Q4 2021 Fidus Investment Corp Earnings Call
Good day, and thank you for standing by and welcome to the fourth quarter of 2021 earnings Conference call. At 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 on your telephone.
Don.
Be advised that today's conference is being recorded.
Your require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Jody Bourbon Yang. Please go ahead.
Thank you Gigi and good morning, everyone and thank you for joining us for fight US Investment Corporation fourth quarter 2021 earnings Conference call.
With me this sport Bras brightest 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 F. D U S Dot com I.
I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.
Conference call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results and cash flows of brightest investment Corporation.
Although management believes these statements are reasonable based on estimates assumptions and projections as of today March four 2022. 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.
<unk> undertakes no obligation to update or revise any of these forward looking statements.
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 fourth quarter 2021 earnings Conference call.
I'm going to open today's call with a review of our fourth quarter performance and our portfolio at quarter end.
Discuss the positive outlook behind the board's dividend decisions and then offer you an update of our views on deal activity in the lower middle market in the year ahead.
Shelby will cover the fourth quarter financial results and our liquidity position.
Once we have completed our prepared remarks, well be happy to take your questions.
Although the last quarter of the year is typically a busy time for us the fourth quarter of 2021 was exceptionally busy extending the trend now.
Elevated velocity of M&A and refinancing activity to five consecutive quarters.
You may recall from last quarter's call we were underinvested at the start of the fourth quarter and we expect it to grow the portfolio by the end of the year.
Although at the same time some portfolio companies were evaluating strategic alternatives.
Didn't expect was it a couple of deals would come together quickly towards the end of the quarter.
As a result repayments were once again at very high levels, including a sizable level of equity realizations.
Ultimately exceeded originations.
Amidst this flurry of activity, we continued to execute our proven investment strategy of carefully selecting investments in high quality lower middle market businesses.
Its resilient business models that generate excess levels of cash flow to service debt and then have positive long term outlooks.
Leveraging the breadth of our in depth of our relationships with deal sponsors.
Our industry knowledge, and our differentiated perspective on financing solutions.
Our portfolio performed extremely well during the fourth quarter 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 $12 million or 49 per share compared to $10 7 million.
Or <unk> 44 per share last year.
Net asset value grew to $487 $8 million or $19 96 per share driven by a combination of strong operating performance.
Underlying portfolio value appreciation and was boosted by net realized gains of $42 $1 million or $1 72 per share, including $24 million from the sale of Mesa line services L. L C.
If I just pay that corridor, our base quarterly dividend of <unk> 32 per share a supplemental cash dividend of <unk> per share and a special dividend of <unk> <unk> per share for a total dividend of 41 per share for the fourth quarter.
For the first quarter the board of directors, recognizing our extremely strong performances throughout the year and exceptionally high level of net realized gains.
The base dividend from 32 per share to 36 cents per share a 12, 5% increase and revise the formula to calculate the supplemental dividend each quarter distributing a greater share of surplus income generated by our portfolio to our stockholders.
It's really the supplemental dividend was equal to 50% of the surplus and adjusted NII over the base dividend from the prior quarter.
Under the revised Formula the supplemental dividend is now equal to 100% of the surplus.
For the first quarter dividend the surplus of 17 cents per share or <unk> 49 per share.
<unk> 49 per share of adjusted NII lots, the fourth quarter base dividend of <unk> 32 cents per share for a total dividend of 53 per share this quarter.
Base dividend up <unk> 36 per share and a supplemental dividend of <unk> 17 per share will be payable on March 25th 2022.
To stockholders of record as of March 11th.
Yes.
In terms of origination.
We invested $101 $2 million in debt and equity securities of which $72 1 billion or nearly three quarters of the total was invested in first lien debt and $25 $8 million was invested in second lien debt.
In terms of new portfolio companies, we invested $79 million and six of them.
Consisting of $18 $5 million in first lien debt revolving loans common equity and warrants and a center a mid co Inc.
Leading a market leading provider of cloud based talent management software solutions.
$8 $5 million in first lien debt subordinated debt and common equity in auto CRM LLC doing business as dealer holdings, a leading SaaS based provider of customer communications software to the auto repair market.
$13 million in first lien debt and Green queues technology, LLC doing business as green cubes.
A leading provider of lithium power systems for motive mobile and stationary power in the industrial automation material handling and telecom markets.
$5 $7 million in first lien debt and mobile wallet, Inc. A leading provider of consumer intelligence solutions.
$16 $5 million in first lien debt and net based solutions, Inc. Doing business as net base.
Global leader in artificial intelligence powered consumer and market intelligence.
$16 $8 million in second lien debt and common equity and suited connector L. L C.
Leading market marketing technology platform for digital customer acquisition.
Cross, most consumer verticals, including financial services home services and insurance.
These new investments reflect our continued focus on companies that are relatively insulated from the adverse effects of the pandemic.
<unk> supply chain disruptions and margin compression due to rising material freight and labor costs.
In terms of repayments and realizations in the fourth quarter, we received proceeds totaling $153 $7 million with nearly two thirds of the total from second lien and subordinated debt investments.
Also successfully monetize equity investments in seven portfolio companies, realizing $42 $1 million of gains in Q4 haven't spent the time and effort on optimizing outcomes.
From my perspective, this reflects well on the team's portfolio management skills and further differentiate <unk> in the market.
We're patient we're focused on the long term when we deliver strong results for our shareholders.
In terms of sales and exits we received payment in full of $7 $1 million, including a prepayment penalty on our subordinated debt in the Trans Atlantic companies.
So your payment in full of $12 $1 million, including a prepayment penalty on our second lien debt and pool in electrical products. In addition, we received proceeds of $10 million and a realized gain of $9 $1 million on our equity investment in pool in electrical products related to the sale of the business.
We received payment in full of $11 $2 million on our second lien debt and bnb roadway and security solutions. In addition, we received a distribution of <unk> $7 million and a realized gain of <unk> $2 million on our equity investment related to the sale of the business.
We received payment in full of $30 million on our existing subordinated debt investments enrolled $10 million.
A new subordinated debt investment in Bcm. One group. In addition, we received proceeds of $3 $3 million and realized a gain of $2 $5 million on the exit of our equity investments from the sale of our equity.
We received proceeds of $7 $5 million and realized a gain of $6 $4 million related to the exit of our equity investment.
And revenue management solutions.
We received proceeds of $2 3 million and realized the gain of $1 8 million related to the exit of our equity investment in Alzheimer's research and treatment Center.
We received payment in full of $13 million, including a prepayment penalty on our first lien debt investments in specialized elevator services Holdings. In addition, we received proceeds of $2 $3 million and realized a gain of $1 $3 million related to the exit of our equity investment.
And we received payment in full of $13 $9 million on our subordinated debt investment in <unk>.
Yeah.
In addition to these sales and exit we closed deals on to control investments during the quarter and I wanted to take a moment to share with you some details about them.
First green fiber.
Might recall Phy this assumed control of green fiber in late 2019 after several difficult operating events.
Our ownership period, our team worked side by side with an outstanding management team and ultimately we facilitated a strategic transaction that merge green fiber with another company to create Applegate Green fiber intermediate the leader in the cellulose insulation arena under new private equity.
Concert.
As part of this transaction the assets of U S. Green fiber were sold and we received a new $9 $6 million subordinated laden and $12 $8 million of equity in Applegate Green fiber intermediate and consideration for 81% of our second lien debt investment in U S Green fiber.
As a former company winds down any residual proceeds will go to pay down the remaining $5 $2 million of U S Green fiber debt on our books at fair.
Our value of the residual debt and equity investments in U S. Green fiber is marked at zero and we have placed this debt investment on non accrual status. We believe this transaction positions our investments for a positive outlooks, while lowering our risk.
Second Mesa line services as you might recall, we assumed control of Mesa line services in the second quarter of 2021 after several self inflicted company events occurred.
The ownership transition, we invested meaningful capital to shore up the company's financial position, we're working hard to improve the overall operations of the business and positioning the company to be sold to a strategic buyer.
As a result of our approach and portfolio management skills. The company was sold and we received payment in full of $26 $5 million, including a prepayment penalty on our subordinated debt investments.
In addition, we received the $21 6 million distribution and realized a net gain of $24 million on our equity investments, reflecting the value we created.
Very proud of the work our teams put into these control investments and the outcomes of each of them showcasing our capabilities, which are differentiated in this industry.
He put repayments and realizations for the fourth quarter in perspective over the course of 2021, we received $472 $8 million from a diverse set of deals and exited 11 portfolio companies.
Subsequent to the into the quarter, we invested a total of $62 $6 million in four new portfolio companies.
These where we invested $10 $8 million in first lien debt and common equity.
A leading provider of alternative out of home advertising across the convenience store and gas station retail truck side and transit markets among others.
We invested $22 $4 million in first lien debt and common equity of Micron ex filtration Holdings, Inc. Doing business as Micronics engineered filtration Group, Inc. A global provider of aftermarket and OEM filtration equipment and consumables for use in mining and chemical wastewater.
And various other industrial end markets.
We invested $15 million in second lien debt of Quest software U S Holdings, Inc. A global cyber security data intelligence and it operations management software provider and we invested $14 $4 million in subordinated debt preferred equity and common equity of CAH inner.
Intermediate LLC, a technology based risk management firm that provides education and customized price risk management services businesses affected by volatility in agriculture markets.
We also received $13 million in repayments consisting of the following and received payment in full of $6 $7 million on our second lien debt investments and Mirage trailers.
A distribution on our equity investment in frontline food services L. L C.
Formerly known as accent food services, resulting in a realized gain of approximately $200000.
We received a distribution on our equity investment and spend men LLC, resulting in a realized gain of approximately $6 $1 million.
The fair value of the portfolio at quarter end was $719 $1 million equal to 115, 7% of cost, reflecting the underlying performances of the portfolio companies and appreciation in the fair value of the portfolio offset by repayments and realizations.
We ended the fourth quarter was 70 active portfolio companies and eight companies that have sold their underlying operations.
While we had high levels of repayments and originations during the quarter overall, the portfolio remains well structured to produce recurring income and through our equity investments to provide us not only with incremental profit.
Also at least a reasonable margin of safety our portfolio continues to perform well and remains well positioned from a risk perspective with the current business environment.
Over the course of 2021, our investments in first lien debt nearly doubled on a fair value basis, while repayments were concentrated in second lien and subordinated debt investments as a result first lien debt grew to approximately 65% of our debt portfolio as of December 31 in terms of the total.
Our mix on a fair value basis.
Debt investments comprised about 77% of the total and equity investments accounted for the remaining 23%.
Looking back on 2021.
A series of high velocity from a deal activity perspective, and we set records in terms of originations repayments and net asset value.
Over the past five quarters with repayments of $573 $5 million exceeding originations of $456 million.
We've seen a rotation of a large majority of our debt portfolio into new portfolio companies without sacrificing yields.
While also being equal.
We would've preferred to have ended the year in a net origination position the high level of repayments is a testament to the overall health of our portfolio to the strength and resiliency of our portfolio of companies, especially in light of the pandemic, which made them attractive candidates for M&A transactions from a credit perspective for.
<unk> and recapitalization.
Looking ahead to 2022, we expect another busy year with strong deal flow, although in all likelihood not at the velocity levels of 2021.
The outlook for M&A, and refinancings, and the lower middle market remains strong and some companies are planning to initiate strategic alternatives in the coming months.
As a result in 2022, we're positioned to both grow the portfolio and monetize some of our equity investments, while staying focused on our long term goal of generating attractive risk adjusted returns and delivering value for our stockholders.
Now I'll turn the call over to Shelby to provide some details on our financials and operating results Shelby.
Thank you Ed and good morning, everyone I'll review, our fourth 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 Q3 2021.
Total investment income was $24 1 million for the three months ended December 31st $2 9 million increase from Q3, primarily due to a one 9 million increase in fee income.
8 million increase in dividend income and apply a $1 million increase in interest income the increase in fee income was driven by a one time $1 3 million management fee related to the successful exit of our investments in Mesa line services.
Total expenses, including income tax provision were $21 7 million for the fourth quarter, approximately $5 5 million higher than the prior quarter, primarily due to a $4 9 million increase in the capital gains incentive fee accrual.
Splitting the accrued capital gains incentive fees total expenses in Q4 were $12 1 billion. The point 6 million increase versus Q3 due to the annual excise tax accrual, which was <unk> 5 million in Q4, and appoint 2 million increase in income incentive fees.
No the capital gains incentive fee is accrued for GAAP purposes. However is only payable to the extent cumulative realized gains exceed realized losses and unrealized depreciation.
As of December 31, 2021 we had accrued capital gains fees on the balance sheet of $29 2 million of which $6 1 million as payable.
Turning to our capitalization in October we successfully issued $125 million of unsecured notes at 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 of closing and to fully redeem $82 3 million of public now.
It's due in 'twenty 'twenty four with interest rates ranging from five 375% to 6% gives.
Given the notice requirements of the bond redemption occurred on November 2nd. So we had one month of incremental interest expense on the public notes in Q4 in conjunction with the bond redemption, we realized a loss on extinguishment of debt in Q4 of $1 6 million related to the unamortized deferred financing costs on the redeem bonds.
Taking into account the debt financing the weighted average interest rate on our outstanding debt was three 7% as of December 31st 2021, we ended the quarter with $374 6 billion of debt outstanding comprised of $107 million of SBA debentures $250 million of unsecured notes.
And $17 6 million of secured borrowings our debt to equity ratio as of December 31st was 0.8 times or six times statutory leverage excluding exempt SBA debentures.
Net investment income or NII for the three months ended December 31st was 10 cents per share versus 21 cents per share in Q3, adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was 49 cents per share in Q4 versus.
<unk> 40 per share in Q3.
For the three months ended December 31st we recognized approximately $42 1 million of net realized gains primarily from our equity investments in Mesa line services pool in electrical products revenue management solutions D. C. M. One Alzheimers research and treatment center and specialized elevator services.
Turning now to portfolio statistics as of December 31st our total investment portfolio had a fair value of $719 1 million, our average portfolio investment on a cost basis was $8 8 million at the end of fourth quarter, which excludes investments in eight portfolio companies that sold their operations there.
In the process of winding down.
We have equity investments in approximately 82 play 1% of our portfolio companies with an average fully diluted equity ownership of four 7%.
Weighted average effective yield on debt investments was 12, 3% as of December 31st 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 December 31st our liquidity and capital resources included cash of $169 4 million, one 5 million of available SBA debentures and $100 million of availability on our line of credit, resulting in total liquidity of approximately $270 9 million.
Subsequent to year end, we paid down $20 million of SBA debentures that are second to SD IC fund and borrowed an incremental $31 5 million of SBA debentures in our third SBA sheets aren't taking into account subsequent events, which include incremental actually I see that availability. We currently have approximately.
$267 3 million of liquidity, which includes 31 and a half million of available SBA debentures.
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 <unk> for their dedication and hard work and our shareholders for their continued support and we'll now turn the call over to D. G.
For Q&A.
Excuse me.
Yes.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Robert Dodd from Raymond James Your line is now open.
Good morning, and congratulations on all.
I'll Miss you understating that.
Good job questions at all.
On Mesa I mean, thank you for that.
Color.
All in all on that and I mean, you mentioned early in your prepared remarks. Some deals that came together really fast I wonder if that was one of them because.
If I look back I mean, you took it over in Q2 and Q3. It was marked below cost and the equity was marked at zero and then obviously you just had.
A large positive.
Equity realization on that so can you can you give us any more color on just like how fast.
That deal came together.
Was it on.
Anticipated to happen. This early in the process or anything like that because obviously the gain versus the Balkan in Q3.
Pretty startling.
Sure sure and a good week.
And a good way I think.
Great question Robert.
We took over Mesa I'm understanding the business, well, but understanding and understanding that it was a great franchise. If you will.
But it obviously also had some issues that we had to manage and deal with.
Yeah, we did that throughout our investment I would you know what I would say is our intent was not to.
Hold the business for you know as an owner for the for the for the long term. If you will we always have the intention of kind of Assurant things up and then we felt like we knew it was a great franchise and that we could.
You know kind of right the ship and liquidate our investment.
Our company performed relatively well through that period post our acquisition.
It didn't need some support from a capital perspective and liquidity perspective.
And ultimately you know we were.
Having some one off conversations you know from a.
Sale perspective, and one of those came together very quickly and I would say you know I don't know probably two and a half months start to finish but I you know given the complexity of the situation. We did not think it could move that quickly, but it but it did.
It ended up coming together at the very end of December so.
That's kind of a synopsis of it.
I appreciate that thank you. Thank you for that additional color that I mean, one not just may submit everything I mean is any of the gain in Q4. I mean is it is it shielded from P. Build slots is not a lot of that at all.
Or being held down and the bulk or anything like that or is all of this is going to flow to investment company taxable income and if that's the case I mean.
Separate question, but related.
What's the spillover undistributed taxable income estimate.
Sure well I'll, let Shelby you jump in on that one right more in her domain.
Sure sure.
Great question, we had some for against tax purposes at the rig some carryforward losses from 'twenty to 'twenty of approximately 25 million. However, while some of our gains that we realized in 2021 where in a block or some of the more substantial ones were not.
As a result, Robert to your point you know we have in our spillover about $19 9 million of gains. So we're now incremental gains at the rig will.
Go into the spillover calculation and ultimately be distributed.
So at the end of the year, we had a buck 56 of estimated spillover, which included the $19 9 million of gains recognized in 2021 at the rack.
Okay.
But the high level of color on that basis, I mean, you know it's it's.
It's a great cause.
That's not a problem to have but the.
The new dividend policy base dividends above 24, if you distribute all the surplus this year.
Spillover would grow but you'd still be bumping up against the edge of of how much spillover.
So well.
Well generally you let you keep I mean, you can move declaration dates and things like that but I mean, so I guess the point is that the board obviously, you've already increased the dividend change of policy is.
Is there anything else in discussion to manage that because I don't think you want to.
Yeah.
Squeeze yourself into into making dividend decisions based on what the IRS tells you to date.
Sure. Let me just start with our estimated spillover of dollar 56 at the end of 'twenty 'twenty. One you know kind of with our new increase in the base dividend and supplemental dividend policy, we will chip away at that and make a pretty big dent, but to your point, we will likely need to declare our.
Fourth quarter dividend earlier in advance of filing our tax return on October 15th in order to fully satisfy and distribute the dollar 56, and then looking forward to 2023, you know, we'll just have to kind of continue to monitor activity in 2022 and as you've kind of noted you know any incremental gains will end.
Pac spillover that we had at year end 2022 and then that'll obviously impact dividend decisions that we need to think about 2020 three.
Got it.
Activating monitoring it unless you highlight we do have a high class problem here is that yes, we've generated a fair amount of spillover at or approaching kind of the upper limit of what you can reasonably just shouldn't be even if you declare your fourth quarter dividend early.
Okay.
Really appreciate that color. Thank you.
One more if I can.
Monopolizing everything but just don't.
Environment you said.
2022 probably down versus 2021 in terms of originations.
But I think given how active a wash, but you've always done.
62 million I think in what is.
Our seasonally slow quarter typically it I mean, you know last year, you did 63 in the first quarter.
It sounds like activity is still very elevated right now I mean it is.
Is that the feeling do you think it's going to slow down through the rest of the year.
Or is that just.
Couldn't too Conservative assessment sure. Let me, let me just I'll just touch on the market for a second if I could.
And then.
I'll answer that question, but the Q4 as everyone knows and I think as her was extreme.
Extremely robust from just an overall market activity perspective.
M&A was was active there were premiums being paid for a very good businesses that haven't been impacted meaningfully by COVID-19 and the other issues that are out there which are numerous.
And Theres, a fair bit of capital right and are chasing good businesses and from both a lending as well as an equity perspective and so.
What I would say as I sit here today is that activity levels are still relatively healthy.
But I do not think that there'll be at the same levels as last year.
I think at the moment and quite frankly, the market from a deal flow perspective.
He is recovering at a little bit it takes some time to build pipelines at the various M&A shops and other <unk>.
Drops but yes.
Yes, it's still active and we do expect the year to be active absent any you know huge events that ended up derailing, the economy and slowing things down in a material way, but at the moment.
There's those healthy M&A, it's a healthy M&A and lending environment from our perspective company performance is pretty good generally speaking and you know, especially those copies that you know aren't as exposed to the issues of inflation.
You know, we're not as exposed to the issues of inflation.
Other issues that are out there so, but we're keeping an eye on it right. It's a it's an interesting environment and there's a lot of moving pieces and.
We are continuing to focus on those businesses that are less exposed to.
To to the environment. If you will and also doing some opportunistic are evaluating some opportunistic investments, where we have a second way out type situations, meaning asset support and IP that kind of thing.
That's helpful color, but I I think.
The market is active.
Not robust like it was last year, but I'd say active which is a good thing and it bodes well.
For us to continue to grow our portfolio.
Thank you. Thank you for that color and again, congratulations on a really good quarter in particularly.
I mean, you know U S green fiber and it makes it that you have to take control of that.
Renovated.
Do you get outcomes.
Thanks, Robert it's good talking to you.
Thank you. Our next question comes from the line of Ryan Lynch from K B W. Your line is now open.
Hey, good morning, and thanks for taking my questions.
Nobody's really nice quarter really nice 2021.
Uh huh.
One thing I was just wondering if you could help out with you guys.
They have this whole level.
With the proceeds received in the quarter, whether it's through.
<unk> equity investment or like.
Baxter distribution are key.
That's kind of the total level of non U.
Equity investment where distributions are keen here in the fourth quarter.
Yeah.
Shelby do you.
And if you don't have.
I might get back to you offline, Brian on that detail if that's all right.
Yeah that'd be great.
And then the other question I had was you guys right now are sitting on.
70 million.
And with $17 million.
Your facilities. So you guys are in a pretty strong liquid cash position kind of a two part question here as you guys look to deploy that capital.
Great utilization dropping down.
Yeah.
You've got in place.
Great great gains in your portfolio, but.
Have you considered putting that cash in any sort of like temporary high quality lower yielding investments that have liquidity number one.
Or do you plan on keeping it.
Cash and then number two.
Have you thought about.
BMD.
Beside the yields.
The company size with the Guy who wants to put capital into which would be slightly larger deals you're doing now.
With that capital more or are you guys just continue kind of the.
It's the same process you guys have always done that.
Our strategy is done.
Sure.
Great question, Ryan I think let me, let me just touch on originations and repayments for this quarter just to set the table.
So those those questions.
You know what we expect this quarter I mean, I guess first and foremost there our focus and it's always been there is on capital preservation and generating attractive.
Returns and you know for US. These days what that means is that the majority of our investments are first lien investments.
Typically.
<unk> revenue type model.
And then obviously, we're also continuing to make what I would call opportunistic, but second lien and subordinated debt investments like we always have for a superlative situations and companies and so that's the that's the approach so far this year. This quarter, we've made four new investments.
Highlighting.
We expect additional origination activity this quarter as well.
And we also expect.
Some existing portfolio companies to make.
Make some acquisitions, where there'll be some modest increases in.
Our exposure to those companies as well so that's kind of the state of play from that perspective.
From a repayments.
Got it.
We announced at Mirage was sold.
The.
Our debt was repaid there.
Our equity investment was also a slower but we havent, we havent received the equity proceeds yet so.
We do expect to gain a small again there but it's.
It's not the number that we know yet.
So at this point and we also had two other equity realizations My line.
The old accent food services small gain and then a $6 million gain with regard.
To spend a minute or so.
We've obviously had some realizations.
Most of its equity quite frankly.
And so as we and we do not expect any additional meaningful our realization activity as I sit here today now having said that you've got a full months ago. We got surprised last time some of that was.
We just were able to facilitate even a couple of transactions quicker than we thought but.
And summarize in summary, I think repayments are going to be a little bit.
Lighter if you will this quarter than than they have been in the past five quarters by a long shot but thats a good thing with regard to trying to grow the portfolio and utilize some of the cash that we have.
Secondly, I would say you know just given the velocity over the last five quarters, our portfolio is pretty young and so.
So again I expect repayments to occur some of them are you know quite frankly things, we'll try and engineer, but they're not huge numbers. So.
My belief system is repayments will be lower.
For the foreseeable future and that.
We should continue to be able to grow the portfolio.
And Ah.
Meaning full way here as we move forward.
Getting to your two questions I'd say.
We are we're not looking to just deploy.
The cash into other.
Other.
Lower yielding investments at this point in time, we believe that we can actually.
You know utilize some cash for investment here over the next you know call. It a six to 12 months, we do think it's gonna be inactive here and again and again lower repayments.
Only time will tell as we all know and we do get surprised from time to time, but that's that's kind of what we see and so we're we're we're staying focused on you know what.
The basics of our business and what we like to do.
And then in terms of expanding the size of the deals from time to time, yes.
Where we are.
We're looking to do that would be a first lien loan that maybe we would.
Create a follow structure first out last out structure, but maybe we'll do a dollar one structure, where yes, it would impact yields a little bit but overall.
That would have us deploying a little bit more capital and so that's the only thing that we're doing a little bit off but I don't think that'll be to the.
Degree that greatly impacts you know our business model.
So hopefully that's helpful. I was a little long winded, but I wanted to give you some context, yeah. That's helpful. That's good context.
I think I would agree with your overall sentiment.
Stray too far from you know your you know your.
Core in your original strategy, which is to.
Put up fantastic long term results.
I agree with all that I.
I appreciate the time today those are all my questions and again, congrats on a really nice quarter.
Thanks, Rhonda good talking to you.
Okay I will follow up.
Thank you. Our next question comes from the line of Bryce Rowe from Paul D. Your line is now open.
Thanks, Good morning, Ed and Shelby.
Good morning, Bryce how are you.
I'm good I'm good.
And I wanted to.
Just wanted to ask about the deals here in the fourth quarter I think historically you have done more or at least recent past you've done more of the last out type structure I only saw one of the.
One of the one of the deals here in the fourth quarter that followed that that type of lashed out structure it sounds like.
Based on your answer to Ryan.
Is that that was that was.
Purposeful so to speak.
And maybe we start to see less of that type of structure, where it was something else kind of just.
I guess idiosyncratic list with with the with the deal flow in the fourth quarter.
Yeah, I don't think it was purposeful it wasn't overly purpose of all I think we look at each transaction on a standalone basis, and there's a lot of a lot of things that go into our first and foremost what's the.
The quality of the business.
And then we figure out how that what's the right structure as you know is it a.
First lien investment is a second lien investment for US you know how do we.
If we like the company and in the situation you know how do we find a way to get involved and so.
There are also times when we want to make sure we.
Provide a loan that provides the value and.
It needs to win the business, but also puts us in a position to manage the P.
The investment in in a way that we think is appropriate and so.
I think every day every deal is different.
You know that.
Speaking to the comments that I made to Ryan I do think one way to deploy a little bit more capital at attractive yields, especially given the cash on our balance sheet is to do some unit tranche investments that are dollar one as opposed to follow that we may have structure and there are a lot.
A lot of factors that go into that do we need to move really quick or do we have time to make sure. We have a partner on that for a lot of transactions. So.
It's a.
It's hard to generalize it if you will but.
Are you continuing to focus on the quality of the assets that we invest in and then in first lien I think will continue to be a large majority of what we do you know what's below and what isn't will well, it's kind of case by case quite frankly, but there are there are a couple of cases, where we're investing in the whole security.
Which does end up driving a little bit more dollars.
Dollars out the door, which is a good thing for our shareholders at this point, so hopefully that's getting absolutely.
Yeah that does that.
Kind of figured it might be like that but just thought I would ask.
Wanted to ask about the right side of the balance sheet.
Nice to see continued drawdowns of the SBA debentures.
Yeah.
It feels like you're starting to find more places for SP IC eligible.
Investments can you just can you talk to that a little bit and then Shelby wanted to ask you is if we're going to see a loss on that.
The prepayment here.
The SBA debentures that did you pay down in the first quarter. If you could help us help quantify that that'd be helpful.
So to answer your first question.
And then yes, we are.
You know a little bit of it.
Just walk if you will but you know what deals qualify for the SBA is obviously a critical component of whether we're using those facilities when they do qualify.
We generally try to utilize them.
Or at least partially utilized at a minimum.
P. A program in the dollars and that has worked well for us in the past we think it will continue to work well for us going forward and so we have had a number of transactions that qualify.
And that's we're utilizing the program so.
No I think you would you should expect that we'll continue to do that.
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As the transactions are evaluated and if they do qualify them and then we're going to continue to use that program. Obviously the financing is attractive but also with it served us well over the years.
We want to continue to up to be a good partner with the SBA as well.
Shelby you got any other comments there when the answer sure just as it relates to the $20 million debt repayment. Bryce you are correct. We will have a slight realized loss on extinguishment of that debt.
Guys cost, it's probably going to be in the order of two to 300 Grand.
Okay.
And I assume Shelby that.
You were able to kind of get in.
As of March pooling with the.
The SBA debenture she pulled down in February what what was the it was the right picture that you kind of walk I don't know that I've seen the rate published yet.
But the the rate from the September pooling was particularly low was one 3%. So I would imagine it would be slightly higher than that but I don't know that I've seen the published rate available yet.
Okay.
For me I appreciate the time and really congratulations on the quarter, it's nice to see.
Bryce good talking to you.
Okay.
Thank you. Our next question comes from the line of Star keeps her Bette Jo from B Riley Securities. Your line is now open.
Good morning, Ed and Shelby and thank you for taking my question here.
Good morning, I just wanted to.
Wanted to focus a little bit on the disclosure here in the press release, saying that you know variable rate securities were about 68% of the debt portfolio I think that compares to about 56% in the prior quarter and then if we go back to the last four acute period was about 37%. So just wanted to get a sense for it.
This more of a strategic shift in mix, given maybe the anticipated rate moves or how should we be thinking about that.
I think.
From my perspective, it correlates directly with the fact that a large majority of.
The.
Investments that we've been making in structuring they've been first lien investments over the last three years and all of those are structured is variable rate loans and typically with LIBOR floors.
And so and then I think we made the comment, but it's almost amazing, but as we've had.
A fair number of.
Second lien and subordinated debt investment repayments over the last 12 months and so the the dollar amount greatly.
Reduced if you will the dollar us dollar amount of our second lien and our junior debt investments went down probably by half probably reduced by 50%. So.
I think the combination of most of the new investments are variable rate investments and we've had a lot of fixed rate investments repaid that.
That's how we ended up in this position of a.
A large majority of our debt investments being in a variable rate category at this point.
So hopefully that's helpful.
Yeah. That's helpful. Thank you for that and I guess, a follow up to that.
Maybe remind us how youre thinking about.
Target leverage levels for the BDC given that the second liens and junior that mixes basically flushed dramatically lower any updates there and then how should we be thinking how should we be thinking about that.
Sure.
Great question.
No.
As we've talked about it in the past is one to one.
GAAP leverage is.
General target for us.
Our comfortable with higher leverage.
Situations drive us there as you know our Spic's funds are levered two to one for instance in and they are you know and we went through the great recession on a two to one basis without any issues. So we are we.
We feel very comfortable at higher leverage points, but at the same time, obviously, we've got a lot of cash to deploy and that'll be a large majority of our investment dollars.
As we discussed.
Few months ago, we will use uspi's debentures to fund investments.
As they qualify for sure and so but other than that we're going to use cash and then obviously.
Now moving towards a target leverage.
It's a one to one is something we wanted to do here over the medium term you know maybe even by the end of the year, but.
We are you know that.
We will see on that piece of the puzzle, but wonder one as is the number that we feel very good about we could go higher but that's not the target and so theres really no change in that thinking.
Since last time.
Understood.
One one final question question, if I can.
Ask about.
For the variable component of the loans that you have in the portfolio.
What would you say would be the weighted average LIBOR floor.
A large majority of them have a 1% floor, but there are.
We have one that doesn't have a floor and we have a couple that I think are 50 basis points I don't know what the weighted average is.
We've never done that I've never done that calculation or added done four for me, so, but I'd say, it's 90 bps would be my guess.
Got it thank you for the color.
Sure good talking to you sorry, Keith.
Thank you. Our next question comes from the line of Mickey Schlein from Ladenburg. Your line is now open.
Good morning, Ed and Shelby Hope you're well.
Good morning Mickey.
And just at a high level I'm following up on the.
Interest rate question interest rates may be a lot higher by the end of this year.
And then they are right now.
How do you feel about your borrowers abilities to to service their debt when you think about the trends in the revenues.
And their margins.
Sure sure Great question, Maggie I think you know.
What we've seen at least the large majority of the companies that are in our portfolio.
What I would say worked hard to adjust to the new normal and are finding ways to prosper and you know what.
What that has meant is that.
There are a number of companies had to raise prices to offset cost increases.
And now you're talking about.
Interest rate increases potentially.
But thankfully most companies have.
Adjusted to this new normal and have been able to do that there are some that are lagging but are in the process of doing it.
You know thankfully, we don't have many companies that don't have an ability.
To increase price and so they most of the companies in our portfolio possess pricing power, which is a big deal and as you know you know in most industries, there's competitors and so that means the.
Issues facing our portfolio companies are also facing their competitors as well and so that's.
Not a bad thing, especially in times like this.
Second piece is just how we go about.
Structuring and underwriting you know our investments.
First and foremost we make sure there's adequate enterprise value cushions for our loans typically 40, 40% to 60% equity in our capital structure, So a fair bit of.
Cushion as you might imagine for our.
And secondly, you know the liquidity positions of the company to make sure they're there they're in a strong liquidity position and lastly, there are strong.
Resilient capital structures that can withstand.
You know the issues.
Everyone's facing quite frankly today.
But what I would say is with rates being as low as they are and the interest coverage of our portfolio. The cash interest coverage being three times, which is very high relative to.
Now if you'll go back to the Ninety's there I go back to the 2000 prior to the great recession, we were more than two times or two to two and a half times and so there's a fair bit of cushion.
In our portfolio and at the portfolio company level to weather any interest rate increases. So I guess, that's a long winded way of saying.
We feel pretty comfortable with our portfolio overall, just the quality of it but secondly, with its ability to deal with any increases in rates.
There are no projected obviously.
Hopefully that's helpful. But yes that is helpful and thank you for that explanation.
Thinking just in terms of idiosyncratic risks are there do you have any portfolio companies with no sort of exceptional risks to what's going on in Europe , Ukraine, you know what I'm thinking about a company that might need to import something that all of a sudden they can't buy or they export something that they can't export any.
More or maybe just a very high level of risk related to energy prices.
Sure.
I I sitting.
Sitting here today.
Don't think we do I'm unaware of any.
Situations, where we are.
Really concerned if you will I will tell you.
It's better to be lucky than good sometimes.
We're looking at a company that had a fair.
A large number of their employees.
And Ukraine, but we did not end up pursuing the transaction.
And that was over the summer this year so.
Obviously, you knew there were some tensions but that didn't drive it as much as just we just didn't end up being a.
A situation that we were comfortable with but.
At this point in time, probably glad that that didn't happen for a large number of reasons, including the award so but right now I'm unaware of any companies.
That are being hugely impacted.
By the war at the moment.
I understand so Ed we can't have a fight as earnings call without asking about sand steel.
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Which is now 8% of the portfolio, it's sort of a gift that keeps on giving and I didn't notice a dividend payment in the fourth quarter.
I just you know I know you can't give us specifics, but can we expect continued sort of annual dividends from Fenichell, assuming you continue to own it and.
No.
It's obviously doing extremely well, but to have anything in the portfolio is that concentrated.
Includes its own risks.
Are you thinking about ports.
Potentially monetizing at least part of that position.
Positioned to to reduce the investment risk in the portfolio.
A great question and just.
To reiterate you know kind of what somebody is it's a it's a manufacturer of high purity sugars.
Hydrates for injectable drugs or biologic drugs.
Many that are used in the oncology arena or in the oncology arena.
Company also participates in the vaccine arena.
The company has been for a long time and continues to perform very well.
And so the positives are definitely outweighing any potential negatives with regard to the COVID-19 outbreak.
And the valuation reflects the risk profile and the outlook of the investment.
With.
With regard to incremental distributions.
The company is positioned to continue to make distributions is what I would say.
We have nothing to do with that decision, making and so it's hard for me to answer it other than to say that the companies in a position to continue to make distributions is it.
As it.
Moves forward.
Obviously, it's always subject to change, but as I sit here today, it's in a very good position. So and then in terms of monetizing this investment or any other equity investments we're always evaluating.
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What's the right time to try to create a transaction or in most cases.
Sponsors are in control of our.
Our portfolio of companies and we're pretty aligned with them with regard to that same type of decision, making is this a good time to exit and do they have a general desire to create realized gains over time and the answer is yes, and we do as well and so I feel like there is strong alignment with the large large majority of our.
Portfolio companies and in the cases, where they're not funded sponsors always trying to generate gains when the time is right.
We obviously evaluate situations and try to determine if it's a good time to either lighten up or try to.
Attain liquidity and so that's an ongoing battle, but at the same time.
We don't want to rush anything and we you know we're never going to be perfect here, but we're clearly not trying to we have tons of money on the table either right. So it's a.
It is a balancing act, it's impossible to get perfect, but we're continuing to evaluate.
Evaluate things on a constant basis and do the best we can.
Okay.
Yes, yes.
It isn't notwithstanding your answer you know congratulations on a on a very very good.
We certainly appreciate.
The efforts that your management team has undertaken.
This year that's it for me.
Thank you Nikki appreciate it very much good talking to you.
Thank you at this time I'm showing no further questions I would like to turn the call back over to Ed Ross CEO for closing remarks.
Thank you Gigi and thank you everyone for joining us. This morning, we look forward to speaking with you on our first quarter call in early May 2022.
Have a great day and a great weekend.
This.
Today's conference call. Thank you for participating you may now disconnect.
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