Michael Mauer - Chairman and Chief Executive Officer Rocco DelGuercio - Chief Financial Officer and Chief Compliance Officer Christopher Jansen - President and Secretary.

Allison Rudary - Oppenheimer Paul Johnson - KBW Robert Dodd - Raymond James Financial Troy Ward - Ares Management.

Welcome to the CM Finance Earnings Release of the Third Earnings 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. Please begin..

Thank you, operator. Thank you all for calling in today. Joining me are Chris Jansen, my Co-Chief Investment Officer; and Rocco DelGuercio, our CFO. Before we begin, Rocco will give our customary disclaimer regarding information and forward-looking statements.

Rocco?.

Thanks, Mike. I would like to remind everyone that today's call is being recorded and that this call is the property of CM Finance Inc. Any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by visiting our Investor Relations page on our website 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 the most recent 10-Q filing for important factors that may cause actual results to differ materially from these projections. We will not update forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our Investor Relations page on our website.

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

Thank you, Rocco. Last night we reported strong results for our fiscal third quarter ended March 31. We had net deployments of $7 million, improved our average yield by 87 basis points of which 53 basis points is due from an increase in LIBOR and continued to maintain a majority of our investments in first lien loans.

Our net investment income was $0.27 per share more than fully covering our dividend.

Market conditions continue to be challenging both within the broader syndicated leverage finance markets and in competitive situations within our core middle market focus .Covenant light transactions, weaker lender protections and increasingly aggressive economic terms are common team as rangers and lenders compete for yield.

As always we are conservative underwriters who focus secured lending for quality companies and management teams. In a frothy market that means being disciplined and passing on the vast majority of opportunities that we see.

Since our last conference call in February our originations have been mix of directly sourced loans and syndicated transactions to borrowers we know well and have historical comfort with. We made a unit tranche invest in and joined a club deal.

Our new investments in the quarter were all first lien including a last out first lien unit tranche and our one new investment after quarter end was also firstly lien. Our pipeline contains a mix of directly sourced opportunities club transactions and secondary opportunities.

When we analyse secondary opportunities our investment team focuses on loan structure including covenants, repayment provisions and documentation. Generally speaking we will look for shorter weighted average [indiscernible] asset where we're comfortable holding the position to maturity.

Direct lending opportunities tend to have significant structural protections for our capital and often carry higher yields than larger deals in the syndicated markets. I now like to turn the call over to Chris to discuss our portfolio activities..

Thanks, Mike. We made four investments during the quarter one of which was to a new portfolio company and three, which were two existing portfolio companies. We also had three realizations during the quarter.

We invested in a last out first lien loan as part of the unit tranche loans of GE Group, a staff and company focused on IT services and finance and accounting positions. We followed the company for over a year and had the opportunity to invest in the seasoned issuer with the world class management team. Our yield at cost was approximately 17%.

We also added 5.4 million to our position in the term loan of the U.S. well services. The company has been performing well and we are very comfortable with the structure and the terms of the loan. Our yield to cost on this new purchase is approximately 11.4%. Subsequent to quarter end we sold all of our Class A shares of U.S.

well services which represented the majority of our equity for approximately $4.5 million. This position was marked at approximately $4.2 million at March 31. We still hold the Class B shares which are marked at approximately $313,000.

I would also note that we had a partial repayment from Liberty Oil Field Services of $3.5 million further reducing our oil and gas related exposure. Our first realization in the quarter was also a new investment in an existing portfolio company. We participated in the refinancing of the first lien loan of AP Gaming.

The company has successfully completed an IPO in the quarter although Apollo remains the largest shareholder. I realized IRR on this term loan was approximately 7.5%. Our realized IRR on all of our investments in AP Gaming from our initial investment in 2013 through our realization in the quarter was 10.2%.

The yield on the new loan to AP Gaming at cost is approximately 6.3%. Our second realization was like AP Gaming also a new investment. [Indiscernible] refinance its credit facilities extending their maturity by three years. Our fully realized IRR on the old loan was approximately 13.5%. Our yield to cost on the new loan is approximately 7.8%.

Our third realization was medical solutions, this was a small position for us at just $4 million. Our fully realized IRR was approximately 6.6%. After quarter end we made one new investment and had two significant realizations. Our new investment was an outstanding loan in a club deal in the first lien loan to Hostway.

Hostway provides cloud, managed and dedicated server hosting services to developers, startups, small medium sized businesses and large enterprises. Our yield to cost is approximately 9.9%. As I previously mentioned we solved our A share of [indiscernible] services.

We exited this position above our mark and made the decision to sell in the context of managing our total exposure to both the borrower and the oil and gas space. The restructuring took place in the first quarter of 2017. We continue to hold the position in the term loan and the B shares as mentioned earlier.

Our IRR on this equity position was approximately 71.6% inclusive of the loss we booked during the restructuring in 2017. Finally we had a partial realization of our position in position in PR Wireless.

We continue to hold the small position and the delay to our term loan and in warrants but had sold our entire funded term loan position which was approximately 14.4%. Our realized IRR on the term loan was 8.7%.

When we fully realized our open mobile position including our remaining delayed draw term, commitment and warrants we expect the IRR to be higher. Our IRR to-date on all PR Wireless or Open Mobile investments in the company using March 31, marks for our remaining positions is 10.8%.

Our portfolio company count was 24 as of March 31 and is 25 today thanks to our investment in Hostway. We have taken the step of changing our industry categorisation to global industry classification or GICs.

We think this makes our portfolio composition easier to understand as well as bringing us into alignment with the best practices of other managers.

Using GICs as of March 31, our largest industry concentration was professional services at 12.7% followed by energy equipment and services at 12%, hotels, restaurants and leisure at 11.3%, commercial services and supplies at 10.6% and diversified telecommunication services at 8.5%.

I'd now like to turn the call back to Rocco to discuss our financial results..

Thank you, Chris. For the quarter our net investment income was $3.7 million or $0.27 per share. AS of March 31, the share value of our portfolio were $297.2 million compared to $286.5 million at December 31. Our investment activity accounts for $7.5 million increase in our portfolio.

We also have $595,000 of unrealized appreciation from investment in the quarter. As of March 31, the weighted average yield of our debt portfolio including amortization was 11.12% versus 10.2% at December 31.

The major driver of the increase in our average yield was an increase in LIBOR during the quarter We also had a positive differential in yields between investments made and realized during the quarter. Our new investments had an average yield of 9.7% versus 8.9% average yield on our realized investment.

Our debut portfolio was comprised of 97.4% floating and 2.6% fixed rate investments. Both one and three month LIBOR are in excess of the applicable floors on all our loans. Our average portfolio company investment was just 12.4 million, our largest portfolio company PGi was $25.3 million, our second largest portfolio company Caelus was $23.4 million.

As of March 31, 50.2% of our portfolio was in first lien investments including a last out first lien unit tranche investment, 42.4% of the portfolio was in second lien investments, 0.3% was in unsecured debt, and the remaining 4.8% was in equity and warrant positions.

Additional information regarding the composition of our portfolio is included in our Form 10-Q which was filed yesterday. We were 0.71 times leverage as of March 31, compared to 0.69 times leverage as of December 31.

With respect to our liquidity as of March 31, we had 6.9 million cash, 2.4 million in restricted cash and 26.6 million of capacity under our revolving credit facility with UBS. With that I would like to turn the call back over to Mike..

Michael Mauer:.

Our marks this quarter increased by an aggregate of $1.7 million offset by $319,000 in accretion. We have four positions that move by $0.5 million or more. These were Bird, Caelus, [indiscernible] Trident. Bird Electric continued to benefit from improving fundamentals as well as continued significant work associated with 27 teens hurricanes.

We increased the mark on our preferred equity position by approximately $500,000 this quarter. Caelus has had an excellent fundamental results and is benefiting from the rising price of oil. Oil prices have double benefit both increasing the value of the company's reserves and generating additional revenue.

We increased the mark from 88 to 90 this quarter. Our mark on Endemol [ph] improved from 95 to 99 this quarter. Endemol's results continue to improve and we have marked up the position over the last several quarters. Finally our position in Trident Health was marked down in the quarter.

Alongside other second lien lenders we hold a position in the tranche A second lien loan, tranche B second lien loan and a preferred position at the holding company. When comparing our position at December 31, to March 31, the aggregate value of our marks on Trident Health decreased from 52 to 47.

We have the loan on partial accrual given its mark and the fact that interest during the quarter was in the form of [indiscernible]. As of April 1st, the interest will be in the form of cash and pick. We continue to work constructively with other stakeholders towards a longer term solution for the company's debt structure.

We fully earned our incentive fee in the March quarter and we expect to earn our incentive fee in the current quarter as well. Our distribution for the quarter ended March 31, 2018 was $0.25 per share and was paid on April 5th.

We believe our dividend level is consistent with our ability to generate NII without reducing our investment quality or changing our focus from secured lending opportunities. We are committed to paying a sustainable dividend to our shareholders.

We earned in excess of our dividend in the March quarter and we believe that our run-rate portfolio to yield and portfolio to size position us to continue to cover our current dividend rate. Our leverage at 0.71 times as of March 31, is within our target range of plus or minus 0.75 times. We are comfortable at our current leverage level.

That said our Board of Directors approved decreasing our asset coverage ratio from 200% to 150% as provided under the Small Business Credit Availability Act. This will become effective in May of 2019. Our border also authorized a share buyback program. Over the next 12 months we may repurchase up to $5 million of our common stock in the open market.

Given the significant disconnect between our NAV and our trading levels we in our Board feel a buyback program is prudent. We are in the process of immediately implementing the buyback program. With that Operator, please open the lines for Q&A..

[Operator Instructions]. Our first question comes from Allison Rudary from Oppenheimer. Please state your question..

I really appreciate all the color on for the portfolio investments this quarter and Mike I might have missed something.

So I just wanted to touch on it again I noticed that there was a pretty substantial in uptick in pick interest income this quarter and I think you have touched on it when you had spoken about the 1888 [ph] industrial services loan, does that go by another name -- were you talking about that -- does that go by another name that I might have missed and so can we discuss maybe a little bit about that kind of set pick toggle..

Yes two things the 1888 did not change that would not have been the uptick in pick during the quarter but the previous name of that is AAR and it changed little while back but AAR oil field services in 1888 are the same.

The difference in the pick was the change in Trident, December quarter was cash and in the March quarter was a 100% pick and starting April 1 is a mix of cash in pick..

Okay.

And so you think that will go down, we will see that number tick down again?.

Yes you will but all the way back but partially back and I want to clarify a few things before we go on. One is I'm going to just clarify one of my partners comments about the 14.4% on PR Wireless that was $14.4 million pay down and the second thing is that today you know subsequent to his comment the B share they had a $313,000 value for U.S.

well equity that we said we continue to hold. We sold today at slightly above the market value. So just to assume it's just a tad above that, but that’s just two clarifications that I want to get out there for everyone..

And I guess my second question kind of regarding the AGS's or American Gaming System that looks like that restructure deal that you know kind of pose might be a little bit lower of a yield than you might otherwise necessarily target.

Do you see this loan of more of a transitional position or you guys comfortable holding it for a long period of time? Is it something that you might think of maybe exiting I assume its roughly [indiscernible] if you have the opportunity to deploy into something that was higher yielding..

Exactly. You hit it a nail on that..

Our next question comes from Paul Johnson from KBW. Please state your question..

I just wanted to kind of touch on the leverage, the asset coverage.

I just was wondering if you guys can talk at all about if you've formed your thoughts around what sort of assets that you'd be looking to invest in or anything that you might be looking to do differently or perhaps the same in pursing that additional leverage?.

As you know the Board approved it so it will not be effective until May of 2019 and so we've had extensive discussions at the board level and at the management level around this exact topic given that we are 12 months from implementing, there's going to be a lot more discussions around it.

So there is not an exact plan to implement because even if there was one it would be different 12 months from now but the general parameter that we are kind of looking at are using increased leverage number one to increase return for shareholders, that’s the most important thing and coincidental with that at an equal level is to do that in a way that ideally reduces the risk.

So by definition that would lend us to a higher mix of the low risk, little bit lower return using more leverage that doesn't mean we won't still do some of what we're doing now but not in the same ratios. We need to continue to develop that, we've got models we're looking at different ratios.

It will also depend on the financing that's available out there.

We've started discussions with our current lender one of our former lenders, we're talking to other people it's everything from you know unsecured debt to the UBS facility we have, discussions around instead of a strict advance raid and overall portfolio looking at the underlying assets highly liquid first lien, less liquid first lien last out, second out of and all of those having potentially different advance rates but that is all you know information to come over the next six to nine months I'd say as we develop not only our strategy but our more leverage providers develop their strategies because the one we talk to have not fully thought through it..

Okay.

And then I guess on that for your credit facilities and your term loan that you've are there one to one debt limitations on those covenants, on those facilities and all?.

No..

Okay. I guess I mean you know as we think about this from just like a high level.

I believe I think I've read that the blended yield and you can correct me if I'm wrong on this you know the cost of your debt is around 4.85% and of you course you add in the basis that’s probably roughly around another 4% and then possibly a little bit more admin costs in and looking at kind of the yields that are available on the market today and of course you know could be 12 months away from any sort of implementation.

Like you know it starts to sort of squeeze on the margin and like you're saying it really depends on the cost of debt and what's available when you start to that.

So I don't know I mean the ROE starts to get squeezed out there I mean if you're targeting lower yielding safer investments which you know we do think is the right strategy the math has to work out for sure..

Yes, I think the important part of the math that you've left out is that if you are going to be lending on lower risk, lower return you're not going to LIBOR plus 350 or 400, you're going to be probably more like LIBOR plus 200 to 250, so the math is very, very different on the borrowing cost of a lower risk, lower return than our current portfolio..

Okay, that makes sense. I mean I appreciate you for correcting me on that. So other than that I mean I guess just kind of looking at maybe the share repurchases. I was just was curious if you guys made any repurchases since you announced that back the Board has chosen to do that a couple weeks ago..

Though we didn’t choose a couple of weeks ago, the last week was a Board meeting and so we are in the process of putting that all in place. I would expect that by the end of next week everything will be done and in place to begin the buyback program..

Sorry about that, I got cut off, but yes those are all my questions. Thanks..

Yes I'm sorry, did I come through or not on the answer to the buyback?.

I think the last part was cut off but I pretty much heard the bulk which was….

Yes. Okay. So just to restate it if anyone else got off. We are putting everything in place, you know all the accounts, all the processes etcetera that should be completed over the next week or so by the end of next week we expect it to be up and running..

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

Just going back to questions about leverages in your comment Mike that if you can get I guess a lower risk type asset and perhaps more diversified you can lower the cost. I mean your marginal cost of borrowings only effectively like L-Plus1 because you have got a sizeable non-used fee on the current facility.

So do you think you can get that down as well if you change the structure of the facility to better match you know potentially the risk assets..

It is entirely possible and that’s why one of the first calls we made was to our current provider to talk about different ways of thinking about our current facility. .

Got it. So framework wise obviously I mean do you've and I realize it's a year out before it can happen, there's a lot of discussion that can go on between now and then but can you give any color about what you think your target leverage ratio could be.

Obviously you've got one right 0.8, where could you -- do you think 1.5 is the ballpark, I would say that loud I hope its not 1.8 or is it lower than that?.

Well its not 1.8, 1.5 could be in the ballpark, it could be 1.2, it really comes back the -- it also comes back, Robert what people are not talking enough about is what is the availability and what are the types of assets as well as for any [indiscernible] that’s out there because those are two critical things.

I think the one premise that a lot of people have around this is that its going to be a more competitive market out there because its going to be more leverage and so it's going to drive yields tighter on the less risky and more liquid. That might be true because if you think about pure math that should be the direction.

The flip side of that is also true that if everybody starts going to the [indiscernible] liquid lower risk then the stuff we're doing today for the same risk we've got we should be able to get wires spread and better pricing and better structure and maybe we don't have to increase leverage as much taking increase ROE because everybody else is going away from the stuff that we do very, very well today.

So it really is going to be a market dependent but the leverage is dependent upon the type of risk we're taking but in any scenario that should translate into better ROE for the shareholder..

Got it, I appreciate that clarification. On that front you know lower risk versus your first lien looking at G or GEER however that’s exactly spelled.

L-Plus 13.754 first lien loan, can you give us any color of that? When you're talking about how competitive the market is etcetera when I look at you know across the rest of your first lien type assets, much lowest spreads obviously, that one really stands out.

So why should we have confidence that that's got the same kind of fire lien credit quality as the rest of your portfolio. .

The borrowing -- the company right now is borrowing like L-Plus 1075 and we were in reviewing the credit about a year and a half ago when really like the credit and you know the lender wanted to you know take their position down and we are sharing in all of the loan repayments and excess cashless sweep but we are last out principle wise and a refinancing or a sale or something like that..

So to clear that out, L-Plus 1375 that’s after the last hour adjustment that's not the coupon?.

And the another important thing, this was not a market deal done today, it was a company that we actually have you know gotten to know through Stifle through that channel that we've got fairly proprietary there was an existing lender we had followed this company who looked at it, had extensive discussions last year and the other party quite truthfully was outsized in their loan and wanted to bring some down and they referred to do it in a first out position and we said fine, we've now watched this thing continue and how it has performed and done everything they've done last year and so we were in a position to move quickly and negotiate a one-off deal..

Got it.

On Trident just mechanics of the accounting purposes, the biggest piece of Trident, you know the $20 million piece is about 52, so is it fair to say right now you have a cooling the pick or 50% of the pick or that's what you did in the quarter and then is that right and then next quarter -- what the mix of roughly of cash versus pick is because obviously a move around the mission rate that you take on the income..

So let me see if I'm answering the question and if not correct me. The accrual is going to be the cash portion of the interest which is 50% of the total interest will be cash paid and 50% of the total interest will be pick. We will be non-accrual on the pick portion.

So what we get paid in cash we will recognize what we get paid in kind, we will not recognize in accrued. It's about the total position that’s 50% of theinterest I think about it as a total position as opposed to tranche by tranche..

And then so in this quarter that you just supported you've recognized 50% of the interest as well or was it just all pick, is that right?.

Yes, exactly..

The couple of other things in top line it looked to me like obviously dividend income, there was some pick same as last quarter, I presume that’s related to Bird Electric, right, so that should be ongoing?.

That’s converted to current because they have passed the milestone where they need to convert to cash, so that’s no longer pick..

Okay.

The other question I mean just when I look at the top line obviously really strong question, so those maybe 750 and you broke down you know obviously the realizations and things like that, but was that $750,000 give or take between accelerated idea accretion and things like that kind of out sizing the quarter and that’s kind of the non-recurring piece that we wouldn’t expect next quarter because obviously you had some large repays etcetera.

Is that kind of like outsized number we are looking at or is it a little smaller than that?.

No, that’s about right..

That’s primarily related to fleet price..

Last one if I can, on the energy front obviously you're changing the -- well right now its doing quite well so that’s appreciating.

If you increase the leverage would you change the kind of the effective cap, because I mean because if you go up the energy if it stays at 20% of the portfolio just looking at historic numbers that becomes larger and larger relative to the equity base and potential volatility given commodity exposure or would that change the industry limits that you've internally for allocation?.

Yes, I think you got to think about it as a notional amount being around where it is might the notional about be slightly different but the percentage would come down significantly..

Got it. Yes. Got it. I appreciate that. Thank you. That’s it for my questions. Thanks a lot..

And just for the record for everyone you know the energy we would expect to continue to trend down in the mid-teens not be in the high teens between the two categories and as we have you know I just note for everyone on the call I know there are two years was a lot of ago a lot of trepidation around this portfolio in energy the first lien, second lien nature of our portfolio is very different than some BDCs that had mostly the second lead or subordinated or mezz [ph] type exposure and you know knock on wood we still have exposure and we like our exposure but the thesis has proven out in the way we've approached it..

Our next question comes from Troy Ward from Ares Management. Please state your question. .

Just real quick on your liability side of the balance sheet as we think about you know a year from now going from one to one -- two to one can you just remind us what the maturity of your liability side and also whether or not there's any restrictions on the leverage rate on the 1 to 1 leverage built into those liabilities..

So on the term loan it is December of 2020 in matures and on the revolver it's December 2019 and there are no restrictions. Mike had noted it before, there is no restrictions the 1 to 1..

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

Well I would like to thank everyone for their time. We actually pretty excited about where the portfolio is and our pipeline going forward and you know the dividend levels that we've gotten and everything else.

We think it's a very good market, it’s a competitive market but given our size and our sourcing channels with both Stifle and [indiscernible] we're pretty excited about next three to six months and I think that is kind of the window that I feel comfortable talking about in any market these days is three to six months. So thank you..

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