Business Context and Reporting Period
Company: HMS Income Fund, Inc. (MSC Income Fund, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2014
Business Model: Externally managed, non-diversified closed-end investment company operating as a Business Development Company (BDC) and Regulated Investment Company (RIC). The Company invests primarily in debt and equity securities of middle market and lower middle market (LMM) companies to generate current income and long-term capital appreciation.
Management: Managed by HMS Adviser LP (affiliate of Hines) with Main Street Capital Corporation (and its subsidiary MSC Adviser I, LLC) serving as Sub-Adviser.
Key Financial Metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total Portfolio Investments (Fair Value) | $473.9 million | $66.9 million |
| Net Investment Income | $11.2 million | $1.7 million |
| Net Increase (Decrease) in Net Assets from Operations | ($3.0 million) | $2.2 million |
| Net Asset Value (NAV) per Share | $8.40 | $8.91 |
| Total Borrowings Outstanding | $182.9 million | $14.0 million |
| Weighted Average Effective Yield (Total Portfolio) | 8.1% | 7.5% |
| Cash and Cash Equivalents | $19.9 million | $6.4 million |
| Stockholder Distributions Declared per Share | $0.70 | $0.70 |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio expanded significantly, increasing from $66.9 million in 2013 to $473.9 million in 2014 (a 607% increase), driven by capital raised from the ongoing public offering and increased leverage.
- Operating Results: While Net Investment Income grew substantially to $11.2 million (from $1.7 million), the Company reported a net decrease in net assets of $3.0 million for 2014, compared to a net increase of $2.2 million in 2013. This reversal was primarily due to $14.2 million in net unrealized depreciation.
- Valuation Declines: The unrealized depreciation was largely attributed to broad price declines in high-yield bond and leveraged loan markets and the impact of declining oil prices on the Company's energy sector investments. Management noted these declines were not necessarily indicative of credit quality deterioration.
- Leverage: Borrowings increased from $14.0 million to $182.9 million as the Company utilized its Syndicated Credit Facility and HMS Funding Facility to finance portfolio growth.
- Offering Price Adjustment: Following the decline in NAV, the Company reduced its public offering price from $10.00 to $9.75 per share effective January 15, 2015.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: The Company intends to continue investing in customized direct secured and unsecured loans and equity securities of LMM companies. It expects to fund future investments through existing cash, capital raised from the offering, and borrowings.
- Fee Waivers and Expense Support: To maintain distributions and manage expenses, the Adviser waived base management fees and administrative expenses. Additionally, the Adviser provided an expense support payment of $328,000 in 2014. The Sub-Adviser ceased waiving fees in 2014, except for a portion of the subordinated incentive fee.
- Default Event: Subsequent to the reporting period (January 5, 2015), a portfolio company with a combined principal balance of $4.4 million failed to repay principal and accrued interest, constituting an event of default.
- Risks: Key risks include the illiquidity of investments, reliance on the Adviser and Sub-Adviser, interest rate fluctuations, and the potential for distributions to exceed earnings (return of capital). The Company is subject to regulatory asset coverage tests under the 1940 Act, which limit borrowing capacity.
- Share Repurchase Program: The Company maintains a quarterly share repurchase program, though it is limited by proceeds from the distribution reinvestment plan and regulatory solvency tests.
Investor Verification Checklist
- NAV vs. Offering Price: Verify the current offering price ($9.75) relative to the most recent NAV per share to assess the premium or discount at which shares are being sold.
- Default Recovery: Monitor the status of the $4.4 million default that occurred in January 2015 and the Company's recovery efforts.
- Expense Support Sustainability: Confirm whether the Adviser's expense support and fee waiver agreements are extended beyond December 31, 2014, as these significantly impacted net investment income.
- Liquidity Event Timeline: Review the Company's progress toward a liquidity event (listing, merger, or liquidation), which is targeted for 4 to 6 years after the completion of the offering period.
- Asset Coverage Ratio: Verify the Company's compliance with the 200% asset coverage ratio required by the 1940 Act, which limits its ability to borrow further or pay distributions.