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CM Finance - More Info - Correcting Reader Comments

|Includes: CM Finance (CMFN)

First the comments:

Igork11 wrote "There are 10 sectors, i.e. 10% weighting in Energy is normal diversification."

There are 10 sectors in the S&P 500 - but there are many more sectors (maybe the right term is 'sub-sectors") in a breakdown for BDC diversification.

Here is the data for CMFN:

     
    Percentage of
Total Portfolio
at June 30,
2016
  Percentage of
Total Portfolio
at June 30,
2015
Entertainment and Leisure     19.46 %     8.91 %
Telecommunications     11.04       14.92  
Industrial     7.96       7.56  
Automobiles and Components     7.88       6.08  
Healthcare-Products/Services     6.92       12.58  
Oil and Gas     6.21       8.59  
Construction & Building     5.91       5.86  
Media     5.88       5.84  
Oilfield Services     5.47       6.78  
Trucking and Leasing     5.02       5.83  
Business Services     4.88       -  
Cable     4.08       3.39  
Information Technology     3.59       -  
Services     2.94       2.58  
Utilities     2.76       4.45  
Pipelines     -       2.84  
Chemicals     -       2.51  
Food & Beverage     -       1.28  
Total     100.00 %     100.00 %

the data for ARCC:

The industrial and geographic compositions of our portfolio at fair value as of December 31, 2015:

InInvestment Funds and Vehicles(1) 21.2%

Healthcare Services 14.6%

Other Services 9.0%

Consumer Products 7.7%

Power Generation 6.3%

Manufacturing 6.0%

Business Services 5.3%

Financial Services 4.6%

Education 4.6%

Restaurants and Food Services 3.5%

Oil and Gas 2.9%

Containers and Packaging 2.8%

Food and Beverage 2.5%

Automotive Services 2.3%

Commercial Real Estate Finance 1.1%

Other 5.6%

the data for MAIN:

Energy Equipment & Services, 8%

Hotels, Restaurants & Leisure, 7%

Machinery, 6%

Media, 6%

Construction & Engineering, 5%

IT Services, 4%

Electronic Equipment, Instruments & Components, 4%

Specialty Retail, 4%

Commercial Services & Supplies, 4%

Diversified Telecommunication Services, 4%

Internet Software & Services, 3%

Health Care Providers & Services, 3%

Food Products, 3%

Diversified Consumer Services, 3%

Health Care Equipment & Supplies, 3%

Diversified Financial Services, 3%

Auto Components, 3%

Software, 2%

Oil, Gas & Consumable Fuels, 2%

Computers & Peripherals, 2%

Pharmaceuticals, 2%

Professional Services, 2%

Road & Rail, 2%

Consumer Finance, 1%

Leisure Equipment & Products, 1%

Building Products, 1%

Distributors, 1%

Communications Equipment, 1%

Air Freight & Logistics, 1%

Aerospace & Defense, 1%

Other, 8%

As of the beginning of 2016, the average BDC weighting in energy was 5.0% on the KBW coverage universe:

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9403281 wrote " this BDC has only been around for a couple of years, so its small size and diversification lends itself to volatility."

I am going to potentially mis-read the comment to answer the question - do BDCs of smaller size have to be low diversification BDCs?

Many BDCs own syndicated loans. Some BDCs actually make loans and break them into smaller pieces for resale (or syndication). Those pieces are not one size fits all.

The PFLT portfolio of $551 million consisted of 92 companies.

The BKCC portfolio of $1.021 billion consisted of 40 companies.

I had now complete the 'liability story' spreadsheet in my prior posting on CMFN. I have that data now:

  Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14
Debt 130.968 139.649 144.153 148.827 148.516 128.293 141.441 123.488 85.591 111.521
Debt/share 9.7883 10.2098 10.5444 10.8887 10.8668 9.3871 10.3491 9.0355 6.2626 8.1599
Debt/share to NAV 82.25% 85.37% 86.64% 79.77% 75.41% 65.10% 69.46% 61.68% 42.75% 55.77%
Interest expense 1.013 1.044 1.007 0.985 0.989 0.924 0.895 0.719 0.621 0.663
Interest expense/share 0.0757 0.0763 0.0737 0.0701 0.0724 0.0676 0.0655 0.0526 0.0454 0.0485
Interest expense/TII 12.96% 13.15% 10.11% 9.98% 8.58% 11.09% 9.72% 9.15% 9.40% 11.98%
Annualized Int exp/Debt 3.09% 2.99% 2.79% 2.65% 2.66% 2.88% 1.58% 2.33% 2.90% 2.38%
PWAY - Int exp/Debt 671 bps 672 bps 752 bps 912 bps 825 bps 832 bps 939 bps 882 bps 754 bps 779 bps
To create a good apples to apples number - the CMFN stats need the adjustment provided below
Amortization of issuance 0.364 .364 0.364 0.348 0.341 0.341 0.341 0.173 0.180 0.180
Total debt expense 1.377 1.408 1.371 1.333 1.330 1.265 1.236 0.892 0.801 0.843
Debt expense/share 0.1029 0.1029 0.1003 0.0975 0.0973 0.0926 0.0904 0.0653 0.0586 0.0617
Debt expense/TII 17.62% 17.74% 13.77% 13.51% 11.55% 15.19% 13.42% 11.35% 12.13% 15.23%
Annualized Debt exp/Debt 4.21% 4.03% 3.80% 3.58% 3.58% 3.94% 3.50% 2.89% 3.74% 3.02%
PWAY - Debt exp/Debt 536 bps 568 bps 651 bps 819 bps 733 bps 726 bps 747 bps 826 bps 670 bps 715 bps

CMFN entered into a $102.0 million Term Facility due December 5, 2018 with UBS. The Term Facility is collateralized by the portion of the CMFN's assets. The interest rate is one month LIBOR plus a spread of 2.75% per annum. CMFN has a $50.0 million revolving facility which expires on December 5, 2016. The Revolving Financing bears interest at a fixed rate of 2.00% per annum on drawn amounts and 0.50% per annum on any undrawn portion. As of the end of Q2-16, The term loan has a balance of $102 million and the credit facility a balance of $30.478 million.

Can I expand my red and pink flag count? Not really. There are no problem numbers - but there are problem trends. The debt expense to Debt ratio is low - but it is rising. The debt expense to TII is relatively low - but it is rising.

And the data shows a problem for any BDC that is experiencing trouble. They can sell assets and pay down debt to fix a leverage problem. And lower debt levels will partially cut the debt expense. But it will not cut the component of debt expense that comes from the amortization of issuance costs.