Investcorp Credit Management BDC(ICMB) - 2020 Q4 - Annual Report

PART I Business Overview The company is an externally managed BDC investing in U.S. middle-market debt, aiming for total return via current income and capital appreciation - The company changed its name to Investcorp Credit Management BDC, Inc. on August 30, 2019[10] - The primary investment objective is to maximize total return to stockholders through current income and capital appreciation from privately held middle-market debt and equity investments[11] - Target middle-market companies typically have annual revenues of at least $50 million and EBITDA of at least $15 million, with investments ranging from $5 million to $25 million[12][39] Portfolio Composition at Fair Value (June 30, 2020) | Investment Type | Percentage of Total Portfolio (%) | | :-------------------- | :-------------------------------- | | First Lien Investments| 83.6% | | Second Lien Investments| 10.2% | | Unitranche Loans | 4.0% | | Equity, Warrant or Other Positions | 2.2% | - As of June 30, 2020, the weighted average total yield on debt and income-producing securities at amortized cost was 9.58%, and on total investments was 9.01%[24] - Investcorp Credit Management US LLC acquired approximately 76% ownership in the investment adviser on August 30, 2019, contributing $32.2 billion in total assets under management to the Investcorp Group by June 30, 2020[28][29] - The company uses a $122.0 million Term Financing facility and a $30.0 million Revolving Financing facility with UBS, both collateralized by debt investments, with $102.0 million and $30.0 million outstanding respectively as of June 30, 2020[13][16][17] - The company has $51.4 million in 6.125% Notes due 2023 outstanding as of June 30, 2020, which are unsecured but effectively and structurally subordinated to secured debt and subsidiary obligations[18][19][21] - Asset coverage requirements for senior securities changed from 200% to 150% effective May 2, 2019, following board approval under the Small Business Credit Availability Act[23][133] Risk Factors The company faces substantial risks from capital market disruptions, economic uncertainty, key personnel dependence, and adviser conflicts, compounded by leverage, illiquid middle-market investments, and subordinated unsecured notes - Capital markets face disruption and economic uncertainty, exacerbated by the COVID-19 pandemic, negatively impacting debt and equity markets, investment valuations, and capital raising ability[165][167][168] - Dependence on key Adviser personnel and potential conflicts of interest from the Adviser's multiple roles and incentive fee structure (potentially encouraging leverage) pose significant risks[188][194][199] - Leverage magnifies potential for loss on investments and equity capital, increasing stockholder risks, with substantially all assets pledged as collateral under financing facilities as of June 30, 2020[230][231] - Investments in private and middle-market companies are risky due to limited public information, potential for financial distress, and susceptibility to economic downturns, leading to possible defaults or losses[285][294][295] - The company's debt investments may be subordinated to other creditors, and Payment-In-Kind (PIK) interest components carry risks of deferred cash receipt and unreliable valuations[293][298][327] Top 3 Industry Concentrations (June 30, 2020) | Industry | Percentage of Total Portfolio (Fair Value) (%) | | :---------------------------- | :--------------------------------------------- | | Professional Services | 11.48% | | Construction & Engineering | 11.18% | | Energy Equipment & Services | 10.92% | - The 2023 Notes are unsecured, effectively subordinated to secured indebtedness (e.g., Financing Facilities), and structurally subordinated to subsidiary liabilities, offering limited protection to noteholders[356][357][359] - The market price of common stock may fluctuate significantly and trade at a discount to net asset value, potentially causing dilution if new shares are sold below NAV or if stockholders do not participate in the dividend reinvestment plan[342][345][353] Unresolved Staff Comments This item is not applicable to the company Properties The company does not own any real estate, with its principal executive offices provided by the Investment Adviser in New York, NY - The company does not own any real estate[373] - Principal executive offices are located in New York, NY, provided by the Adviser[373] Legal Proceedings The company is not currently involved in any material legal proceedings, nor are any material proceedings threatened against it - The company is not currently subject to any material legal proceedings, nor are any material legal proceedings threatened against it[374] - Routine legal proceedings in the ordinary course of business are not expected to materially affect financial condition or results of operations[374] Mine Safety Disclosures This item is not applicable to the company PART II Market for Common Equity and Stockholder Matters The company's common stock trades on NASDAQ under 'ICMB', with a closing price of $4.38 per share as of September 18, 2020, and an 'opt out' dividend reinvestment plan - Common stock is traded on the NASDAQ Global Select Market under the symbol ICMB[378] - As of September 18, 2020, the last reported sale price for common stock was $4.38 per share, with 29 stockholders of record[379] Common Stock Price vs. NAV (Fiscal Year Ended June 30, 2020) | Quarter | NAV Per Share ($) | High Sales Price ($) | Low Sales Price ($) | Discount of High Sales to NAV (%) | Discount of Low Sales to NAV (%) | | :------------ | :---------------- | :------------------- | :------------------ | :-------------------------------- | :------------------------------- | | Fourth quarter| $7.79 | $4.84 | $2.95 | (37.87)% | (62.13)% | | Third quarter | $8.15 | $7.65 | $1.49 | (6.13)% | (81.72)% | | Second quarter| $10.15 | $7.32 | $6.45 | (27.88)% | (36.45)% | | First quarter | $10.19 | $7.65 | $6.65 | (24.93)% | (34.74)% | - The company intends to qualify as a Regulated Investment Company (RIC), requiring distribution of at least 90% of its net ordinary income and realized net short-term capital gains[382] - The company has an 'opt out' dividend reinvestment plan, where cash distributions are automatically reinvested in additional common stock unless stockholders opt out[384] Distributions Declared Per Share (Fiscal Year Ended June 30, 2020) | Quarter | Type | Amount Per Share ($) | | :------------ | :----------- | :------------------- | | First Quarter | Base | $0.2500 | | Second Quarter| Base | $0.2500 | | Third Quarter | Base | $0.2500 | | Fourth Quarter| Base | $0.1500 | | Fourth Quarter| Supplemental | $0.0300 | | Total | | $0.9300 | - No shares of common stock were repurchased during the year ended June 30, 2020[387] Selected Financial Data This section summarizes key financial data for Investcorp Credit Management BDC, Inc. for fiscal years 2016-2020, covering statements of operations, per share data, balance sheet figures, and other operational metrics Selected Financial Data (Years Ended June 30) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------------------ | :------------- | :------------- | :------------- | :------------- | :------------- | | Statement of Operations Data: | | | | | | | Total investment income | $34,460,604 | $34,397,822 | $40,791,752 | $31,012,197 | $35,579,922 | | Total expenses, net of fee waiver | $20,295,322 | $20,898,983 | $21,816,119 | $15,313,613 | $15,725,966 | | Net investment income | $14,165,282 | $13,498,839 | $18,975,633 | $15,698,584 | $19,853,956 | | Net increase (decrease) in net assets | $(24,656,475) | $(14,542,229) | $15,625,480 | $23,579,465 | $(9,344,770) | | Per Share Data: | | | | | | | Net asset value | $7.79 | $10.51 | $12.57 | $12.41 | $11.90 | | Net investment income | $1.03 | $0.99 | $1.39 | $1.15 | $1.45 | | Earnings per share | $(1.79) | $(1.07) | $1.14 | $1.72 | $(0.68) | | Distributions declared | $0.93 | $1.00 | $1.00 | $1.20 | $1.83 | | Balance Sheet Data: | | | | | | | Investments at fair value | $270,621,709 | $306,390,993 | $293,592,013 | $254,907,171 | $272,114,164 | | Cash and cash equivalents | $14,876,444 | $19,706,281 | $5,620,441 | $10,646,697 | $18,433,066 | | Total assets | $296,794,509 | $336,947,992 | $314,534,581 | $296,033,878 | $321,471,906 | | Total liabilities | $188,669,514 | $193,864,102 | $143,011,915 | $126,085,766 | $158,722,023 | | Total net assets | $108,124,995 | $143,083,890 | $171,522,666 | $169,948,112 | $162,749,883 | | Other Data: | | | | | | | Number of portfolio companies | 38 | 33 | 25 | 23 | 22 | | Weighted average yield on debt investments | 9.58% | 10.50% | 11.19% | 9.73% | 9.80% | | Weighted average yield on total investments | 9.01% | 10.25% | 11.12% | 9.64% | 9.70% | Management's Discussion and Analysis This section analyzes the company's financial condition and operations, highlighting the Investcorp Transaction, COVID-19 impact, accounting policies, financing, portfolio, and performance for fiscal years 2020-2018 - The Investcorp Transaction on August 30, 2019, involved Investcorp acquiring a 76% ownership in the Adviser, leading to new Advisory and Administration Agreements, and requiring Investcorp BDC to purchase 680,985 newly issued and 680,985 open-market shares by August 30, 2021[402][404][405] - Operating results for the year ended June 30, 2020, were negatively impacted by the COVID-19 pandemic, causing severe global economic disruptions and significant net unrealized depreciation on investments due to widening credit spreads[409] - Investment valuation is a critical accounting policy, with fair value determined by the board using market and income approaches, often with independent firm input; all investments were classified as Level 3 as of June 30, 2020 and 2019[412][415][416] - Revenue recognition includes accrual of interest income, amortization of fees/discounts, and prepayment penalties; no loans were on non-accrual status as of June 30, 2020, which occurs when payments are 90+ days past due or collectability is doubtful[424][427][428] - The company's financing includes a $102.0 million Term Financing and a $30.0 million Revolving Financing with UBS, and $51.4 million in 6.125% Notes due 2023, which are unsecured and structurally subordinated to secured facilities[431][432][435] Portfolio Composition and Yield (June 30, 2020) | Metric | Value / Percentage | | :------------------------------------------ | :----------------- | | Investment Portfolio Fair Value | $270.6 million | | Number of Portfolio Companies | 38 | | First Lien Investments | 83.6% | | Second Lien Investments | 10.2% | | Unitranche Loans | 4.0% | | Equity, Warrants and Other Positions | 2.2% | | Weighted Average Total Yield (Debt, amortized cost) | 9.58% | | Weighted Average Total Yield (Total, amortized cost) | 9.01% | Key Financial Performance (Years Ended June 30) | Metric | 2020 | 2019 | 2018 | | :-------------------- | :------------ | :------------ | :------------ | | Investment Income | $34.5 million | $34.4 million | $40.8 million | | Total Expenses (net) | $20.3 million | $20.9 million | $21.8 million | | Net Investment Income | $14.2 million | $13.5 million | $19.0 million | | Net Realized Loss | $7.6 million | $22.0 million | $9.9 million | | Net Unrealized Depreciation | $31.2 million | $6.1 million | $6.5 million (appreciation) | - As of June 30, 2020, the company had $14.9 million in cash, $5.4 million in restricted cash, and no capacity under the Revolving Financing, with senior securities totaling $183.4 million and an asset coverage ratio of 159.3%[470] - The Advisory Agreement includes a Base Management Fee of 1.75% of gross assets and an Incentive Fee with income-based (20.0% of Pre-Incentive Fee Net Investment Income above an 8.0% hurdle) and capital gains components (20.0% of cumulative realized capital gains, commencing FY2021)[484][487][493] - Off-balance sheet arrangements primarily consist of unfunded commitments, totaling $2.1 million to three portfolio companies as of June 30, 2020[504] - Subsequent to June 30, 2020, through September 18, 2020, the company invested $13.3 million and received $19.7 million in repayments, with the board declaring a Q1 FY2021 base dividend of $0.15/share and a supplemental dividend of $0.03/share[505][506] Market Risk Disclosure The company is primarily exposed to interest rate risk, with 99.5% of debt investments bearing floating rates, and a 1.00% interest rate increase would raise net interest income by approximately 4.4% - As of June 30, 2020, 99.5% of the company's debt investments bore interest based on floating rates (e.g., LIBOR)[507] Interest Rate Sensitivity (June 30, 2020) | Interest Rate Change (%) | Impact on Net Interest Income (%) | | :----------------------- | :-------------------------------- | | +1.00% | +4.4% | | +2.00% | +4.0% | - Floating rate investments subject to a floor only benefit from interest rate increases once rates exceed the floor[508] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements, including Statements of Assets and Liabilities, Operations, Changes in Net Assets, and Cash Flows for fiscal years 2020-2018, along with detailed Schedules of Investments and comprehensive notes - RSM US LLP provided an unqualified opinion on the consolidated financial statements for the period ended June 30, 2020, confirming conformity with U.S. GAAP[514][518] Consolidated Statements of Assets and Liabilities (June 30) | Metric | 2020 | 2019 | | :------------------------------------------ | :------------- | :------------- | | Total Assets | $296,794,509 | $336,947,992 | | Investments at fair value | $270,621,709 | $306,390,993 | | Cash and restricted cash | $20,293,562 | $26,296,182 | | Total Liabilities | $188,669,514 | $193,864,102 | | Notes payable, net | $182,332,503 | $165,526,408 | | Total Net Assets | $108,124,995 | $143,083,890 | | Net Asset Value Per Share | $7.79 | $10.51 | Consolidated Statements of Operations (Years Ended June 30) | Metric | 2020 | 2019 | 2018 | | :------------------------------------------ | :------------- | :------------- | :------------- | | Total investment income | $34,460,604 | $34,397,822 | $40,791,752 | | Net expenses | $20,295,322 | $20,898,983 | $21,816,119 | | Net investment income | $14,165,282 | $13,498,839 | $18,975,633 | | Net realized gain (loss) from investments | $(7,632,194) | $(21,982,973) | $(9,855,453) | | Net change in unrealized appreciation (depreciation) | $(31,189,563) | $(6,058,095) | $6,505,300 | | Net increase (decrease) in net assets resulting from operations | $(24,656,475) | $(14,542,229) | $15,625,480 | | Net investment income per share | $1.03 | $0.99 | $1.39 | | Earnings per share | $(1.79) | $(1.07) | $1.14 | Consolidated Statements of Cash Flows (Years Ended June 30) | Metric | 2020 | 2019 | 2018 | | :------------------------------------------ | :------------- | :------------- | :------------- | | Net cash provided by (used in) operating activities | $(10,550,392) | $(13,962,564) | $(28,147,866) | | Net cash provided by (used in) financing activities | $4,547,772 | $31,932,032 | $3,211,706 | | Net change in cash | $(6,002,620) | $17,969,468 | $(24,936,160) | | Cash and restricted cash at end of period | $20,293,562 | $26,296,182 | $8,326,714 | Investment Portfolio Composition by Type (June 30, 2020) | Investment Type | Amortized Cost ($) | Percentage of Total Portfolio (Amortized Cost) (%) | Fair Value ($) | Percentage of Total Portfolio (Fair Value) (%) | | :-------------------------------- | :----------------- | :------------------------------------------------- | :------------- | :--------------------------------------------- | | Senior Secured First Lien Debt | $248,155,342 | 78.30% | $237,079,624 | 83.65% | | Unitranche First Lien Debt | $11,277,314 | 3.56% | $10,713,448 | 3.96% | | Senior Secured Second Lien Debt | $38,520,395 | 12.15% | $27,719,133 | 10.24% | | Equity, Warrants and Other | $18,971,587 | 5.99% | $5,822,952 | 2.15% | | Total | $316,924,638 | 100.00% | $270,621,709 | 100.00% | Investment Portfolio Composition by Industry (June 30, 2020, Fair Value) | Industry Classification | Fair Value ($) | Percentage of Total Portfolio (%) | | :-------------------------------- | :------------- | :-------------------------------- | | Professional Services | $31,056,563 | 11.48% | | Construction & Engineering | $30,252,174 | 11.18% | | Energy Equipment & Services | $29,555,420 | 10.92% | | Trading Companies & Distributors | $24,586,660 | 9.09% | | Media | $19,176,144 | 7.09% | | Containers & Packaging | $16,052,915 | 5.93% | | Diversified Telecommunication Services | $12,562,817 | 4.64% | | Commercial Services & Supplies | $12,402,682 | 4.58% | | Retail | $11,700,000 | 4.32% | | Distributors | $9,456,000 | 3.49% | | Internet Software & Services | $9,226,180 | 3.41% | | Consumer Finance | $9,113,150 | 3.37% | | Airlines | $9,067,500 | 3.35% | | Construction Materials | $6,531,518 | 2.41% | | Auto Components | $6,236,446 | 2.31% | | Internet & Direct Marketing Retail| $6,193,975 | 2.29% | | Specialty Retail | $5,641,123 | 2.08% | | Household Durables | $4,919,063 | 1.82% | | Chemicals | $4,800,000 | 1.77% | | Road & Rail | $3,873,349 | 1.43% | | Hotels, Restaurants & Leisure | $3,846,750 | 1.42% | | IT Services | $2,964,904 | 1.10% | | Technology Hardware, Storage & Peripherals | $1,406,376 | 0.52% | | Wireless Telecommunication Services | $0 | 0.00% | | Total | $270,621,709 | 100.00% | Unfunded Commitments (June 30, 2020) | Investments | Unfunded Commitment ($) | | :-------------------------------- | :---------------------- | | 1888 Industrial Services, LLC - Revolver | $594,059 | | 1888 Industrial Services, LLC - Term E | $120,845 | | Altern Marketing, LLC | $1,370,249 | | Limbach Holdings Inc | $5,769,230 | | Total Unfunded Commitments | $7,854,383 | Financial Highlights (Years Ended June 30) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :------------------------------------------ | :------------- | :------------- | :------------- | :------------- | :------------- | | Net asset value, beginning of period | $10.51 | $12.57 | $12.41 | $11.90 | $14.41 | | Net investment income per share | $1.03 | $0.99 | $1.39 | $1.15 | $1.45 | | Net realized and unrealized gains (losses) per share | $(2.82) | $(2.06) | $(0.24) | $0.56 | $(2.13) | | Net increase (decrease) in net assets resulting from operations per share | $(1.79) | $(1.07) | $1.15 | $1.71 | $(0.68) | | Distributions from net investment income per share | $(0.93) | $(1.00) | $(1.00) | $(1.20) | $(1.51) | | Net asset value, end of period | $7.79 | $10.51 | $12.57 | $12.41 | $11.90 | | Market value per share, end of period | $3.49 | $7.61 | $8.90 | $10.00 | $8.88 | | Total return based on market value | (43.32)% | (1.49)% | 0.01% | 27.93% | (21.26)% | | Shares outstanding at end of period | 13,885,335 | 13,619,690 | 13,649,504 | 13,689,221 | 13,679,686 | | Asset Coverage Ratio | 1.59 | 1.85 | 2.43 | 2.67 | 2.23 | | Portfolio Turnover Rate | 33% | 51% | 52% | 52% | 21% | Changes in Accountants and Disclosures There were no changes in or disagreements on accounting or financial disclosure with RSM US LLP, the company's independent registered public accounting firm, during the fiscal year ended June 30, 2020 - No changes in or disagreements on accounting or financial disclosure with RSM US LLP during the fiscal year ended June 30, 2020[754] Controls and Procedures Management concluded that disclosure controls and procedures, and internal control over financial reporting, were effective as of June 30, 2020, with no material changes identified during the quarter - Disclosure controls and procedures were evaluated as effective as of June 30, 2020, providing reasonable assurance for timely and accurate financial reporting[755] - Management's assessment concluded that internal control over financial reporting was effective as of June 30, 2020, based on COSO 2013 criteria[758] - No material changes in internal control over financial reporting were identified during the quarter ended June 30, 2020[759] Other Information This section updates on fees and expenses, including stockholder transaction and annual expenses, detailing Base Management and Incentive Fee components, and provides a hypothetical example of projected cumulative expenses Annual Expenses (as percentage of net assets attributable to common stock) | Expense Category | Percentage (%) | | :-------------------------------------------------- | :------------- | | Base management fees | 4.73% | | Incentive fees payable under the investment advisory agreement (20.0%) | 0.46% | | Interest payments on borrowed funds | 9.54% | | Other expenses | 4.52% | | Total annual expenses | 19.25% | - The incentive fee has two components: an ordinary income component (20.0% of Pre-incentive Fee Net Investment Income over an 8.0% quarterly hurdle rate) and a capital gains component (20.0% of cumulative realized capital gains, net of losses and unrealized depreciation)[762][764] Projected Cumulative Expenses on a $1,000 Investment (assuming 5% annual return) | Period | Cumulative Expenses ($) | | :------- | :---------------------- | | 1 Year | $212 | | 3 Years | $485 | | 5 Years | $686 | | 10 Years | $986 | PART III Directors, Executive Officers and Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Annual Meeting Proxy Statement, with the company maintaining a code of business conduct and ethics - Information is incorporated by reference from the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[772] - The company has adopted a code of business conduct and ethics, available on its website (www.icmbdc.com)[773](index=773&type=chunk) Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[774] Security Ownership and Related Matters Information on security ownership of certain beneficial owners, management, and related stockholder matters is incorporated by reference from the 2020 Annual Meeting Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[775] Related Transactions and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Annual Meeting Proxy Statement - Information is incorporated by reference from the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[776] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement for the 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[777] PART IV Exhibits and Financial Statement Schedules This section lists filed financial statements, including the Report of Independent Registered Public Accounting Firm, consolidated statements, schedules of investments, and comprehensive notes, along with a detailed list of exhibits - Financial statements filed include Consolidated Statements of Assets and Liabilities, Operations, Changes in Net Assets, Cash Flows, Schedules of Investments, and Notes to Financial Statements[778] - Exhibits include Articles of Amendment and Restatement, Bylaws, Form of Stock Certificate, Base Indenture, Investment Advisory Agreement, Administration Agreement, and various other agreements and certifications[779][782] Signatures This section contains the required signatures for the Form 10-K report, including those of the Chief Executive Officer, Chief Financial Officer, and Directors, certifying compliance with the Securities Exchange Act of 1934 - The report is signed by the Chief Executive Officer, Chief Financial Officer, and Directors, certifying compliance with the Securities Exchange Act of 1934[784][785]