Business Context and Reporting Period
Company: Carlyle GMS Finance, Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarter and nine months ended September 30, 2013
Status: The Company commenced substantial investment operations on May 2, 2013, following its Initial Closing. Prior to this date, it was a development stage entity. The Company invests primarily in first lien senior secured and unitranche loans to U.S. middle market companies.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2013 |
|---|---|---|
| Total Assets | $162,067 | $162,067 |
| Investments (Fair Value) | $94,052 | $94,052 |
| Cash and Cash Equivalents | $62,765 | $62,765 |
| Secured Borrowings | $35,947 | $35,947 |
| Total Net Assets | $123,791 | $123,791 |
| Net Asset Value (NAV) per Share | $19.11 | $19.11 |
| Investment Income | $1,145 | $1,165 |
| Net Expenses | $1,951 | $4,546 |
| Net Investment Income (Loss) | $(806) | $(3,381) |
| Net Change in Unrealized Appreciation (Depreciation) | $(366) | $(302) |
| Net Increase (Decrease) in Net Assets from Operations | $(1,171) | $(3,682) |
| Earnings Per Share (Basic & Diluted) | $(0.29) | $(2.54) |
Material Changes vs. Prior Period
- Operational Commencement: The Company had no investments and minimal assets ($2) as of December 31, 2012. The current period reflects the full deployment of capital following the May 2013 Initial Closing.
- Portfolio Growth: Investments grew from $0 to $94.05 million (fair value), consisting of 12 portfolio companies/obligations. First Lien Debt comprises 86.39% of the portfolio.
- Capital Deployment: The Company issued 6,477,169 shares during the nine-month period, raising $127.5 million in gross proceeds.
- Leverage: The Company utilized a Revolving Credit Facility, with $35.9 million in secured borrowings outstanding as of September 30, 2013, compared to $0 in the prior year.
- Expense Structure: Significant organization expenses ($1.4 million) were incurred in the nine-month period related to the initial formation and launch of the Company.
Outlook, Risks, and Management Commentary
- Investment Strategy: The Company targets U.S. middle market companies with $10M-$100M EBITDA. It expects 70-80% of assets to be in Middle Market Senior Loans.
- Fee Waivers: The Investment Adviser waived one-third (0.50%) of the base management fee prior to a Qualified IPO. No incentive fees were earned on income or capital gains for the period due to the net loss position.
- Liquidity and Capital: As of September 30, 2013, the Company had $62.8 million in cash. Total capital commitments from stockholders were $790.8 million, with $663.3 million remaining unfunded.
- Dividends: No dividends or distributions have been declared or paid to date. The Company expects to declare its first dividend in the first quarter of 2014.
- Risks:
- Valuation Risk: Investments are valued at fair value using Level III inputs (unobservable), requiring significant management judgment.
- Interest Rate Risk: The portfolio and borrowings are subject to floating rates (LIBOR). A 100 basis point increase in rates would result in a net negative impact of $153k on annualized net investment income based on current holdings.
- Liquidity Risk: Investments are in private companies with no ready market; liquidation may be subject to significant limitations.
- Subsequent Events: In October 2013, the Company borrowed an additional $14.45 million and issued a capital call for $17.5 million.
Investor Verification Checklist
- Capital Deployment Rate: Verify the timeline for drawing down the remaining $663 million in unfunded capital commitments.
- Fee Waiver Termination: Confirm the conditions and timeline for the termination of the 0.50% base management fee waiver upon a Qualified IPO.
- Valuation Methodology: Review the specific Level III inputs (discount rates, default rates) used to value the $94 million portfolio, as these significantly impact NAV.
- Dividend Policy: Monitor the Board's declaration of the first dividend expected in Q1 2014 to assess cash flow generation.
- Asset Coverage: Verify continued compliance with the 200% asset coverage requirement under the Investment Company Act (currently at 444%).