Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarter ended March 31, 2015
Business Model: Externally managed closed-end fund investing primarily in debt and equity securities of lower middle market and middle market companies to generate current income and capital appreciation.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net Investment Income | $6.33 million | $0.82 million |
| Net Increase in Net Assets from Operations | $10.19 million | $1.12 million |
| Net Asset Value (NAV) per Share | $8.57 | $8.86 |
| Total Portfolio Investments (Fair Value) | $659.87 million | $141.22 million |
| Total Assets | $696.92 million | $147.67 million |
| Total Liabilities | $344.44 million | $64.59 million |
| Notes Payable (Debt) | $264.00 million | $20.75 million |
| Cash and Cash Equivalents | $23.91 million | $17.55 million |
| Weighted Average Shares Outstanding | 36.27 million | 7.39 million |
| Distributions Declared per Share | $0.17 | $0.17 |
Material Changes vs. Prior Period
- Portfolio Growth: Total portfolio investments increased by approximately 366% (from $141.2 million to $659.9 million) driven by significant capital raising and deployment of borrowings.
- Revenue Surge: Net investment income increased 668% to $6.33 million, primarily due to the expanded asset base and higher average borrowings ($223.4 million vs. $20.8 million).
- Expense Increase: Total expenses (net of waivers) rose to $5.47 million from $0.84 million, reflecting higher management fees, interest expense, and administrative costs associated with the larger portfolio.
- Debt Utilization: Notes payable increased to $264.0 million as the Company fully drew its $105.0 million Syndicated Credit Facility and utilized $159.0 million of its HMS Funding Facility.
- Unrealized Gains: Net unrealized appreciation was $3.84 million, compared to $0.23 million in the prior year, driven by improvements in high yield bond and leveraged loan markets.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects further increases in investment income due to a growing base of portfolio investments. The weighted average effective annual yield on the portfolio increased to 8.5%.
- Fee Waivers: The Adviser waived subordinated incentive fees of $358,000 and administrative services expenses of $437,000 for the quarter. The fee waiver agreement was extended through December 31, 2015.
- Asset Quality: Two investments in one portfolio company (Clarius BIGS, LLC) totaling $4.4 million principal were placed on non-accrual status due to default. These represent approximately 0.3% of the total portfolio at fair value.
- Subsequent Events:
- Public offering price increased to $9.90 per share effective May 7, 2015.
- HMS Funding Facility borrowing capacity increased to $225 million on May 5, 2015.
- Filed a tender offer to repurchase approximately 578,585 shares at NAV.
- Risks: Significant exposure to interest rate fluctuations (81.3% of debt portfolio has floating rates). A 1% increase in rates would increase interest income by ~$0.75 million but increase interest expense by ~$2.6 million.
Investor Verification Checklist
- Capital Deployment: Verify the pace of investment of the $98.9 million raised in Q1 2015 and subsequent $32.6 million raised in April 2015.
- Asset Coverage Ratio: Confirm the BDC asset coverage ratio remains above the 200% regulatory minimum (reported at 222% including unfunded commitments).
- Non-Accrual Status: Monitor the recovery efforts and potential impairment charges related to the Clarius BIGS, LLC default.
- Distribution Sustainability: Assess the source of distributions; 96% of Q1 2015 distributions were funded by net realized income, but the Company notes distributions may exceed earnings in early stages.
- Fee Waiver Expiration: Note that the Adviser's fee waiver is currently extended only through December 31, 2015, which could impact future expense ratios.