Business Context and Reporting Period
Company: HMS Income Fund, Inc. (a Business Development Company or BDC)
Reporting Period: Quarter and nine months ended September 30, 2016
Overview: The Company is an externally managed, non-diversified closed-end investment company focused on generating current income through debt and equity investments in lower middle market and middle market companies. As of September 30, 2016, the Company held 162 investments in 124 companies with a total portfolio fair value of $932.6 million.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2016 | 9 Months Ended Sep 30, 2015 |
|---|---|---|
| Total Investment Income | $64.7 million | $44.5 million |
| Net Investment Income | $36.8 million | $24.7 million |
| Net Realized Gain (Loss) | ($12.0 million) | $0.1 million |
| Net Unrealized Appreciation (Depreciation) | $12.9 million | ($11.5 million) |
| Net Increase in Net Assets from Operations | $37.8 million | $13.3 million |
| Net Asset Value (NAV) per Share | $7.92 | $8.35 |
| Total Assets | $988.4 million | $893.4 million (Dec 31, 2015) |
| Total Liabilities | $426.4 million | $401.8 million (Dec 31, 2015) |
| Cash and Cash Equivalents | $40.0 million | $24.0 million (Dec 31, 2015) |
| Notes Payable (Debt) | $385.0 million | $380.0 million (Dec 31, 2015) |
| Weighted Average Effective Yield | 8.5% | 8.3% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 45% year-over-year, driven by portfolio growth from new equity capital and borrowings. Interest income rose from $43.7 million to $62.4 million.
- Realized Losses: The Company reported a net realized loss of $12.0 million for the nine months ended September 30, 2016, compared to a gain of $0.1 million in the prior year. This was primarily due to an $8.8 million loss from restructuring two Middle Market investments and a $2.4 million loss from exiting one Middle Market investment.
- Unrealized Gains: Net unrealized appreciation of $12.9 million in the current period contrasts with $11.5 million of depreciation in the prior year, attributed to the recovery of high yield bond and leveraged loan markets.
- Expense Increases: Total expenses (net of waivers) increased to $27.9 million from $19.8 million, driven by higher management fees ($3.1 million increase) and interest expense ($3.6 million increase) due to higher average borrowings.
- Non-Accrual Status: Investments on non-accrual status increased from three (in two companies) at year-end 2015 to six (in five companies) as of September 30, 2016. Four of the non-accrual companies were in the oil and gas industry.
Guidance, Outlook, and Risks
- Offering Status: The Company's continuous public offering is expected to close on or about March 31, 2017, though the Board retains the right to accelerate or extend. As of September 30, 2016, $81.7 million had been raised in the current offering.
- Distributions: The Company declared distributions of $0.17 per share for the quarter ended September 30, 2016. Distributions for October through December 2016 were declared at a rate of $0.00191781 per share, per day. A portion of distributions may be funded from sources other than net realized income, including offering proceeds and borrowings.
- Liquidity: The Company maintains two credit facilities: a $125 million Capital One facility ($60 million outstanding) and a $385 million Deutsche Bank facility ($325 million outstanding). Total available borrowing capacity is $125 million, subject to asset coverage ratios.
- Risks: Key risks include interest rate fluctuations (though 85.9% of debt investments are floating rate with floors), credit deterioration in the oil and gas sector, and the potential for distributions to exceed earnings, resulting in a return of capital.
- Fee Waivers: The Advisers waived subordinated incentive fees of $493,000 and administrative services expenses of $1.6 million for the nine months ended September 30, 2016.
Investor Verification Checklist
- Non-Accrual Exposure: Verify the specific credit status and recovery prospects of the six portfolio companies on non-accrual status, particularly the four in the oil and gas sector.
- Realized Loss Drivers: Review the details of the $12.0 million realized losses to understand the restructuring terms and exit strategies for the affected Middle Market investments.
- Distribution Sustainability: Assess the proportion of distributions funded by net investment income versus return of capital or borrowings to evaluate long-term dividend sustainability.
- Debt Covenants: Confirm compliance with asset coverage ratios under the 1940 Act and the terms of the Capital One and Deutsche Bank credit facilities.
- Offering Closure: Monitor the status of the continuous public offering and the Board's decision regarding the March 31, 2017 closing date.