Business Context and Reporting Period
Company: CM Finance Inc (CMFN), a closed-end, externally managed Business Development Company (BDC) regulated under the Investment Company Act of 1940 and treated as a Regulated Investment Company (RIC) for tax purposes.
Reporting Period: Quarterly report (Form 10-Q) for the period ended December 31, 2018 (unaudited).
Investment Strategy: The Company invests primarily in debt and related equity of privately held middle-market companies, focusing on unitranche, first lien, and second lien loans to fund acquisitions, growth, or refinancing.
Key Financial Metrics
| Metric | Six Months Ended Dec 31, 2018 | Six Months Ended Dec 31, 2017 |
|---|---|---|
| Total Investment Income | $17.55 million | $15.18 million |
| Net Investment Income | $7.13 million | $6.70 million |
| Net Realized Gain/(Loss) | ($0.18 million) | ($7.38 million) |
| Net Change in Unrealized Appreciation/(Depreciation) | ($14.90 million) | $8.67 million |
| Net Increase/(Decrease) in Net Assets from Operations | ($7.95 million) | $7.99 million |
| Net Asset Value (NAV) Per Share | $11.49 | $12.57 (June 30, 2018) |
| Total Assets | $301.98 million | $314.53 million (June 30, 2018) |
| Total Debt (Notes Payable, net) | $134.01 million | $117.87 million (June 30, 2018) |
| Cash and Restricted Cash | $12.18 million | $8.33 million (June 30, 2018) |
| Asset Coverage Ratio | 2.15x | 2.46x (June 30, 2018) |
Material Changes vs. Prior Period
- Portfolio Valuation Decline: The Company recorded a significant net unrealized depreciation of $14.90 million for the six months ended December 31, 2018, compared to unrealized appreciation of $8.67 million in the prior year period. This was primarily driven by decreased valuations of specific portfolio companies (Trident USA Health Services, LLC and Premiere Global Services, Inc.) and accretion of discounts.
- Debt Issuance: In July 2018, the Company issued $34.5 million in 6.125% Notes due 2023. Consequently, total notes payable increased from $117.87 million (June 30, 2018) to $134.01 million (December 31, 2018).
- Expense Increase: Total expenses rose to $10.45 million (net of waivers) for the six months ended December 31, 2018, from $8.47 million in the prior year period. This increase was largely due to higher interest expenses resulting from increased LIBOR rates and the new Notes issuance.
- Investment Activity: The Company purchased approximately $105.0 million in investments and sold/repaid approximately $101.8 million during the six-month period, resulting in a net portfolio turnover rate of 32%.
Guidance, Outlook, and Risks
- Dividend Policy: The Company declared a quarterly distribution of $0.25 per share for the quarter ended March 31, 2019, payable in April 2019. The Company intends to distribute between 90% and 100% of annual taxable income to maintain RIC status.
- Liquidity: As of December 31, 2018, the Company held $6.2 million in unrestricted cash and $6.0 million in restricted cash. It also had $50.0 million of capacity remaining under its 2017 UBS Revolving Financing facility.
- Asset Coverage: The Company's asset coverage ratio was 2.15x at period end. The Company has approved modified asset coverage requirements (reducing the threshold from 200% to 150%) effective May 2, 2019, under the Small Business Credit Availability Act.
- Interest Rate Risk: Approximately 94.4% of the debt portfolio bears floating interest rates. Management estimates that a 1.00% increase in interest rates would decrease net interest income by approximately 8.1% due to interest rate floors on assets.
- Unfunded Commitments: The Company had $10.0 million in unfunded commitments to three portfolio companies as of December 31, 2018, up from $2.8 million at June 30, 2018.
Investor Verification Checklist
- Unrealized Loss Drivers: Verify the specific credit events or market conditions causing the $14.9 million unrealized depreciation, particularly regarding Trident USA Health Services and Premiere Global Services.
- Debt Covenants: Confirm compliance with asset coverage ratios under the 1940 Act and specific covenants in the UBS Term Financing and 2023 Notes indentures.
- Portfolio Concentration: Review the top 10 portfolio holdings to assess concentration risk, noting that the largest single investment was approximately $24 million (8.65% of net assets).
- Share Repurchase Program: Monitor the execution of the $5.0 million share repurchase program authorized in May 2018, under which $358,573 was spent in the six-month period.
- Non-Qualifying Assets: Note that 10.31% of total assets were non-qualifying assets as of December 31, 2018, which impacts the Company's ability to acquire additional non-qualifying assets under BDC regulations.