Q2 2023 Fidus Investment Corporation Earnings Call
Okay.
Good morning, and welcome to the fight is second quarter 2023 earnings conference call.
Speaker 1: Good morning and welcome to the FIETIS Second Quarter 2023 earnings conference call. I will now turn the call over to Joe.
I will now turn the call over to.
To Jody.
Or if any.
Thank you Sally and good morning, everyone and thank you for joining us for fight US investment corporations second quarter 2023 earnings conference call.
Speaker 2: Thank you, Savvy, and good morning, everyone. And thank you for joining us for FITUS Investment Corporation's second quarter 2023 earnings conference call. With me this morning are Ed Ross, FITUS Investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherrod, Chief Financial Officer.
With me. This morning are Ed Ross brightest investment corporations, Chairman and Chief Executive Officer.
And Shelby Sherard, Chief Financial Officer.
Speaker 2: Fides 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 Invest Relations page of the company's website at fdus.com. I'd also like to call your attention to the customary Safe Harbor Disclosure regarding forward-looking information included on today's call.
<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.
D U S 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.
Speaker 2: Comfort's call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, cash flows, of fight-and-investment cooperation. Although management believes these statements are reasonable, based on...
This call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results cash flows or financed investment Corporation. Although management believes these statements are reasonable based on.
Speaker 2: As of today, August 4, 2023, these statements are not guaranteed as 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.
As of today August four 2023. 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.
Not limited to the factors set forth in the company's filings with the Securities and Exchange Commission.
Speaker 2: Fitus undertakes no obligation to update any of these forward-looking statements. With that, I would now like to turn the call over to Ed. Good morning, Ed.
<unk> undertakes no obligation to update any.
Any of these forward looking statements with that I would now like to turn the call over to Ed Good morning, Ed.
Good morning, Jody and good morning, everyone welcome to our second quarter 2023 earnings Conference call.
Speaker 3: Good morning, Jody, and good morning, everyone. Welcome to our second quarter 2023 earnings conference call.
On today's call I'll start with a review of our second quarter performance and our portfolio at quarter end and then share with you our outlook for the second half of 2023.
Speaker 3: On today's call, I'll start with a review of our second quarter performance in our portfolio at quarter end and then share with you our outlook for the second half of 2023.
Speaker 3: Shelby will cover the second quarter financial results and our liquidity position.
Shelby will cover the second quarter financial results and our liquidity position.
Speaker 3: After we have completed our prepared remarks, we'll be happy to take your questions.
After we have completed our prepared remarks, we'll be happy to take your questions.
Yeah.
Speaker 3: For the second quarter, we continue to enhance the earnings power of our healthy and high-performing portfolio by further building our portfolio of income-producing assets and benefiting from a widened spread.
For the second quarter, we continued to enhance the earnings power of our healthy and high performing portfolio by further building our portfolio of income producing assets and benefiting from a widening spread.
We grew our total portfolio to $928 $7 million on a fair value basis at quarter end, putting a fair amount of capital to work in a reasonably active second quarter.
Speaker 3: We grew our total portfolio to $928.7 million.
Speaker 3: fair value basis in quarter end, putting a fair amount of capital to work in a reasonably active second quarter.
Although deal activity is still spotty.
Speaker 3: Although deal activity is still spotty, our relationships with deal sponsors
<unk> chips with deal sponsors.
Speaker 3: experience and industry knowledge continue to enable us to invest selectively in companies with predictable revenues, draw cash flow generation and positive long-term outlooks that meet our strict underwriting standards.
And industry knowledge continue to enable us to invest selectively in companies with predictable revenues strong cash flow generation and positive long term outlooks that meet our strict underwriting standards.
In addition, we continued to generate adjusted net investment income well in excess of the base dividend for the quarter.
Speaker 3: In addition, we continue to generate adjusted net investment income well and access of the base dividend for the quarter.
Speaker 3: adjusted that investment income, which we define as that investment income, excluding any capital gain and benefit, the triviality of realized and unrealized gains and losses increased 50.1 percent to 15.6 million dollars or 62 cents per share compared to 10.4 million dollars or 43 cents per share last year.
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 increased 58, 1% to $15 6 million or <unk> 62 per share.
<unk> to $10 $4 million or <unk> 43 per share last year.
Speaker 3: Interest income increased due to growth in our debt portfolio and a debt yield that expanded 260 basis points to 14.5% compared to the second quarter last year.
Interest income increased due to growth in our debt portfolio.
A debt yield that expanded 260 basis points to 14, 5% compared to the second quarter last year.
We paid dividends totaling <unk> 70 per share consisting of a base dividend of 41 per share a supplemental dividend of <unk> 19 per share and a special cash dividend of <unk> 10 cents per share.
Speaker 3: We pay dividends totaling 70 cents per share, consisting of a base dividend of 41 cents per share, a supplemental dividend of 19 cents per share, and a special cash dividend of 10 cents per share. As a reminder, we are distributing a special cash dividend of 10 cents per share each quarter this year to satisfy Rick requirements and to bring our spillover and come in line with our target level.
As a reminder, we are distributing a special cash dividend of <unk> 10 per share each quarter. This year dissatisfy Ric requirements and to bring our spillover income in line with our target level.
For the third quarter on July 31, 2023, the board of directors declared dividends totaling <unk> 72 per share consisting of a base dividend of 41 per share a supplemental dividend of 21 per share equal to a 100% has the surplus and adjusted.
Speaker 3: For the third quarter on July 31st, 2023.
Speaker 3: Board of Directors declared dividends totaling 72 cents per share, consisting of a base dividend of 41 cents per share, a supplemental dividend of 21 cents per share.
Speaker 3: equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter.
NII over the base dividend from the prior quarter and a special cash dividend of 10 cents per share, which will be payable on September 27, 2023 to stockholders of record as of September 20th 2023.
Speaker 3: and a special cash dividend of 10 cents per share, which will be payable on September 27th, 2023.
Net asset value was $483 3 million or $19 13 per share as of June 30th.
Originations for the quarter totaled $95 $8 million about two thirds of which or $64 6 million was invested in five new portfolio companies. They were added to the portfolio through M&A financings drilling.
Speaker 3: Drilling down further, we invested a total of $47.2 million in personally investments in four of the five new portfolio companies.
Drilling down further.
First at a total of $47 $2 million in first lien investments in four of the five new portfolio companies.
Speaker 3: The reigning portion of originations was invested in add-ons in support of our existing portfolio copy.
The remaining portion of originations was invested down and add ons in support of our existing portfolio companies.
Continuing to build our portfolio of debt securities that generate recurring interest income and co invested in equity securities as a means of adding a margin of safety and creating the opportunity.
Hence returns.
Speaker 3: We receive proceeds totaling $60.6 million, primarily from the exit of four companies, including $7.6 million in proceeds from equity sales, resulting in net originations of $35.2 million for the quarter.
We received proceeds totaling $66 million, primarily from the exit of four companies, including $7 $6 million in proceeds from equity sales, resulting in net originations of $35 $2 million for the quarter.
Speaker 3: of debt investments on a fair value basis grew to $808.3 million or 87 or 87% of the total portfolio at quarter end. First-learn investments continue to account for the largest piece of the debt portfolio at 65%.
Our portfolio of debt investments on a fair value basis grew to $808 $3 million or <unk> 87, or 87% of the total portfolio at quarter end first lien investments continue to account for the largest piece of the debt portfolio at 65%.
Speaker 3: within the fair value of our equity portfolio of $120.4 million. The fair value of the total portfolio at quarter ends stood at $928.7 million equal to 103.7% of cost and representing a 3.5% increase compared to the end of the first quarter.
Including the fair value of our equity portfolio of $124 million the fair value of the total portfolio at quarter end stood at $928 7 million equal to 103, 7% of cost and representing a three 5% increase compared to the end of the first.
Quarter.
Speaker 3: We ended the second quarter with 79 active portfolio companies and two companies that have sold their underlying operations.
We ended the second quarter was 79 active portfolio companies and two companies that have sold their underlying operations.
Subsequent to quarter end, we invested $19 million in first lien debt subordinated debt and equity.
Speaker 3: Up to going to quarter end, we invested $19 million in first-line debt, subordinate debt, and equity in a new...
In a new portfolio company.
Speaker 3: Overall, our portfolio remains healthy from a credit perspective and for the most part, our portfolio companies continue to perform well.
Overall, our portfolio remains healthy from a credit perspective and for the most part of our portfolio companies continue to perform well as always there are some puts and takes as you would expect for a portfolio of our size.
Speaker 3: As always, there are some puts and takes that you would expect for a portfolio of our side.
Speaker 3: If you portfolio companies have been struggling while others have been improved performance and outlook.
<unk> portfolio of companies have been struggling while others have you seen improved performance and outlook.
Speaker 3: To that end, we removed already from non-acruel during the quarter and placed vertex on non-acruel. Already it's performing materially better and has a positive outlook. While vertex has had a few hiccups, but we expect performance to improve in both the near and medium term.
To that end, we removed already from non accrual during the quarter and place vertex on nonaccrual.
Already is performing materially better and has a positive outlook. While vertex has had a few hiccups, but we expect performance to improve in the in both the near and medium term.
Speaker 3: In addition, we wrote off our investment in Eblens and recognized an $11.5 million dollar law.
In addition, we wrote off our investment in Netherlands, and recognized an $11 $5 million loss.
As of June 30, non accruals represented one 5% of the total portfolio on a fair value basis.
Speaker 3: June 30th, Non-Acrules represented 1.5% of the total portfolio on a fair value base.
Looking ahead to the second half of 2023, we continue to see ample opportunities in the lower middle market to invest in high quality companies that possess defensive characteristics strong cash flow generating business models and positive long term outlooks further building our debt portfolio.
Speaker 3: Looking ahead to the second half of 2023, we continue to see ample opportunities in the lower-middle markets to invest in high-quality companies that possess defensive characteristics, drunk cash flow generating business models, and positive long-term outlooks. Further building our debt portfolio and co-investing in equity and balance.
So investing in equity investments.
Speaker 3: with a healthy and growing portfolio of data investments generating strong recurring income. We remain positioned to generate adjusted NII growth well in excess of base dividends.
With a healthy and growing portfolio of debt investments generating strong recurring income we remain positioned to generate adjusted NII growth well in excess of base dividends.
Speaker 3: As always, we intend to adhere to our proven investment strategy and to remain focused on our long-term goals of growing our net asset value over time, preserving capital, and generating attractive risk adjusted returns for our shareholders.
As always we intend to adhere to our proven investment strategy and remain focused on our long term goals of growing our net asset value over time, preserving capital and generating attractive risk adjusted returns for our shareholders.
Speaker 3: Now I'll turn the call over to Shelby provide some details on our financial and operating results. Shelby.
Now I'll turn the call over to Shelby provides some details on our financial and operating results Shelby.
Speaker 4: Thank you, Ed, and good morning, everyone. I'll review our second quarter results in more detail and close with comments on our liquidity position. Please note I will be providing comparative commentary versus the prior quarter Q1 2023.
Thank you Ed and good morning, everyone I'll review, our second quarter results in more detail and close with comments on our liquidity position. Please note I'll be providing comparative commentary versus the prior quarter Q1 2023.
Speaker 4: Total investment income was $30.6 million for the three months ended June 30th. A 1.5 million increase from Q1 primarily due to an 8 million, a 0.8 million increase in interest income, including PIC, and a 0.8 million increase in fee income given higher originations and a 0.4 million prepayment fee. Slightly offset by a 0.1 million decrease in dividend income.
Total investment income was $30 6 million for the three months ended June 30th a one 5 million increase from Q1, primarily due to an $8 million a point 8 million increase in interest income, including pick and a point 8 million increase in fee income given higher originations and a point for a million prepayment fee.
Slightly offset by a $1 million decrease in dividend income.
Speaker 4: The increase in interest income was driven by an increase in average debt investment balances outstanding as well as an increase in the yield on our debt investments given increase in interest rates on variable rate loans.
The increase in interest income was driven by an increase in average investment balances outstanding as well as an increase in the yield on our debt investments given increase in interest rates on variable rate loans.
Total expenses, including income tax provision were $13 8 million for the second quarter.
Speaker 4: Total expenses including in-tum tax provision were 13.8 million for the second quarter. 0.6 million lower than Q1 driven primarily by a 1.3 million decrease in the accrued capital gains and synopsy, offset by a 0.4 million increase in interest expenses related to incremental debt outstanding, but SBA debentures and barring under our line of credit. And a 0.4 million increase in the base management and income and synopsy.
$6 million lower than Q1, driven primarily by a $1 3 million decrease in the accrued capital gains incentive fee.
By a point 4 million increase in interest expenses related to incremental debt outstanding, but the SBA debentures and borrowings under our line of credit and applying for a million increase in the base management and income incentive fees.
Speaker 4: We ended the quarter with 478.6 million of debt outstanding comprised of 182 million of SBA debentures, 250 million of unsecured notes, 30 million outstanding on our line of credit, and 16.6 million of secured borrowings. Our debt to equity ratio as of June 30th was 0.99 times or 0.6 times statutory leverage, excluding exempt SBA debentures.
We ended the quarter with $478 6 million of debt outstanding comprised of $182 million of SBA debentures.
$50 million of unsecured notes 30 million outstanding on our line of credit and $16 6 million of secured borrowings our debt to equity ratio as of June 30th was <unk> 99 times, a 0.6 times statutory leverage excluding exempt SBA debentures.
Speaker 2: The weighted average interest rate on our outstanding debt was 4.5% as of June 30th, 2023.
The weighted average interest rate on our outstanding debt was four 5% as of June 32023.
Speaker 2: Net investment income or NII for the three months ended June 30th was 67 cents per share versus 59 cents per share in Q1. Adjusted NII, which excludes any capital gains and synathy of cruelles or reversals attributable to realized and unrealized gains and losses on investments, was 62 cents per share in Q2 versus 60 cents per share in Q1.
Net investment income or NII for the three months ended June 30th was 67 per share versus 59 cents per share in Q1.
Adjusted NII, which excludes any capital gains incentive fee accruals or reversals attributable to realized and unrealized gains and losses on investments was <unk> 62 per share in Q2 versus <unk> 60 per share in Q1.
Speaker 2: Turning now to portfolio statistics as of June 30th. Our total investment portfolio had a fair value of 928.7 million. Our average portfolio company investment on a cost basis was 11.3 million, which excludes investments in two portfolio companies that sold their operations during the process of winding down. We have equity investments in approximately 75.3% of our portfolio companies with average fully diluted equity ownership of 3.2%.
Turning now to portfolio statistics as of June 30th.
Investment portfolio had a fair value of $928 7 million, our average portfolio company investment on a cost basis was $11 3 million, which excludes investments in two portfolio companies that sold their operations during the process of winding down.
Equity investments and approximately 75, 3% of our portfolio companies with average fully diluted equity ownership of three 2%.
Speaker 2: Weighted average effective yield on debt investments was 14.5% as of June 30th versus 14.3% at March 31st.
Weighted average effective yield on debt investments was 14, 5% as of June 30th versus 14, 3% at March 31st.
Speaker 2: The weighted average yield is computed using effective interest rates for dead investments at cost, including the accretion of original issue discounts on loan origination fees, but excluding investments on non-accural offending.
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.
Speaker 2: Now I'd like to briefly discuss our available liquidity. As of June 30th, our liquidity and capital resources included cash of 38 million, 8 million of available SBA adventures, and 70 million of availability on our line of credit, resulting in total liquidity of approximately 116 million. Now I'll turn the call back to Ed for concluding.
Now I'd like to briefly discuss our available liquidity as of June 30th our liquidity and capital resources included cash of $38 million 8 million of available SBA debentures and $70 million of availability on our line of credit, resulting in total liquidity of approximately 116 million now I'll turn the call back to Ed for concluding comments.
Got it.
Thanks Shelby.
Speaker 3: Thanks Shelby. As always, I'd like to thank our team and the Board of Directors at Fighters for their dedication and hard work and our shareholders for their continued support. I will now turn the call over to Savvy for Q&A. Savvy.
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 Savi for Q&A Savi.
Speaker 1: It is now time for the Q&A session. The floor is open. To ask a question at this time, please press star one on your telephone keypad. If at any point you would like to withdraw from the queue, please press star one again.
It is now time for the Q&A session. The floor is open to ask a question at this time. Please press star one on your telephone keypad.
So at any point, you would like to withdraw from the queue. Please press star one again.
Speaker 1: Our first question comes from Robert Dodd with Raymond J.
Our first question comes from Robert Dodd with Raymond James.
Speaker 5: Congratulations on the quarter. On kind of the market environment, it's a smaller end of the market, you'll call market. It does seem there's more activity still than there is in the larger company end. Are you seeing any shift in competitors, maybe looking at, hey, deals are still happening at smaller companies and now,
And oh installations on their own.
Quota.
And one kind of the market environment.
Is this more of end of the market Youll cool market. It does seem there's more activity still than there is in it.
The larger company and are you seeing any shift in competitors, maybe looking at it.
Deals are still happening at smaller companies.
Yes.
Speaker 5: Just any more people coming in.
And any more people coming into it.
Speaker 3: Yeah, great question, Robert. Um, thanks. Yeah, just to talk about the March of 22nd. You know, we, we've been commented on this.
Yes, great question Robert.
Just to talk about the market.
Thank you.
On that.
On our call last quarter, but deal flow did pick up.
Speaker 3: on our call last quarter, but you know, deal flow did pick up, call it late spring, if you will.
Call. It late spring if you will.
Speaker 3: And you know, it was a, you know, what I would say a decent quarter or a pretty good deal flow, but the...
And.
You know, what I would say a decent quarter or a pretty good deal flow but.
Speaker 3: The quality was hit or miss and you know that trend somewhat continues their ebbs and flows the summer's a little slower You know our current expectation is
Quality was hit or Miss in that trend somewhat continues their ebbs and flows the summer is a little slower you know our current expectation is for a post labor day to pick up a little bit from a seasonal perspective, and so I'd say overall in our market deal flow is decent there.
Speaker 3: You know, post-labor day to pick up a little bit from a seasonal perspective and I'd say overall in our market Deal flow is decent
Speaker 3: There are plenty of folks that do want to consider selling or transacting.
There are plenty of folks that do want to consider selling are transacting and then there's also a fair number as well that are saying, Okay. You know valuations are a little lower inflation has gotten in the way interest our total interest expense or interest rates have gotten in the way of peak valuations.
Speaker 3: And then there's also a fair number as well that are saying, okay, you know, valuations are a little lower.
Speaker 3: got in the way interest total interest expense or interest rates have gotten in the way of you know peak valuations And I'm gonna wait and so there's a little bit of both going on But in our market there continues to be what I would say ample or decent Flow and there are transactions to pursue and so we are trying to find the best ones in the highest quality ones to do that way That's how I think about that from a
I'm going to wait and so theres, a little bit about what's going on but in our market. There continues to be what I would say ample are decent flow and there are transactions to pursue and so we are trying to find the.
The best ones in the highest quality ones to do that with them. So that's how I think about that from a competitive perspective.
Speaker 3: I do think there's a little inching down by some of the larger providers of debt capital, but it's not really impacting us. We haven't lost a deal to someone that's a surprise, for instance.
I do think Theres, a little inching down by some of the larger providers of debt capital, but we're not it's not really impacting us we haven't lost a deal to someone that's a surprise for instance.
Speaker 3: But I am aware of some inching down, you know, both on the private equity groups as well. There's some private equity groups that are inching down into smaller companies than they usually would. So it's an interesting market, but I do think the lower middle market is more active than the big market.
I'm aware of some aging down both on the private equity groups as well, there's some private equity groups that are inching down into smaller companies than they usually would.
It's an interesting market, but I do think the lower middle market is more active than the big market for sure.
Speaker 5: Yeah, that is very helpful. Thank you. And then just on the, you had the knee on a core, I didn't write down the name. So you said expect near of medium term improvement. How and maybe not specifically that, where there's some increment.
Hopefully that's helpful. Yes, that's very helpful. Thank you and then just on only.
You had the new nonaccrual I didn't write down the name.
But you said expect near or medium term.
Improvement, how and maybe not specifically that where it is.
Some incremental.
Speaker 5: under the relative underperformance by the company. How are the interactions with sponsors going on that right now? I mean, are they willing to step up promptly and make changes or put in more capital or whatever? Are they they they calling their ground?
Your relative underperformance mindful, what part of the company how are the interactions with sponsor that's going on that right now I mean are they willing to step up.
And make changes will put in more capital or whatever.
Holding their ground a little bit.
Sure.
Speaker 3: Another great question. You know, what I would say, you know, when I look at our non-acrolls just to have hit it, because you asked about it, you know, we have two operating companies on non-acrolls.
Another great question, what I would say when I look at our non accruals just to hit it because you asked about it you know we have two operating companies on non accrual.
Speaker 3: One is, you know, a suited connector, which was on last quarter as well. And just ahead of it, it's a digitally generation platform focused on the mortgage, the home services, and the insurance verticals.
One is.
<unk> connector, which was on last quarter as well and just ahead of its a digital lead generation platform focused on the mortgage the home services and the insurance verticals.
Speaker 3: So consumers look into comparison shop, provide information via company on websites.
Consumers looking to comparison shop provide information via company on our website.
Speaker 3: You know, a company's owned by a sponsor. The sponsor is very active.
Denise owned by our sponsor.
The sponsor is very active.
Speaker 3: and has been active from a capital perspective as well. And so look, that's a tough market, if you think about the mortgage market right now, and probably thought all of us a little by surprise. And so the goal of all the capital structure constituents, including the financial sponsors, to get to the other.
It has been active from a capital perspective, as well and so look thats a tough tough market. If you think about the mortgage market right now probably caught all of us a little by surprise.
And so the goal of all of the capital structure constituents, including the financial sponsors to get to the other side and so that is.
Speaker 3: So that is what they're doing and it's what we're doing as well. So in that case, yes, we've got a supportive sponsor. Do they love providing incremental capital, no? But it's somewhat, if there's a reason to play for the long term, what we find is almost all situation sponsors play for the long.
That is what you know.
They are doing and that's what we're doing as well.
So in that case, yes, we got a supportive sponsor do they love you know.
Providing incremental capital no, but it's somewhat there's a reason to play for the long term what we find is a almost all situations sponsors you know play for the long term.
Speaker 3: And then Burntex is a bit of a one off situation as well. That's the new daughter.
And then vertex.
A bit of a one off situation as well that's the new non accrual.
Speaker 3: And, you know, it's a manufacturing company that's focused on applications in the defense, space, and different government platforms. So it's electronics manufacturing.
It's a manufacturing company that's focused on applications in the defense space and in different government platforms.
Electronics manufacturing.
Speaker 3: So Good End Markets is a company of size and owned by a sponsor and the sponsor is supportive there as well. It did have some hiccups, but we believe in the near and the medium term outlook, you know, we think those are positive, but I would say.
So good good end markets as a company of size and owned by our sponsor and the sponsor's supportive there as well it did have some hiccups.
But we believe in the near and the medium term outlook.
We think those are positive.
Check.
Got it thank you.
Absolutely good talking to you Robert.
Our next question comes from Mickey Schlein with Ladenburg.
Speaker 1: Our next question comes from Mickey Shlion with Laydenburg.
Speaker 6: Yes, good morning, everyone. Ed, are you seeing any incremental opportunities for FITAS from the pull bank of regional banks? And, you know, how is that impacting, you know, the sort of structures of deals that are, you know, your sweet spot currently and the terms that you can get on those deals?
Yes, good morning, everyone.
Are you seeing any incremental opportunities for side is from the pool bank of regional banks and you know how is that impacting the sort of structures of deals that or youre.
Your sweet spot currently and the terms of that you can get on those deals.
Sure.
Speaker 3: Great question, Mickey. We are seeing incremental opportunity, just to provide capital where banks may have done so previously. So that has been an opportunity, that's not, we're not seeing a flood of them, but it's definitely a part of the market. It's just...
Great question Mickey.
We are seeing incremental opportunity I'm.
Just to provide capital where banks may have done so previously.
So that has been an opportunity that's not we're not seeing a flood of them, but it's definitely a part of the market at this moment.
Speaker 3: And then what I'd say with regard to our first outlast out product where we do work with banks.
And then what I would say with regard to our first out last out product, where we do work with banks.
Speaker 3: It is still an active market, but the aggressiveness of the banks has
It is still an active market, but the aggressiveness of the banks.
Speaker 3: It's greatly reduced as what I would say. It's not getting in the way of our business, but what I would say is they are...
Is greatly reduced I was what I would say, it's not getting in the way of our business, but you know what I would say is they are.
Less active from a leverage perspective pricing similar.
Speaker 3: less active from a leverage perspective, pricing similar, but they, as you might imagine, they're interested in good companies and they're interested in companies that have deposits. And so there's interesting pieces of the...
As you might imagine they're interested in good companies and they're interested in companies that have deposits and so there is there is interesting pieces of the puzzle, but we are finding ways to continue to pursue pursue those structures and we will plan to continue to do so as we move forward.
Speaker 3: of the puzzle, but we are finding ways to continue to pursue those structures and we'll plan to continue to do so as we move forward.
Speaker 3: But it is a bit of a sea change, not a huge change, but of somewhat of a change from their aggressors.
But it is a bit of a sea change not a huge change, but it is somewhat of a change from their aggressiveness.
Speaker 6: Okay, I understand that's helpful, Ed.
Okay I understand that's helpful Ed.
And given the to follow up on Robert's.
Speaker 6: And given the follow-up on Robert's question, spreads have been generally hanging in there despite the rise in LIBOR and so forth. And I'm just curious whether you're seeing that attract some sort of irrational private capital at the margin. You know, we've seen that before and whether those folks are starting to show up and cause some dislocation.
<unk>.
Spreads have been.
Generally hanging in there despite the rise in LIBOR and so for <unk> and I'm, just curious whether youre seeing that attracts some sort of irrational private capital at the margin you know we've seen that before and.
Whether those folks are starting to show up and.
Cause some dislocation.
When you say irrational private I just want to make sure I'm following the question.
Speaker 3: When you say the rational private, I just want to make sure I'm following the question.
You mean people in our capital structures of all of our investments or no competitors that might be offering deal terms that you don't think or yeah.
Speaker 3: You mean people in our capital structures of our investments or? No competitors that might be offering deal terms that you don't think are appropriate risk adjusted returns for the borrowers. Thank God Jim. You know, generally speaking the answer to that is no. I think what we are seeing primarily is pretty good discipline across the board.
Appropriate risk adjusted returns for the borrowers.
What you.
Generally speaking the answer to that is no I think what we are seeing primarily is pretty good discipline across the board.
Speaker 3: I think banks obviously are looking for more yield. The Fincos, the COO, finance businesses are being quite disciplined relative to previous periods. I think they have less capital. They're being less aggressive as well by long shots. Some of them being almost out of the market.
You know I think banks, obviously, you are looking for more yield.
<unk> goes to CLO finance businesses.
Our being quite disciplined relative to previous periods I think they have less capital there being less aggressive as well by a long shot some of them being almost out of the market.
Speaker 3: You know, I think BDCs are being very rational from our perspective. And then SBICs down in those very low end of the market, we don't compete a lot against them, but a little bit, and sometimes you find them doing things that the accept yields that are lower than you might think they would for an equity investment, if you will. So there's a little bit, but it's not the norm and it's not really greatly impacting our business. Yes. But, let the effect go off. The election will be approved in the short term.
I think bdcs are being very rational from our perspective.
And then spic's down in the very low end of the market. We don't compete a lot against them, but a little bit and sometimes you find them doing things that.
They'll accept yields that are lower than you might think they would for an equity investment. If you will so it was a little bit, but it's not the norm and it's not really greatly impacting our business by any stretch of imagination.
Well. Thank you for that my last question Ed You you mentioned <unk> and you know the more.
Speaker 6: Thank you for that. My last question, Ed, you mentioned CLOs and the more broadly syndicated market. We're sort of seeing bifurcation in those markets where you have half of the portfolios doing well in terms of revenues and EBITDA on margins being sustainable and the other half not so well. Are you seeing sort of the same bifurcation in the middle market and lower middle market?
The broadly syndicated market, we're sort of seeing.
Bifurcation in those markets, where you know you have half of the portfolios doing well in terms of revenues and EBITDA and margins being sustainable in the other half not so well or are you seeing sort of the same bifurcation in the middle market and lower middle market.
Speaker 6: and how concerned are you with those trends in relation to your own portfolio?
And you know how concerned are you with those trends.
In relation to your own portfolio.
Sure.
Speaker 3: Sure, great question. From our perspective, what we're seeing is slow growth.
Great question.
From our perspective, what we're seeing is kind of slow growth or even.
Speaker 3: Still seeing pretty good growth in the portfolio. If I were to look at EBITDA this quarter, you know, as a portfolio and
Still seeing pretty good growth in the portfolio. If I were to look at EBITDA This quarter as a portfolio and this is absent the a our loans in the large company that skew the analysis.
Speaker 3: absent the ARLons and the large-company that skew the analysis. Our EBITDA grew about 2% this quarter, so an analyzed basis, that'd be 8. So we're still seeing overall pretty good performance.
<unk> EBITDA grew about 2% this quarter on an annualized basis that'd be eight so we're still seeing overall.
Pretty good performance.
Speaker 3: And I take, you know, slow growth is generally the...
And you know I'd say slowed slow growth is generally the.
Speaker 3: The theme, so we are obviously paying very close attention to the portfolio, inter-sixpensis, higher, right? And you've got to pay attention and make sure cash flows are where they need to be.
The theme so.
We are obviously paying very close attention to the portfolio interest expenses higher right and.
You got to pay attention and make sure the cash flows are or where they need to pay.
Speaker 3: And not every company's doing great. Don't get me wrong. I think 55% of our companies grew EBITDA that's quarter.
Not every company is doing great and don't get me wrong, I think 55% of our companies grew EBITDA this quarter.
Speaker 3: The most were very stable. I mean, our leverage, if you look at that metric, went down from four times to 3.9.
But most were very stable I mean, our leverage if you look at that metric went down from four four times to three nine.
Speaker 3: EVTA for the portfolio grew and I really feel like there's pretty good stability out there. You know where the issues are and it's always the case there's one or two companies that have had some events happen that you've got to manage through. And those are the tougher situations which we spend on.
EBITDA for the portfolio grew and I really feel like there's pretty good stability out there you know where the issues are and it's always the case there is one or two companies that have had some events happen.
You've got to manage through and that those are the tougher situations, which we spend a lot of time on obviously, but thanks.
Speaker 3: Thankfully, that's a very small number in our portfolio and and something that we believe is manageable.
Thankfully, that's a very small number in our portfolio.
And something that we believe is manageable as well.
Speaker 6: I appreciate that. Those are all my questions this morning. Thanks for your time, as always. Yeah, thank you, Mickey. Good talking to you. Likewise.
I appreciate that.
All my questions. This morning. Thanks. Thanks for your time as always thank you you're making good talking to you.
Wise.
Okay.
Speaker 1: Our next question comes from Bryce Row, would be Riley.
Our next question comes from Bryce Rowe with B Riley.
Thanks, Good morning, Ed and Shelby.
Good morning, Brian .
Speaker 7: Let's see, wanted to maybe start on...
Let's say wanted to maybe start on <unk>.
Speaker 7: capital structure and and and and Shelby you might be able to cover these but just curious You know how you're thinking about capital structure at this point you all typically don't
Capital structure.
And Shelby you might be able to cover these but just curious.
How youre thinking about capital structure at this point you all typically don't.
Speaker 7: use the credit facility all that regularly and obviously you have some outstanding now. So that's kind of question number one is just how you're thinking about kind of max usage of the credit facility and then
Use the credit facility all of that regularly and obviously you have some <unk>.
Outstanding now so.
That's kind of question number one is just how youre thinking about kind of Max usage of the credit facility and then in relation to that.
Speaker 7: In relation to that, you drew another 8 million of SBA debentures subsequent to quarter end. What is the ultimate capacity from an SBA perspective at this point beyond the 8?
You drew another $8 8 million of SBA debentures subsequent to quarter end what is the ultimate capacity from an SBA perspective at this point beyond beyond the eight.
Joe do you want to take.
Sure Let me great question, so on the CIC capacity.
Speaker 2: Sure, let me, great question. So on the SBIC capacity, we have an incremental 25 million. And as you know, either kind of intermittent capital applications that you have to apply for to have access to that money. We have now received SBA approval to be able to access that 25 million.
We have an incremental $25 million.
As you know either kind of intermittent capital applications that you have to apply for it to have access to that that money. We have now received SBA approval to be able to access that $25 million. So between the eight we had a quarter end that we've drawn now we have an incremental 25.
Speaker 2: So between the eight we had a quarter end that we've drawn, now we have an incremental 25. The goal would be to find SBIC eligible deals, which we do have plenty in the pipeline and utilize the 25 million. And then kind of have anything else go to the RIC or FIC and utilizing the line of credit.
The goal would be to kind of find SB IC eligible deals, which we do have plenty in the pipeline and utilize the $25 million and then you know kind of have anything else go to the.
The Red Cross I C and utilizing the line of credit.
I mean, unlike you know kind of call it a year or two ago. When we had a lot of repayments in excess cash on the books. It's got a lot more money put to work and so we are starting to more actively use our airline.
Speaker 2: I mean, unlike kind of a call it a year or two ago, when we had a lot of repayments and excess cash on the books, we've got a lot more money put to work. And so we are starting to more actively use our line, but we do have plenty of capacity remaining. Today.
We do have plenty of capacity remaining.
Got it okay.
That's helpful.
Speaker 7: Another quarter here of activity on the ATM, assume that they're still appetite there to draw equity off of the ATM, especially considering kind of that, that I guess capital structure backdrop, we just talked about.
Yes.
Another quarter here of activity.
On the ATM.
Assume that there is still appetite there.
To draw equity off of the ATM, especially considering kind of that debt I guess capital structure backdrop, we just we just talked about.
Sure Yes.
Yeah.
Speaker 3: Yeah, I'll jump in there. I think, you know, rights, we're pleased with where the stock price is kind of holding its own now. And so we're also very pleased with the overall performance of the business. And as you just commented, we turned on the ATM program in Q4 last year.
I'll jump in there I think.
We're pleased with where the stock prices kind of holding its own now.
We're also.
Very pleased with the overall performance of the business and as you just commented we turned on the ATM program in Q4 of last year and then we've raised $5 billion of capital in each of the last two quarters. So in Q1 and Q2 of this year and so.
Speaker 3: and then we've raised 5 million of capital in each of the last two quarters, so Q1 of Q2 this year and so.
Speaker 3: You know, we would expect to keep that open this quarter. And, you know, if the markets are attractive, then that makes good sense for us, from our perspective, it's an creative way to raise capital.
We would expect to keep that open this quarter.
And.
If it if the markets are attractive and that makes good sense for us from our perspective, it's an accretive way.
To raise capital.
Speaker 3: And that's what we're looking to do in the long-term, whether it's that or equity we're looking to enhance the shareholders position.
<unk>.
And that's what we're looking to do in the long term, whether it's debt or equity we're looking to enhance the.
The shareholders position.
Hopefully that's helpful.
Speaker 7: Yep, that is maybe one last one for me, just on kind of portfolio of stats. I think in the past, Dad, you've talked about, you know, low into values being relatively low for your debt securities, if you could update us on kind of what that's looking like today, whether it be weighted average, average, medium, whatever is the most appropriate measure.
Yes.
It is maybe maybe one last one for me just on kind of portfolio stats I think in the past you've talked about.
Loan to values being relatively low for for your debt debt Securities. If you could update us on kind of what that's looking like today, whether it be weighted average average median whatever whatever is the most appropriate metric.
Speaker 3: Sure, it's the London value for the portfolio is 40% at the moment. I think that's in line with last quarter, the 60% equity cushions overall.
Sure.
The loan to value for the portfolio is 40%.
At the moment I think thats in line with last quarter.
So 60% equity cushion overall.
Speaker 3: Typically when we're structuring new deals, 40% equity push in is somewhat of a minimum. And what I would say over the last three to five years, it's been 50 to 60 to even 70 and 80% in some cases.
Typically when we're structuring new deals, 40% equity cushion as somewhat of a minimum and what I would say over the last three years to five years, it's been 50 to 62.
And 80% in some cases some of the IRR type situations.
Speaker 3: You know, we feel very good about the enterprise value cushions, if you will, for the poor.
We feel very good about.
The enterprise value cushion, if you will for the portfolio.
Speaker 7: Appreciate your time and we appreciate the answers. Thanks.
Yep.
Okay.
I appreciate your time and.
I appreciate the I appreciate the answers thanks.
Good talking to you right.
Okay.
Speaker 1: Our next question comes from Paul Johnson with KBW.
Our next question comes from Paul Johnson with <unk>.
Yeah, Good morning, guys.
Speaker 8: Yeah, good morning guys. I'm glad I found a good quarter. Only one or two for me.
Congrats on a good quarter.
One or two for me.
Just kind of broadly on.
Speaker 8: This kind of broadly on getting your thoughts on inflation for companies in your portfolio and just companies in general sort of the lower middle market obviously this is a smaller, just a little bit less the ability to kind of combat inflation even the smallest size of the company. Is that still an issue these days or at this point has that pretty much subsided and it's really no a lot very part of conversations with response.
Just kind of getting your thoughts on installation for companies in your portfolio and just in general sort of the lower middle market. Obviously, those businesses smaller just a little bit less ability to kind of combat inflation given the smaller sizes.
Company is that still an issue these days or at this point is that pretty much subsided and it's really no longer a part of.
Organizations with your sponsors.
Sure Great question Paul.
Speaker 3: Sure, great question Paul. Now, I wouldn't say it's totally subsided, but what I would say, you know.
I wouldn't say, it's totally subsided, but what I would say you know.
Speaker 3: Not every company, but almost all companies have found ways to really deal or adjust to the new normal, if you will. And in most cases, that's raising prices to us that cost increases, whether it's labor or whether it's input costs, what happens.
Not every company that almost all companies.
<unk> ways to really deal or adjust to the new normal if you will and in most cases.
That is raising prices to offset cost increases whether it's labor, whether it's input costs what have you.
Speaker 3: So investing companies that have pricing power is an important element of being able to deal with this risk. And one of the things we like to do is invest in value added businesses, high free cash flow businesses that typically have that kind of pricing power when they need to. So let's come on in.
Investing in companies that have pricing power.
As an important element of.
Being able to deal with this risk.
One of the things we like to do is invest in value added businesses high free cash flow businesses that typically have that kind of pricing power when they need to.
So the less commodity oriented if you will and so I do think it's slowed down quite a bit I mean, theres a lot of costs that have decline and think about freight for instance.
Speaker 3: And so now I do think it's slowed down quite a bit. I mean, there's a lot of costs that have declined and think about freight.
Speaker 3: running for costs are there. They're there.
A lot of input costs are there they're there.
Speaker 3: and what to say, but again, I think most companies have adjusted to this new normal. And so it's a discussion, but it's not a terrible thing at this point.
Somewhat to stay but again I think most companies have adjusted to this new normal.
And.
So.
Discussion, but it's not you know a.
Terrible thing at this point, maybe that's the right way to think about it.
Speaker 8: I got it, appreciate that. And then just kind of lastly, I mean, this is not been as central to your investment strategy, seeing a more recent years here, but I'm just curious if...
Got it I appreciate that.
And then just kind of lastly, I mean.
This has not been as central to your investments.
Strategy.
More recent years here, but I'm just curious if.
Speaker 8: subordinating or any sort of mezzanine capital opportunities have been cropping up if that's something that you've found interesting or Disappoint, you know, spreads are just too good in that, you know, you're trying to first meet
Subordinated or any sort of mezzanine capital opportunities has been cropping up and that's something that you've found interesting or distantly grads.
Brands are just as good in that Unitranche first lien.
Speaker 8: or the cappel structure that is just not really on your eyes radar.
Part of the capital structure that is not really on your own.
As radar.
Sure Great question.
Speaker 3: Great question. Now we are continuing to see opportunities there and probably an increase in opportunities.
No we are continuing to see opportunities, there and probably an increase in opportunities.
Speaker 3: And what I would say is, you know, a large, large majority of our origination, just like this quarter, for the five were personally an investment.
And what I would say is a large large majority of our originations just like this quarter for the five were first lien investments.
Speaker 3: You know, we're going to focus on more of the first lean category, but there are plenty of situations from our perspective.
We're going to focus on more of the first lien category, but there are plenty of situations from our perspective.
Speaker 3: where a junior debt security makes a lot of sense.
We're a junior debt security makes a lot of sense and as I N is highly attractive and so we expect the <unk>.
Speaker 3: and it's highly attractive. And so we expect the junior debt portfolio to continue to be a minority portion of the portfolio. Probably expect senior debt to increase from here. But it will be a piece of the puzzle for us as we move forward. Good for us. We're looking at, we're looking for great companies with great outlooks and high free cash flow type situations where we have a strong view. We have a good understanding and a strong view.
And your debt portfolio to continue to be a minority portion of the portfolio.
Please expect senior debt to increase from here, but it will be a piece of the puzzle for us as we move forward for US we're looking at.
We're looking for great companies with great outlooks and high free cash flow type situations, where we have we have a strong view we have a good understanding of the strong viewing.
Speaker 3: In those cases, I think we can get attractive returns, especially in this market, but in all markets with that type of security. So it's not the primary focus, but it clearly is a piece of the puzzle.
In those cases, I think we can get attractive returns, especially in this market, but in all markets.
That type of securities.
It's not the primary focus but it clearly is a piece of the puzzle from our perspective.
Speaker 8: Yeah, okay, great thanks. Thanks for the helpful colors always. I'll read.
Got it okay great. Thanks, Thanks for the helpful color as always.
Yeah, absolutely good talking to you Bob.
Yeah.
Speaker 1: All right, our last question is from Eric Zwig with Havvy Group.
All right. Our last question is from Erik Zwick with hub group.
Speaker 9: Thank you, good morning, Adam Shelby. Wanted to first just start with the pipeline. Curious if you could quantify either an $1, or maybe just directionally, where it stands today relative to 30 days ago. And secondly, are there any particular industries or market segments that are more prominent there in the pipeline at present?
Thank you good morning, and until they wanted to first just start with the pipeline I'm curious if you could.
Quantify either in dollar terms or maybe just directionally, you know where it stands today relative to 30 days ago, and secondly are there any particular industries or market segments that are more prominent narrowed the pipeline at present.
Sure Great question.
Speaker 3: Great question, Eric. You know, I think the pipeline for us, it's funny, kind of ebbs and flows. There was a little bit of a lull, that's picked up here recently.
Eric.
Thank the pipeline for us.
Funny kind of ebbs and flows there was a little bit of a lull, but its picked up here recently.
Speaker 3: But for us, they're not all awarded. We're working hard on things, trying to get those awards and obviously had to documentation in some cases. And so, but what I would say is activity is picked up here over the last several weeks.
But for US it's they're not all awarded were working hard on things trying to.
Get those awards and obviously had to.
Documentation in some cases and so.
But what I would say is activities picked up here over the last several weeks.
Speaker 3: And the, you know, we think it'll continue to be a pretty decent market, not robust by any stretch, you know, as we move towards, you know, the fourth quarter. So from an industry perspective, it's a little bit across the board. There are, you know, we have some...
And the.
We think it will continue to be a pretty decent market is not robust by any stretch.
As we move towards.
The fourth quarter.
So from an industry perspective is a little bit across the board. There are we have some software more tech enabled type situations for sure. But then at the same time distributors industrial businesses.
Speaker 3: software, more tech-enabled type situations for sure, but then at the same time distributors, industrial businesses, and healthcare are all, you know, pieces of the pipeline that we're seeing right now.
And healthcare are all you know.
Pieces of the pipeline that we're seeing right now.
Hopefully that.
Speaker 3: Hopefully that's an answer to your question, but that's the, you know, it's really broad-based, if you will.
To your question, but thats the.
It's pretty broad based if you will.
Speaker 9: Yeah, that's great colors. Thank you. And then the only other one for me is, could you provide a quick update just on the two companies that remain in the portfolio that have sold their underlying operations, just kind of the status of those and what the outlook is, are they going to stay around for a while or I just can't recall.
Yeah, that's great color. Thank you and then the only other one for me could you provide a quick update just on the two companies that remain in the portfolio that have sold their underlying operations just kind of the status of those.
Outlook is are they going to stay around for a while or I just can't recall.
Speaker 3: Sure, there are kind of, I mean, those copies have been sold. And in one case, we're trying to get to a resolution.
Sure.
We're kind of in those companies have been sold and in.
One case, we're trying to.
To get to a resolution.
Speaker 3: It's kind of an escrow type situation. There is value there, but I think we probably want to get to a resolution. So we'll see how it ends up. We're more interested in resolution than...
It's kind of an escrow type situation there is value.
There.
But I think we would probably want to get to a resolution. So we will see.
How it ends up being more interested in resolution and then waiting five years for the ultimate outcome. So there's a there's some work being done on that.
Speaker 3: and waiting five years for the ultimate outcome. So there's some work being done on that.
Speaker 3: The other one is more of, we're keeping it in place now. That's the green fiber loan that is in a lost situation if it's in a articulated debt before. So it's not like that's going to come back. We expect that to stay in that place.
The other one is more of a.
We're keeping that in place now that's the green fiber loan that is it's in a loss situation.
And I have articulated that before so it's not like that's going to come back we expect that to.
And in that play in that.
Speaker 3: realm if you will. So, you know, I don't know if that'll come off in the next year or not. That's unclear, but I think the expectation is that they lost and it's at, I think, a zero right? And so there's some cash in the account, but beyond that, it's...
Realm, if you will.
So.
I don't know if that will come off in the next year or not that's unclear, but I think the expectation is that's a loss and it's at zero right now.
There is some cash in an account of beyond that.
Zero.
Speaker 9: Hopefully that's all right. Thank you for yeah, that was thank you for taking my questions today.
Hopefully that's helpful. Thank you.
Yes that was thank you for taking my questions today.
Absolutely good talking to you.
Okay.
Speaker 1: All right, it appears that there are no other questions, so the Q&A is now closed. I will direct the call back to Ed Ross.
Alright. It appears that there are no other questions. So the Q&A is now closed I will direct the call back to Ed Ross.
Thank you Savi and thank you everyone for joining us. This morning, we look forward to speaking with you on our third quarter call in early November .
Speaker 3: Thank you, Savvy, and thank you everyone for joining us this morning. We look forward to speaking with you on a third quarter call in early November . Have a great day.
Have a great day and a great weekend.
Speaker 1: This concludes the meeting. You may now disconnect.
The meeting you may now disconnect.
Yeah.
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