CM Finance: Changes To Financing
On November 27, 2017 CM Finance (CMFN) announced changes to its financing facility with UBS in a SEC filing. (At this time, CMFN has not posted the 8-K filing to its website, so we have provided a link to the official SEC site) . Here are the details and an analysis and discussion of the potential impact on expenses, earnings and liquidity of the BDC; followed by a discussion of our own investment approach.
On November 20, 2017, CMFN announced changes to its existing Term and Revolver with UBS AG.
First, the Term facility was extended by 1 year to December 5, 2020.
Pricing remains unchanged at LIBOR + 2.75% through December 4, 2018 and LIBOR + 2.55% from December 5, 2018 to maturity.
The Company also incurs an annual fee of approximately 1% of the outstanding borrowings under the Term Financing.
The amount outstanding under the Term Loan is $102mn.
Second, CMFN is arranging for a $50mn Revolver from UBS AG.
Outstandings will be charged an interest rate of LIBOR + 3.55%, and unused amounts will involve a fee of 2.5%-2.75%, depending on the percentage of the Revolver drawn.
The financing expires December 5, 2019.
With the draw of the new UBS Revolver, CMFN repaid a similar revolver with Citi on November 20, 2017.
According to the latest 10-Q, the Citi Revolver was $27.0mn and was priced at LIBOR + 485 bps.
The press release says the new financing arrangements will “decrease aggregate financing costs”.
Between them, the Term Loan and Citi Revolver accounted for all the debt financing CMFN enjoys at September 30, 2017.
The Citi Revolver was only booked in November 2016, and was due to expire May 1 2019.
CMFN was paying an unused utilization fee equal to 2.85% of undrawn amounts ($23mn at September 30, 2017).
As a result, CMFN will have to accelerate the write-off of any amortized costs associated with the Citi financing.
CMFN had previously borrowed $50mn under a Revolving Facility with UBS but that facility had expired in December 2016 and was replaced with the Citi Revolver.
The prior UBS Revolver was priced at a fixed rate of 2.0% on drawn amounts and 0.5% on undrawn.
At September 30, 2017 CMFN had pledged $249mn of loan and cash assets to support the UBS and Citi financings.
We don’t expect the savings to CMFN from this change in the Revolver financing to be material. Net of the Term debt fee and legal costs, the annual savings will amount to 3-4 cents per share.
We also can’t help noting that CMFN is paying UBS for the Revolver a spread over LIBOR substantially higher than a year ago.
That suggests the lender is worried about increased credit risks at CMFN and has upped its pricing at a time when many borrowers – including BDCs- are getting better terms.
Nor is there any additional liquidity generated from CMFN from these new facilities.
As far as we can tell, the amount of availability under the Revolver remains unchanged.
Technically, CMFN can draw up to $23mn more under the Revolver, but with asset coverage of debt already tight and the need to hold back some availability for committed draws or to adjust for further asset write downs (10% of all assets or $27mn at FMV are rated as performing below expectations) any increase in borrowings (and thus in portfolio assets or earnings ) is likely to be minor ($0-$10mn).
We discussed some of the specific risks in our prior November 11 article.
Down The Road A Bit
The bigger risk is what might happen – or not – in 2019 when the Revolver comes up for refinancing and in 2020 when the Term debt is due.
A modest drop in the value of CMFN’s loan collateral and/or less generous market advance rates for debt investments might make refinancing the UBS facilities difficult.
At least 5 of the loans held as collateral for the Term & Revolver are to borrowers whose loans have been written down from par.
A couple of others are to fully valued borrowers but who are in the notoriously unpredictable energy industry.
With a bit of bad luck in a one or two key investments, or due to a general reduction in the value of credit assets, CMFN might have a liquidity crunch on its hands in 2019-2020.
To quantify the issue: just a 10% drop in asset values could trigger a shortfall.
Our approach has not changed since our prior article.
We have no position in CMFN’s common stock and have no intention of taking one.
The risk of a liquidity crunch and of a lower dividend are too high even with the stock dropping to $8.50 at time of writing (versus NAV of $12.39).
There are still chances CMFN might be able to maintain its distribution while staying within the BDC and debt financing coverage limits, but the odds are not great.
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