After my first article on Runway Growth Finance (Nasdaq: RWAY) I was eagerly waiting for the next financial results to see how the company performed in the last quarter.well, someday After the failure of SVB and several other smaller banks, we can get a glimpse, if any, of the impact this has had on the venture capital (VC) market in general and RWAY rolodex’s client roster in particular.
Let’s dig in.
Gross investment income was $39.3 million ($36.8 million in the prior quarter) and net investment income was $18.2 million ($18.4 million in the prior quarter). Net earnings per share translated to 45 cents in the quarter, in line with consensus and flat on a quarterly basis. Spending growth also jumped slightly, but higher interest expense Being the biggest driver here, management fees were a little higher and incentive fees slightly lower. Spending was $21.1 million, up from $18.4 million in Q4 2022.
Higher overall costs offset higher earnings, resulting in flat earnings sequentially.
Seven new loans were issued during the quarter, totaling $12.9 million, with $10.2 million worth of repayments at the same time. Investment losses also occurred, totaling $1.18 million. Total investment increased to $1.16 billion from his $1.14 billion last quarter.
95% of the portfolio is in senior secured loans and the remaining 5% is warrants and equity related investments, spread across 49 portfolio companies. The market price movement of this small portion of the portfolio due to certain restructuring efforts weighed heavily on the net asset value (NAV) of the portfolio. Figures like realized losses and unrealized depreciation (losses) on investments also weighed on, with NAV dropping to $14.07 from $14.22 last quarter. These numbers, highlighted below, are an improvement from last quarter’s positive realized/unrealized P&L of $132,000.
This shows two things. First, the liability portion of the book (95% of the portfolio) is stable. Of course, the equities/warrants portion is subject to greater volatility and market pricing, which is causing some pain in the quarter. While it is an unfavorable weight to earnings at the moment, it is part of a portfolio that could yield greater returns when economic activity and business conditions stabilize and turn positive again.
As we know, losses are part of the lending game and are natural. However, it is comforting to know that RWAY’s loss rate is well contained and much lower than VC and the direct lending industry as a whole.
An interesting point to note is that the entire $12.9 million of new financing that was deployed came from existing contracts where the original financing was delayed. In addition to this, there are still approximately $63 million worth of loans that have been approved but not yet drawn down available this year. This indicates that management is taking a rather conservative position, as they have not put “new” loans or customers on the balance sheet. But at the same time, even if we don’t get any new loans or customers from here, it’s going to be a place where we can see some growth for the rest of the year. Either way, management seems to be taking a wait-and-see approach to the first quarter.
I am going to assume that this conservative behavior has something to do with the current “state” of the market and the economy, and until there is more clarity about inflation and whether there is inflation or not, management is playing it safe. I feel pretty safe when I am there. We’ll also see if interest rates have actually peaked, how the economy will eventually digest the current rate hikes, and of course, if there will be a recession as the year progresses.
Leverage increased slightly, but still falls short of the 1.1x level the company hopes to achieve, and well below the industry group average of around 1.3x. So there is still room to be flexible when the opportunity arises.
In a macro environment that is more challenging than ever, this is a solid and stable quarter for RWAY. Although there were some losses and an increase in expenses, earnings remained flat, a testament to the earning power that the company has built up since its inception. Leverage lower than target leverage and significantly lower than peer group leverage, as well as the fact that 95% of assets are senior stable collateral and first debt with high loan-to-value (LTV) Additionally, it helps mitigate some of the risk compared to other investments in this area. The underlying company share is only 17.4%.
On the conference call, the current 5-cent quarterly add-on dividend is likely to hold despite material downsides and likely remain at that level even as leverage reaches 1.1x. , it was pointed out that this probably suggested that the business would continue. At least for the foreseeable future, and probably forever, it will operate below the average for its peers.
For a more detailed overview of the risks associated with RWAY, see our previous article here.
We add that equity investments in underlying companies, other than those mentioned there, clearly demonstrate that deviations from core top-of-stack debt strategies entail additional risks. increase. Its true benefits are only truly realized in environments where: Interest rates are lower and the business environment is stronger and I’m sure this part of the cycle will come at some point, but it’s worth looking at the impact this will have on NAV and the opportunity cost of not letting these assets go. There is In addition, you can quickly generate another asset.
I believe that the repeated additional dividends indicate that management is satisfied with the performance of the business in the current environment and, as a result, is willing to continue paying dividends in small increments as share price volatility presents opportunities. is thinking
However, once again, these investments are risky and the liquidity in this name is also very small, as large shareholders are large shareholders. So if you choose to invest here, keep that in mind when determining your position size.
At current prices, the dividend yield is 16% and the discount to NAV is over 20%. If you buy or add positions before the close of business on May 11th, you can still earn 45 cents. This makes the yield significantly higher year-on-year, with a cost yield of $2.25. Assuming everything stays the same, it’s 20%.