Offering Status: Note that the public offering to new investors is closed; future capital growth depends on the distribution reinvestment plan and potential follow-on offerings.