Investcorp Credit Management BDC(US:ICMB)2023-05-15 20:17PART I. FINANCIAL INFORMATION This section encompasses the company's unaudited consolidated financial statements, management's discussion and analysis of financial condition, market risk disclosures, and internal controls Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including statements of assets and liabilities, operations, cash flows, and detailed investment schedules, with accompanying notes for the periods ended March 31, 2023 Consolidated Statements of Assets and Liabilities As of March 31, 2023, total assets were $239.0 million and total liabilities were $150.8 million, resulting in total net assets of $88.2 million, representing a decrease from $93.5 million as of June 30, 2022, with Net Asset Value (NAV) per share decreasing to $6.13 from $6.50 over the same period Consolidated Balance Sheet Highlights (in millions) | Metric | March 31, 2023 (in millions) | June 30, 2022 (in millions) | | :--- | :--- | :--- | | Total Investments, at fair value | $221.3 | $233.7 | | Total Assets | $239.0 | $246.4 | | Notes Payable, net | $145.3 | $146.8 | | Total Liabilities | $150.8 | $152.9 | | Total Net Assets | $88.2 | $93.5 | | Net Asset Value Per Share | $6.13 | $6.50 | Consolidated Statements of Operations For the three months ended March 31, 2023, the company reported a net decrease in net assets of $1.1 million, or ($0.08) per share, compared to a net decrease of $0.06 million in the prior year period, with the quarterly result driven by a significant net realized loss of $26.9 million, partially offset by a net change in unrealized appreciation of $23.2 million Operating Results Highlights (in millions, except per share data) | Metric | Q1 2023 (3 months, in millions) | Q1 2022 (3 months, in millions) | YTD 2023 (9 months, in millions) | YTD 2022 (9 months, in millions) | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $7.0 | $5.9 | $20.1 | $18.6 | | Net Investment Income | $2.5 | $1.8 | $7.2 | $6.4 | | Net Realized Loss on Investments | ($26.9) | ($6.6) | ($26.9) | ($14.4) | | Net Change in Unrealized Appreciation | $23.2 | $4.7 | $20.8 | $14.6 | | Net Increase (Decrease) in Net Assets | ($1.1) | ($0.06) | $1.2 | $6.7 | | Earnings Per Share | ($0.08) | ($0.00) | $0.08 | $0.47 | Consolidated Schedule of Investments As of March 31, 2023, the total investment portfolio had a fair value of $221.3 million across 35 portfolio companies, heavily concentrated in Senior Secured First Lien Debt at 90.56% of fair value, with largest industry concentrations in Trading Companies & Distributors (15.94%) and Professional Services (14.05%) Portfolio Composition by Investment Type (March 31, 2023) | Investment Type | Fair Value ($) | Percentage of Total Portfolio | | :--- | :--- | :--- | | Senior Secured First Lien Debt Investments | $200,423,277 | 90.56% | | Equity, Warrants and Other Investments | $20,892,152 | 9.44% | | Total | $221,315,429 | 100.00% | - The total investment portfolio fair value decreased from $233.7 million at June 30, 2022 to $221.3 million at March 31, 2023203204 - The portfolio consists of investments in 35 companies, with an average investment size of $6.3 million and the largest single investment at $12.5 million by fair value203 Notes to Unaudited Consolidated Financial Statements These notes detail accounting policies, investment valuation, borrowing facilities, related-party transactions, and financial highlights, including Level 3 asset valuation and adviser fee structure - All investments were valued using Level 3 significant unobservable inputs, as determined by the Board of Directors2882 Borrowings as of March 31, 2023 | Facility | Principal Outstanding (in millions) | Maturity Date | Interest Rate | | :--- | :--- | :--- | :--- | | Capital One Revolving Financing | $81.9 million | Aug 22, 2026 | SOFR + 2.50% | | 4.875% Notes | $65.0 million | Apr 1, 2026 | 4.875% (Fixed) | - The Investment Adviser earns a base management fee of 1.75% of gross assets and a two-part incentive fee (Income-Based and Capital Gains). For the nine months ended March 31, 2023, the Adviser earned $3.2 million in base management fees, of which $0.3 million was voluntarily waived133134 Financial Highlights (Per Share) | Metric | Nine months ended Mar 31, 2023 | Nine months ended Mar 31, 2022 | | :--- | :--- | :--- | | Net asset value, beginning of period | $6.50 | $6.92 | | Net investment income | $0.50 | $0.45 | | Net realized and unrealized (losses) gains | ($0.42) | $0.01 | | Net asset value, end of period | $6.13 | $6.93 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operating results, covering portfolio composition, investment activity, asset quality, liquidity, capital resources, and regulatory compliance, in light of market developments Portfolio and Investment Activity As of March 31, 2023, the investment portfolio was valued at $221.3 million, down from $233.7 million at June 30, 2022, consisting of 35 companies with 90.56% in first lien investments, and a weighted average total yield on debt increasing to 13.36% from 10.09% due to rising interest rates, while asset quality shifted with '3' rated investments increasing to 20.2% of fair value - During the nine months ended March 31, 2023, the company added 16 new investments totaling approximately $29.8 million, with 12 of these in new portfolio companies206 Asset Quality by Investment Rating (% of Portfolio Fair Value) | Investment Rating | Description | March 31, 2023 | June 30, 2022 | | :--- | :--- | :--- | :--- | | 1 | Performing above expectations | 16.2% | 15.0% | | 2 | Performing within expectations | 57.4% | 73.9% | | 3 | Performing below expectations | 20.2% | 10.0% | | 4 | Substantially below, loss of return expected | 5.2% | - | | 5 | Substantially below, loss of principal expected | 1.0% | 1.1% | - As of March 31, 2023, 99.6% of the company's debt investments were floating rate, positioning the portfolio to benefit from rising interest rates207 Results of Operations For the three months ended March 31, 2023, investment income increased to $7.0 million from $5.9 million year-over-year due to rising floating interest rates, but a net realized loss of $26.9 million, primarily from American Teleconferencing Services investments, led to a net decrease in net assets of $1.1 million, while the nine-month period saw net investment income rise to $7.2 million from $6.4 million despite the significant realized loss - For Q1 2023, investment income rose by 18.6% YoY to $7.0 million, driven by higher floating interest rates on the portfolio211212 - A net realized loss of $26.9 million was recorded in Q1 2023, primarily from the write-off of investments in American Teleconferencing Services, Ltd. (Premiere Global Services, Inc.)215 - Net investment income for the nine months ended March 31, 2023, increased to $7.2 million from $6.4 million in the prior-year period, reflecting higher interest income220 Liquidity and Capital Resources As of March 31, 2023, the company had $2.9 million in cash, $11.3 million in restricted cash, and $33.1 million of available capacity under its Capital One Revolving Financing, with an asset coverage ratio of 160.1% exceeding the regulatory minimum of 150%, indicating sufficient liquidity for operational needs, dividend payments, and unfunded commitments of $7.9 million - Total liquidity sources as of March 31, 2023, included $2.9 million in cash and $33.1 million in borrowing capacity226 - The company's asset coverage ratio stood at 160.1% as of March 31, 2023, compliant with the 150% minimum requirement for BDCs228 - For the nine months ended March 31, 2023, cash from operating activities was a positive $15.7 million, while financing activities used $10.7 million, primarily for stockholder distributions and net debt repayments225 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk due to its portfolio of floating-rate investments and use of leverage, with 99.6% of debt investments being floating-rate as of March 31, 2023, and management estimating that a 1.00% increase in interest rates would increase net interest income by approximately 8.03%, with no hedging transactions in place - As of March 31, 2023, 99.6% of the company's debt investments bore floating interest rates, making its income sensitive to rate changes239 Interest Rate Sensitivity Analysis (as of March 31, 2023) | Change in Interest Rates | Estimated Impact on Net Interest Income (%) | | :--- | :--- | | +1.00% | +8.03% | | +2.00% | +16.06% | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2023, concluding they were effective at a reasonable assurance level, with no material changes to internal control over financial reporting identified during the quarter - The CEO and CFO concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective245 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls246 PART II. OTHER INFORMATION This section covers legal proceedings, updated risk factors, unregistered sales of equity securities, and a list of filed exhibits Item 1. Legal Proceedings The company reports that it is not currently subject to any material legal proceedings, other than ordinary routine litigation incidental to its business - The company is not currently subject to any material legal proceedings248 Item 1A. Risk Factors The company states there have been no material changes to the risk factors disclosed in its Annual Report on Form 10-K for the year ended June 30, 2022, except for the addition of a new risk factor addressing the potential impact of adverse developments in the financial services industry, such as liquidity issues or failures of financial institutions where the company, its Adviser, or its portfolio companies may hold cash balances exceeding federally insured limits - A new risk factor was added concerning the potential impact of adverse developments in the financial services industry, including the risk of holding cash balances at financial institutions that exceed federally insured limits251 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended March 31, 2023, the company issued 3,319 shares of common stock under its dividend reinvestment plan for a total of $11,562, with these issuances not registered under the Securities Act - In Q1 2023, 3,319 shares were issued via the dividend reinvestment plan for $11,562254 Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including certifications from the CEO and CFO as required by the Sarbanes-Oxley Act of 2002, and Inline XBRL documents - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906260