Q1 2022 Fidus Investment Corp Earnings Call
Welcome to fight US first quarter 2022 earnings conference call. My name is Sheila that and I will be your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
During the question and answer session. If you have a question. Please press star zero, one using your Touchtone phone again, that's zero one using your touchtone phone.
As a reminder, this conference is being recorded.
And now I would like to turn the call over to MS. Jody <unk>.
<unk> you may begin.
Thank you Hilda and good morning, everyone and thank you for joining us for <unk> Investment Corporation first quarter 2022 earnings Conference call.
With me. This morning are Ed Ross slightest investment corporations, Chairman and Chief Executive Officer.
Shelby Sherard Chief Financial Officer.
<unk> investment Corporation issued a press release yesterday afternoon with the details of the company's quarterly financial results copy of the press release, it's available on the Investor Relations page of the Companys 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.
Our conference call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results and cash flows.
<unk> investment Corporation.
Although management believes these statements are reasonable based on estimates assumptions and projections as of today may six 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 Companys filings with the Securities and Exchange Commission.
Vivus undertakes no obligation to update or revise any of these forward looking statements.
I would now like to turn the call over to Ed Good morning, Ed.
Good morning, Jody and good morning, everyone.
Welcome to our first quarter of 2022 earnings conference call.
On today's call I'll start with a review of our first quarter performance and our portfolio at quarter end.
And then offer you an update of our views on deal activity in the lower middle market.
Shelby will cover the first quarter financial results and our liquidity position.
Once we have completed our prepared remarks, we'll be happy to take your questions.
During the first quarter with deal activity in the lower middle market at reasonably healthy levels.
We grew our debt port growth portfolio through a combination of our strong relationships with deal sponsors our industry knowledge and our differentiated perspective on financing solution.
While our global supply chain disruptions and inflationary pressures on input cost labor and freight continued to weigh on many businesses operations and profitability.
Solid opportunities that fit our strategy of investing in high quality lower middle market businesses.
<unk> resilient business models.
<unk> excess levels of cash flow to service debt and then have positive long term outlook.
Adjusted net investment income, which we define as net investment income.
Any capital gain incentive fee attributable to realized and unrealized gains and losses.
$6 million 43 per share.
Compared to $11 2 million or <unk> 46 per share last year.
That asset value was steady at $486 $5 million or $19 91 per share.
Selecting solid operating performance and net realized gains along with increased total dividend payout for the first quarter.
As you May recall last quarter, the board of directors, recognizing the extremely strong portfolio performance, an exceptionally high level of net realized gains in 2021.
Increase the base dividend from <unk> 32 per share to $32 36 per share and increase the supplemental dividend calculation from 50% of surplus income generated by our portfolio to 100%.
The fight has paid a base quarterly dividend of 36 cents per share and a supplemental cash dividend of <unk> 17 per share for a total dividend of 53.
Per share.
During the first quarter.
For the second quarter on May <unk> 2022, the board of directors declared a base dividend of <unk> 36 cents per share and a supplemental dividend of <unk> seven per share equaled.
Equal to 100% of the surplus in adjusted NII over the base dividend from the first quarter, which will be payable on June 24th 2022 to stockholders of record as of June 10 2022.
In terms of originations and repayments after five consecutive quarters of elevated levels of repayments, we had net originations in the quarter of $91 $2 million, we invested $114 $4 million in debt and equity securities.
All of which was invested in debt securities in new portfolio companies.
Following that trend and it started well before the pandemic the largest percentage of debt investments was in first lien debt amounting to $76 $7 million for the first quarter.
In terms of new portfolio companies, we invested $101 $2 million in seven of them.
<unk> of $10 $8 million in first lien debt and common equity in.
M intermediate Holdco LLC.
As I said all of our media.
<unk> provider of alternative out of home advertising across the C store and gas station retail truck side and transit markets among others.
$14 $4 million in subordinated debt and common and preferred equity in CAH intermediate L. L. C. A T.
Technology based risk management firm that provides education and customized price risk management services to businesses affected by volatility in the agriculture markets.
$14 $5 million in first lien debt and fishbowl solutions, LLC, a leading provider of inventory management and manufacturing software.
$22 $4 million in first lien debt and common equity in Micronics filtration holding Inc. Doing business as my products engineered filtration Group Inc.
Global provider of aftermarket and OEM filtration equipment and consumables were used in mining chemical wastewater and various other industrial end markets.
$15 million in second lien debt and Quest software U S Holdings, Inc. A global cyber security data intelligence in it operations management software provider.
$19 $1 million in first lien debt subordinated debt and preferred equity in TD accompanied company L. L C.
A leading manufacturer of high purity solvents and chemicals.
Just on laboratory pharmaceutical and biotech end markets in.
And $5 million.
First lien debt and common equity in <unk>, LLC, a leading supplier of products and services to the home furnishings industry.
In terms of repayments and realizations in the first quarter, we received proceeds totaling $23 2 million of which $12 $1 million or a little more than half of the total was due to the monetization of equity investment.
In terms of sales and exits we received payment in full of $6 $8 million on our second lien debt and Mirage trailers and Additionally, we received a distribution of $2 $5 million and realized a gain of <unk> $3 million.
On our equity investments related to the sale of the business.
We received proceeds of $2 2 million and realized a gain of $2 million related to the sale of frontline food services.
And we received proceeds of $7 $1 million and realized a gain of $6 $1 million related to the exit of our equity investment and spend then.
Subsequent to the end of the quarter, we invested a total of $19 $5 million in two new portfolio companies invested $8 $5 million in first lien debt and made a commitment up to $1 million of additional first lien debt.
And choice technology solutions LLC doing business.
As Joyce merchant solutions, LLC, a leading omnichannel global payments platform.
We invested $11 million in second lien debt of vertex enterprises L. P. A leading vertically integrated electronic manufacturing services provider.
We also received $10 $9 million in repayments consisting of payment in full of $8 $8 million, including a prepayment penalty on our first lien debt investment in comply 365 LLC.
And we received a distribution of $2 $4 million from our equity investment in Transco and realized a gain of $1 $9 million.
Weighted to the sale of the business.
The fair value of the portfolio at quarter end was $812 million equal to 112, 8% of costs.
Reflecting the underlying solid performances of our portfolio companies.
And net originations for the quarter.
We ended the first quarter was 74 active portfolio companies and 10 companies that have sold their underlying operations.
Including net originations of $91 $2 million, our overall portfolio remains healthy and well structured to produce recurring income and through our equity investments to provide us not only with incremental profits, but also a reasonable margin of safety.
From a risk perspective, our portfolio, including a net addition of four portfolio companies remains well positioned for the current investment environment.
Our residual investments in green fiber in K two are on non accrual.
With net originations primarily in first lien debt during the quarter our portfolio on a fair value basis remains weighted in favour of first lien debt.
In terms of the total portfolio mix on a fair value basis debt investments increased to 80% of the total compared to 77% as of December 31 2021.
Total yield on debt decreased from 12, 3% last quarter to 11, 9%.
Our outlook for 2022 is unchanged from the perspective, we shared with you last quarter.
We still expect continued healthy deal activity in the lower middle market, driven by both M&A and refinancings and we continue to see several opportunities to monetize equity investments and some of our portfolio companies have initiated strategic alternative discussions.
Having grown our debt portfolio during the first quarter after five consecutive quarters of heightened repayments.
We believe we are well positioned to further increase income producing assets going forward.
In doing so we will adhere as always to our proven underwriting standards, our focus on high quality businesses and our long term goal of generating attractive risk adjusted returns, while delivering value to our stockholders.
Now 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 I'll review, our first 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 Q4 2021.
Total investment income was $20 5 million for the three months ended March 31st.
$3 6 million decrease from Q4, primarily due to a $1.6 million decrease in interest income, including pick a one 4 million decrease in fee income and a <unk>.
$6 million decrease in dividend income.
The decrease in interest income was driven by a decrease in average debt investment balances outstanding given higher volume of repayments in Q4, and Nu Q1 investments being more backend weighted in addition to lower weighted average yield on debt in Q1 versus Q4.
Total expenses, including income tax provision were $10 2 million for the first quarter, approximately $11 5 million lower than the prior quarter, primarily due to a $9 3 million decrease in the capital gains incentive fee accrual note. The capital gains incentive fee is accrued for GAAP purposes. However is only payable annually in arrears.
To the extent that cumulative realized gains exceed realized losses and unrealized depreciation.
Excluding the accrued capital gains incentive fees total expenses in Q1 were $9 9 million a $2 2 million decrease versus Q4 due to a $1 6 million decrease in income incentive fees and the annual excise tax accrual which was.
$1 million in Q4.
In Q1, we repaid $20 million of SBA debentures in our second SBA IC fund and borrow at $41 5 million of SBA debentures in our third Spic's fun, So net incremental SBA debentures of $21 5 million.
We ended the quarter with $395 9 billion of debt outstanding comprised of $128 5 million of SBA debentures $250 million of unsecured notes and $17 4 million of secured borrowings our debt to equity ratio as of March 31 was <unk> eight times or six times statutory leverage.
Exempt SBA debentures.
The weighted average interest rate on our outstanding debt was three 7% as of March 31st.
Net investment income or NII for the three months ended March 31 was 42 per share versus <unk> 10 per share in Q4.
Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was 43 per share in Q1 versus 49 cents per share in Q4.
For the three months ended March 31st we recognized approximately $6 9 million of net realized gains primarily from our equity investments and spend men and Mirage trailers.
Turning now to portfolio statistics as of March 31st our total investment portfolio had a fair value of $812 million. Our average portfolio company investment on a cost basis was $9 7 million, which excludes investments in 10 portfolio companies that sold their operations are in the process of winding down we have equity investments and approximately.
82, 1% of our portfolio companies with an average fully diluted equity ownership of four 3%.
Average effective yield on debt investments was 11, 9% as of March 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 March 31st our liquidity and capital resources included cash of $86 1 million $21 5 million of available SBA debentures and $100 million of availability on our line of credit, resulting in total liquidity of approximately $207 6 million 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.
I will now turn the call over to Hilger for Q&A.
Thank you.
We will now begin the question and answer session.
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And we have a question from Matt Tjaden from Raymond James. Please go ahead.
Hey, Ed and Shelby morning, and hope all is well and wanted to start out on the credit outlook be interested kind of how how you see the credit outlook for year end 'twenty two today versus how it changed versus you know, maybe six or nine months ago.
Sure Great question, obviously, there is a there is a lot going on in the world today, whether it's geopolitical or obviously inflation and rising interest rates, but yeah.
For us obviously the portfolio complexion has changed for us from a on a senior debt portfolio is now almost 70% of our debt portfolio. So that's a good thing as we think about the ebbs and flows of the.
Different businesses, we're investing them, but what I would suggest is you know our portfolio the quality of our portfolio today is maybe as good as it's ever been we feel great about.
You know what we've seen in their ability to deal with the issues of today.
So obviously we're being.
Very thoughtful and deliberate as we move forward as we originate new investments, but also as we manage our portfolio, but we are we feel great about the quality of the portfolio today and don't expect any material changes to the negative at this point.
Yeah.
Got it that's helpful. Maybe following up on the portfolio composition.
Surprising given the healthy level of originations in the quarter. It looked like equity balance that cost was pretty much flat I'd be interested in any kind of any high level color on what youre seeing in terms of.
Our deal flow for equity co invest opportunities.
Sure I think if I'm not mistaken we did make incremental.
Equity and debt since last quarter to the tune of just shy of $5 million.
So we're continuing to invest in the or make co investments in our portfolio companies when it makes sense and doing it to a degree that obviously.
With them we like.
Yeah. So.
Our cost basis has not changed materially.
Nor is our fair value something we're very very proud of.
You know, we would we do see a fair bit of M&A activity.
Still taking place a large majority of the activity in Q1 was M&A driven.
And we're also seeing continued M&A activity.
From both a realization perspective as well as a new investment perspective. So we would expect that that trend to continue so as I think about.
Equity as a percentage of cost for us as we move forward I think.
10% or a little less as the goal for us and that's what we would expect going forward.
Great last one for me just on again kind of following up on the Q1 originations.
Interested in do you think any of that was kind of a pull forward from what was already a strong Q4.
Or was that primarily you know underwritten in in Q1.
Sure Great question, Let me, let me talk about the market for a second and also talk about originations and <unk>.
Repayments for that matter, but overall, what I would say is you know that is.
Enacting devotee was solid though there was pull forward from Q4 for sure probably two or three of those investments.
Really were originated in Q1, and just took longer to close.
You know what we're seeing in Q2 this thus far reflects.
So a pretty similar stance I think deals or maybe a little bit harder to get over the finish line there are potentially more issues out there like performance issues.
In some cases, they get in the way of deals but.
You know, we we expect continued pretty good activity levels. Nevertheless.
So the market today seems to be primarily focused on companies that have not been meaningfully impacted by COVID-19, or the supply chain issues and overall inflation dynamics. There's obviously many companies are.
Experiencing in facing and in fact, what I, what we're we're continuing to see a premium paid for those businesses that are operating.
Without meaningful incident or concern of those issues.
There's obviously a fair bit of pent up demand and a lot of liquidity desiring to invest in high quality assets.
You know in fact, I would say private equity and private debt you know war chest for lack of a better word or near record levels today.
So.
As I sit here today I would suggest activity levels are still reasonably solid and the lower middle market.
Obviously nowhere near last year.
From an investment originations perspective.
You know we are you know most of our originations are first lien investments obviously, we're also making.
Opportunistic second lien and subordinated debt investments and superlative companies in situations and we expect to continue to do that as we move forward.
Expect Q2 to be an overall solid origination quarter, but maybe not as strong as Q1 in the aggregate.
We've made two new platform investments so far this year as I mentioned.
And we are we do expect some additional origination activity this quarter as well.
<unk> said all of that and how we're continuing to be very deliberate and careful.
Same time, taking advantage of the best opportunities that we're uncovering.
And then so from a repayment.
You know perspective.
We are.
You know, we're we're seeing you know very little on the debt side and a little bit of that has to.
Has to do with.
As you know our.
He is much younger than.
And it's.
In the past and we're not seeing anywhere near the activity levels that we saw last quarter or last year and we're expecting.
You know this quarter to kind of reflect the same thing as last quarter, which is a good thing.
So hopefully that's helpful on the market and overall origination and repayment activity.
Yeah.
Yes, certainly that's it for me Ed and Shelby I appreciate the time this morning.
Thank you I appreciate it Matt.
Thank you. Our next question comes from Ryan Lynch from K B W. Please go ahead.
Yeah.
Hey, good morning, Ed and Shelby.
Hey, good morning, Brian .
Hey first question.
I just had was.
Just on kind of how you guys.
Kind of the current marketplace.
So a lot of dynamics going around a lot of uncertainty in the broader economy today.
Has that changed your investments focused on the types of businesses you guys.
I'm willing to invest in or are you guys doing.
And further on the potential risk is one of the issues I think is that.
A lot of protection with a lot of it would be inflation and labor issues.
Those are.
Just started in 2022.
The financial impact Havent really are basically unknown on how that looks great.
So how are you kind of manner.
The pretty big unknown.
Yeah.
Sure.
It's a great question.
Ryan I think you know.
For us and thankfully I think.
Sometimes the most companies as you know.
I've been working at adjusting to the what I would call the new normal and are finding ways to prosper.
You know what that means in many cases needing to raise prices to offset price increases.
So having pricing power.
A very important element of managing this risk in.
You know thankfully, we feel well positioned given almost all of our portfolio companies and exhibited pricing power in this market.
First and foremost.
I would say that and thankfully we've been focused on those companies that have more pricing power and secondly, we do focus on businesses that you know high free cash flow of business is no different than before and a relatively stable demand characteristics.
You know I think that strategy.
Has and will continue to serve us well and helped mitigate some of the risks that you've highlighted.
And then other pieces of the puzzle for us that are really important or investment structuring you know which is.
As you know 40 to.
60% equity cushion that as somewhat of a minimum you know depending on the situation in the company and then you know how.
How we're underwriting.
There's no change there from our perspective in terms of you know.
Enterprise value out level of cushion interest.
Coverage and whatnot, so again, we feel.
We're going to kind of stick to our knitting.
Focused on companies that operate in industries, we know well and the companies that are.
You know quite frankly being less affected are expected to be less affected.
You know by the environment that we're all living in we also do you know focus on opportunistic situations, where they're strong asset bases, but also we feel good about that strategy.
As we move forward as well.
So hopefully that's helpful.
Yeah.
You there.
Yes, that's helpful.
On the new the new term for.
Yields out, particularly regarding yields and spreads.
Just curious.
As risk free rates.
Continue.
To move higher and obviously the forward curve shows that significantly higher number than they are today.
Have you started seeing any pushback on it.
Brad.
You guys aren't going to market with.
<unk> started seeing borrowers.
We're pushing for more.
Fixed rate debt solutions versus floating rate just love to hear your opinion on any changes in kind of the.
Market dynamics.
Right now as your approached.
Approached borrowers.
Sure.
Great question Ryan.
I'd tell you in the lower middle market, and we have not seen them.
Any real push back on spreads at this point in time I.
Do you envision at some point there'll be some compression.
I don't think it'll be overly meaningful, but that's always the case, especially with competition out there.
I would also say we have not seen a push for fixed rates.
At least with regard to you know our first lien investments. So we have not seen any.
Sure.
Our requirements to be competitive in the market from that perspective.
No real change obviously, there is a big.
The increase in short term rates this week.
But again as we are working today and as we work you know over the last year year and a half we have not seen.
Any any real pushes there and in our market.
Okay.
That's good to hear I appreciate the time today. Thanks.
Nice talking to you.
Yeah.
Thank you. Our next question comes from Bryce Rowe from Xavi Group. Please go ahead.
Thanks, Good morning, Ed and Shelby.
Good morning, Brian how are you.
I am good I appreciate it.
Let's see maybe I'll start with your Shelby.
Can you kind of just remind us how how you're viewing.
The SBA and the access to the future.
Future SBA debentures, obviously, you've been a little bit more active here recently using those debentures. If you could just kind of breakdown whats left on to and how much how much more you have to go on three even even if there is some available beyond the 'twenty, one and a half that you have available to you right now.
Sure So big picture.
Our our second SB IC fund, we are currently in wind down mode and.
So that kind of means we will opportunistically use cash proceeds from repayments as they come in.
So you kind of continue to pay down SBA debt and the second fund and then the third fund we are still within our investment period, and so again opportunistically as the pipeline grows and we have SB IC eligible investments we will seek to put those in the third fund.
And so that's why you kind of saw the pay down that you did in the first quarter of fund to debt and then borrowings under fund three debt because we were able to deploy more capital.
So at the end of March on the third fund, we had about 78 and a half million of SBA debentures outstanding and so that's one can go up to $175 million, that's subject to certain SBA approvals and a little bit further equity capital commitments that we have plenty of room to grow on the third.
Funds that a little bit less than $100 million and then on the on the second fund. We currently have $50 million and again, you'll kind of probably see that come down as we have ever had.
Next payment window will be September 1st and so we'll just evaluate does it make sense to redeploy cash to the BDC and make investments there does it make sense to continue to pay down debt overtime got it.
That's that's a great rundown I appreciate it.
And then maybe maybe another question for me.
Looking at spillover spillover income obviously, it bumped up here.
In the quarter it sounds like you've got some more realized activity.
In the pipeline.
Just curious how youre thinking about that.
Is it bumps higher.
Prospects for.
Maybe a special at some point in 'twenty two early 'twenty three just any color around that would be helpful. Thanks.
Sure.
Yeah, Brian It's obviously it's early.
Early in the year, if you will.
At the same time, we did see a nice pop in our spillover position.
We did not factor in our spillover position into the base dividend or obviously the supplemental given our new methodology. We are continuing to monitor that position at this point. There continues to be you know as you know uncertainty in the U S and we liked the idea of having a very large spillover position.
For a rainy day.
I think we are.
But we're monitoring the overall situation and.
And.
To think about it as we move forward, but right now we're in a place where we don't need to do.
Make any adjustments or of any significance and so.
We like our like the position.
We're in and we also liked the fact that.
You know we were able to raise the dividend at a very low base dividend in a very meaningful way last quarter.
And obviously, we'll continue to evaluate both the base and supplemental dividends as we move forward.
Great.
Thanks for the time guys.
Thank you Brian .
Yep.
Thank you once again for any questions. Please sprint seaworld one.
And we're showing no further question. Thank you I would like to turn the call back to Mr. Roth for final remarks.
Thank you Hilda and thank you everyone for joining us. This morning, we look forward to speaking with you on our second quarter call. In early August 2022 have a great day and have a great weekend.
Thank you ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.
Okay.
Yeah.
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