Investcorp Credit Management BDC(US:ICMB)2023-09-21 20:07markdown [Part I](index=3&type=section&id=PART%20I) [Business](index=3&type=section&id=Item%201.%20Business) The company operates as an externally managed Business Development Company (BDC) focused on maximizing total return by investing in debt and equity of U.S. middle-market companies - The company is an externally managed **BDC** and a **RIC**, primarily investing in debt of **U.S. middle-market companies** with enterprise values under **$750 million**[11](index=11&type=chunk)[12](index=12&type=chunk) Portfolio Snapshot as of June 30, 2023 | Metric | Value | | :--- | :--- | | Total Portfolio Fair Value | $220.1 million | | Number of Portfolio Companies | 36 | | First Lien Investments (as % of FV) | 89.21% | | Equity, Warrant, Other (as % of FV) | 10.79% | | Weighted Average Total Yield (Debt & Income Producing) | 12.46% | - The company is externally managed by **CM Investment Partners LLC**, which is approximately **76%** owned by **Investcorp Credit Management US LLC**[23](index=23&type=chunk)[24](index=24&type=chunk) [Portfolio Composition and Strategy](index=4&type=section&id=1.1%20Portfolio%20Composition%20and%20Strategy) The company's $220.1 million portfolio, as of June 30, 2023, is concentrated in specific industries, focusing on first and second lien loans to middle-market companies with defined revenue and EBITDA thresholds Top 5 Industry Concentrations (at Fair Value) - June 30, 2023 | Industry | Percentage of Total Portfolio | | :--- | :--- | | Trading Companies & Distributors | 15.98% | | Professional Services | 12.83% | | IT Services | 10.71% | | Commercial Services & Supplies | 6.51% | | Software | 6.26% | - The company primarily invests in standalone **first and second lien loans**, and **unitranche loans**, with selective investments in unsecured debt and equity, targeting companies with revenues of at least **$50 million** and EBITDA of at least **$15 million**[35](index=35&type=chunk) - The investment portfolio is managed using a **five-level risk rating system**, with **59.7%** of the portfolio by fair value rated **1 or 2** (performing at or above expectations) and **11.9%** rated **4 or 5** (performing substantially below expectations) as of **June 30, 2023**[55](index=55&type=chunk)[56](index=56&type=chunk)[57](index=57&type=chunk) [Management and Advisory Agreements](index=14&type=section&id=1.2%20Management%20and%20Advisory%20Agreements) The company is managed by CM Investment Partners LLC under an Advisory Agreement, outlining a Base Management Fee and a two-part Incentive Fee, alongside an Administration Agreement for services - The Base Management Fee is **1.75%** annually of gross assets, excluding cash and cash equivalents[76](index=76&type=chunk) - The Income-Based Incentive Fee is **20%** of pre-incentive fee net investment income over an **8%** annualized hurdle rate, with a catch-up provision, subject to a **Total Return Requirement**[79](index=79&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk) - The Capital Gains Fee is **20%** of cumulative realized capital gains, net of cumulative realized losses and unrealized depreciation, since the agreement's commencement[86](index=86&type=chunk) - The Board of Directors, including all Independent Directors, approved the continuation of the Advisory Agreement on **August 29, 2023**, finding the fees reasonable for the services provided[99](index=99&type=chunk)[100](index=100&type=chunk) [Regulation and Taxation](index=23&type=section&id=1.3%20Regulation%20and%20Taxation) Operating as a BDC and RIC, the company adheres to 1940 Act requirements for asset composition and coverage, and tax rules for income distribution - As a BDC, the company must invest at least **70%** of its assets in "**qualifying assets**," typically securities of private or small public U.S. companies[117](index=117&type=chunk) - The company is permitted to issue senior securities if its asset coverage ratio is at least **150%** immediately after issuance, a level adopted effective **May 2, 2019**[120](index=120&type=chunk)[121](index=121&type=chunk) - To maintain its RIC status and avoid corporate-level income tax, the company must distribute at least **90%** of its annual investment company taxable income to shareholders[136](index=136&type=chunk) [Risk Factors](index=29&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including dependence on key personnel, conflicts of interest, leverage, illiquidity, industry concentration, regulatory compliance, and market disruptions - The business is highly dependent on **key personnel** of the Adviser, particularly **Messrs. Mauer and Shaikh**, whose loss could significantly harm the company's ability to achieve its investment objective[153](index=153&type=chunk) - The use of leverage magnifies potential gains and losses, requiring the company to maintain an asset coverage ratio of at least **150%**, where a decline in asset value could force disadvantageous asset sales[161](index=161&type=chunk)[163](index=163&type=chunk) - The portfolio is concentrated in a few industries, with **Trading Companies & Distributors (16.0%)**, **Professional Services (12.8%)**, and **IT Services (10.7%)** representing significant portions as of **June 30, 2023**, exposing the company to downturns in these sectors[225](index=225&type=chunk)[226](index=226&type=chunk) - The transition away from **LIBOR** to alternative rates like **SOFR** could cause market disruptions and adversely impact the value of certain investments[240](index=240&type=chunk)[241](index=241&type=chunk) [Properties](index=57&type=section&id=Item%202.%20Properties) The company does not own real estate, with its principal executive offices provided by the Adviser under an Administration Agreement - The company **does not own any real estate**; its office facilities are provided by the Adviser pursuant to the **Administration Agreement**[316](index=316&type=chunk) [Legal Proceedings](index=57&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently subject to any material legal proceedings, nor is it aware of any threatened against it - The company is **not currently subject to any material legal proceedings**[317](index=317&type=chunk) [Part II](index=58&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=58&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under 'ICMB', experiencing a significant discount to NAV in FY2023, while maintaining quarterly distributions and an opt-out dividend reinvestment plan Quarterly Stock Price and Distribution Data (Fiscal Year 2023) | Quarter | NAV per Share | High Price | Low Price | Discount to NAV (High) | Discount to NAV (Low) | Distribution per Share | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Q1 2023 | $6.47 | $4.85 | $3.52 | (25.04)% | (45.60)% | $0.15 | | Q2 2023 | $6.36 | $4.32 | $3.42 | (32.08)% | (46.23)% | $0.15 | | Q3 2023 | $6.13 | $4.23 | $3.39 | (31.00)% | (44.70)% | $0.15 | | Q4 2023 | $6.12 | $3.98 | $3.24 | (34.97)% | (46.99)% | $0.18 | - As of September 15, 2023, the company's common stock traded at a discount of approximately **33.50%** to its **June 30, 2023** NAV of **$6.09 per share**[324](index=324&type=chunk) - The company has an '**opt out**' dividend reinvestment plan (**DRIP**), where cash distributions are automatically reinvested unless the stockholder elects to receive cash[328](index=328&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=62&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For FY2023, net investment income increased, despite a significant net realized loss partially offset by unrealized appreciation, while credit quality shifted and liquidity was maintained with a strong asset coverage ratio Results of Operations Comparison (in millions) | Metric | FY 2023 | FY 2022 | FY 2021 | | :--- | :--- | :--- | :--- | | Total Investment Income | $26.7 | $24.4 | $26.7 | | Net Expenses | $17.3 | $15.5 | $17.6 | | **Net Investment Income** | **$9.4** | **$8.9** | **$9.1** | | Net Realized Loss | ($26.9) | ($14.4) | ($5.8) | | Net Change in Unrealized Appreciation (Depreciation) | $20.7 | $8.1 | ($5.6) | | **Net Increase (Decrease) in Net Assets** | **$3.2** | **$2.6** | **($2.3)** | Portfolio Risk Rating Distribution (% of Fair Value) | Investment Rating | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | 1 - Performing Above Expectations | 7.5% | 15.0% | | 2 - Performing Within Expectations | 52.2% | 73.9% | | 3 - Performing Below Expectations | 28.4% | 10.0% | | 4 - Substantially Below, Loss of Return Expected | 6.0% | 0.0% | | 5 - Substantially Below, Loss of Principal Expected | 5.9% | 1.1% | - As of June 30, 2023, the company had **$71.9 million** outstanding on its **$100 million** Capital One Revolving Financing and **$65.0 million** of **4.875% Notes due 2026**, with an asset coverage ratio of **164.1%**, above the required **150%**[373](index=373&type=chunk)[380](index=380&type=chunk)[411](index=411&type=chunk) - Unfunded commitments to portfolio companies decreased to **$6.0 million** as of **June 30, 2023**, from **$13.9 million** as of **June 30, 2022**[437](index=437&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=78&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate sensitivity, with 99.6% of debt investments being floating-rate, leading to a positive impact on net interest income from hypothetical rate increases - As of **June 30, 2023**, **99.6%** of the company's debt investments bore floating interest rates, making net interest income sensitive to rate changes[440](index=440&type=chunk) Interest Rate Sensitivity Analysis (as of June 30, 2023) | Change in Interest Rates | Estimated Impact on Net Interest Income | | :--- | :--- | | +1.00% | +5.4% | | +2.00% | +13.4% | [Financial Statements and Supplementary Data](index=80&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) The FY2023 audited financial statements show total assets of $231.8 million and net assets of $87.7 million, with a NAV per share of $6.09, and an unqualified auditor's opinion highlighting Level 3 investment valuation Consolidated Financial Highlights (Per Share) | For the Year Ended June 30, | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net asset value, beginning of year | $6.50 | $6.92 | $7.79 | | Net investment income | $0.65 | $0.62 | $0.65 | | Net realized and unrealized gains (losses) | ($0.43) | ($0.44) | ($0.82) | | **Net increase (decrease) in net assets** | **$0.22** | **$0.18** | **($0.17)** | | Dividends from net investment income | ($0.63) | ($0.60) | ($0.70) | | **Net asset value, end of year** | **$6.09** | **$6.50** | **$6.92** | - The independent auditor, **RSM US LLP**, issued an **unqualified opinion** on the financial statements and highlighted the valuation of **Level 3 investments** as a **critical audit matter** due to subjective judgments involved[447](index=447&type=chunk)[452](index=452&type=chunk)[453](index=453&type=chunk) Consolidated Statement of Assets and Liabilities (in millions) | | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Total Investments, at fair value | $220.1 | $233.7 | | Total Assets | $231.8 | $246.4 | | Total Liabilities | $144.1 | $152.9 | | **Total Net Assets** | **$87.7** | **$93.5** | | **Net Asset Value Per Share** | **$6.09** | **$6.50** | [Controls and Procedures](index=120&type=section&id=Item%209A.%20Controls%20and%20Procedures) As of June 30, 2023, management concluded that both disclosure controls and internal control over financial reporting were effective, with no material changes identified - Management concluded that the company's disclosure controls and procedures were **effective** as of **June 30, 2023**[630](index=630&type=chunk) - Based on the **COSO 2013 framework**, management determined that the company's internal control over financial reporting was **effective** as of **June 30, 2023**[633](index=633&type=chunk) [Part III](index=121&type=section&id=PART%20III) Information for Part III (**Items 10-14**) is incorporated by reference from the company's definitive **Proxy Statement** for the **2023 Annual Meeting of Stockholders** - Information required for Part III (**Items 10-14**) is incorporated by reference from the definitive **Proxy Statement** for the **2023 Annual Meeting of Stockholders**[637](index=637&type=chunk) [Part IV](index=122&type=section&id=PART%20IV) Part IV lists the financial statements, schedules, and comprehensive exhibits filed with the report or incorporated by reference, including governance and material contracts - Part IV lists the **financial statements, schedules, and exhibits** filed with the **Form 10-K**[645](index=645&type=chunk)[646](index=646&type=chunk)