Investcorp Credit Management BDC(US:ICMB)2021-02-09 21:26Investment Strategy and Portfolio - Investcorp Credit Management BDC, Inc. aims to maximize total return to stockholders through investments in debt and equity of privately held middle-market companies [179]. - The company’s investment strategy includes unitranche loans, first and second lien loans, and mezzanine loans to support middle-market companies [179]. - The investment portfolio at fair value was $257.7 million as of December 31, 2020, consisting of debt and equity investments in 37 portfolio companies [231]. - During the three months ended December 31, 2020, the company added three investments in new portfolio companies totaling approximately $17.1 million, all of which were first lien investments [234]. - As of December 31, 2020, 99.4% of debt investments bore interest based on floating rates, while 0.6% bore interest at fixed rates [235]. - The weighted average total yield of debt and income-producing securities at amortized cost was 9.87% as of December 31, 2020, compared to 9.58% as of June 30, 2020 [233]. - The company had two investments with aggregate unfunded commitments of $1.8 million as of December 31, 2020 [236]. Financial Performance - Investment income decreased to $7.1 million for the three months ended December 31, 2020, down from $9.4 million for the same period in 2019, primarily due to a decrease in assets under management [241]. - Net investment income fell to $3.0 million for the three months ended December 31, 2020, down from $3.8 million for the same period in 2019, attributed to a decrease in assets under management [243]. - For the six months ended December 31, 2020, investment income decreased to $14.1 million from $18.0 million for the same period in 2019, primarily due to a decrease in assets under management [247]. - Net investment income decreased to $5.7 million for the six months ended December 31, 2020, down from $7.3 million for the same period in 2019, attributed to decreased investment income offset by lower expenses [249]. - Total expenses for the three months ended December 31, 2020, decreased to $4.2 million, compared to $6.1 million for the same period in 2019, mainly due to reduced interest expenses from the repayment of $20.0 million of Term Financing [242]. - Total expenses for the six months ended December 31, 2020 decreased to $8.5 million, compared to $11.1 million for the same period in 2019, mainly due to a reduction in interest expenses after repaying $20.0 million of Term Financing [248]. COVID-19 Impact - The COVID-19 pandemic has significantly impacted the U.S. and global economy, affecting the company's portfolio companies and potentially leading to financial distress and defaults [194][195]. - The company is assessing the ongoing impact of COVID-19 on its portfolio companies, which may lead to reduced interest payments and impairments on investments [195]. - The company has implemented a work from home policy for employees in response to the COVID-19 pandemic, with most expected to continue working remotely [196]. Management and Fees - The company has a base management fee of 1.75% of gross assets, with an incentive fee of 20.0% on pre-incentive fee net investment income above an 8.0% hurdle rate [187]. - For the three and six months ended December 31, 2020, the Base Management Fees earned by the Adviser were $1,189,440 and $2,410,212, respectively, with $94,359 and $207,330 waived [266]. - No Income-Based Fees were incurred for the three and six months ended December 31, 2020, with $1,237 currently payable to the Adviser [272]. - As of December 31, 2020, there was no Capital Gains Fee accrued, earned, or payable to the Adviser under the Advisory Agreement [275]. Financing and Capital Structure - The company entered into a $102.0 million term secured financing facility, which was amended to increase to $122.0 million, with borrowings outstanding of $102.0 million as of December 31, 2020 [213][214]. - The company had $4.0 million borrowings outstanding under a revolving financing facility as of December 31, 2020, reduced from $30.0 million as of June 30, 2020 [215]. - The company closed a public offering of $30 million in aggregate principal amount of 6.125% notes due 2023, with total net proceeds of approximately $33.2 million [216]. - The 2023 Notes had an outstanding principal balance of approximately $51.4 million as of December 31, 2020, with an estimated fair value of $51.2 million [220]. - The unrestricted cash balance decreased by $11.1 million for the six months ended December 31, 2020, with cash from operating activities increasing by $19.1 million, primarily due to $47.1 million from sales of investments [253]. - As of December 31, 2020, the company had $3.8 million in cash, $4.7 million in restricted cash, and $16.0 million of capacity under the Revolving Financing [254]. Valuation and Investment Risks - As of December 31, 2020, all investments were classified as Level 3 investments based on valuations by the board of directors [205]. - The valuation process for investments involves a multi-step approach, maximizing observable inputs and minimizing unobservable inputs [203]. - Fair value determination involves subjective judgments and estimates, with potential significant differences from values that could be realized [206]. - A 1.00% increase in interest rates would decrease net interest income by approximately 4.0%, while a 2.00% increase would increase net interest income by approximately 3.7% [282]. - Floating rate investments are subject to a floor, which means the company does not benefit from increases in interest rates until they exceed the floor [282]. - The company believes that higher yielding assets in its investment portfolio are less sensitive to interest rate changes compared to other debt investments [282]. - Management's analysis of interest rate sensitivity does not account for changes in credit markets or the composition of the asset portfolio [283].