Runway Growth Finance Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Runway is an externally managed business development company (BDC) that lends to and selectively invests in high-growth companies, primarily through senior secured loans. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $41.9 | $25.0 | $81.2 | $44.3 |
| Operating expenses | $22.2 | $10.5 | $43.3 | $17.3 |
| Net investment income (NII) | $19.7; $0.49/share | $14.5; $0.35/share | $37.9; $0.94/share | $26.9; $0.65/share |
| Net realized and unrealized investment gain (loss) | $2.6 | $(15.3) | $(3.6) | $(24.9) |
| Net increase in net assets from operations | $22.3; $0.55/share | $(0.8); $(0.02)/share | $34.3; $0.85/share | $2.0; $0.05/share |
- Income and costs: Q2 investment income rose 67% year over year, mainly from higher market rates and a larger invested balance. Operating expenses more than doubled, primarily due to higher interest and financing costs, management fees, and incentive fees. Six-month interest and other debt financing expense was $22.3 million, versus $3.9 million a year earlier.
- Portfolio and NAV: Investments at fair value totaled $1.095 billion, down from $1.126 billion at December 31, 2022. Net assets were $573.9 million and NAV was $14.17 per share, compared with $576.1 million and $14.22 at year-end. The six-month total return based on NAV was negative 0.35%; market-value total return was positive 14.32% (both not annualized).
- Cash flow and liquidity: For the six months, operating activities provided $71.6 million, compared with $73.0 million used in 2022; financing activities used $39.6 million, versus $75.1 million provided. Cash and cash equivalents were $37.7 million at June 30, 2023. Reported available liquidity was $227.7 million, including approximately $190.0 million of credit-facility availability, subject to borrowing-base capacity.
- Debt and coverage: Debt principal was $557.3 million ($547.3 million net of deferred debt costs), including $310.0 million under the floating-rate credit facility and $247.3 million of fixed-rate notes. Asset coverage was 203%, above the BDC statutory minimum of 150%. The company reported no debt principal due within one year.
- Portfolio yield and distributions: Annualized dollar-weighted yield on debt investments was 16.69% for Q2 and 15.65% for the first half, compared with 15.11% and 13.44% in 2022. The company declared and paid $0.45 per share for Q2 ($0.40 ordinary and $0.05 supplemental); total first-half distributions were $0.90 per share.
Material changes and portfolio developments
- Q2 operations turned positive versus a loss in the prior-year quarter, reflecting higher NII and a $2.6 million unrealized gain instead of the prior-year $16.2 million unrealized loss. For the first half, NII increased, while investment valuation losses narrowed substantially year over year.
- During the first half, the company funded $63.5 million in eight existing portfolio companies and made no investments in new portfolio companies. It received $98.9 million in loan repayments and $6.8 million in scheduled principal payments. The portfolio had 49 companies at both June 30, 2023 and year-end 2022.
- Senior secured loans represented 94.1% of portfolio fair value. Health care technology was the largest industry exposure at $260.3 million, or 45.4% of net assets. The five largest portfolio companies represented 34.2% of fair value of debt investments.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or portfolio guidance. Management stated it believed liquidity was sufficient for near-term capital requirements. The board declared a further $0.45 per share distribution for August 2023, subject to the stated record and payment dates.
- Interest-rate sensitivity is significant: all performing debt investments were floating-rate, while the credit facility also bears floating interest. The company estimated that a hypothetical 200-basis-point increase could raise annual investment income by up to $20.3 million; a decrease could lower it by up to $19.7 million, before considering changes in borrowing costs and other effects.
- PIK interest, which is accrued but not received in cash, was 15.3% of Q2 investment income and 12.6% for the first half. The filing notes that PIK income can affect required RIC distributions before the related cash is collected.
- One loan, to Pivot3, remained on non-accrual: $18.0 million cost basis and $11.6 million fair value, or 1.06% of the portfolio. Cumulative interest and OID of $5.4 million were not recognized as income. Management reported no material legal proceedings.
- Most investments are Level 3 valuations based on unobservable inputs; $1.081 billion of investments were Level 3 at June 30. Fair values therefore involve significant judgment and may differ materially from realizable values. Economic downturns, portfolio-company credit deterioration, concentration, leverage, and restricted-market liquidity are key risks.
- After quarter-end, the company funded $20.0 million to Elevate Services; received full payment on its Fidelis Cybersecurity investment; received a partial Marley Spoon loan repayment; and received Allurion’s $55.0 million loan prepayment. CEO and board chair R. David Spreng took a temporary medical leave effective July 31. Greg Greifeld was appointed acting CEO, Thomas Raterman acting president, and Julie Persily acting board chair and permanent lead independent director.
Important facts for investors to verify
- Whether portfolio-company repayments, credit performance, and any future non-accruals support the reported fair values and NII; pay particular attention to Pivot3 and the Level 3 valuation assumptions.
- How rising or falling benchmark rates affect net income after accounting for the floating-rate credit facility, floors, cash caps, and PIK provisions.
- Actual availability under the $500 million credit facility and the timing and drawability of the $234.3 million in unfunded commitments; only approximately $103.0 million was eligible to be drawn based on milestones at June 30.
- Whether NII and cash collections cover distributions, including the supplemental component, given that some reported income is non-cash PIK.
- Leadership continuity during the CEO’s leave and the terms and status of the acting appointments.