Runway Growth Finance Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023 unless otherwise noted. Runway is an externally managed, non-diversified business development company (BDC) and regulated investment company (RIC), focused primarily on lending to growth-stage companies. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Investment income | $39.3 | $19.2 |
| Operating expenses | $21.1 | $6.8 |
| Net investment income | $18.2; $0.45 per share | $12.5; $0.30 per share |
| Net realized and unrealized investment loss | $6.3 | $9.6 |
| Increase in net assets from operations | $12.0; $0.30 per share | $2.9; $0.07 per share |
| Net asset value per share | $14.07 | $14.22 at Dec. 31, 2022 |
| Total assets / net assets | $1,173.5 / $569.8 | $1,141.8 / $576.1 at Dec. 31, 2022 |
| Debt, principal outstanding | $594.3 | $559.3 at Dec. 31, 2022 |
| Cash and cash equivalents | $3.3 | $5.8 at Dec. 31, 2022 |
- Investment income rose 104% year over year, primarily from a larger invested balance and higher market rates. Net investment income increased 46%.
- Debt financing and interest expense increased to $10.9 million from $1.6 million; management and incentive fees also rose. The filing attributes the higher costs in part to increased leverage and interest rates. The filing does not provide a conventional operating margin measure; net investment income was about 46% of investment income in Q1 2023 versus about 65% in Q1 2022.
- Net asset value per share declined from $14.22 at year-end to $14.07. Q1 operations added $0.30 per share, while the $0.45 dividend and investment valuation changes contributed to the decline.
- Net cash used in operating activities was $18.5 million; net cash provided by financing activities was $16.0 million, including $35.0 million of net credit-facility borrowing and $18.2 million of dividends paid. Cash fell by $2.5 million during the quarter.
Portfolio, debt and liquidity
- Investments at fair value totaled $1,160.3 million, compared with $1,126.3 million at year-end. The portfolio comprised 49 portfolio companies; senior secured loans were $1,060.5 million, or 91.4% of total investment fair value. Health care technology, application software and internet software/services were the largest industry exposures.
- Portfolio debt investments had a dollar-weighted annualized yield of 15.24%, up from 12.15% in Q1 2022. This is a portfolio yield before company expenses and is not a shareholder return.
- All debt portfolio investments were floating rate at quarter-end: approximately 68% based on SOFR and 32% on Prime. The company estimated a hypothetical 200-basis-point rate increase could add up to $20.9 million of annual investment income; a decrease could reduce it by up to $20.1 million, before considering funding-cost effects. Credit-facility borrowings are also floating rate.
- Gross debt principal was $594.3 million, with $583.9 million carrying value after deferred debt costs. It included $372.0 million drawn on a $500 million credit facility and $222.3 million of unsecured notes. Credit-facility availability is subject to borrowing-base and other conditions. Asset coverage was 196.0%, down from 203.0% at December 31, 2022.
- Unfunded loan commitments were $302.7 million, down from $315.7 million. Management stated that available cash and credit-facility availability were sufficient to cover them, subject to contractual draw conditions. The filing reports no outstanding reverse repurchase agreements or off-balance-sheet arrangements.
Material changes and notable items
- Q1 investment funding was $12.9 million, all to existing portfolio companies; there were no new portfolio-company investments. The company received $10.2 million in loan repayments. By comparison, Q1 2022 included $82.8 million funded across six companies.
- Unrealized depreciation was $5.1 million, driven primarily by valuation declines in Gynesonics loans and preferred stock, partly offset by an increase in Pivot3’s loan valuation. The realized loss of $1.2 million was attributed to losses on CareCloud and Gynesonics warrants.
- One loan, to Pivot3, remained on non-accrual. Its $19.2 million cost basis was valued at $11.6 million; $4.6 million of cumulative interest and discount accretion had not been recorded as income.
- Approximately 9.7% of Q1 investment income was non-cash payment-in-kind (PIK) interest, compared with 7.4% in Q1 2022. PIK income is recognized before cash collection and may affect required RIC distributions.
- Approximately $1,111.4 million of investments were Level 3 fair value assets, involving significant unobservable inputs and valuation judgment. The company reported net unrealized depreciation on investments of $29.4 million relative to cost at quarter-end.
Outlook, risks and subsequent events
- The filing provides no specific earnings or investment-growth guidance. Management said it intends to make quarterly distributions when funds are available; the Board declared a $0.40 ordinary and $0.05 supplemental distribution per share for May 2023.
- Management identified risks from economic slowdown, portfolio-company repayment capacity, inflation and interest-rate volatility, access to credit and capital markets, leverage, and the illiquid and judgment-based valuation of private investments. The company also cited potential impacts from bank failures; it had no depository relationships with Silicon Valley Bank, Signature Bank or First Republic Bank, though some portfolio companies had relationships with those banks and experienced disruptions that were reported as resolved.
- At March 31, 2023, non-qualifying assets were 10.38% of total assets; BDC rules generally require at least 70% qualifying assets at the time of acquiring additional non-qualifying assets. The company also depends on continued compliance with RIC requirements to avoid corporate-level tax treatment.
- Subsequent events through May 9 included a $30 million Mustang Bio loan prepayment; issuance of $25 million of 8.54% notes due 2026; amendments to Marley Spoon’s loan, including PIK interest through September 2023 and an added deferral fee; and new funding to Epic IO and Kin Insurance. The TRACON investment was terminated with obligations satisfied.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material legal proceedings were reported.
Important facts for investors to verify
- Whether higher floating-rate income continues to exceed rising funding costs, particularly on the floating-rate credit facility.
- Portfolio-company credit quality, including developments at Pivot3 and Gynesonics, and the level and collectability of PIK interest.
- Assumptions behind Level 3 fair values and the effect of any further valuation reductions on NAV and asset coverage.
- Actual availability under the credit facility after borrowing-base limits, alongside the timing and likelihood of draws against $302.7 million of unfunded commitments.
- Whether net investment income and available cash support the distribution level, including the supplemental distribution.
- Compliance with BDC asset-coverage and qualifying-asset requirements and continued RIC tax qualification.