Q3 2021 Fidus Investment Corp Earnings Call
[music].
Okay.
Good day, and thank you for standing by and welcome to the <unk> take likely 2020 One earnings conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press Star One thing right telephone. Please be advised that today's conference is being recorded I would now like behind the conference with one of your speakers.
Today Ms. Jody <unk>. Please go ahead.
Thank you Vic and good morning, everyone and thank you for joining us for <unk> Investment Corporation third quarter 2021 earnings Conference call.
With me. This morning are Ed Ross <unk> investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer.
<unk> investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results a copy of the press release is available on the Investor Relations page of the company's website at <unk> Dot Com 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 and cash flows to finance investment Corporation. Although management believes these statements are reasonable based on estimates assumptions and projections as of today November five 2021.
These statements are not guarantees of future performance time sensitive information may no longer be accurate at the time of 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 in 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.
Come to our third quarter 2021 earnings conference call.
I hope all of you your families friends and coworkers are staying healthy and well.
I'm going to open today's call with a review of our third quarter performance and our portfolio at quarter end.
Then offer you an update of our views on deal activity in the lower middle market.
Shelby will cover the third quarter.
Actual results and our liquidity position.
Once we have completed our prepared remarks, we'll be happy to take your questions.
As expected activity levels in the lower middle market from both an M&A activity and refinancings perspective were healthy and robust during the third quarter.
In a period of heightened activity that began nearly a year ago.
Against this backdrop, our portfolio performed well and we continue to see a strong flow of opportunities for investments in high quality businesses that possess resilient business models that generate strong levels of cash flow to service debt and that have positive long term outlooks.
Payments remained at high levels and outpaced originations.
Part to the timing of deal closings.
Adjusted net investment income, which we define as net investment income excluding any capital gain incentive fee attributable to realized and unrealized gains and losses was $9 8 million or <unk> 40 per share compared to $9 7 million or <unk> 40 per share last year.
<unk> grew to $447 5 million or $18 31 per share.
In both a solid operating performance and underlying portfolio value appreciation.
In addition, we reported net realized gains of $8 4 million or <unk> 35 per share as we harvested.
Real mature equity investments in conjunction with sales and exits of portfolio companies.
By this pay to base quarterly dividend of <unk> 32 per share a supplemental cash dividend of <unk> <unk> per share and a special dividend of <unk> <unk> per share for the third quarter.
As a reminder, 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 distributed to shareholders on November one 2021 board of directors declared a base quarterly dividend of <unk> 32.
<unk> per share a supplemental quarterly cash dividend of <unk> <unk> per share and a special dividend of five <unk>.
Per share for a total dividends of <unk> 41 per share for the fourth quarter the.
Dividends will be payable on December 17th 2021 to stockholders of record as of December 3rd 2021.
In terms of originations, we invested $78 2 million in debt and equity securities of which $39 6 million or roughly half of the total was invested in first lien debt and roughly 40% was invested in second lien debt.
<unk> in new portfolio companies consisted of $14 $3 million in first lien debt and common and preferred equity in card back intermediate LLC, a leading provider of chargeback prevention and recovery services for E Commerce and card not present businesses.
$5 million in second lien debt and common equity and power grid services acquisition, LLC, a leading utility services business, providing repair and maintenance services for distribution transmission and substation infrastructure.
As you can see we continue to focus on companies with stable and diversified demand characteristics relative installation from the supply chain constraints and inflationary pressures currently weighing on many companies and strong positive long term outlooks.
The remaining $53 4 million as a new $20 million second lien loan commitment and worldwide Express and a number of follow on investments in support of M&A transactions on the part of some of our portfolio companies.
Shortly after the end of the quarter, we invested a total of $27 million in two new portfolio companies. These were $8 $5 million in first lien debt subordinated debt and common equity of auto CRM LLC.
Businesses dealer holdings, a leading SaaS based provider of customer communications software to the auto repair market.
$18 $5 million in first lien debt common equity and warrants of ascend or a mid co Inc. A leading provider of cloud based talent management software solutions.
In addition, we committed $16 million in second lien debt to a leading technology platform for digital customer acquisition across all consumer vehicles, including financial services.
Services and insurance, which we expect to fully fund in Q4.
In terms of repayments and realizations in the third quarter, we received proceeds totaling $127 $5 million with the majority from second lien and subordinated debt investments and $23 4 million in proceeds from monetizing equity investments.
In terms of exits.
Received payment in full of $21 million on our first lien debt and converted debt to equity and Hilco technologies and realized a net loss of approximately $1 million on our original equity investment in the company.
We received payment in full of $11 $4 million on our second lien debt in Crs solutions Holdings LLC.
<unk> payment in full of $20 million on our second lien debt in worldwide Express LLC and realized a gain of $3 million on our equity investment in conjunction with the sale of worldwide Express, we invested $1 $5 million in common equity of which <unk> 8 million was rolled over from the original.
Common equity investment and funded.
A $20 million second lien loan commitment.
We received payment in full of $11 million on our subordinated debt investment in LNG, Indeed, LLC and realized a gain of $4 $5 million on our equity investment.
<unk> payment in full of $21 $5 million on our subordinated debt and Allied 100, and realized a gain of one $8 million on our equity investments.
We received payment in full of $11 $6 million, including a prepayment penalty on our subordinated debt in ECM industries LLC and.
In addition, we received a cash distribution of <unk> $8 million on our equity investments.
We received payment in full of $17 $3 million, including a prepayment penalty on our debt investment in route where Inc.
Subsequent to quarter end, we received payment in full of $7 $1 million, including a prepayment penalty on our subordinated debt and trans on it companies.
The fair value of the portfolio at quarter end was $719 1 million equal to 113, 9% of cost.
And reflecting net repayments for the quarter, partially offset by appreciation in the fair value of the portfolio.
We ended the third quarter was 70 active portfolio companies and.
Six companies that have sold their underlying operations.
Our portfolio remains well structured positioned to produce both high levels of recurring income and to provide us with a reasonable margin of safety along with the opportunity to enhance returns.
Given current market conditions, we remain focused on rotating mature equity investments into income producing assets.
With first lien debt investments exceeding repayments in second lien and subordinated debt repayments exceeding originations during the third quarter. The mix continued to shift in favor of first lien debt on both an absolute basis and as a percent of the total portfolio.
At quarter end first lien debt accounted for 41, 2% of the total portfolio on a fair value basis compared to 25, 2% as of December 31 2020.
While second lien debt decreased to 28% of the portfolio on a fair value basis from 44, 7% as of December 31.
That accounted for nine 7% and equity investments grew to 21, 1% of the portfolio on a fair value basis.
Moving to portfolio performance.
Overall, our portfolio continues to perform well and risks remains at comfortable levels as of September 30th.
Did not have any companies on non accrual.
For our portfolio of companies continue to work their playbooks in terms of pricing and product productivity measures in response to supply chain challenges created by the pandemic.
<unk> component shortages material and freight cost inflation and labor availability.
In light of these unprecedented business conditions, having a well diversified portfolio continues to serve us well.
To help us assess the overall health 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 a rating of one is outperform and a readiness of five is an expected loss at September 30, the weighted average investment ratio for the portfolio was two on a fair value basis.
Another metric we track is the credit performance of our portfolio, which is measured by our portfolio companies combined ratio of total net debt through Friday as debt investments to total EBITDA for the third quarter. This ratio was five times, excluding equity only and <unk> deals.
Third measure we track is the combined ratio of our portfolio company's total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have.
In aggregate to meet their debt service obligations to us.
For the third quarter. This metric was three one times, excluding equity only an IRR deals.
As a result of the elevated velocity of M&A activity that began in the first fourth quarter last year, we have seen high levels of originations and repayments in each of the past four quarters.
Because repayments outpaced originations for the third quarter, we were Underinvested as we started the fourth quarter. Nevertheless, we continue to currently expect to grow the portfolio in the fourth quarter.
I mentioned earlier that we closed three deals in early October for a total of $43 million in originations, including the $16 million commitment.
And strong deal flow.
Or is us opportunities to add further to originations before the end of the year.
While we are encouraged by these near term opportunities. We will continue to manage the business for the long term and not rush to grow the portfolio in a way it would have a four foot for fit our underwriting standards.
As always our proven underwriting discipline places greater value on quality than quantity.
In summary, I remain confident that our relationships with deal sponsors our experience and our strategy of selectively investing in high quality companies with defensive characteristics and positive long term outlooks.
<unk> us well for the growth over time with a focus with a long term goal of generating attractive risk adjusted returns from our debt and equity investments and on preserving capital.
Now I'll turn the call over to Shelby to provide some details on our financials and operating results Shelley.
Thank you Ed and good morning, everyone I'll review, our third quarter results in more detail and close with comments on our liquidity position.
Please note all of you providing comparative commentary versus the prior quarter Q2 2021.
Total investment income was $21 2 million for the three months ended September 30th.
One 6 million decrease from Q2, primarily due to a <unk> 5 million decrease in fees and a <unk> 4 million decrease in fee income offset by a <unk> three.
$3 million decrease in interest income.
Total expenses included.
Including investment tax provision were $16 1 million for the third quarter, approximately $8 million higher than the prior quarter.
Primarily due to $8 million increase in the capital gains incentive fee accrual in Q3, we accrued $4 7 million of capital gains incentive fees given meaningful appreciation in the fair value of the portfolio note. The capital gains incentive fee is accrued for GAAP purposes, but not currently payable excluding the accrued kath.
Little gains incentive fees total expenses in Q3 were $11 4 million in line with Q2.
As a reminder, expenses will be higher in the fourth quarter as we will incur an annual excise tax expense, which I would estimate to be approximately two to three per share similar to prior years.
As of September 30, the weighted average interest rate on our outstanding debt was four 2% excluding secured borrowings.
Q3, we prepaid $44 3 million of SBA debentures, we ended the quarter with $360 million of debt outstanding comprised of $95 million of SBA debentures, $207 3 million of unsecured notes and $40 million outstanding on our line of credit and $17 7 million of secured bar.
Our debt to equity ratio as of September 30 was eight times or six times statutory leverage which excludes SBA debentures.
Net investment income or NII for the three months ended September 30 was 21 per share versus 26 per share in Q2, adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was <unk> 40 per share.
In Q3 versus <unk> 42 per share in Q2.
For the three months ended September 30th we recognized approximately $8 4 million of net realized gains primarily from the sale of our equity investments and connector to energy worldwide Express and Allied 100.
Turning now to portfolio statistics as of September 30, our total investment portfolio.
<unk> <unk> hundred $19 1 million.
Our average portfolio investment on a cost basis was $9 million at the end of the third quarter, which excludes investments in six portfolio companies that sold their operations and are in the process of line durations that are in the process of winding down.
Equity investments in approximately 88, 2% of our portfolio companies with an average fully diluted equity ownership of five 6%.
Weighted average effective yield on debt investments was 12, 3% as of September 30, the weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual if any.
Now I'd like to briefly discuss our available liquidity.
As of September 30th our liquidity and capital resources included cash of $98 8 million $13 5 million of available SBA debentures and $60 million of availability on our line of credit, resulting in total liquidity of approximately $172 3 million <unk>.
In October we successfully issued $125 million of unsecured notes at a three 5% interest rate. The net proceeds and available cash were used to pay down the outstanding balance on the line of credit of $40 million at closing and to fully redeem $82 3 million of public notes due in 2024 with interest.
Rates ranging from.
Five 375% to 6%.
Given the notice requirements. The bond redemption occurred on November 2nd. So we will have one month of incremental interest expense on the public notes in Q4 of approximately $4 million in conjunction with the bond redemption in Q4, we will realize a onetime loss on extinguishment of debt of approximately one.
$6 million relating to the unamortized deferred financing costs on the bonds.
Taking into account subsequent events, including the debt refinancing. We currently have approximately $185 2 million of liquidity now I will turn the call back to Ed for concluding comments Ed.
Thanks, Shelby as always I'd like to thank our team and the board of directors at Phi This for their dedication and hard work and our shareholders and our shareholders for their continued support.
Now I'll turn the call over to Vic for Q&A Vic.
Vic.
Hello.
Yeah.
Hello.
Shelby are you there.
I am not hearing anything on my line either.
I'm not sure if we lost.
Okay.
Okay.
Okay.
And your recommendation.
It appears that the operator is having technical difficulty so.
I mean, we can certainly hanging on the call for a couple more minutes, but otherwise I would suggest unfortunately, we might need to.
Hmm.
Okay.
Well.
They are trying to work on it.
So hopefully they'll figure it out but absent that we might have to adjourn the call.
But we did get a message that folks are trying to work on.
Getting the operator back to allow for Q&A.
Thanks for your patience, everyone sorry about this.
Okay.
Okay.
Okay.
Yeah.
Okay.
Okay.
Yes.
Okay.
Yes.
Yes.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone.
If a question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question comes from Mickey <unk> from Ladenburg. Your line is open.
Good morning, Ed and Shelby I guess patience is a virtue.
Alright Mickey.
Hi, Ed, there's obviously intense competition higher up in the middle market with so much private debt and equity capital available.
Or would you describe the effects of that competition, if any on the lower middle market, where you operate.
Great question, Maggie I mean from my perspective competition as you know over the last 12 months it's been.
It's similar right.
It's not like there is a huge influx of capital, but there obviously is a fair bit of capital out there.
The same players so it's not a bunch of new entrants.
And so in some cases, we're seeing lenders accepting lower yields.
We've definitely seen some unnatural acts.
To win business.
What we're doing is focusing on the nuts and bolts of our business and sticking to what we know again focusing on the long term the industries, we know well and situations we like them.
So when I look at it from a pricing perspective, I would say market pricing is in line generally with.
Where it was pre COVID-19 levels.
It's a little lower but.
I would say leverage is very similar to pre COVID-19 levels as well.
So when I think about risk adjusted returns I think about equity capitalization, which is typically much higher in this.
High valuation environment.
I think the risk adjusted returns are quite good.
And more importantly in the lower middle market. The terms Havent changed so terms when I think about security when I think about.
Covenants real covenants real maintenance covenants.
All of those things I think are.
Still in place haven't changed.
I think a real positive for from our perspective regarding the market that we're playing primarily in <unk>.
So hopefully that helps yes.
That's good news.
Given that Theres always a chance that those folks will start to look at the lower middle market down the road.
Just one follow up question, Ed you had another strong quarter of unrealized depreciation and if I'm not mistaken. The portfolio's valuation is now at a record level in terms of cost over the fair value of our costs. What are the main drivers of those valuation gains.
And do you see more upside when you look at your portfolio companies performance and market trends.
Sure. Another great question, Maggie I think when I look at the drivers. So we had $23 million of appreciation this quarter in the portfolio.
Most of that being a large majority of them, obviously being an equity.
Given by three.
Three things are underlying company performance that was the biggest driver by a long shot, but obviously also we got some visibility into certain M&A processes.
Where.
And so that impacted things there you know people are great franchises people are paying.
Up right now.
As.
You've heard talked about quite a bit so and then lastly market calibration, but that obviously, that's something that we take into account every quarter, but it's a very small degree.
Rationale for the.
The appreciation this quarter.
Hopefully that's it.
That's helpful. Ed those are all my questions. This morning. Thank you okay. Thank you Mickey I appreciate it.
Thank you and our next question comes from Robert Dodd from Raymond James Your line is open.
Hi, guys.
On.
The repayment levels in the quarter now I think year to date repayments have now exceeded the combined number in 2019 to 2020.
When does the pace slowed down.
Thank you I mean, just activity levels on that side seem to be.
Really really high I mean, your originations this quarter with low by historic standards, but they just don't Miss the boat.
Spot, which nation.
Yeah.
Sure.
Great question, Robert I think from our perspective.
Hesitant to say this because last quarter. There were some surprises literally couple of surprise repayments in September we heard about in September they happened in September.
So.
It's hard to predict as we've talked about in the past.
Value is.
Q4.
<unk>.
At least today.
Feel like it's going to be.
A.
Limited quarter from a repayment perspective relative to last quarter.
And so we will I don't think well get anywhere near last quarter and.
I think what I would say is.
<unk> in the overall market activity has been extremely high for four quarters in a row.
And obviously, we've had a fair number of M&A transactions, where we have also realized equity investments, but also.
This debt refinancings or recapitalization, where we were taken out.
Which tells you we had a pretty strong portfolio. So our approach has always been we want to invest in high quality businesses.
They can weather the various storms that we anticipate or don't anticipate they can weather the storms.
So yes.
We feel good about getting repaid obviously it creates a challenge for us.
In terms of reinvesting and we're going to go from that perspective, we're going to stick to our discipline. We're going to we are sticking to how we're going about our business and self originating large large majority of the investments, we're making in sticking to the industries that we know well so.
<unk>.
I do think this quarter will it will slow down.
And I do think originations will outpace.
Repayments this quarter and the question is to what degree.
<unk>.
We'll be able to tell you that in February.
That's the.
That's what I'm seeing.
See any slowdown in terms of.
I appreciate that.
On.
Kind of a tight since with so many repayments so much recycling.
About roughly speaking I think half of that.
The capital you have how after the portfolio has been of michon AT&T it might not be new businesses. This fall at once et cetera, et cetera has been mentioned added since COVID-19.
Yes.
Mickey's question, though that.
Portfolio turnover it doesn't seem to have impacted your portfolio yield significantly about the only thing I can think of that's really changed out of that.
Maybe less which has gone up a little bit.
Is that.
Indicative of the types of businesses I mean, obviously, you've got games firstly now with.
More so.
Second.
Is it would.
Would you say your loan to value as will other characteristics.
Kind of stayed the same or even improve.
As that that portfolio is kind of when you eat.
And then the other thing to that is with such a scene.
Seems like a relatively new portfolio should we expect.
Prepayments.
Prepayment fees and things like that to be low say next year over the next 18 months with so much of that cap.
Capital being newly out there.
Okay.
A lot of questions in there Robert.
And all of them.
But the <unk>.
So let me, let me hit leverage first and it's a little bit of an anomaly to be honest.
So what I cited in our prepared remarks was a five times net leverage excluding <unk> loans on our balance sheet.
That's an average number.
The.
Candidates.
Distorted by several but really one in particular much larger deal that we've had in our portfolio for a very long time.
It's now a very large company and so if you excluded this name the average leverage it would be more like four four times.
Which is more indicative of the whole portfolio and so.
<unk>.
What I would say with regard to things like leverage.
I don't think that has changed materially loan to values only improves in this environment quite frankly.
From our perspective.
I think you touched on prepayments prepayments R. R.
A piece of the puzzle I think that will always be there.
Could they go down a little bit next year I think the answer to that is.
Yes, but I don't think it's material.
Honestly I think a lot of the repayments, we had were in pretty mature debt investments in.
Many of those prepayment fees were.
Not that sizable but.
I think prepayments as part of the business and will remain part of the business, maybe there'll be a little bit lower but I can tell you it's going to be a lot lower so and so fees, obviously as an originator first lien.
We do.
Obviously have a healthy fee income and that depends somewhat on activity levels as you know.
But we would expect so.
So fees will move with activity levels, but as I look forward to next year I expect it to be an active year I don't know if it'll be as active as this year I doubt it.
But I still think it'll be an active year theres still a fair number of companies I know in our portfolio that we expect to be sold.
And that's a good thing from our perspective.
I appreciate that thank you. Thank.
Thank you good talking to you Robert.
Thank you. Our next question comes from Ryan Lynch from <unk>. Your line is open.
Hey, good morning, and thanks for taking my questions and really nice nice quarter again.
My first question has to do with.
As far as your equity portfolio.
<unk> had a.
A nice exit of $23 million of equity investments this quarter, but given the strength in that portfolio.
<unk> grew a die despite despite those accidents.
My question was I would presume that given how active the market today.
Would expect equity investment excuse me equity monetization.
Continue at.
That's fairly.
Consistent basis, maybe not as high as we saw in the third quarter, but I would assume that uhm.
Consider those data to continue to happen, but please let me know if that's not the case.
So my question would be.
Is the thought process to just continue to monetize equity investments in the normal course like we saw in the third quarter.
Which again because of the other strength in the equity portfolio didn't actually reduce reduce that which is a good problem to have.
Or is there any consideration being given to.
Selling off kind of a basketball portfolio.
Minority equity position similar to what you guys.
Had done in early 2020.
Sure Great question Ryan.
I think.
From a let me try to hit the beginning.
Of your comments, which is do we expect.
Further realizations in the equity portfolio and what I would tell you is along.
Along the lines a little bit of what I just finished with Robert.
We do have portfolio companies that are.
Evaluating strategic alternatives now.
And that meeting here in the Q4.
And we also have others that have spoken specifically about first half of next year planning due to also evaluate strategic alternatives.
Continue to believe that the M&A market is going to be active and we think our equity portfolio will participate to some degree.
Hopefully a very healthy degree, but to some degree in that activity and those activity levels. So I think thats a positive and I think that's your assumption there is correct.
With regard to selling.
Part of the portfolio. If you will like we did previously I think that idea.
Is definitely on the table, it's been on the table.
I'll also tell you it's not something that we are working actively on right now.
But it is something that we.
We do talk about.
<unk>.
We'll consider it at the appropriate time, but at the moment, it's not we're not actively doing that we like the idea that we have that as an option.
But it's again I think we feel good about the quad.
Quality of our equity portfolio.
And we also don't want to rush things. So there is a balance as you will know.
With regard to monetize and equity investments and we're trying to strike that but youre never going to hit it perfectly, but we would yes.
We're trying to strike the right balance right now.
Okay. That's helpful.
Helpful commentary on that on that topic.
The other question I had was.
You discussed the kind of the elevated level of repayments with Robert hopefully those start to moderate a little bit but while we're in this process of increased activity.
Have you all considered or maybe you guys had actually done this.
Sort of trying to widen the investment funnel by.
Moving.
Tim.
Maybe slightly different areas for instance, like maybe moving up to slightly larger companies.
Not necessarily loosening.
The underwriting procedures.
Or are we seeing kind of the underwriting metrics that you guys Lew use but maybe just moving to larger companies that maybe have a little bit of a lower yield but will allow us to put capital to work.
A little bit quicker to kind of offset some of these repayments have you guys done any of that have you guys considered any of that why or why not.
Sure.
Great question.
So what I would tell you is we do play in.
The larger lower middle market space, and we have a couple of companies that I would argue are more just middle market are definitely several companies that are just more middle market investments. So we do that on an opportunistic basis, typically where we've got good relationships and we've got you.
Again industry knowledge and a view that.
That is differentiated.
So we do participate there I would also say.
One of the things we've done just to widen the funnel for instances over the last three or four years is focused on more of the software and tech enabled space.
And developed a real expertise there from a industry perspective, and a financing perspective.
So we are doing those things I would tell you our deal flow is extremely strong.
So we feel good about the opportunity set we feel very good about the opportunity set here in Q4 as I discussed in our prepared remarks.
But at the same time, we are sticking to our knitting, we're sticking to.
The business that.
That we have executed well over time, and we do see again growth here in the fourth quarter Quest.
Question is by how much and that's going to be dependent on both deal closings as well as what level of repayments, but.
We do see the trend of repayments slowing and to be honest, we expect that to slow as we as we move forward from here.
We are doing a lot of the things you just talked about but I would say.
Obviously, a very disciplined and gradual manner as opposed to.
Just switching gears.
Will.
Okay.
Understood.
I appreciate the time this morning.
Yes, nice talking to you Ryan Thank you.
Thank you and again, ladies and gentlemen to ask a question. Please press star and then one on.
Our next question comes from Sarkis <unk> from B Riley Your line is open.
Hi, Good morning, and thank you for taking my question here.
And you guys have plenty of availability to deploy into earning assets in light of your comments. Just now that you said that you would expect the trend of repayments to slow down moving forward I guess as we step back.
How long do you think it'll take to kind of get back to some target leverage levels and then if you can remind us how youre thinking about target leverage in the current environment.
Sure.
Thanks <unk>.
Sure.
What I would say is over the next.
Three.
Three to nine months.
Is where we start getting closer.
Closer to.
Sure.
In a more of a one to one leverage.
And I don't think it will happen this quarter, we won't get there this quarter, but I think we'll make some progress.
So thats something we are positive about and excited about quite frankly.
With regard to we've always talked about target leverages kind of one to one where obviously.
Actually.
As our portfolio continues to migrate towards.
More of a first lien portfolio and we expect that trend to continue.
Its cosmetically more comfortable to operate at a little more leverage than one to one but thats not the goal we're comfortable doing it and quite frankly, we're comfortable today doing it you know as you know.
Some of our Spic's funds are.
Levered two to one.
Went through the great recession that two to one leverage point with the Spic's funds and so leverages not something we're concerned about but I think there is a balance.
As much including a cosmetic basis.
There is we don't to generate good returns, we don't need to to be over levered or push leverage and so are a good number for US is one to one that's how we've talked about it for quite a while and I don't think that's changed.
Hopefully thats helpful, but we do see making progress towards that number here over the next three to nine months.
No. That's certainly helpful. And then just to be clear that's one to one on a statutory basis correct.
More of a GAAP basis actually.
Gotcha.
Okay, and as we think about kind of the cadence into the next year clearly closing out the year strong but.
As we look at the cadence of activity expected next year do you think it's going to be a little bit more elevated than historic norms, just kind of given the no.
Availability of liquidity and just kind of generally a robust environment in this space you plan.
Just to make sure you're talking about here in Q4.
Yep.
Now moving beyond Q4, just kind of looking into 2022.
Still seems like Theres, a lot of liquidity out there in the <unk>.
Pace of deals in the velocity of deals.
Probably going to continue so just wanted to get your sense for or do you think things returned to kind of a historical cadence or it'll be somewhat elevated.
It's a great question and a tough one to answer but if I were to answer that question I'm going to what I would say is I think it will be.
Elevated relative to historical levels.
But not not what we've seen over the last four quarters.
We do this what we're seeing is a lot of companies performing very well.
Today the economy, despite all the issues we discussed.
Growing nicely.
It is growing slower today and projections have come down here recently as we all know but.
It is growing nicely and there's a ton of companies out there that are performing quite well and have.
Outlooks to continue to perform quite well and so that sets up for.
A fair bit of deal activity.
And so that's where we that's where I would fallout.
B above historical norms, but not.
I don't think it will be where we have been the last four quarters or so.
Yeah.
Very helpful. Thank you yep.
These are keys.
Thank you and I am showing no further questions from the phone lines I'd now like to turn the conference back over to Ed Ross for any closing remarks.
Thank you Vik and thank you everyone for joining us. This morning, we look forward to speaking with you on our.
Our fourth quarter call in early March 2022 have a great day and a great weekend.
Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.
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