Business Context and Reporting Period
Company: HMS Income Fund, Inc. (MSC INCOME FUND, INC.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2013
Business Overview: An externally managed, non-diversified closed-end investment company operating as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The Company's primary objective is to generate current income through debt and equity investments in middle-market and lower-middle-market companies. As of the reporting date, the portfolio consisted entirely of first-lien secured debt.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2013 | Balance Sheet (Sep 30, 2013) |
|---|---|---|---|
| Total Assets | - | - | $45,911 |
| Portfolio Investments (Fair Value) | - | - | $38,366 |
| Net Assets | - | - | $29,562 |
| Net Asset Value (NAV) per Share | - | - | $8.91 |
| Total Interest Income | $808 | $1,759 | - |
| Net Investment Income | $498 | $896 | - |
| Net Increase in Net Assets from Operations | $748 | $1,288 | - |
| Net Investment Income per Share | $0.17 | $0.42 | - |
| Stockholder Distributions Declared per Share | $0.17 | $0.52 | - |
| Cash and Cash Equivalents | - | - | $1,918 |
| Note Payable (Debt) | - | - | $11,300 |
Material Changes vs. Prior Period
- Portfolio Growth: Portfolio investments at fair value increased from $16.1 million (Dec 31, 2012) to $38.4 million (Sep 30, 2013), a 138% increase, driven by the investment of raised equity capital and borrowings.
- Revenue Increase: Total interest income for the nine months ended Sep 30, 2013, rose to $1.76 million from $1.29 million in the prior year period. This was driven by a larger portfolio base and $112,000 in Payment-in-Kind (PIK) interest income recognized in 2013 compared to $25,000 in 2012.
- Expense Increase: Total expenses (net of waivers) for the nine months ended Sep 30, 2013, were $863,000 compared to $417,000 in the prior year. Increases were attributed to higher interest expense due to increased borrowings, professional fees, and insurance costs associated with operating as a public company.
- Debt Utilization: Borrowings under the Credit Facility increased to $11.3 million from $7.0 million at the end of 2012. The facility capacity was expanded from $15 million to $25 million in August 2013.
- Portfolio Composition: The portfolio shifted to 100% first-lien secured debt. Lower middle-market (LMM) investments decreased as a percentage of the total portfolio from 27% to 4% due to the addition of larger private placement investments.
Guidance, Outlook, Risks, and Unusual Items
- Distribution Policy: The Company declared a distribution rate of $0.00191781 per share per day for the fourth quarter of 2013, representing an annualized yield of 7.0% based on the $10.00 public offering price. Distributions are funded by net investment income, fee waivers, borrowings, and offering proceeds.
- Fee Waivers: Under a Conditional Fee Waiver Agreement, the Advisers waived base management fees ($469,000 for the nine months) and administrative expenses ($689,000 for the nine months) to support distributions. These waivers may be subject to reimbursement within three years if cumulative net assets exceed cumulative distributions.
- Subsequent Event: On November 11, 2013, the Company entered into an Expense Support and Conditional Reimbursement Agreement where the Adviser agreed to pay up to 100% of operating expenses through December 31, 2013, subject to future reimbursement.
- Technical Default: One portfolio investment experienced a technical default during the period, resulting in additional PIK interest and the issuance of warrants (valued at zero). The Company has executed a contract to sell this investment, which had not settled as of the reporting date.
- Risks: The Company faces interest rate risk (88% of the portfolio has floating rates), liquidity risk due to illiquid investments, and the risk that distributions may exceed earnings, potentially resulting in a return of capital for tax purposes.
Investor Verification Checklist
- Distribution Sustainability: Verify the proportion of distributions funded by fee waivers versus net investment income to assess long-term sustainability without advisor support.
- Capital Raising Progress: Confirm the status of the ongoing public offering (raised ~$21.4 million as of Sep 30, 2013) and its impact on future investment capacity.
- Debt Covenants: Review compliance with the Credit Facility covenants, specifically the asset coverage ratio (3.6 to 1.0) and interest coverage ratio (4.3 to 1.0).
- Unsettled Transactions: Monitor the settlement of the contract to sell the investment that experienced a technical default.
- Fee Waiver Reimbursement: Track the potential future obligation to reimburse the Adviser for waived fees if the Company's cumulative net assets exceed cumulative distributions.