Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company and Regulated Investment Company)
Reporting Period: Quarter and nine months ended September 30, 2017
Business Overview: The Company invests primarily in illiquid debt and equity securities of lower middle market and middle market companies. It is externally managed by HMS Adviser LP and MSC Adviser I, LLC (a subsidiary of Main Street Capital Corporation).
Capital Markets Activity: The Company closed its continuous public offering to new investors effective September 30, 2017, having raised approximately $172.0 million since the offering's inception.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2017) | Amount ($ in thousands) | Per Share Amount |
|---|---|---|
| Total Investment Income | $76,243 | $0.99 |
| Net Investment Income | $43,246 | $0.56 |
| Net Realized Gain (Loss) | $3,359 | $0.04 |
| Net Unrealized Appreciation (Depreciation) | $(7,165) | $(0.09) |
| Net Increase in Net Assets from Operations | $39,440 | $0.51 |
| Total Assets | $1,158,088 | - |
| Total Portfolio Investments (Fair Value) | $1,090,706 | - |
| Total Liabilities | $512,143 | - |
| Notes Payable (Debt) | $490,000 | - |
| Cash and Cash Equivalents | $39,709 | - |
| Net Assets | $645,945 | - |
| Net Asset Value (NAV) per Share | - | $8.16 |
| Distributions Declared per Share | - | $0.52 |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased to $76.2 million for the nine months ended September 30, 2017, compared to $64.7 million in the prior year period. This was driven by portfolio growth from new equity capital and borrowings, as well as accelerated accretion of original issue discounts.
- Expense Increases: Total expenses (net of waivers) rose to $32.9 million from $27.8 million year-over-year. Increases were primarily due to higher interest expense (due to increased average borrowings and rates) and higher base management fees.
- Realized vs. Unrealized Gains: The Company reported a net realized gain of $3.4 million, a significant improvement from a net realized loss of $12.0 million in the prior year. However, this was offset by net unrealized depreciation of $7.2 million, compared to net unrealized appreciation of $12.9 million in the prior year.
- Portfolio Composition: The portfolio grew by approximately 10.8% on a cost basis. The weighted average effective yield on the portfolio decreased slightly from 8.9% to 8.5%.
- Debt Levels: Outstanding borrowings increased to $490.0 million ($95.0 million EverBank facility; $395.0 million Deutsche Bank facility) from $413.0 million at year-end 2016.
Guidance, Outlook, Risks, and Unusual Items
- Offering Status: The continuous public offering was closed to new investors on September 30, 2017. Future capital growth will rely on the distribution reinvestment plan and potential future offerings.
- Fee Waivers: The Advisers waived subordinated incentive fees on income of approximately $2.3 million and administrative services expenses of $2.2 million for the nine months ended September 30, 2017. These waivers are not subject to future reimbursement for administrative expenses, while incentive fee waivers may be subject to reimbursement under specific conditions.
- Asset Quality: As of September 30, 2017, five debt investments in four portfolio companies were on non-accrual status, representing approximately 0.3% of the total portfolio at fair value. This is an increase from three investments in two companies at year-end 2016.
- Unfunded Commitments: The Company had $57.6 million in outstanding unfunded commitments (loans and capital) as of September 30, 2017, up from $42.7 million at year-end 2016.
- Subsequent Events: In October 2017, the Company amended its EverBank Credit Facility to increase commitments to $120.0 million. Additionally, the Company filed a tender offer to repurchase approximately 1.6 million shares at NAV.
- Risk Factors: The Company is subject to interest rate risk, as a significant portion of its portfolio and borrowings are floating rate. It also faces credit risk inherent in lending to middle market companies.
Investor Verification Checklist
- Distribution Sustainability: Verify the source of distributions, noting that for the nine months ended September 30, 2017, 100% of distributions were funded by net realized income from operations, though the Company notes it may use other sources (borrowings, offering proceeds) in the future.
- Fee Waiver Terms: Review the conditions under which the $2.3 million in waived incentive fees could be required to be repaid to the Advisers.
- Non-Accrual Trends: Monitor the five investments currently on non-accrual status and the potential for further credit deterioration in the portfolio.
- Leverage Capacity: Confirm the Company's ability to draw on the remaining $5.0 million of capacity under the Deutsche Bank Credit Facility, subject to asset coverage ratios.
- Offering Closure Impact: Assess the impact of the closed offering on future asset growth and the reliance on the distribution reinvestment plan for capital formation.