Michael Mauer - Chairman and Chief Executive Officer Jai Agarwal - Chief Financial Officer Christopher Jansen - President and Secretary.

Robert Dodd - Raymond James Financial Inc..

Welcome to the Earnings Call Third Fiscal Quarter Ended March 31, 2016 Conference. Your hosts for today’s call are Mike Mauer, Jai Agarwal and Chris Jansen. [Operator Instructions] A question-and-answer session will follow the presentation. I’ll now turn the call over to your speakers. Please begin..

Thank you, operator. Thank you all for joining us today. With me today are Chris Jansen, my Co-Chief Investment Officer, and Jai Agarwal, our CFO. Before we begin, Jai will first give our standard disclaimer regarding information and forward-looking statements.

Jai?.

Thanks, Mike. I would like to remind everyone that today’s call is being recorded. Please note that this call is the property of CM Finance, Inc. and that any unauthorized broadcast of this call in any form is strictly prohibited.

Audio replay of the call will be available by using the telephone numbers provided in our press release announcing this call. I’d also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today’s conference call may also include forward-looking statements and projections.

And we ask that you refer to our most recent filing with the SEC for important factors that could cause actual results to differ materially from these projections. We will not update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.cmfn-inc.com.

At this time, I’d like to turn the call back to our Chairman and CEO, Mike Mauer..

Thank you, Jai. I’d like to take this opportunity to thank, Jai, for his contributions to the firm. As we have announced, Jai, will be leaving us shortly to pursue another opportunity. Jai will be returning to the real estate industry, where he had significant historical experience.

We have extended an employment offer to Rocco DelGuercio, a highly qualified candidate to become our next CFO, who comes to us with a wealth of closed-end fund and BDC experience, as outlined in our 8-K filing yesterday.

He has accepted and we look forward to introducing Rocco to all of you on our next call in September, for our June 30 fiscal year-end. As with our prior calls, I will begin with the discussion of the leveraged finance market. I’ll then turn the call over to Chris to walk through our portfolio activity in the quarter.

And then, I’ll speak a bit about some of the key metrics in our portfolio and fair value marks. Volatility continues to be the theme in the fixed income markets, after a period of increased volatility during the first quarter.

While spreads initially widened in the first quarter, on balance, spreads have tightened marginally since the beginning of the year across broadly syndicated market, the high-yield market and, our focus, the middle market. Middle market investments have been able to maintain better spreads in terms than the broadly syndicated markets.

Very few new-issue deals could clear the market in late 2015 and the tightening effect we have seen over the past few weeks is in some ways is simply a return to a functioning market, where new issue is an option for borrowers and investors. Overall volumes have been less than 50% over the same period last year.

Supply and demand remained somewhat imbalanced, especially for the more storied credits. We have been and continue to be very selective and cautious. But broadly speaking, the environment remains investor-friendly with structures and terms favorable to capital providers like us. I now like to turn the call to Chris to discuss investment activity..

Thanks, Mike. We did not make any new portfolio investments during the quarter. And during the quarter we had one investment realization. Our position in Nexeo Solutions’ notes was our only unsecured investment. And we made that investment in April of last year. The yield to maturity on our notes at the time of purchase was over 13%.

Our realized IRR in this investment was 17%. We are very pleased with our returns here. Since quarter end, we have made one new investment, received one repayment and have seen news that one additional portfolio investment is likely to repay. Our new investment is in the first lien loan of Premiere Global Services or PGI.

PGI is a leading global provider of conferencing and collaboration solutions. Our loan helps back the acquisition of the company by Siris Capital. Our yield on this investment at cost is approximately 10.6%. Our investment in RegionalCare’s second lien term loan was repaid at its 101 call premium.

Recall that Apollo purchased the company via a change of control amendment with lenders in December. Apollo merged RegionalCare with Capella Healthcare and refinanced capital structure in April. Our Realized IRR on our RegionalCare investment was 14.4%.

Remaining on the theme of Apollo and mergers, it was announced that Apollo will be acquiring both AmQuip Crane Rental and Maxim Crane, and merging these two companies. We are invested in the second lien loan to Maxim Crane.

And with its maturity in 2018, we expect to see the new sponsor refinance the capital structure rather than trying to secure change of control amendments as they did with RegionalCare. We did not yet have an expected repayment date for our Maxim position.

Over time, we’ll seek to increase our number of portfolio companies from the 21 we held at quarter-end. As we do, we will continue to focus on diversifying our portfolio.

At March 31, our largest industry concentration was in gaming at 19.2% of the portfolio at fair value, this is up from 18.1% last quarter, and as a result of loan pay-downs and changes in our marks. Our second largest sector was healthcare at 13.7%, followed by energy at 11.6%, and telecommunications at 10.9%.

With the repayment of RegionalCare, our concentration in healthcare declines to 7.8% of the portfolio, while our other weightings increased slightly. I’d now like to turn the call back over to, Mike..

Thanks, Chris. As of March 31, we were 0.83-times levered, essentially unchanged from our leverage at 12.31%. We continue to maintain a balance of first and second lien investments with 51.4% of the portfolio in first lien investments and 48.6% in second lien. We do not currently have any unsecured investments.

The weighted average yield on our debt investments at cost decreased to 9.73% from 10.3% as of December 31. While, Nexeo’s coupon was 8.375, our yield at cost was approximately 13%. And our exit from that investment was a major driver of the decrease in our average yield across the portfolio of this quarter.

The other significant driver was a decision to move AAR from partial non-accrual to full non-accrual. As of March 31, the fair value of the portfolio was $276.5 million. At December 31, the fair value of the portfolio was $293 million.

Our investment activity including sales, pay downs and repayments accounts for $14.3 million of the fair value decrease. The remainder is due to net changes in our marks. With one exception, credit in our portfolio was not a major factor in changes in our fair value this quarter. I’ve spoken at length about AAR in prior calls.

We continue to work through the restructuring process, both on their balance sheet as well as operationally. We received a partial repayment at par about 7% of our principal during this quarter. We move to the remaining position to full non-accrual and we reduced our fair value mark on the balance of the position from 65% to 55%.

Our other non-accrual loan is Bird Electric. Bird remains in default and we continue to work closely with other lenders, the company and the sponsor. These two loans represent 6.1% of our portfolio at fair value and approximately 10% at our amortized cost.

These two investments continue to be developing situations and we are having constructive dialogues with all the stakeholders involved. Both continued to be very well-positioned providers within their respective basins with their key customers, but obviously the oil price environment continues to be a challenge.

Regarding our other investments in the energy space, Caelus and U.S. Well Services, they continue to perform well. Caelus’ commodity hedges in 2016 and 2017 are substantial and we’re struck at much higher oil price than the current spot.

We think they’re best-in-class management team and we’re comfortable with the leverage profile and our collateral coverage. We’ve have been pleased with U.S. Well’s results of operations through a very difficult pricing environment. They have great customer relationships and we think their Clean Fleet technology is a real competitive differentiator.

Our mark was unchanged on both these positions this quarter. As you know, we agreed to waive our incentive fee through 2016 to the extent necessary for NII to cover the dividend. We also have a three-year high water mark. The high water mark was triggered during our prior quarter.

We did not earn any incentive fee in this quarter, due to the high water mark. And we do not expect our earn incentive fees in the current quarter ending June. On April 28, our Board of Directors declared a distribution for the quarter ended June 30, 2016 of $0.3516 per share payable on June 7 to shareholders of record on June 17.

This dividend level represents a 9.375 yield on our IPO price of $15 and 16.2% yield based upon yesterday’s closing price of $8.65. And I’d like to just correct one thing I said, the dividend is payable on July 7, just to correct what I had said. After receiving comments on our SBIC license application with the SBA.

We will not be proceeding with that process at this time. While disappointed, this outcome does not have an effect on our operations we have planned for the future. With that, I would like to turn the call back to Jai to review our results for the quarter..

Thank you, Mike. Our net investment income for the quarter was $4.3 million or $0.31 per share. Our aggregate net realized and unrealized losses were $2.4 million or $0.17 per share. The weighted average yield at cost on our debt portfolio was 9.73%. Our debt portfolio was comprised of 88% floating rate and 12% fixed-rate investments.

Our average portfolio company investment was approximately $13 million and our largest portfolio company investment was $29 million. Further information regarding the composition of our portfolio is included in our Form 10-Q filed yesterday.

With respect to our $50 million financing facility, we had $40 million outstanding at quarter-end and $31 million as of today. And with that, I’ll turn the call back over to Mike..

Thank you, Jai. Our overall portfolio continues to perform well. Volatility in the credit markets is always a challenge, but with that challenge we see opportunities to invest in dislocated credits, in underwriting positions and potentially in companies going through restructuring. We continue to have a great dialogue with our origination sources.

We think the syndicated credit market volatility will continue. And although there are some signs of stability, there are also significant signs of stress. We will remain focused on the quality of the management teams, capital structures, our security and covenants for the protection and preservation of capital over the long-term.

We continue to believe that being patient and conservative is the right approach, especially in this environment. With that, operator, please open the line for Q&A..

Ladies and gentlemen, at this time, we will conduct a question-and-answer session. [Operator Instructions] our first question comes from Robert Dodd from Raymond James. Please state your question..

Hi, guys. Some housekeeping ones first, if I can. On Regional, you said about the repayment, you paid - repaid at 101 which is 170 in prepay fee. And then, the amortized cost is about a 150 below par.

Was there about a 150 in accelerated amortization as well that we’d expect in the second quarter?.

That’s right..

Okay, got it. Just on to a Maxim Crane, I mean, maturity 2018 presuming it repays, which is not guaranteed, I realize.

Would there be a prepayment premium associated with that as well?.

I do not think there is one, but it depends on timing. But I’ll take a look, Robert. I think that one has come down to par..

Okay, got it. Thank you. On the overall supply-demand dynamic, if I can, I mean, from your opening comments, Mike, I mean, volumes down, roughly speaking 50% from this time last year. There is a lot of capital out there. But then the comment you made there were terms were still favorable for capital providers.

Can you reconcile that a little bit for us that, it would seem if there is not a lot of suppliers and there is a ton of demand that the terms would be continuing, they deteriorate last year, but they’d be deteriorating. And that doesn’t seem to be what you’re seeing..

Yes. It’s a great point, Robert. I would say, I’d bifurcate the markets bit here. And we’re seeing a little bit of a pickup in the broadly syndicated market around CLO new issuance. So there is a little bit more bid there. And the vast majority of the fall-off has been around sponsor deals. So they tended to be larger deals.

And so those are the general statement. A lot of the deals we don’t even look at. They’re LIBOR plus 350 to 500. They may have some second-liens that are covenant-lites. And we haven’t been doing any covenant-lites over the last 12 months. We did some before where we thought there was value and everything else. But we thought it got a bit too aggressive.

When we get away from that, we do think that there are a lot of deals that we will not do. We look - our pipeline has over a dozen things in it today that we talk about and we look at. And from our perspective, we have some cash. We have that Maxim Crane, let’s assume that, there is a repayment coming.

We have some capital that we do want to deploy, but we are not in a ramp-up period, where we got to deploy $50 million to $75 million. And so we can be very selective.

And I think when you’re in a position where you can be very selective, there are opportunities from an investor standpoint to either drive terms, structural terms in pricing or to be able to force pricing around a structure that maybe preexisted. And a very good example of that is PGI.

That has evolved and that was a hung position that banks had funded that they wanted to distribute. Regionally it had about 40% equity. That was increased through a pick-hold-note-down to be effectively 50% equity.

It was originally about an 8% yield at a slight discount and so the discount was expanded down to be 10 points to effectively get us to 10.6% yield. And that’s a perfect example to the types of things that selectively we can go after and help drive our target back up into the mid-10%s to 11% yield on the incremental.

I do think that the opportunities to invest in the 12% to 14% are not as attractive and a lot tougher to find than they were 12 and 24 months ago. And then, you will see us more focused in a risk return in this 9 to 12 range..

Got it, got it, thank you. I mean one other investment that stands out on kind of the schedule of investments. Land Holdings, where your fair value is higher than amortized cost, which typically happens if you think a prepayment is potential there as well.

I mean, can you give us - have you heard anything on that front and that’s driving the mark there or…?.

I’m going to ask Chris to address that, but a lot of this comes down to construction risk, operating and loan to value, so….

Hey, Robert, the facility was completed as we spoke about and opened in December, December 9 of last year. Right now, it’s a 103 call until June 26. And then it goes down to 102. Just to refresh our memory, because I think we spoke about this last quarter.

There the deal - the casino itself is being sponsored by an individual who has greater than 65% of the cost of the build invested as equity. The debt here is well under $100 million, which was probably about 60% of what they had originally forecast, because the sponsor has purchased back that pieces of debt from other lenders..

And retired..

…and retired it, we do expect this to either be - there is a significant possibility that it’s refinanced sometime after the call goes to 102. If not we’re quite pleased to hold on to it since it’s a 12% with a very favorable capital structure..

I think it’s a great example of where we have continued to as recently at the last 48-hours have discussion with management, they continue to - management being the principal owner there - they continue to invest more capital either through buying back some of the debt, where he has been able to buy it back between 99 to 101 from other parties.

We are not a seller there. We like the loan to value. We like the proposition. And we think that the longer it’s out there the better it is for our shareholders given the risk return on it. One correction, I just got a note passed to me. Maxim steps down to 101 in the near future, so it’s not par, but it’s more probable 101 take-up..

Got it, thank you. One last one, if I can. Since the end of the quarter, obviously, I mean, loan markets continue to kind of valley, for lack of a better term. I mean, can you give us any color. And I know you don’t want to do this, but I’m going to ask you anyway.

What the move has been or would be in terms of fair value marks since the end of the quarter, just from mark-to-market perspective?.

Yes. You’re right. We do not go through and re-mark fair value on a daily basis. So I don’t even want to try to answer that. I think we are very comfortable with the value of the portfolio. But I could not quantify the benefit of that market move..

Got it. Thank you..

Yes..

Our next question comes from [Owen Val] [ph] from Oppenheimer. Please state your question..

Hi, thank you for taking my question. My question is related to capital deployment. I may ask the question slightly differently. Maybe could you please add more color about the timing and which sector do you see the opportunity to deploy your remaining capital to earn the $0.35 per share? Thank you..

Sure. I think there is two pieces to that, if I can. One is, what is the timing until our next new investment, deploy more capital. And there is nothing that is eminent that we have committed to that we expect to fund in the next 14 days. We are working on several opportunities. As I said, we’ve got a reasonably strong pipeline of investments to look at.

We ended the quarter at 0.83-times leverage, which was basically flat over the prior. We’ve had one repayment, RegionalCare since then, and we have made one investment since then also. So we haven’t fully redeployed, but we partially redeployed that repayment.

As far as second part of the question around fully earning the dividend, we are focused really around being cautious in our approach right now. And while we want to fully earn and cover the dividend, and we will continue to waive our fee even with a full recovery on mark-to-market.

If we didn’t have a high water we’d still be waiving to make sure that we maintain that dividend through the end of the year, as we had said we would. We want to be cautious in the way we deploy capital in this market, because we have seen volatility come and go. And that as Robert had just commented, it feels like we’ve got some more stability.

We’d like to see a little bit more time around that stability as we are looking to deploy. And we would rather be a little under-earning and paying the dividend than deploying capital too fast in the prudent deployment for our shareholders..

Okay. That’s it for me. Thank you very much..

Thank you..

[Operator Instructions] At this time we have no further questions..

Thank you, operator. And at this time, I’d like to thank everyone else who had called in today. Look forward to speaking to you next quarter..

This concludes today’s conference call. Thank you for attending..