Mike Mauer - Chief Executive Officer Chris Jansen - Co-Chief Investment Officer Rocco DelGuercio - Chief Financial Officer.

Ryan Lynch - KBW Robert Dodd - Raymond James Chris Kotowski - Oppenheimer.

Welcome to the CM Finance Fourth Quarter Earnings Release Conference Call. Your speakers for today’s call are, Mike Mauer, Chris Jansen and Rocco DelGuercio. [Operator Instructions] A question-and-answer session will follow the presentation. I’ll now turn the call over to your speakers. Gentlemen, you may begin..

Thank you, Operator. Thank you all for calling in today. I’m joined today by Chris Jansen, my Co-Chief Investment Officer and Rocco DelGeurcio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information on forward-looking statements.

Rocco?.

Thanks Mike. I would like to remind everyone that today’s call is being recorded and that this call is a property of CM Finance, Inc. Any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of this call will be available by visiting our Investor Relations page on our Web site at www.cmfn-inc.com.

I would also like to call your attention to the Safe harbor disclosure in our press release regarding forward-looking information, and remind everyone that today’s call may include forward-looking statements and projections.

We ask that you refer to our most recent 10-K filing for important factors that may 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 Investor Relations page on our Web site.

At this time, I would like to turn the call back over to our Chairman and CEO, Michael Mauer..

Thanks, Rocco. As has become our tradition, I will begin with a discussion of the leveraged finance market. Next, Chris will review our investment activity during the quarter and Rocco will discuss our financial results. I will conclude with some commentary on our outlook for the portfolio. Lending conditions remained borrower friendly.

In both the syndicated loan market and in the upper and middle market, covenant like deals are the norm and structures are aggressive. Refinancing and re-pricing activity appears to have slowed somewhat since quarter end. However, according to LCD, almost half the loans to the middle market issuers were covenant light in the calendar second quarter.

We pride ourselves on our attention to documentation and the weak structures, which our current market standard are concerned to us. Our diverse multi-channel origination is not dependant on sponsor finance.

Our team also maintains long-standing trading relationships, which helps us to find opportunities in the secondary market that many of our BDC peers do not focus on. Through our relationships with Cyrus Capital and with Stifel, we see diverse opportunities, which are not generally visible to other lenders.

As a reminder, Stifel is a full-service retail and institutional broker and an investment banking firm. As of June 2017, Stifel covered approximately 1,200 U.S. and 290 European equities and has over 2,000 financial advisors.

In addition, the investment banking group, consisting over 400 professionals and support associates, focused on middle-market companies as well as large companies in targeted industries for Stifel.

Also, Cyrus Capital Partners, founded by Stephen Freidheim in 1999 is a registered investment advisor with officers in New York and London, managing several billion dollars.

Cyrus Invest, on a global basis in securities and loans, issued by corporates and sovereigns and invest across the entire capital structure of companies, taking positions in debt, equity and derivatives. It also directly structures capital solutions for companies and leads capital raises.

Cyrus is an active investor is deep value focused and experienced in legal and process oriented opportunities. The Cyrus team is comprised of professionals with skill sets, including bankruptcy and restructuring, industry expertise, legal, private equity, capital structure derivatives, trading and capital markets.

Through these strategic relationships and the proprietary networks of our investment team, we are well positioned to call-on high quality industry, product and situational expertise, as well as leveraging our origination capacity.

Today, our pipeline is focused largely on direct lending opportunities, supplemented by secondary investments and add-ons to existing issuers. All of these channels allow us to bifurcate our analysis into fundamental credit analysis and analysis of available structural and covenant protection for our shareholders' capital.

We’re always focused on first and second lien lending to high quality management teams and companies. We are optimistic about the opportunities in our current pipeline, and we expect to continue to be able to deploy the capital we've gotten back from prepayment into new investments.

I'd now like to turn the call over to Chris to discuss our portfolio activity..

Thanks Mike. We made seven investments during the quarter, including six new portfolio companies and one investment and an existing portfolio company. We also had six realizations during the quarter, and I'll cover the realizations first. We sold our positions in the first-lien of Immucor and the first lien of Intermedia.

Both of these were small holdings where we couldn't build a meaningful position, so we use market liquidity to exit both positions at attractive returns. Our realized IRRs for these short holding periods were 24.1% and 20.2% respectively.

Our investment in School Specialty repaid its exit loan at par as Company's exit loan was refinanced at lower rates. Our fully realized IRR was 14%. Additionally, Telecommunications management repaid its loans in connection with CableOne's acquisition of the Company. Our fully realized IRR was 9.6%.

We also fully realized our position in North American Lifting Holdings, also known as TNT Crane. The Company’s leverage increased substantially during our holding period, and we remain concerned about liquidity in the Company and market exposure.

We sold our second lien position, realizing a capital loss but a positive IRR of 7.5% on this investment during our holding period. We also received repayment at full of our position in AP Gaming, which had been our largest portfolio company investment. AP Gaming refinanced its loans and we participated in the new first lien loan.

Our fully realized IRR was 10.6% and our yield on our new first lien position at cost is 6.9%. We also participated in the incremental second line loan for Touch Tunes, an interactive music and entertainment company. This loan funded the merger of Touch Tunes and PlayNetwork. Our yield at cost is 9.4%.

As I mentioned on our last call, we purchased second lien secured notes of International Wire Group. International Wire is a manufacturer of copper wire products for a variety of end market customers. Our yield at cost is 11.3%.

We added to our position in the first lien loan to Montreign, which was our one investment in an existing portfolio of company this quarter. We participate in the new first lien loan for Melissa & Doug, which is a maker of a wide variety of children’s toys.

Our position here was lower than we’d like, and we sold it shortly after quarter end, realizing an IRR of 20%. Finally, we invested in Immucor’s new first lien loan in the primary market. This is a new deal for the same issuer, which we held for several months, but sold in April.

Immucor develops, manufactures and sells manual and automated analysis equipment used to test blood for transfusions. Our yield at cost is approximately 6.8%. After quarter end, we had two realizations and one new portfolio company investment. As I just mentioned, we realized our second investment in Melissa & Doug.

We also realized our investment in YRC Worldwide, which we had held since CM’s IPO in February 2014. Our realized IRR on YRC was approximately 10%. Our new portfolio company investment made after the quarter was in the first lien loan to CareerBuilder.

This loan backed Apollo purchase of the company, which is a leading online employment Web site on the Internet, which serves both employers and job seekers. Our yield at cost is 9%. We had 21 portfolio companies as of March 31st and 23 portfolio companies as of June 30th. Today, we have 22 portfolio companies.

As of June 30, our largest industry concentration was in business services at 16.7% of the portfolio at fair value. Energy, through exposure to both oil and gas and oilfield services industries, was second largest sector at 15.6%; followed by entertainment and leisure at 15.0%; telecommunications at 12.0% and healthcare at 11.2%.

I would now like to turn the call over to Rocco to discuss our financial results..

Thank you, Chris. For the quarter, our net investment income was $3.4 million or $0.25 per share. As of June 30th, the fair value of our portfolio was $254.9 million compared to $268.7 million at March 31. Our investment activity accounts for $13.2 million decrease in our portfolio.

We also had $2.7 million in net realized loss associated with our sale of North American Lifting Holdings. This was primarily offset by $400,000 increase in net changes in our marks. As of June 30, the weighted average yield of our debt portfolio, including amortization was 9.73%, up 1 basis point from our weighted average yield as of March 31.

Our debt portfolio was comprised of 95.2% floating rate investments, 4.8% fixed rate investments. All of our floating rate investments have LIBOR floors, although both one and three months LIBOR are in excess of the floors on all of our loans.

Our average portfolio company investment was approximately $11.1 million, our largest portfolio company investment EGI was $25.9 million and our second largest portfolio company [Kay Lift] was $22.1 million.

As of June 30th, 49.9% of our portfolio was in first lien investments and 49.7% of our portfolio was in second lien investments with the remaining 0.4% in equity investments. We did not hold any unsecured investment as of June 30. Additional information regarding the composition of our portfolio is included in our form 10-K filed yesterday.

We were 0.6 times levered as of June 30th compared to 0.67 times levered as of March 31st. With respect to our liquidity, as of June 30th, we had $10.6 million in cash, [$22.6 million] in restricted cash and $15 million of capacity under our revolving credit facility with Citi. With that, I’ll turn the call back over to Mike..

Thank you, Rocco. Our marks this quarter were generally consistent with the prior quarter. In the March quarter, spreads in the leverage finance markets clearly tightened. During the June quarter, we have observed more stability. Also, during the quarter, we had two marks, which changed more meaningfully. These were AAR and Trident.

Last quarter, we moved the AAR Term Loan B to partial accrual where we accrued interest proportional with the mark on that position. Our mark increased to 65 as of quarter-end, so we are now accruing 65% of the stated interest rate. Improvement in activity in the DJ Basin, as well as some company specific progress, led us to increase our mark.

We decreased our mark on Trident Health from 85 to 78. Trident is a healthcare services provider with a focus on diagnostic services into skilled nursing facilities. Nursing homes have had their share of challenges today. And we think that the customers’ weakness is directly affecting Trident’s results.

We are monitoring the credit closely especially given the company has a revolver that matures next year. As of June 30th, Bird Electric was on non-accrual. That represents 2.9% of our portfolio at fair value.

On September 1st, the Company completed its financial restructuring, which resulted in the elimination of $15 million of second lien principle and the addition of 10 Class C units.

The Class C units are a non-voting class of preferred equity with $10 million liquidation preference that accretes at 10% rate until such time as certain EBITDA targets are met. After which, the units are paid at 10% cash dividend. In addition, we retain an option to recover reductions in our claims subject to future performance.

Our portfolio yield was stable at 9.7%. As I mentioned at the outset of the call, we are disciplined in investing new capital; not overly enamored of the terms generally on offer in the market and cautious in general outlook.

As such, we made a deliberate decision to invest in several lower yielding liquid less risky first lien loans during the quarter. We are committed to paying an attractive sustainable dividend to our shareholders.

Our Board of Directors previously declared a distribution for the quarter ended June 30, 2017 of $0.25 per share, which was paid on July 6th. Our Board declared $0.25 distribution for the quarter ending September 30th payable on October 5th to the shareholders of record as of September 8th.

We believe our dividend level is consistent with our ability to generate NII without reducing our investment quality by reaching for yield or changing our focus from secured lending opportunities. We fully earned our incentive fee in the June quarter and expect to earn our incentive fee in the current quarter.

Our management of the portfolio has been focused on lowering its risk portfolio, while maintaining net investment income in order to sustain our dividend. As we look back over the last 12 months, we have had net appreciation of $19.7 million.

We have decreased our average position size, we have increased our number of portfolio investments and we have reduced and non-accruals. The team underwrites conservatively focusing on quality management teams, sustainable capital structures, security packages and financial covenants for the protection and preservation of value over the long-term.

We focus on protecting against downside risk, but we also think conditional upside NAV potential remains in our current portfolio. Operator, please open the line for Q&A..

[Operator Instructions] Our first question comes from Ryan Lynch from KBW. Please state your question..

First one, you mentioned a lot about the environment today. It’s obviously very competitive with lot of pressure on structures, covenants even some pressure on yield. So when I look at your guys balance sheet today, you guys are running, I would say, under you guys optimal level of on the balance sheet. So you guys do have some capital deploy.

So can you talk about your ability to deploy capital in today’s environment, given the competitiveness that we’re seeing out there?.

It’s a great point. I think it’s one that everyone across the industry is focused on. First of all, I’d like to highlight that in the environment over the last six months where we’ve seen a lot of repayments and we’ve invested over $50 million, we have had stability around our average unlevered yield at 9.7%.

I actually believe there is some upside to that. And that longer term, 10% plus or minus unlevered is the right range for us to be targeting. Specifically, over the next 30 days, plus or minus, we would expect to close on $25 million to $50 million, probably in the $30 million to $50 million of new investments.

Net of any repayments coming in, it’s probably in the $30 million to $40 million, because we know of at least one that we expect to repay. The net of all of that should be an increase to our average unlevered yield that will be probably one or two first lien loans and one second lien loan average among those being around an 11% unlevered yield.

Those are commitments we have we’re finalizing docs and moving toward closing. So we have probably another 10 plus live real opportunities in the pipeline on top of another 20 that are still in gestation.

So from our perspective, and I think what we’re seeing is the investment team has done a fabulous job of working a lot of the traditional sourcing, both sponsor and non-sponsor. And the Stifel banking network has yielded more fruit, I’d say, over the last three to six months than it has over the last 12 to 18.

And we see more opportunities in that direct lending channel. But hopefully that address the question.

Just a follow-up to that, I mean you’re talking about these new potential originations having approximately 11% roughly unlevered yield. And I look at your investments that you put to work in the calendar second quarter, looks like 8.2% yield. And given what you said about the competitive environment, pressure on yields.

How should investors be comfortable with that yield of the new investments, given state environment? And how do you ensure investors that you guys aren’t stretching for yield and taking on excess risk to originate those higher yielding loans?.

No, listen I think that goes to the heart of our strategy. If you look at that 8.2%, which you're spot on, there are three investments in there that are sub-7% and those three investments total little shy of $20 million or, I'll call it, 30% to 40% of the new activity.

Those were put on because we're not going to stretch for opportunities that don't make sense from a structure or credit perspective.

They're also put on because those are ones where we're very comfortable with the credit risk and liquidity it's an opportunity for us, from a shareholder standpoint, to put 7% money out at with liquidity while we are working with the 9% to 12% opportunities..

And then when you look at, I guess, what's going on currently with the hurricane situation with Huston and the potential for Florida with Irma. Have you guys looked at your potential exposure? I know you guys have few oil and gas investments, as well as Bird Electric been a machine operator.

Have you guys looked at your exposure, and you guys expect any impact from Harvey in Huston or any impact to you guys portfolio companies from potentially the Hurricane about to hit Florida?.

Yes, we've been through the whole portfolio. And specifically, there are two companies that we are focused on. One is Open Mobile which run cellular service in Puerto Rico. We've had dialogue with them running up into Irma coming into Puerto Rico, they shutdown early, they secured facilities.

We have not had any update of any significant damage to their equipment. We're waiting for updates and discussions with the company. But there has been nothing negative as of this call that we're aware of. And while it would significant, they escape the eye of the storm. I'll let Chris to comment more on that..

I think the electric is still out in most of Puerto Rico. But to keep in mind also that Open Mobile has entered into a JV agreement where they're going to contribute their business and combine it with Sprint’s business. They announced that about four months ago, they’ve been working on it for quite a long time.

So, there is nothing in those documents that we think gets derailed by anything. But that leads us to being even more comfortable with that credit..

And that timeline is fourth quarter first quarter expected finalization of the Sprint JV..

And with regard to Bird, Bird as you recall, is in the Permian Basin. So they have been unaffected. There has been no negative effect of Harvey on them. And in fact, we just met with the sponsor this morning and they are seeing business opportunities for storm damage work, both in Harvey where they have boots on the ground already.

And in Irma, they've already -- this week, they will send a couple of crews to help in that with Florida as the damage hopefully doesn’t come in, but as it comes in. So that will be a positive to Bird versus a negative.

And there is been no disruption to the flow of their work in the Permian Basin that they have seen and they talk to management daily..

And they are based on Midland and Eastland ad all their equipment and crews and everything were remote from any of Harvey's damage..

So that's all West Texas New Mexico, predominantly..

Our next question comes from Robert Dodd from Raymond James. Please state your question..

A couple, just on Bird real quick, obviously, restructured post the end of the quarter.

So I'm going to presume right now that that 10%, will that be on the 10% on that the $10 million liquidation preference, I presume? Would that be on full accrual or is it going to be depending on the mark on the 10, is it going to be partial accrual or?.

On non-accrual now, the accrual will kick-in at higher levels of profitability, which the Company is not yet achieving..

And we will evaluate that from a non-accrual standpoint at 9.30, but there’s nothing today that would lead us to change that. The work on Harvey and Irma and some other progress that they are making could change that over the near term..

And then just on the point about a number of investments with sub-7% yield. Would you -- and I think you effectively said this but back you and to a little bit, okay.

Would you say that those are temporary tradable assets where you’re pocking, for lack of a better term, pocking excess cash until such time as other opportunities for high yield have it similar risk, since the goal really, investments become available under those, so those are just -- rather than it being a core piece of the portfolio that would expect 10% of the portfolio or something like that to be sub 7% assets, going forward?.

Robert, we’re fully comfortable at holding those long-term. But clearly, this was part of our strategy to not force investments just for the sake of keeping a higher return. We’re comfortable with the credits longer term, but they are highly liquid and should be easily sold to accommodate higher yielding attractive investments as they come in..

So I mean not that you’d ever back you sit in a corner, Robert. But in a word, yes. That is, if you were to redeployment pool that we feel very comfortable about the credit risk, structure risk, sponsors, et cetera..

And then I was scribbling this. So on your comments the post the refinancing wave may have slowed down a little bit, you gave some color that you still see some more. And obviously you’ve deployed a considerable amount of capital in the quarter, but also had a lot of repayments and then chosen exits.

Today, would you say that there are any credits on the books that you may be not going to get repaid on, but that you consider; for example, like TNT Crane what you said you got a good IRR but you had some concerns about it; so you decided to exit it and got a good IRR out of that.

Are there any other assets on the books like that that you would say may be not repayments, but that you are considering exiting for credit reasons? I am not expecting you to name them, because that would be….

There is other thing that we’re considering exiting today, so the answer to that is no, explicitly. At the same time, where we’ve got a close eye on it and we’re working with other lenders, et cetera, is trying to -- I mean, we mentioned that earlier in the speech. But we are not focused on exiting, to be clear..

Our next question comes from Chris Kotowski from Oppenheimer. Please state your question..

You mentioned in the first release, $67 million of repayments in sales.

And I wonder was there any significant amount of prepayment income or amortization of OID?.

There is nothing significant. It was spread across basically six different -- there were two different tails of TNT Crane. So there were seven different exits. But it was broadly spread. There was no big single lump that made up prepayment or acceleration of deep discount….

Unlike last quarter….

Where we had a discount, Chris, was in AP Gaming, but that’s one that we’ve held for 2.5 years. So that had largely been amortized..

And then -- so looking at your $7.2 million of investment income, all things being equal, I mean that seems like reflective of a reasonable run rate of the current portfolio?.

Yes Chris, it does..

And then you said that subsequent to quarter-end, the net impact of that would be $30 million to $40 million increase in the year?.

Including things that are in the pipeline over the next 30 days, it may close by quarter-end, it may close slightly after. But yes, those things that we expect to close, exactly..

And they may not have much of an impact on 3Q revenues, but by 4Q, one should see it..

That is exactly right..

And then I want to come back to Bird, one second. I mean it seems like in the restructuring, you’re ending up with a smaller claim, less seniority and a lower rate.

And usually, when you have that significant or severe of a restructuring, it seems to me you should end up with common equity ownership of the company and that seems to be not part of the equation.

And am I reading that correctly and can you give any color around that?.

Sure, a couple of things. Number one is the piece that you did not talk about that I mentioned when I went through it is an option that we continue to have to recover decreases in our claim based upon future performance.

So there is a upside that has put call features in it over the next five to 10 years that as the company performs, we do have the ability to recover in excess of the $10 million; and in extreme scenarios in excess of $15 million but above the $10 million. So there is equity upside.

It is not contingent on equity monetization, because of put call provisions in there. The Company has an ownership structure that’s driven by a minority owner, as well as the founder of the company Brian Bird. And we did not want to disrupt that equity ownership, because of the way of lot of contracts and bidding and everything else goes out.

So we opted for this option to realize upside with put call features in it..

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

Thank you very much, Operator. I’d like to thank everyone for the questions, and their attention today. We look forward to speaking with you in the near future..

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