Q2 2021 Fidus Investment Corp Earnings Call

[music].

Good day, and thank you for standing by and welcome to the fight of second quarter, 2021 and earnings conference call.

At this time all participants are in a listen only mode.

After the Speakers' remarks, there will be a question and answer session.

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I would now like to hand, the conference over to Jody burning. Please go ahead.

Thank you Christie and good morning, everyone and thank you for joining US. This morning for fight of <unk> Investment Corporation.

Quarter 2021 earnings Conference call with me. This morning are Ed Ross quite as investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer and.

And by this investment Corp issued a press release.

Yesterday afternoon with the details of the company's quarterly financial results. The copy of the press release is available on the Investor Relations page of the company's website and F. D. U S Dot com and I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call. The conference call today will contain.

Forward looking statements, including statements regarding the goals strategies beliefs future potential operating results cash flow as the Fi investment Corp.

Although management believes these statements of reasonable based on estimates assumptions and projections as of today August 6.2021. These statements are not guarantees of future performance time sensitive information may no longer be accurate at the time of the any telephonic or webcast replay actual results may differ materially as a result.

The risks uncertainties and other factors, including but not limited to the factors set forth and the company's filings with the Securities and Exchange Commission quite as undertakes no obligation to update or revise any of these forward looking statements with that I would now like to turn the call over to Ed Good morning, Ed.

Good morning, Jody and good morning, everyone.

Welcome to our second quarter 2021 earnings conference call.

All of you your families and friends and co workers for St.

And well.

I'm going to open today's call with the review of our second quarter performance and portfolio at quarter end.

And then share with you our views on deal activity and the lower middle market for the second half of the year.

Shelby will cover the second quarter financial results and our liquidity position.

And once we have completed our prepared remarks, we'll be happy to take your questions.

Overall, we are very pleased with our results improved portfolio performance for the second quarter.

Adjusted net investment income grew year over year, and net asset value per share reached the record level of.

Originations and repayments were at high levels in line with our expectations for a busy quarter from the deal flow perspective.

We continue to focus on carefully selecting high quality companies and the lower middle market and a reasonably insulated from economic stresses associated with the pandemic.

The company does really resilient business models and generate strong levels of cash flow to service debt and positive long term outlooks.

Our portfolio remains well structured and positioned to produce those high levels of recurring income and the <unk>.

Potential for equity upside and support of our capital preservation and.

The income goals.

Adjusted net and net net investment income, which we define as net investment income and excluding any capital gain incentive fee attributable to realized or unrealized gains and losses grew 15% versus last year to $10.4 million for 42 cents per share.

Sure.

At quarter, and net asset value and reached a record $429.4 million for $17 and 57 per share.

Collecting both solid operating performance and underlying portfolio of value fair value appreciation.

By the has paid a quarterly dividend of 31 cents per share and a supplemental cash dividend of <unk> per share on June 28, 2021 of your stockholders of record as of June 14th.

As a reminder of the board has devised a formula to calculate the supplemental dividend each quarter under which 50% of the surplus and adjusted NII over the base dividend from the prior quarter and distribute it to shareholders.

For the third quarter I am pleased to report that we are increasing the base dividend of <unk> 32 cents per share and the.

The surplus and 6 cents per share.

In addition, we will pay a special dividend and Q3 of <unk> per share therefore.

On August <unk> 2021, and the board of directors of Directors declared a base quarterly dividend of 32 per share the supplemental quarterly cash dividend of <unk> per share and the special dividend of <unk> <unk> per share the dip.

Evidence will be payable on September 28, 20, and 21 to stockholders of record as of September 14th.

And in 'twenty 1.

Following a busy first quarter of deal flow activity remained at high levels during the second quarter.

Driven by both M&A transaction and refinancing opportunity.

In contrast to the first quarter, however, originations outpaced repayments and.

In terms of originations, we invested a 100 and for $2 million and debt and equity securities of which 96 million for nearly all of the total was invested in the first lien debt.

And that's been and new portfolio companies consisted of.

$18 million and first lien debt and common equity and 2 K direct Inc. A leading omni channel digital advertising platform for small and midsized businesses.

$7 million and first lien debt and common equity and the <unk> Inc.

Flyer of data transfer and signal analysis.

The indications products and related engineering services, primarily to the defense industry.

$25.5 million, and first lien debt and common equity and.

The ISI PSG holdings, LLC doing business as incentives of solutions.

Provider of online rewards travel incentives and gift card reward programs.

We subsequently sold a $13.5 million participating interest in the first lien debt.

$6.5 million, and first lien debt and common equity and.

And the level of Education group LLC.

The leading provider of online continuing education for mental health and nursing professionals.

Well of a million dollars and first lien debt and U P. G Company L. L C and the original design and contract manufacturer of complex assemblies with roots as a manufacturer of precision and injection molded plastics.

And finally of $11 million and first lien debt and why none of the Foods, Inc. A leading provider of natural and processed cheese product sources and plant based alternatives.

These investments are indicative of our president and focus on companies that have not been meaningfully impacted by the pandemic and for.

S revenue streams that of recurring in nature.

In terms of repayments and realizations, we received proceeds totaling $93 million with the.

The majority from second lien debt investment.

And in terms of exits, we receive payment and full of $15 million, including a prepayment penalty on our second lien debt and cash.

The income.

Receipt of payment and full of $8 million and our second lien debt and assurance Holdings LLC.

So the payment and full of $12 million on our second lien debt and Virginia tile Company L. L C.

Receive payment and full of $7.8 million on our second lien debt and steward holding LLC.

So the payment in full of $4.7 million on our first lien debt and Palmetto Moon LLC.

We received payment and full of $22.5 million on our second lien debt and a b C investors LLC.

And we had exited our equity investment and wheel Pros, Inc. A realized gain of approximately $2.1 million.

Subsequent to quarter and Hilco technologies was sold to <unk>.

Control of Hilco, and the second quarter and exchanged a $10.3 million dollar debt investment for an equity investment and a new holding company.

And in conjunction with the sale of subsequent to quarter and we received payment in full on a residual of that and converted equity investment and.

And realized a net loss of approximately $1.1 million of our original equity investment and the company.

We receive payment and full of $11.4 million on our second lien debt and Crs solution Holdings LLC.

We received payment and full of $20 million on our second lien debt and worldwide Express operations LLC and realized a gain of $3 million on a per force on a portion of our equity investment.

In conjunction with the sale of worldwide Express.

The $1.5 million and common equity of which $8 million was rolled over from our original common equity investment.

And funded a $20 million second lien term loan commitment.

But the originations coming in above repayments and exits and the fair value of the portfolio of appreciating relative to the first quarter. The fair market value of our portfolio as of June 30 of 2021 was $743.5 million equal to $110.8 per.

And of course.

And we ended the second quarter was 72 active portfolio companies and for companies that have sold their underlying operations.

In terms of portfolio construction and our continued focus on investing and first lien debt.

Bind with a heavy weighting of second lien debt exits has altered the mix since the beginning of the year first lien debt investments of increased on an absolute basis and.

As a percent of percent of total portfolio.

And a quarter and first lien debt accounted for 38, 3% of the portfolio on the fair value basis compared to the 25, 2%.

As of December 31, 2020.

And contrast, second lien debt has decreased on an absolute basis and a percent of the total portfolio and accounted for 28% of the portfolio on a fair market basis compared to 44, 7% as of December 30.

Coordinated debt accounted for 13, 4% and equity investments accounted for 23% of the portfolio on a fair value basis.

Our portfolio remains well structured for current economic conditions.

The debt investments generating high levels of current and recurring income and equity investments, providing us with a reasonable margin of safety along with the opportunity to enhance returns.

Moving to the portfolio performance overall, our portfolio continues to perform well and risks remains at comfortable levels.

As of June 30th we did not have any companies on non accrual last quarter I mentioned that some of our portfolio of companies, we're dealing with operational challenges, including supply chain constraints and higher input costs.

Although the challenges and abated since then management at these companies of rising to the challenge, making adjustments as necessary and pricing <unk> productivity and their own.

Overall demand remains favorable.

To help us assess the overall health and stability and performance of our investment portfolio.

Several quality measures on a quarterly basis first we track the portfolios weighted average investment rating based on our internal system.

Under our methodology and a rating of 1 is outperformed and a rating of 5 is unexpected losses.

And 30th the weighted average investment ratio for the portfolio was 2 on the fair value basis.

The other metric we track is the credit performance of our portfolio, which is measured by a portfolio of companies combined ratio of total net debt to finance the debt investments the total EBIT.

For the second quarter of this ratio was 4.2 times, excluding equity only and a R argued.

The third measure we track is the combined ratio of our portfolio of companies' total EBITDA the total cash interest expense.

She is indicative of the cushion of our portfolio of companies have and aggregate to meet their debt service obligations to us.

For the second quarter of this metric was 3.2 times.

The equity only and they are all of the deals.

M&A activity picked up at the beginning of the fourth quarter of last year and has remained at healthy levels today, resulting in high levels of originations and repayments of.

Although the net originations rebounded in the second quarter.

Currently not invested and are not fully invested and our debt portfolio. After several consecutive quarters of unusually high levels of debt repayments.

We have been and the situation before and have a proven track record of redeploying proceeds into new debt investments that provide us with high levels of current and recurring investment income.

Out either sacrificing our underwriting standards or deviating from our philosophy of managing the business for the long term.

We therefore intend to adhere to our strategy of carefully investing and high quality companies with the.

Vince of characteristics and positive long term outlook for her.

And companies that have not been materially impacted by the pandemic and they possess the resilient business models and strong cash flow profiles.

As we move into the second half of the year, we still see very healthy the robust conditions for deals and the lower middle market from both M&A activity and refinancings, where we can leverage our relationships and experience.

This favorable environment supports our goal of growing our debt portfolio and the coming quarters.

It also supports a positive outlook for equity realizations.

Combination of our investment strategy and underwriting principles.

Our goals of capital preservation, and generating attractive risk adjusted returns and all.

I'll turn the call over to Shelby to provide some details on our financial and operating results.

Okay.

Thank you Ed and good morning, everyone.

I'll review, our second quarter results in more detail and close with comments on our liquidity position.

I will be providing comparative commentary versus the prior quarter Q1.2021.

Total investment income was $21.8 million for the 3 months ended June 30th.

<unk> 5 million decrease from Q1, primarily due to a $1.2 million decrease in interest income and of 1 million decrease and fee income offset by a <unk> 7 million increase and dividend income.

Due to the Hilco restructuring and exchange of debt for equity.

And my point $6 million of interest income was converted into dividend income yields were relatively stable and Q2 at 12, 2% versus 12, 3% and Q1, however, as Ed mentioned, yielding assets and lower than historical levels, given the unusually high level of repayments over the last several quarters.

We had 1 counting nuance and Q2 that I wanted to highlight regarding secured borrowings.

And I had mentioned subsequent to the initial closing we syndicate of $13.5 million of our unit tranche loan and incentive solutions to the first out lender.

Given our continuing involvement and the alone the $13.5 million that was assigned does not meet the GAAP accounting criteria for sale accounting treatment rather of the $13.5 million of day.

Secured borrowing which simply means that it remains of security on our balance sheet included and total assets with an offsetting liability of secured borrowing on the balance sheet.

Similarly, the interest on the 13 point and 5 million portion of the loan is included in both interest income and interest expense.

Given the total assets include secured borrowings the advisor granted the waiver to include the <unk>.

$14.5 million of secured borrowings from the base management fee waiving of approximately 29000 of fees in Q2.

Not to penalize shareholders for the accounting treatment.

Total expenses, including income tax provision for 15 point for a million for the second quarter, approximately $3.1 million higher than the prior quarter, primarily due to a $3.8 million of inquiries and the capital gains incentive fee accrual and Q2, we accrued $3.9 million of capital gains incentive fees given meaningful appreciation.

The Asian, and the fair value of the portfolio and.

And the interest and financing expenses decrease in Q2 by $6 million, primarily due to the redemption of bonds and Q1.

Note the capital gains incentive fee is accrued for GAAP purposes, but not currently payable.

As of March 31st the weighted average interest rate on our outstanding debt was 4.2% excluding secured borrowings and.

And we had $360.1 million of debt outstanding comprised of $139.3 million of SBA debentures, $207.3 million of unsecured notes and $13.5 million of secured borrowing.

Our debt to equity ratio as of June 30th was <unk> 8 times of 1.5 times of statutory leverage and splitting exempt SBA debentures.

Net investment income of NII for the 3 months ended June 30th was 26 cents per share versus <unk> 45 per share and Q1 and.

Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investment was 42 cents per share and Q2 versus 46 cents per share and Q1.

For the 3 months ended June 30th we recognized approximately $2.2 million of net realized gains primarily from the sale of our equity investment and we'll price.

Turning now to portfolio statistics as of June 30th our total investment portfolio had fair value of $743.5 million, our average portfolio company investment on the cost basis was $9.3 million at the end of the second quarter.

Glued investments and for portfolio companies, the tilda operations that are and the process of winding down.

Yeah, the equity investments and approximately 85, 5% of our portfolio company with an average fully diluted equity ownership of 7.4%.

Weighted average effective yield on debt investments was 12, 2% and as of June 30th the weighted average yield is computed using the effect of interest rates for debt investments and cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non accrual of any now.

Now I'd like to briefly discuss our available liquidity.

As of June 30th liquidity and capital resources and included cash of $54.2 million.

$13.5 million of available SBA debentures at $100 million of availability on our line of credit, resulting in total liquidity of approximately $167.7 million.

Taking into accounts subsequent events. We currently have approximately $203.2 million of liquidity and Q3, we plan to use excess cash and our second after the I see fund to pay down at least $40 million of outstanding SBA debentures, and I will turn the call back to Ed for concluding comments Ed.

Thanks, Shelby and that's all.

The ways I'd like to thank our team and the board of directors at <unk> for their dedication and hard work and our shareholders for their continued support.

I will now turn the call over to Christy for Q&A Christine.

Thank you for the floor is now open for questions have sort.

Reminder, to asking the question Press Star then the number 1 on your telephone keypad.

And your first question is from Ryan Lynch of K B W.

Hey, good morning, Thanks for taking my questions really nice quarter guys are the.

First question I had the with regarding.

You guys had about $18 million of it looks like unrealized gains and your equity portfolio can you just talk about what what were the drivers behind those what would the and bathrooms and the concentrate and the funeral wasn't witnessed by the cost money and.

And those companies.

Sure.

Great question, Ryan and I think to be honest it was a pretty broad based.

You know of appreciation if you will.

About 2 thirds of our company.

Companies and our portfolio and.

The EBITDA growth on and L. P. M basis, this quarter and fact that was I think for the whole portfolio of 7%. So that's just 1 L. P M growth from Q1 for Q2.

So it was driven.

Largely.

Do have to calibrate some of it was really driven largely by the performance of the portfolio.

Clearly there are some names in there that had larger moves and others, but I would say it was the wholesale and.

Prudent and performance and for the portfolio.

And I would think about it.

Okay, that's helpful, but yep yep.

And that's definitely helpful.

And of on that point, you know you guys have had a ton of success and your equity portfolio of net equity co investment strategies and hugely hugely successful.

1 of the you know the.

The I guess the the good problem to have though as that portfolio has grown to 20% of.

Of your overall portfolio, which is the highest that need the type of bad.

And you got to true.

What is your outlook for potentially accelerating some of the equity investment the M&A picking up and the market the market and there's a lot of activity and so I would think the outlook would be good.

Don't know how much of the equity investment you actually control the outcome of the accident and so any outlook or any commentary on what what is the potential from a high level of I D.

And those equity investment and also on that would you guys ever consider.

I think and the path of thinking that'd be wary of 2020 Yugo completed the sale of a portion of about 50% of about 20 of equity investment.

Would you guys consider doing Matt and if some.

And the equity investment don't kind of.

Excellent you know kind of normal fashion.

Sure.

Great question.

A lot of discussion of all around and this obviously as you might imagine the.

Amongst the management team as well as the board for it frankly.

And thank you mentioned is the.

And it's a nice problems of the house, we like our lack of equity portfolio overall.

Got a lot of obviously high performing companies, but I'll just also just quality.

The company that you know, we have investments and and so you know as I look at the market today.

And just say, it's a very healthy 1 from an M&A perspective, and probably the only gets even more active here in the fourth quarter.

So we do have an expectation for.

Additional realizations and quite frankly on both of the data and the equity side of things primarily driven by M&A.

And so you know I think of the outlook for realizing some of the portfolio is very positive from that perspective.

And we would expect that to continue and we are of a lot of companies that are pretty right.

If you will for M&A or some type of transaction.

So I view, the the outlook from a natural perspective to be very good.

When I look at the companies we control we control a couple of companies today, and so and then we have impact on some other ins and outs.

And that's where maybe the sponsors and total control of the situation or and it would be a negotiation if you will amongst ourselves and other shareholders and other.

And the good news and those situations of the companies are our and of.

The good position to.

To have the transaction to the extent and we wanted to having said that I you know I think we also liked those investment so there's the balance you've got to strike and and I E.

And I wouldn't say, we're looking to go.

The sell those investments right now because there's a there's a good outlook, but at the same time, you know and so as I think about things, yes, we're a little long and the equity today, you know just a percentage basis, but I would also tell you is there you know we.

Think of the portfolio overall is a very healthy and good portfolio. So there's a balance she got the strike there because I don't want to sell too early or you know or the create transactions that aren't aren't advisable. So well. We you know and then the last question. You asked was you know where we consider selling.

All of our portfolio of equity investment, it's like we did the.

And half ago and.

Say look and anything's on the table for sure and I would never take that option off the table.

But it's not something that we're working on right now, but it is a it's clearly an option on the table down the road of if we think that's the right answer at that point. So hopefully that's helpful. A little long winded, but.

For the half from our perspective, but yeah, it's the where.

And where we are yes.

Yeah, No. That's that's helpful and obviously you know the day.

And you know the business year and today is obviously due to the.

Incredible success, and our portfolios and so I mean the spend.

It's been a great way for.

The shareholders just 1 last 1 if I can.

We talked of a lot of bdcs over the last several days and a lot of them are focused on more of kind of the upper of core middle market.

And so I wanted to get your all you all and then on where the where the competition and what is it and from the competitors.

The endpoint and the lower middle market as far as competition and as far as terms and structures.

And I can figure for the day I was kind of the the market you know.

The robot.

Sure sure.

Well, starting with the deal terms and structures I mean, they continue to be the same for us where we go to market as the solution provider of it.

So the first lien debt is and has been for you know really.

3 of 4 years, the big priority of ours, and it's where we've been having some great success and the market. So structures are primarily there having said that we still are making second lien and sub debt investments for the the right situations for the severity of opportunities that we see so I think.

That's how we're approaching it from a competition standpoint, you know it is competitive out there right. It's you know it and I would say, it's more competitive than 3 years ago or 5 years ago, not crazy more competitive more competitive I think the good news is our leverage really hasn't gotten any more aggressive though.

And those time periods and.

The Leverages and you know very much at pre Covid levels. If you will so you know and interest is about that but we have seen.

Pockets of it you know kind of.

Extra aggressiveness, if you will from certain.

Participants that and the market there are more and players if you will and and doing things that are you know unnatural and I don't think that's the norm, but we've seen it for sure. So it is aggressive out there, but and the lower middle market. The you know.

The terms are very kind of the same you know we still have covenants. So these are covenant light deals.

And you know the of the overall structures and it has not changed though you know obviously, we're getting pushed up from a variety of angles.

The patent environment like this.

Hopefully that's helpful, but it yet.

The robot the market from all angles, right or active or healthy market. If you will.

Yep Yep.

Helpful.

And I really appreciate your your time today, but for all my questions and really nice quarter.

Thanks, Ryan and nice talking with you.

You too.

Thank you. Your next question is from Matt Tjaden of Raymond James.

Hey, Ed and Shelby Good morning, and and appreciate you taking my questions first 1 for me it looks like your November 2020 for notes can be redeemed.

In November of this year for for modeling purposes, any color you can give about plans for the capital structure and the remainder of 2021.

Sure and shelf and you want to take that.

Sure I would say you know as I mentioned in my remarks, and we do have some repayments that have occurred and our second as the IC fun and so in terms of kind of redeeming that we're probably going out the gain from SBA debt here and the third quarter, we will opportunistically.

<unk> opportunities for redeeming our baby bonds, it's not something that's you know if it's something that we have to do given that we have a fair amount of time left for maturity, but we will certainly consider opportunities as they present themselves and we're also focused on getting a little more reinvested and the second half of the here.

And using up our liquidity and and having some portion of callable bonds and our capital stack is kind of heat of the long term strategy.

Got it I appreciate that second 1 for me on fee income no it can be rather volatile quarter to quarter, but but maybe in 2020.2 as activity moderates. When do you expect 2020.2 fee income to be below 2021 levels.

Yeah, Matt and I don't know that I would project that I would say you know we are you know as we.

We're here today, and the and the market and have been for a while where you know originator of first lien loans and other.

You know to the extent that the.

We stay in that.

The category, if you will which we believe we will there's no change in strategy from our perspective that we would expect originations to continue to be healthy in 2022 and that there'd be a.

Some fee income with that we also think there'll be some prepayments, but as you heard today from.

1 of the 6 are.

And that since we had you know had prepayment penalties and not all of them have them.

I mean, they all have them, but they they they expire and usually after a couple of 3 years. So you know, but I would expect at least the you know whether we match the same level of fees and 2022 versus 2021 and I don't know but.

And I expect it to be dramatically lower.

At this point at all and I wouldn't I don't foresee that.

Got it and that's it for me I appreciate the time this morning.

It's talking with you and Matt Thank you.

Thank you. Your next question is from Bryce Rowe of hub group.

Thanks, Hi, Ed and Shelby and how are you.

And I hope you are.

And I appreciate it.

Let's see here, so and you talked about.

And you highlighted the use of the.

The second lien.

Payments and the and you've consistently highlighted the.

Focus on 1 first lien over the last few years.

And I'm curious of the second lien repayments is that is that.

Just a function of just natural course.

The company activity and.

Or is that something that you all and it's kind of focused on trying to kind of push companies to the to repay the second lien investment. So that you can rotate them and.

And to enter.

For the first lien heavy debt portfolio.

Sure.

Great question.

Drifting away at it.

Really normal course.

You know and and to be honest and certain of the.

For the situations those weren't investments that we wanted to the lose quite frankly, they were very good investment, but they had reached the I'd say for of the 6.

Repayments.

The.

Materialize due to just being able to access much lower cost of capital I E Bank debt.

Just due to their.

Leverage profile. So they had performed very well and and de Levered and took advantage of the market opportunities out of them. So.

You know it and the other 2 quite frankly, where acquisitions, where the whole capital structures were.

We're kind of Rejiggered, if you will of reconstructed and we just weren't part of the solution. So you know it was a more normal course, we arent looking.

Looking to force our way out of investment, but right now and we don't well I mean, we obviously had to get active with regard to help go but you know and those are more 1 off situations not a normal course trying to push second lien investments out because we're still the.

And making second lien investments today, it's just yeah, we're doing a very I'd say opportunistic basis at the moment.

Okay.

And then next question and maybe for for Shelby.

And I appreciate the the the heads up on the $40 million of SBA.

Pay downs.

Have you been able to to draw.

The newer SBA debentures here.

Lee.

Should we expect that trend to continue and in terms of SBA debentures for.

Funding some of the and some of the new originations.

Here and the here and the near future.

The short answer is yes, and certainly you know the SBA has been a very good partner provided us over the years and we have ample opportunity to continue to grow our third SBA fund them, but it's really just going to be a function of what do we have and the pipeline and does it meet SBA eligibility criteria.

It does we would look to them that's sort of out of the SBA and if it doesn't we've got opportunities to invest from the parents ADC.

Okay.

That's it for me I appreciate you all the time.

Thank you, Brian and I was talking with you.

At the same here.

Thank you. Your next question is from Mickey Schlein of Ladenburg.

Good morning, Ed and Shelby just a couple of questions from me.

The weighted average effective yield on the portfolio of Hasnt been nicely steady at around 12%.

Despite the higher first lien allocation at cost, which as you've noted I think has more than doubled of what.

And the approach you've been using and choosing first lien investments, which has allowed you to maintain that portfolio yield.

Sure Great question, and I think as you know, we've obviously touched on our first lien approach, which includes you know.

1 the first lien investment, but it also includes first style of lifestyle structures.

Where we partner with other financing providers to.

The lower the cost of capital and quite frankly for the borrower and so and the.

Those cases go where we are maintaining yields, but investing and senior debt that maybe it's probably slower we are using a first out lifestyle and structure.

Which we've talked about before and that I'd say you know that is 1 of the ways that we've been able to maintain our yields obviously, we're still make and second lien investments and sub debt investment.

Keep yields up as well, but.

That's probably the driver that I would highlight for you, but it's nothing different than what we've been doing the you know over the last several years of just a larger percentage of the overall financing transactions that were getting involved with the.

And it and those deals are you selling the first out pieces generally too you know commercial banking relationships and and how many turns of leverage do you usually sell to them.

Sure.

It is and we have a network of of commercial banking relationships that we work with and <unk>.

So we've created and that work there.

And then in terms of the the.

The leverage it really varies deal by deal.

I mean, there are times 1 of the maybe at the you know for and 4 and a half times you know.

Average financing and you know the bank will take 2 and a half for 3 turns.

And there are times when the only take 1 turn and we will take the of the other.

2 or 3 turns of whatever.

So it's a it really is deal by deal and we put it together and conjunction with the the.

And the bank.

We will end up working with.

The it's fluid from that perspective, theres not a fixed formula.

Understand and and and those transactions Ed.

Is there of language and your documents that.

The only give you a call option on whatever you sold to them in the event. The borrower you know violate covenants or whereas other troubled and that gives you control over the deal.

Sure. So generally speaking I'd say the answer of that is yes, I mean every documents all different as well as you know, but generally speaking the answer of that is yes.

Okay and.

And my last question when you look at the vintage of the portfolio.

Oh, how much remaining call protection would you say you have on your debt investments.

The key that's a tough 1.

And I can answer that with any accuracy.

The you know it I would say, we as I sit here today, we've got a fair bit of call protection and that has to do with the fact that we've you know and quite frankly exited a fair number of debt investments over the last the 2.

And for months and and you know obviously of a fair number of new portfolio companies and the portfolio as well. So typically when you when and if that's the case, we would have pretty good and were healthy and call protection on those newer deals if you will.

So I can't answer it anymore.

Currently than that.

That's helpful, but that's what it just maybe as a last follow up do you usually structure sort of of 3 to 1 call protection sliding scale or is that too aggressive and this kind of market.

And it's either of 2 year or 3 year those are the and it just depends as of the second lien investment and is it first lien bigger and the first lien and you know those kinds.

Thanks for that Okay. It's 2 to 3 years.

That's it for me Oh I'm just congratulations on all the good quarter and I Hope you guys have a good weekend. Thank you.

Thanks for making nice talking with you and hope you are of good weekend as well.

Thank you. Your next question is from Circus sure Betsy and of B Riley.

Good morning, Ed and Shelby how are you guys.

Good how are you sort of pause.

Yeah. Good. Thanks first question just kind of circles around.

The the leverage levels and I guess, just remind us where you plan to take the business from a regulatory leverage perspective.

Sure.

I think of as we've talked about it and the and then in the past Sarkis I think.

We have we have said 1 of the 1 we're obviously very comfortable with as you know you can lever your has the IC funds, which are subsidiaries of 2 to 1 and so and we and.

We were all of it and that's the IC fund the only and we went through the great session of recession and and <unk>.

Of the 1 leverage and we obviously went through that without any problems and we're very comfortable with higher leverage. What we've said is we're now 1 of the ones are good number, especially given the complexion of the.

The the our portfolio, which was weighted more towards junior debt.

As you know the portfolio is changing or the complexion of the portfolio is changing just 2 more first lien and originations and the exit of some of the second lien investments just from them.

Just a day.

And and natural course of should I say, so you know what I would say is we continue to think 1 to 1 is a very good number but we also would be comfortable increasing that if we needed to or if it makes sense, but it's just given the complexion of the portfolio and the other.

But you know we we.

We kept me like that number of but we can go up a little bit or you know obviously were much lower than 1 to 1 at the moment and we're comfortable with that as well so.

Hopefully that's helpful. But that's how we've always kind of thought about it is and.

We're very comfortable around the 1.1 to 1 but we have increased flexibility today due to the the.

The complexion of the portfolio changes.

Yes.

Yeah. The that's exactly right I mean, it just seems like you know with the shifts more and more towards first lien and it seems like your portfolios.

And under Levered and can support more leverage and that's exactly what I was getting to and I guess, you know and in that light you know kind of given the current environment. Maybe if you can speak to the current pipeline and and potentially you know put a number on that and then just kind of frame.

And your expectations for balancing originations versus repayments.

You know clearly trying to understand when we get to that comfortable lever of.

Level of of achieving net leverage.

Sure sure. So you know I think it's you got to start with the the Mark.

You know the.

Market has been very active.

It's really since Q4 of last year, and I'd say robust last year this year healthy levels.

I'd also say, it's expected to you know.

And I remain healthy too robust the rest of the year.

And so I think that's the the industry backdrop, I would say so from and originations perspective, and I've mentioned, the first lien investments.

Primary focus for Opportunistically make and second lien investments and sub debt investments as well.

We think Q3 will be busy from an originations perspective, and we made 1 new investment and worldwide Express and then.

Mentioned and our prepared remarks.

We've also made several add on I'd say material add on investment are 2 portfolio companies, where we were supportive and the acquisitions.

And then and and then in addition, and what I'd say is it's busy today. So we are active.

And and we're working on several opportunities, but obviously, it's too early to tell what closes and what doesn't and what not but it is the right now.

So in terms of repayments and you know as I mentioned.

And our subsequent event section, we announce the full debt and realization of 3.3 investments and I'll go worldwide Express and Crs worldwide, we reinvested and.

And those companies or and that company.

And you know at this point, what I'd say is we we have a visibility and the 2 transactions.

Transactions that we think will.

And will also result, and the and a.

The repayment of debt investments as well as the realization of equity investment.

They haven't closed yet so you never know, but that's so it just kind of continue to be inactive.

The quarter from of repayments perspective, so overall, what I would say is and.

And we expect originations to maintain maintaining pace with repayments.

But at the same time and I'll tell you it's too early to tell the just given we don't know what's going to close and what's not going to close but that's that's what we would say today.

So hopefully that's helpful. But it's a it's a busy time and I expect it and you know what we're hearing as you know and.

M&A bankers are as busy as they can be today and so we're expecting the busy fall.

Yeah, Yeah, certainly helpful and just 1 more for me if you can maybe.

Speak to the current pricing environment real time, just kind of help us think about how the near origination yields are behaving.

True to your standard and is it.

Are you, losing some are you gaining some you know any color there would be helpful. Sure sure I mean back to the.

Previous conversation competition as renal out there.

For the right credit well, we reduce price a little bit just oh. The answer is yes, but having said that you know we've always been and will continue to be focused on risk adjusted returns and so that's going to drive our decision, making but you know yields are.

Of our 12 to 12, 2% for us on the debt portfolio and if it were to move I would say it probably moved down a little bit just due to the yield environment and and competition I don't expect any major swings there but.

You know the that's that's kind of the where we are today and from a competitive standpoint, so until.

Still yields start to move for it I would expect that there may be of some very modest drifting down.

Makes sense.

Yeah, and that's all for me. Thank you. Okay. Thanks of our cause I was talking with him.

Thank you we have no further questions at this time I will turn the floor back over to Ed Ross for any additional or closing remarks.

Thank you Christie and thank you everyone for joining us this morning.

We look forward to speaking with you on our third quarter call in early November.

Great day and have a great weekend.

Thank you. This does conclude today's conference call you may now disconnect.

Yeah.

Yeah.

[music].

[music].

Good day, and thank you for standing by and welcome to the fight of second quarter 2021 earnings conference call.

At this time all participants are in a listen only mode.

After the Speakers' remarks, there will be a question and answer session.

To ask a question during the session. Please press star 1 on your telephone keypad.

Please be advised the today's conference is being recorded.

You require any further assistance, please press star zero and.

I would now like to hand, the conference over to Jody burning. Please go ahead.

Thank you Christy and good morning, everyone and thank you for joining US. This morning for <unk> Investment Corporation second quarter 2021 earnings Conference call with me. This morning are Ed Ross Lightest investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer and.

By the <unk> investment Corporation issued a press release.

Sturdy afternoon with the details of the company's quarterly financial results. The copy of the press release is available on the Investor Relations page of the company's website and F. T U S Dot com and I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call. The conference call today will contain.

Forward looking statements, including statements regarding the goals strategies beliefs future potential operating results cash flow of the finest investment Corp.

Although management believes these statements of reasonable based on estimates assumptions and projections as of today August 6.2021 day.

Statements are not guarantees of future performance time sensitive information may no longer be accurate at the time of the any telephonic or webcast replay actual results may differ materially as a result of risks uncertainties and other factors, including but not limited to the factors set forth and the company's filings with the Securities and Exchange Commission.

Brightest undertakes no obligation to update or revise any of these forward looking statements with that I would now like to turn the call over to Ed Good morning, Ed.

Good morning, Jody and good morning, everyone.

Welcome to our second quarter 2021 earnings Conference call I Hope all of you your family friends and co workers are staying healthy and well.

I'm going to open today's call with the review of our second quarter performance and portfolio at quarter end.

And then share with you our views on deal activity and the lower middle market for the second half of the year.

Shelby will cover the second quarter financial results and our liquidity position.

Once we have completed our prepared remarks, we'll be happy to take your questions.

Overall, we are very pleased with our results in terms of portfolio performance for the second quarter.

Adjusted net investment income grew year over year and.

Net asset value per share reached the record level of.

Originations and repayments were at high levels in line with our expectations for a busy quarter from of deal flow perspective.

We continue to focus on carefully selecting high quality companies and the lower middle market and are reasonably insulated from economic stresses associated with the pandemic.

The company's debt, that's really resilient business models, the generating strong levels of the cash flow to service debt and positive long term outlook.

Our portfolio remains well structured and positioned to produce those high levels of recurring income and the the.

Potential for equity upside and support of our capital preservation and income goals.

Adjusted net and net net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized or unrealized gains and losses grew 15% versus last year to $10.4 million for 42 cents per share.

Sure.

At quarter end, and net asset value and reached a record $429.4 million for $17 and 57 per share.

And both solid operating performance and underlying portfolio value fair value appreciation.

By the has paid a quarterly dividend of <unk> 31 per share and a supplemental cash dividend of <unk> <unk> per share on June 28, 2021 of your stockholders of record as of June 14th.

As a reminder of the board has devised a formula to calculate the supplemental dividend each quarter under which 50% of the surplus and adjusted NII over the base dividend from the prior quarter and distributed to shareholders.

For the third quarter I am pleased to report that we are increasing the base dividend of <unk> 32 cents per share and the surplus and 6 cents per share.

In addition, we will pay a special dividend and Q3 of <unk> per share therefore on.

On August <unk> 2021, and the board of Directors Directors declared a quarterly dividend of 32 per share.

Supplemental quarterly cash dividend of <unk> for share and a special dividend of <unk> per share of dividends will be payable on September 28, 2021 to stockholders of record as of September 14th.

And in 'twenty 1.

Following a busy first quarter of deal flow activity remained at high levels during the second quarter.

Driven by both M&A transaction and refinancing opportunity.

In contrast to the first quarter, however, originations outpaced repayments.

In terms of originations, we invested a $104.2 million and debt and equity securities of which $96 million or nearly all of the total was invested and first lien debt.

Investment and new portfolio of companies consisted of $18 million and first lien debt and common equity and 2 K direct Inc. A leading omni channel digital advertising platform for small and midsized businesses.

$7 million and first lien debt and common equity and Aaron ex Inc. The supplier of data transfer and signal analysis communications products and related engineering services, primarily to the defense industry.

$25.5 million and first lien debt and common equity and ISI PSG holdings LLC and.

The business as incentive solutions, a provider of online rewards travel incentives and gift card reward programs.

Subsequently sold a $13.5 million participating interest in the first lien debt.

$6.5 million and first lien debt and common equity.

And the level of Education group LLC.

The leading provider of online continuing education for mental health and nursing professionals.

Well the million dollars and first lien debt and <unk> company LLC and the original design and contract manufacturer of complex assemblies.

With roots as a manufacturer of precision injection molded plastic and.

And finally of $11 million and first lien debt and why none of the Foods, Inc. A leading provider of natural and processed cheese product sources and plant based alternatives.

These investments are indicative of our present and focus on companies that have not been meaningfully impacted by the pandemic and for.

The revenue streams that of recurring in nature.

In terms of repayments and realizations, we received proceeds totaling $93 million with the vast majority from the second lien debt investment.

In terms of exits, we received payment and full of $15 million, including a prepayment penalty on our second lien debt and caused the the Qiagen company.

The payment and full of $8 million and our second lien debt and the insurance Holdings LLC.

And the payment and full of $12 million on our second lien debt and Virginia tile Company L. L C.

The <unk> payment and full of $7.8 million on our second lien debt and steward holding LLC.

The payment and full of $4.7 million on our first lien debt and Palmetto Moon LLC.

And we received payment and full of $22.5 million on our second lien debt and a VC investors LLC.

And we had exited our equity investment and wheel Pros, Inc, and realized gain of approximately $2.1 million.

Subsequent to quarter and Hilco technologies was sold and took control of Hilco and the second quarter and exchanged a $10.3 million dollar debt investment for an equity investment and a new holding company.

In conjunction with the sale and subsequent to quarter and we received payment in full on a residual of that and converted equity investment and realized a net loss of approximately $1.1 million of our original equity investment and the company.

He received favorite and full of $11.4 million on our second lien debt and CRM solutions Holdings LLC.

The payment in full of $20 million on our second lien debt and worldwide Express operations LLC and realized a gain of $3 million on a pro force on a portion of our equity investment.

In conjunction with the sale of worldwide Express we and.

Invested $1.5 million and common equity of which $8 million was rolled over from our original common equity investment and <unk>.

Funded a $20 million second lien term loan commitment.

For the originations coming in above repayments and exits and the fair value of the portfolio of appreciating relative to the first quarter the <unk>.

Fair market value of our portfolio as of June 30 of 2021 was $743.5 million equal to 110, 8% of cost.

And we ended the second quarter was 72 active portfolio of company and for companies that have sold their underlying operations.

In terms of portfolio construction and our continued focus on investing and first lien debt combined with a heavy weighting of second lien debt exits and.

The alter the mix since the beginning of the year for us.

First lien debt investments have increased on an absolute basis and as a percentage of percent of total portfolio.

And a quarter and first lien debt accounted for 38, 3% of the portfolio on the fair value basis compared to 25, 2% as of December 31.2020.

And contrast, second lien debt has decreased on an absolute basis and a percentage of total portfolio and accounted for 28% of the portfolio on a fair market basis compared to 44, 7% as of December 30.

The coordinated debt accounted for 13, 4% and equity investments accounted for 23% of the portfolio on a fair value basis.

Our portfolio remains well structured for current economic conditions with debt investments generating high levels of current and recurring income and equity investments, providing us with a reasonable margin of safety along with the opportunity to enhance returns.

Moving the portfolio performance overall, our portfolio continues to perform well and risks remains at comfortable levels.

As of June 30, we did not have any companies on non accrual.

Last quarter, I mentioned that some of our portfolio of companies, we're dealing with operational challenges, including supply chain constraints and higher input costs.

Although the challenges haven't abated since then management at these companies of rising to the challenge, making adjustments as necessary and pricing and our productivity because their overall demand remains favorable.

To help us assess the overall health and stability and performance of our investment portfolio. We tracked several quality measures on a quarterly basis first we track the portfolios weighted average investment rating based on our internal system.

Under our methodology and the rating of 1 is outperform and a rating of 5 is unexpected losses.

June 30th the weighted average investment ratio for the portfolio was 2 on the fair value basis.

The other metric we track of the credit performance of our portfolio, which is measured by our portfolio companies combined ratio of total net debt through <unk>.

Is that investment the total EBITDA for.

For the second quarter of this ratio was 4.2 times, excluding equity only and argued.

The third measure we track is the combined ratio of our portfolio of companies' total EBITDA to total cash interest expense.

Which is indicative of the cushion and our portfolio of companies have and aggregate to meet their debt service obligations.

For the second quarter. This metric was 3.2 times.

For the equity only and they are all of the deals.

M&A activity picked up at the beginning of the fourth quarter of last year and has remained at healthy levels today.

<unk> and high levels of originations and repayments.

Although the net originations rebounded and the second quarter. We are currently not invested and are not fully invested and our debt portfolio. After several consecutive quarters of unusually high levels of debt repayments.

We have been in the situation before and have a proven track record of redeploying proceeds into new debt investments that provide us with high levels of current and recurring investment income without either sacrificing our underwriting standards or deviating from our philosophy of managing the business for the long term.

Therefore intend to adhere to our strategy of carefully investing and high quality companies with defensive characteristics and positive long term outlook.

Advertising companies that have not been materially impacted by the pandemic and the possess resilient business models and strong cash flow profile as.

As we move into the second half of the year.

You'll see very healthy the robots conditions for deals and the lower middle market from both the M&A activity and refinancings, where we can leverage our relationships and experience of this.

This favorable environment supports our goal of growing our debt portfolio and the coming quarters.

It also supports a positive outlook for equity realizations.

Combination of our investment strategy and underwriting principles.

For our goals of capital preservation and generating attractive risk adjusted returns.

And I'll turn the call over to Shelby to provide some details on our financial and operating results Shelby.

Thank you Ed and good morning, everyone.

Ill review, our second quarter results in more detail and close with comments on our liquidity position. Please note I will be providing comparative commentary versus the prior quarter Q1, 2020.1.

Total investment income was $21.8 million for the 3 months ended June 30th.

<unk> 5 million decrease from Q1, primarily due to a $1.2 million decrease in interest income and of 1.

$1 million decrease and fee income offset by a <unk> 7 million increase and dividend income.

Due to the Hilco restructuring and exchange of debt for equity of approximately 6 million of interest income was converted into dividend income yields were relatively stable and Q2 at 12, 2% versus 12, 3% and Q1, However, as Ed mentioned, yielding assets were lower than historical levels given the unusually high.

All of the repayments over the last several quarters.

We had 1 counting nuance and Q2 that I wanted to highlight regarding secured borrowings.

As Ed mentioned subsequent to the initial closing we syndicate of $13.5 million of our Unitranche loan and incentive solutions to the first out lender.

Given our continuing involvement and the loan of $13.5 million that was assigned does not meet the GAAP accounting criteria for sale accounting treatment rather of the $13.5 million a day.

The secured borrowing which simply means that it remains of security on our balance sheet included and total assets with an offsetting liability of secured borrowing on the balance sheet.

Similarly, the interest on the 13th and 5 million portion of the loan is included in both interest income and interest expense given the total assets include secured borrowings the advisor granted the waiver to include the $13.5 million of secured borrowings from the base management fee waiving of approximately 29000 of fees in Q2.

Shareholders for the accounting treatment.

Total expenses, including income tax provision for $15 for a million for the second quarter.

$3.1 million higher than the prior quarter, primarily due to a $3.8 million increase and the capital gains incentive fee accrual and Q2, we accrued $3.9 million of capital gains incentive fees, given meaningful appreciation and the fair value of the portfolio.

And the interest and financing expenses decrease in Q2 by $6 million, primarily due to the redemption of bonds and Q1.

No the capital gains incentive fee is accrued for GAAP purposes, but not currently payable.

As of March 31st of the weighted average interest rate on our outstanding debt was 4.2% excluding secured borrowings and we.

$361 million of debt outstanding comprised of $139.3 million of SBA debentures.

$107.3 million of unsecured notes and $13.5 million of secured borrowing.

I got the equity ratio as of June 30th What's the 0.8 times of 0.5 times statutory leverage excluding exempt SBA debentures.

Net investment income of NII for the 3 months ended June 30th was 26 cents per share versus <unk> 45 per share and Q1.

Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investment was for.

The 2 cents per share and Q2 versus 46 cents per share and Q1.

For the 3 months ended June 30th we recognized approximately $2.2 million of net realized gains primarily from the sale of our equity investment and we'll price.

Turning now to the portfolio statistics as of June 30th.

Total investment portfolio had fair value of $743.5 million, our average portfolio company investment on the cost basis was $9.3 million at the end of the second quarter, which excludes investments and for portfolio companies. That's the other operations that are and the process of winding down.

For the equity investments and approximately 85, 5% of our portfolio company with an average fully diluted equity ownership of 7.4%.

Weighted average effective yield on debt investments was 12, 2% and as of June 30th the weighted average yield is computed using the effective interest rates for debt investments and cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non accrual if any.

Now I'd like to briefly discuss our available liquidity.

As of June 30th our liquidity and capital resources included cash of $54.2 million.

$13.5 million of available SBA debentures, and 100 million of availability on our line of credit, resulting in total liquidity of approximately of $167.7 million.

Taking into accounts subsequent events. We currently have approximately $203.2 million of liquidity and Q3, we plan to use excess cash and our second at the IC fund to pay down at least $40 million of outstanding SBA debentures, and now I will turn the call back to Ed for concluding comments Ed.

Thanks Shelby.

And as always I'd like to thank our team and the board of directors and find this for their dedication and hard work and our shareholders for their continued support of.

I'll now turn the call over to Christy for Q&A Christine.

Thank you and the floor is now open for questions.

And are you asking a question press Star then the number 1 on your telephone keypad.

And your first question is from Ryan Lynch of K B W.

Hey, good morning, Thanks for taking my questions really nice quarter guys. The.

First question and I had though was regarding.

You guys had about $18 million out of it looks like unrealized gains from your equity portfolio can you just talk about what what were the drivers behind those what would the investment and the concentrate and fuel wasn't looking for spread across the money.

And what went on for the company.

Sure.

Great question, Ryan and I think to be honest it was a.

Pretty broad based.

You know of appreciation if you will about 2 thirds of our compass.

Companies and our portfolio and.

EBITDA growth on an LTM basis, this quarter and fact that was I think for the whole portfolio of 7%. So that's just 1 L. P M growth from Q1 the Q2.

And it was driven.

You know of largely.

We do have to calibrate some of it was really driven largely by the performance of the portfolio.

Clearly there are some names in there that had larger moves and others, but I would say it was the wholesale and <unk>.

<unk> and performance and for the portfolio.

Is that and I would think about it because of it.

That's helpful, but yeah yeah.

And that's definitely helpful. You know kind of on that point you guys have had a ton of success.

And your equity portfolio of net equity co investment strategies and huge hugely successful you know 1 of the you know the I guess the the good problem at the half, though as that portfolio has grown to 20% of.

Of the overall portfolio, which is the highest doesn't mean, it's every day.

That's the true.

What is your outlook for potentially accelerating some of the equity.

M&A is picking up and the market the market and there's a lot of activity from thank you.

Outlook would be good I don't know how much of the equity investment you actually control the outcome of London and.

And so any outlook or any commentary on what what is the potential from the high levels of actually exiting of equity investment and also on that would you guys ever consider.

I think and the path I think in February of 2020, you've all completed the sale of a portion of about 50% of about 20 of equity investment.

Would you guys consider doing that if some of these.

Equity investments don't kind of.

Extra and you know kind of at normal fashion.

Sure.

Great question.

A lot of discussion of all around and it's obviously as you might imagine the.

And amongst the management team and as well as the board for it frankly.

And then.

I think you mentioned is the.

And it's a nice problem the house, we like our lack of equity portfolio overall.

Got a lot of obviously high performing companies and I'll just also just quality.

The companies that you know, we have investments and and so you know.

As I look at the market today I think it's a it's a very healthy 1 from an M&A perspective, and probably the only gets even more active here in the fourth quarter.

So we do have an expectation for additional realizations and quite frankly on both of the data and the equity side of things.

And primarily driven by M&A.

And so you know.

I think of the outlook for realizing some of the portfolio is very positive from that perspective.

And we would expect that to continue and we are of a lot of companies that are pretty right.

If you will for M&A or some type of transaction.

Yeah, So I view the outlook from a natural perspective to be very good.

You know when I look at the companies we control we control a couple of companies today.

And.

And so and then we have impact on some other.

And that's where maybe the sponsors thought and total control of the situation or.

And if it would be a negotiation if you will amongst ourselves and other shareholders and.

And the good news and those situations of the companies or our.

And a good position to.

To have the transaction to the extent and we wanted to having said that I you know.

And I think we also liked those investment so there's just the balance you've got to strike and and.

And I wouldn't say, we're looking to go sell.

Sell those investments right now because there's a there's a good outlook, but at the same time.

And so as I think about things.

And yes, we're a little long and equity today, just on a percentage basis, but I would also tell you is there.

Thank the portfolio overall is very healthy and good portfolio. So theres a balance you got to strike there because I don't want to sell too early or you know or to create transactions that are current advisable. So, but we you know and then the last question you asked was where we consider selling.

All of our portfolio of equity investment like we did of ear and eye.

And half ago and.

Say look at anything from the table for sure and I would never take that option off the table.

It's not something that we're working on right now.

But it is a it's clearly an option on the table down the road. If we think that's the right answer at that point. So hopefully that's helpful low long winded, but.

And the half from our perspective, but yeah, it's the where we are.

No that's helpful and obviously you know the day.

You know the business year and today is honestly.

And the incredible success and a portfolio of that so.

And Oh.

A great win for shareholders just 1 last 1 if I can.

We talked of a lot of bdcs over the last several days and a lot of them are focused on more of kind of the upper of core middle market.

And so I wanted to get your all of you all and you know.

And we're aware of the competition where is it and.

And the standpoint.

And the lower middle market as far as competition and as far as terms and structures.

United States at the day at the time of the market.

And to do their robot.

Sure of pure well, starting with the deal terms and structures.

Continue to be the same for us where we go to market as the solution provider. Obviously first lien debt is it has been for you know really.

3 of 4 years, the big priority of ours, and it's where we've been having some great success and the market. So structures are primarily there having said that we still are making second lien and sub debt investments for the the right situations for the severity of opportunities that we see.

So I think you know that.

And that's how we're approaching it from a competition standpoint, you know it.

It's competitive out there right.

And I would say, it's more competitive than 3 years ago or 5 years ago, not crazy more competitive more competitive I think the good news is our leverage really hasn't gotten any more aggressive than those time periods.

And so Leverages you know very much at pre Covid levels, if you will.

So you know and interest is about that but we have seen.

Pockets of.

And of.

Extra aggressiveness, if you will from certain.

The participants that and.

And the market there are more and players if you will.

And in doing things that are you know unnatural and I don't think that's the norm, but we've seen it for sure. So it is aggressive out there, but and the lower middle market the.

And the terms are very low to the same we still have covenants. So these are covenant light deals and you know the.

And the overall structure has not changed though you know obviously, we're getting pushed out from a variety of angles and.

And the competitive environment like this.

That's helpful but.

The robot the market from all angles, right or of active or healthy market. If you will.

Yes.

Helpful.

And I really appreciate your your time today first of all my questions and really nice quarter.

Thanks, Ryan and nice talking with you.

You too.

Thank you. Your next question is from Matt Tjaden of Raymond James.

Hey, Ed and Shelby good morning, and and I. Appreciate you taking my questions first 1 for me it looks like your November 2020 for notes can be redeemed.

In November of this year for modeling purposes, any color you can give about plans for the capital structure and the remainder of 2021.

Sure shelf and you want to take that.

Sure I would say you know as I mentioned in my remarks, we do have some repayments that have occurred in our second of CIC fun and so in terms of kind of redeeming that we're probably going to of redeemed from SBA debt here and the third quarter, we will opportunistically.

<unk> opportunities for redeeming our baby bonds, it's not something that you know if it's something that we have to do given that we have a fair amount of time left before maturity, but we'll certainly consider opportunities as they present themselves and we're also focused on getting a little more reinvested and the second half of the here.

And using up our liquidity and and having some portion of callable bonds and our capital stack is kind of key to the long term strategy.

Got it I appreciate that second 1 for me on fee income no. It can be rather of volatile quarter to quarter, but maybe in 2020.2 as activity moderates would you expect 2020.2 fee income to be below 2021 level.

Yeah, Matt and I don't know that I would project that I would say we are you know as we.

We're here today, and the and the market and have been for a while where originator of first lien loans and.

You know to the extent that that.

And we stay in that.

Category, if you will which we believe we will there's no change in strategy from our perspective that we would expect originations to continue to be healthy and 2022 and that the.

And some fee income with that we all sort of things there'll be some prepayments, but as you heard today think of it.

1 of the 6 and <unk>.

Since we had you know had prepayment penalties and not all of them have them.

I mean, they all have them, but they they they expire and usually after a couple of 3 years. So.

But I would expect at least the you know whether we match the same level of fees and 2022 versus 2021, and I don't know, but I don't expect it to be dramatically lower at this point at all.

I don't foresee that.

Got it that's it for me I appreciate the time this morning.

Nice talking with you Matt Thank you.

Thank you. Your next question is from Bryce Rowe of have decreased.

Thanks, Hi, Ed and Shelby and how are you.

The good hope you are.

And I appreciate it.

Let's see here, so and you talked about you know you highlighted the use of the.

The second lien.

Payments and and the and you've consistently highlighted the.

Focus on 1 first lien over the last few years.

And I'm curious of the second lien repayments and that is that.

Just a function of just natural course.

The company activity and.

Or is that something that you all have kind of focused on trying to kind of push companies to the to repay the second lien investment so that you can rotate and.

And to me too.

For the first lien heavy debt portfolio.

Sure.

Great question.

Christine it's really normal course.

And.

And to be honest and certain of those situations those weren't investment that.

We wanted to lose quite frankly, they weren't very good investment, but they had reached a I'd say for of the 6.

Repayments.

No.

Materialize due to just being able to access much lower cost of capital I E Bank debt.

And just due to their leverage profile and so they had performed very well and and de Levered and took advantage of the market opportunities ahead of them. So.

And.

And the other 2 quite frankly were acquisitions, where the whole capital structures were.

For the kind of Rejiggered, if you will of reconstructed and we just weren't part of the of that solution. So you know it was the more normal course, we arent looking.

Looking to force our way out of investment, but right now and we don't Oh, well I mean, we obviously had to get active with regard to Hilco, but you know and those.

Those are more 1 off situations not a normal course trying to push second lien investments out because we're still the.

And making second lien investment today, it's just yeah, we're doing and are very I'd say opportunistic basis at the moment.

Okay.

And then next question maybe for for Shelby.

And I appreciate the the the heads up on the $40 million of SBA.

Pay downs, you guys have been able to draw all that.

The newer SBA debentures here recently.

Should we expect that trend to continue and in terms of SBA debentures.

Funding some of the and some of the new originations.

Here and the here and the near future.

The short answer is yes, and certainly you know the.

The a has been a very good partner provided us over the years and we have ample opportunity to continue to grow.

Our third Spic's fund them.

But it's really just going to be a function of what do we have and the pipeline and does it meet SBA eligibility criteria and so if it does we would look to and that's sort of out of the SBA and if it doesn't we've got opportunities to invest from the parents ADC.

Okay.

That's it for me I appreciate you all the time.

Thank you, Brian and I was talking with them.

At the same here.

Thank you. Your next question is from Mickey Schlein of Ladenburg.

Good morning, Ed and Shelby just a couple of questions for me.

And the weighted average effective yield on the portfolio of Hasnt been nicely steady at around 12%.

Spike the hire of first lien allocation of cost, which as you've noted I think has more than doubled whats been the approach you've been using and choosing first lien investments, which has allowed you to maintain the portfolio yield.

Sure Great question.

And I think it's you know, we've obviously touched on our first lien approach which includes.

1 the first lien investment, but it also includes first.

First out of lifestyle structures.

Where we partner with other financing providers too.

Lower the cost of capital quite frankly for the borrower and so and those cases, where we are maintaining yields but investing in the senior debt that maybe its price lower we are using a <unk>.

First out of lifestyle structure, which we've talked about before and that I'd say you know that is 1 of the ways that we've been able to maintain our yields obviously, we're still make and second lien investments and sub debt investments the deep yields up as well but.

That's probably the driver that I would highlight for you, but it's nothing different than what we've been doing the you know over the last several years, it's just a larger percentage of the overall financing transactions that were getting involved with the.

And it and those deals are you selling the first out pieces.

Generally 2 commercial banking relationships and and how many turns of leverage do you usually sell to them.

Sure.

Is it the we have a network of commercial banking relationships that we work with.

And so we've created and network there.

And then in terms of the.

The leverage it really varies deal by deal.

I mean, there are times 1 of the maybe it's the you know for and 4 and 5 times net.

Leverage financing and you know the bank will take 2 and a half for 3 turns and.

There are times when the only take 1 turn and we will take the of the other.

2 or 3 turns of whatever.

So it's a it really is deal by deal.

And we put it together and in conjunction with the the.

The bank.

We will end up working with so it's the it's fluid from that perspective, theres not a fixed formula.

For Stan and and in those transactions Ed.

And their language and your documents that effectively give you a call option on whatever you sold to them and the event. The borrower you know of violate covenants or whereas other trouble that gives you control over the deal.

Sure. So generally speaking I would say the answer of that is yes, I mean every documents all of different as well as you know, but generally speaking of the answer of that is yes.

And.

And my last question when you look at the vintage of the portfolio.

Oh, how much remaining call protection would you say you have on your debt investment.

The key that's a tough 1 of them.

And I can answer that with any accuracy.

And the you know it I would say, we as I sit here today, we've got a fair bit of call protection and that has to do with the fact that we've you know quite frankly exited a fair number of debt investments over the last the.

24 months and and you know obviously you have a free.

For a number of the new portfolio of companies in the portfolio as well so typically when you when and if that's the case.

We would have pretty good and were healthy and call protection on those newer deals if you will.

So I cant answer it any more accurately than that.

That's helpful. But that's what I was just maybe as of last follow up do you usually structure sort of of 3 to 1 call protection and sliding scale or is that too aggressive and this kind of market.

It's either of 2 year or 3 year those are the.

And it just depends and sort of second lien investment and as of first lien.

And the first lien and you know those kinds of things, but okay.

3 years.

And that's it for me I'm just congratulations on from on a good quarter and I Hope you guys have a good weekend. Thank you. Thanks for making nice talking with you and hope you have a good weekend as well.

Thank you. Your next question is from Sarkis, your Betsy and of B Riley.

Good morning, Ed and Shelby and how are you guys.

Good how are you sort of pause.

Yeah. Good. Thanks first question just kind of circles around the.

The leverage levels, I guess, just remind us where you plan to take the business from a regulatory leverage perspective.

Sure.

I think as we've talked about it and then and the past Sarkis I think we.

We have we have said 1 of the 1 we're obviously very comfortable with as you know you can lever your has the IC funds.

Is there a subsidiary of 2 to 1 and so and we and.

We were all of it and that's the IC and the only and we went through the great session of the recession and.

The 2 to 1 leverage and we obviously went through that without any problems and we're very comfortable with higher leverage what we've said is where no..1 the ones are good number, especially given the complexion of the.

The our portfolio, which was weighted more towards junior debt.

As you know the portfolio is changing.

And the complexion of the portfolio is changing just 2 more first lien and originations and the exit of some of the second lien investments just from them.

Just a day.

And and natural course of should I say, so you know what I would tell you is we continue to think 1 the 1 is a very good number but we also would be comfortable increasing that if we needed to or if it makes sense, but it's just given the complexion of the portfolio and the.

But you know we.

We kept me like that number but we can go up a little bit are you know obviously were much lower than 1 to 1 at the moment and we're comfortable with that as well so.

Hopefully that's helpful. But that's how we've kind of thought about it is and.

We're very comfortable around the 1.1 to 1 but we have increased flexibility today due to the the.

The complexion of the portfolio changes.

Yes.

Yeah, that's exactly right I mean, it just seems like you know with the shifts more and more towards the first planned and it seems like your portfolios.

Early under Levered and kind of support more leverage and that's exactly what I was getting to and I guess, you know and in.

And that light.

You know kind of given the current environment, maybe if you can speak to the current pipeline and and potentially put a number on that and then just kind of frame your expectations for balancing originations versus repayments.

Clearly trying to understand when we get to that comfortable lever of.

Level of of achieving that leverage.

Sure sure. So you know I think it's you got to start with the the.

And the market.

The market has been very active.

It's really since Q4 of last year, and I would say robust last year. This year healthy levels, but I'd also say it's expected to.

Remain healthy too robust the rest of the year and so I think thats the the industry backdrop I would say so.

From an originations perspective, and I've mentioned, the first lien investments of the primary focus for Opportunistically make and second lien investments and sub debt investments as well.

We think Q3 will be busy from net originations perspective, and we made 1 new investment and worldwide Express as I as I mentioned in our prepared remarks.

We've also made several add on I'd say material add on investment 2 portfolio companies, where we were support and the acquisitions.

And then and then and in addition, and what I'd say is it's busy today. So we are active.

And we're working on several opportunities, but obviously, it's too early to tell what closes and what doesn't and what not but it is the right now.

So in terms of repayments as I mentioned.

And our subsequent event section, we announced the all of that realization of 3.3 investments and Alco worldwide Express and Crs worldwide, we reinvested and that those companies for that company.

And you know at this point and what I'd say is we have visibility and due to transactions that we think.

We will also result, and the and a.

The repayment of debt investments as well as the realization of equity investments.

They haven't closed yet so you never know, but that's so it's going to continue to be and active.

The quarter from a repayments perspective, so overall, what I would say is and we expect originations to maintain maintaining pace with repayments.

But at the same time on the.

I'll tell you it's too early to tell the just given we don't know what's going to close and what's not going to close but that's that's what we would say today. So hopefully that's helpful. But it's a it's a busy time and I expect it and you know what we're hearing as you know M&A bankers are as busy as they can be today and so we're expecting a busy fall.

Yes, yes, certainly helpful and just 1 more for me if you can maybe.

Speak to the current pricing environment real time, just kind of help us think about how the near origination yields are behaving is it true to your standard of it.

Are you, losing some of are you gaining some of you know any color there would be helpful.

Sure sure I mean back to the.

Previous conversation competition as renal out there.

For the right credit as well, we reduce price a little bit just oh. The answer is yes, but having said that we've always been and will continue to be focused on risk adjusted returns.

And so that's going to drive our decision, making but yields are.

Of our 12 to 12, 2% for us on the debt portfolio and if it were to move I would say it probably moved down a little bit just due to the yield environment and competition I don't expect any major swings there but.

And that's that's kind of the where we are today and from a competitive standpoint, so until.

So you'll start to move for it I would expect that there may be of some very modest drifting down.

Makes sense.

Yeah. That's all for me. Thank you okay. Thanks, RK nice talking with you.

Thank you we have no further questions at this time I will turn the floor back over to Ed Ross for any additional or closing remarks.

Thank you Christie and thank you everyone for joining us this morning.

We look forward to speaking with you on our third quarter call in early November.

Great day and have a great weekend.

Thank you. This does conclude today's conference call you may now disconnect.