Q1 2025 Fidus Investment Corp Earnings Call
Operator: Good day and welcome to the FIDUS First Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Good day and welcome to the <unk> first quarter 2000, and twenty-five Kosmos earnings conference call all.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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Jody Burfening: I would now like to turn the conference over to Jody Burfening from LHA, please go ahead. Thank you, Danielle, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's first quarter 2025 earnings conference.
Jody buffering: Now I'd like to turn the conference over to Jody buffering from Allergan.
Alicia: Alicia Please go ahead.
Speaker Change: Thank you Danielle and good morning, everyone and thank you for joining us for slightest investment Corporation's first quarter 2025 earnings Conference call with me. This morning are Ed Ross brightest investment corporations, Chairman and Chief Executive Officer.
Jody Burfening: With me this morning are Ed Ross, Fidus Investment Corporation's Chairman and Chief Executive Officer, and Shelby Sherard, Chief Financial Officer. Fidus 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 FDUS.com.
Speaker Change: 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.
Jody Burfening: I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included on today's call. The conference call today will contain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results, and cash flows of Fidus Investment Corporation. Although management believes these statements are reasonable based on estimates, assumptions, and projections as of today, May 9, 2025, 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 companies' filings with the Securities and Exchange Commission.
Speaker Change: I'd also like to call your attention to the customary safe Harbor disclosure regarding forward looking information included on today's call.
Speaker Change: The conference call today will contain forward looking statements, including statements regarding the goals strategies beliefs future potential operating results and cash flows are financed investment Corporation.
Speaker Change: Although management believes these statements are reasonable based on estimates assumptions and projections as of today may nine 2025.
Speaker Change: They 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.
Jody Burfening: Fidus undertakes no obligation to update or revise any of these forward-looking statements.
Speaker Change: [noise] finest undertakes no obligation to update or revise any of these forward looking statements with that I would now like to turn the call over to Ed Good morning, Ed.
Edward Ross: With that, I would now like to turn the call over to Ed. Good morning, Ed. Good morning, Jody, and good morning, everyone.
Ed Ross: Good morning, Jody and good morning, everyone.
Edward Ross: Welcome to our first quarter 2025 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 share with you our outlook for the rest of 2025.
Speaker Change: Welcome to our first quarter 2025 earnings conference call.
Speaker Change: On today's call I'll start with a review of our first quarter performance and our portfolio at quarter end.
Speaker Change: And then share with you our outlook for the rest of 2025.
Shelby Sherard: Shelby will cover the first quarter financial results and our liquidity position.
Shelby Sherard: Shelby will cover the first quarter financial results and our liquidity position.
Edward Ross: After we have completed our prepared remarks, we'll be happy to take your questions. In the first quarter, deal activity in the lower middle market was at more modest levels, continuing the lackluster M&A trends we have been seeing. Including a couple deals held over from the fourth quarter, we continue to build our debt portfolio on the strength of our durable sponsor relationship. proven industry expertise, and investment experience. carefully and deliberately selecting portfolio companies that fit our strategy of investing in high quality companies. resilient business models, strong cash flow generation, and achievable prospects for growth. Consistent with our strategy, we co-invested in the equity of nearly all of the new portfolio companies.
Shelby Sherard: After we have completed our prepared remarks, we'll be happy to take your questions.
Shelby Sherard: In the first quarter deal activity in the lower middle market was at more modest levels continuing the lackluster M&A trends, we have been seen.
Shelby Sherard: Including a couple of deals held over from the fourth quarter, we continued to build our debt portfolio on the strength of our durable sponsor relationships.
Shelby Sherard: Proven industry expertise and investment experience.
Shelby Sherard: quickly selecting portfolio companies that fit our strategy of investing in high quality companies with resilient business models, strong cash flow generation, and achievable prospects for growth.
Shelby Sherard: Consistent with our strategy, we co-invested in the equity of nearly all of the new portfolio companies.
Edward Ross: As a result, at quarter end, assets under management stood at approximately $1.2 billion on a fair value basis, up 6% compared to December 31, 2024. suggested net investment income for the quarter was $18.5 million compared to $18.1 million in the prior year, Q1 2024. On a per share basis, adjusted NII was $0.54 compared to $0.59 for the same period last year, including the impact of incremental shares issued under our Equity ATM program over the past 12 months. That asset value was $677.9 million, or $19.39 per share, at quarter end, compared to $655.7 million, or $19.33 per share, as of December 31, 2024.
Shelby Sherard: As a result, at quarter end, assets under management stood at approximately $1.2 billion on a fair value basis, up 6% compared to December 31st, 2024.
Shelby Sherard: Adjusted net investment income for the quarter was $18.5 million compared to $18.1 million in the prior year, Q1 2024.
Shelby Sherard: On a per share basis, adjusted in I.I. was 54 cents compared to 59 cents for the same period last year, including the impact of incremental shares issued under our equity ATM program over the past 12 months.
Shelby Sherard: That asset value was $677.9 million, or $19.39 per share at quarter end compared to $655.7 million.
for $19.33 per share as of December 31st, 2024.
Edward Ross: For the first quarter, dividends paid totaled $0.54 per share consisting of the base dividend of $0.43 per share and a supplemental dividend of $0.11.
Shelby Sherard: For the first quarter, dividends paid totaled $0.54 per share, consisting of the base dividend of $0.43 per share and a supplemental dividend of $0.11 per share.
Thank you.
Edward Ross: For the second quarter of 2025, the Board of Directors declared a total dividend of $0.54 per share, which consists of a base dividend of $0.43 per share and a supplemental dividend of $0.11 per share, equal to 100% of the surplus in adjusted NII over the base dividend from the prior quarter, which will be payable on June 25, 2025, to stockholders of record as of June 13, 2020. Originations totaled $115.6 million for the first quarter. $102.1 million of which was invested in seven new portfolio companies. Reflecting our practice of investing in industries we know well, most of our investments in new portfolio companies focused on business service companies with relatively high enterprise value multiples, and we continued to structure our debt investments with attractive loan-to-values well less than 50%.
Shelby Sherard: For the second quarter of 2025, the Board of Directors declared a total dividend of 54 cents per share, which consists of a base dividend of 43 cents per share.
Shelby Sherard: and a supplemental dividend of 11 cents per year equal to 100% of the surplus in adjusted an I.I. over the base dividend from the prior quarter
Shelby Sherard: which will be payable on June 25th, 2025 to stockholders of record as of June 13th, 2025.
Shelby Sherard: Originations totaled $115.6 million for the first quarter, $102.1 million of which was invested in seven new portfolio companies.
Shelby Sherard: Reflecting our practice of investing in industries we know well, most of our investments in new portfolio companies focused on business service companies with relatively high enterprise value multiples.
Shelby Sherard: and we continue to structure our debt investments with attractive loan to values well less than 50 percent.
Edward Ross: That investment totaled $111.6 million. First lien securities accounted for approximately 94% of the total. co-invested in the equity of six of the new portfolio companies for a total of approximately $4 million. Subsequent to quarter end, we invested $5.8 million in first lien debt and equity in another new portfolio company. Proceeds from repayments and realizations totaled $57.3 million for the first quarter, and we monetized equity investments in two portfolio companies. Maturant Holdings and Health Use, both of which have been evaluating strategic alternatives. for a realized gain of $13.3 million. With $58.3 million in net originations for the first quarter, our total portfolio on a fair value basis increased to approximately $1.2 billion.
Shelby Sherard: That investments totaled $111.6 million, first-lean securities accounted for approximately nearly 94% of the total.
Shelby Sherard: We co-invested in the equity of six of the New Portfolio companies for a total of approximately four million dollars.
Shelby Sherard: Subsequent to Quarter End, we invested $5.8 million in First Lean, Dad, and Equity in another New Portfolio Company.
Shelby Sherard: Proceeds from repayments and realizations totaled $57.3 million for the first quarter and we monetized equity investments in two portfolio companies.
Shelby Sherard: Metchern Holdings and Health Use, both of which have been evaluating strategic alternatives for a realized gain of $13.3 million.
Shelby Sherard: With $58.3 million in net originations for the first quarter, our total portfolio on a fair value basis increased to approximately $1.2 billion.
Edward Ross: equal to 100.5% of cost. Our debt portfolio totaled approximately $1 billion on a fair value basis. 79% of which consisted of first lien investments, and our equity portfolio studded $137.8 million, or 11.9% of the total portfolio at quarter end. Our portfolio is well diversified and is structured to produce both high levels of recurring income and the potential for capital gains from our equity investments. From a credit quality perspective, the portfolio remains healthy with companies on non-accrual remaining under 1% of the total portfolio on a fair value basis and 3.9% of the total portfolio on a cost basis.
equal to 100.5% of cost.
Shelby Sherard: Our debt portfolio told us approximately $1 billion on a fair value basis.
Shelby Sherard: 79% of which consisted of first-lean investments and our equity portfolio studied $137.8 million or 11.9% of the total portfolio at quarter-end.
Shelby Sherard: Our portfolio is well diversified and it's structured to produce both high levels of recurring income and the potential for capital gains from our equity investments.
Shelby Sherard: From a credit quality perspective, the portfolio remains healthy with companies on non-accrual remaining under 1% of the total portfolio on a fair value basis and 3.9% of the total portfolio on a cost basis.
Edward Ross: with respect to the macroeconomic challenges and uncertainties associated with the administration's current trade policy. We believe our portfolio companies are reasonably insulated from the stresses and challenges that may lie ahead. Not only are they domestic businesses with limited tariff exposure, but the vast majority of them are niche market leaders with pricing power and proprietary services and products, and they have effective risk mitigation levers to pull as necessary. While M&A activity overall is currently slowing down because of market turbulence, a fluid macroeconomic environment, and a higher level of uncertainty, we have a decent outlook for originations in the second quarter based on our new investment pipeline, which consists of both new investment opportunities and add-on investments in existing portfolio companies.
Shelby Sherard: With respect to the macroeconomic challenges and uncertainties associated with the Administration's current trade policies.
Shelby Sherard: We believe our portfolio companies are reasonably insulated from the stresses and challenges that may lie ahead.
Shelby Sherard: Not only are they domestic businesses with limited tariff exposure, but the vast majority of them are niche market leaders with pricing power and proprietary services and products, and they have effective risk mitigation levers to pull as necessary.
Shelby Sherard: While M&A activity overall is currently slowing down because of market turbulence,
Shelby Sherard: a fluid macroeconomic environment and a higher level of uncertainty. We have a decent outlook for originations in the second quarter based on our new investment pipeline, which consists of both new investment opportunities in add-on investments in existing portfolio companies.
Edward Ross: As we look forward, we believe we are well positioned from a capitalization and liquidity position as we expect a more interesting investment environment. which we have experienced historically in periods of high volatility. should economic conditions deteriorate. Our debt portfolio is well positioned to weather a storm, as a vast majority of our portfolio companies possess resilient cash flow generating business models that can absorb economic stresses and possess moderate leverage levels and robust equity capitalization. As in the past, when we faced uncertainties and challenges, Our philosophy of managing the business cautiously and deliberately in the long-term interest of our shareholders keeps us active and focused on generating attractive risk-adjusted returns while preserving capital.
Shelby Sherard: As we look forward, we believe we are well positioned from a capitalization and liquidity position as we expect a more interesting investment environment.
which we have experienced historically in periods of high volatility.
and should economic conditions deteriorate.
Shelby Sherard: Our debt portfolio is well positioned to weather a storm as a vast majority of our portfolio companies possess resilient cash flow generating business models that can absorb economic stresses.
and possessed moderate leverage levels in robust equity capitalizations.
As in the past, when we faced uncertainties and challenges,
Shelby Sherard: Our philosophy of managing the business cautiously and deliberately in the long-term interest of our shareholders keeps us active and focused on generating attractive risk adjusted returns while preserving capital.
Shelby Sherard: Now, I'll turn the call over to Shelby to provide some details on our financial and operating results. 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 2024. Total investment income was $36.5 million for the three months ended March 31st. A $1 million decrease from Q4 driven primarily by a $1.1 million decrease in interest income primarily due to a decline in the weighted average yield on debt investment. a $1.9 million decrease in fee income, given a decrease in prepayment and amendment fees in Q1, offset by a $1.1 million increase in dividend income from equity investment.
Shelby Sherard: Now I'll turn the call over to Shelby to provide some details on our financial and operating results. Shelby?
Shelby Sherard: 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 2024.
Shelby Sherard: Total Investment Income was $36.5 million for the three months and in March 31st. A $1 million decrease from Q4, driven primarily by a $1.1 million decrease in interest income, primarily due to a decline in the weighted average yield on debt investments.
Shelby Sherard: A 0.9 million decrease in fee incomes given a decrease in prepayment and amendment fees in Q1 Offset by a 1.1 million increase in dividend income from equity investment
Shelby Sherard: Total expenses, including income tax provision, were $18.3 million for the first quarter, $0.5 million less than Q4, driven primarily by a $1.8 million decrease in income tax provision related to the annual excise tax accrual in Q4, offset by a $0.5 million increase in interest expense related to higher average debt balances outstanding and an increase in the weighted average interest rate with the issuance of incremental debt in March 2025 and a $0.2 million increase in management and income incentive fees and a $0.5 million increase in the capital gains incentive fee accrual. Net investment income, or NII, for the three months ended March 31st was $0.53 per share versus $0.55 per share in Q4.
Shelby Sherard: Total expenses including income tax provision were 18.3 million for the first quarter.
Shelby Sherard: 0.5 million less than Q4, driven primarily by a 1.8 million decrease in income tax provision related to the annual expires tax accrual in Q4.
Shelby Sherard: Offset by a .5 million increase in interest expense related to higher average debt balances outstanding and an increase in the weighted average interest rate with the issuance of incremental debt March 20th.
Shelby Sherard: 25 and a .2 million increase in management and in income and centipedes and a .5 million increase in the capital gains and centipede accrual.
Shelby Sherard: Net Investment Income, RNII, for the three months and in March 31st was 53 cents per share versus the 55 cents per share in Q4.
Shelby Sherard: Adjusted NII, which excludes any capital gains, incentive fee accruals, or reversals attributable to realized and unrealized gains and losses on investment. was $0.54 per share in both Q1 and Q4. For the three months ended March 31st, we recognized approximately $11.5 million of net realized gains, net of income tax. related to the sale of two portfolio companies. We recognize a gross realized gain of $10.1 million, not including the income tax provision, on our equity investments and maturant holdings, and a $3.2 million realized gain on our equity investment in healthcare.
Shelby Sherard: A Jepfit NII, which excludes any capital gains and centipede accruals or reversals, attributable to realizing and unrealizing gains and losses on investment, was 54 cents per share in both Q1 and Q4.
Shelby Sherard: For the three months in in March 31st, we recognized approximately 11.5 million of net-realized gains net-of-income tech.
Shelby Sherard: related to the sale of two portfolio companies. We recognize a gross realized gain of 10.1 million, not including the income tax provision, on our equity investments in insurance holdings and a 3.2 million realized gain on our equity investment in health use.
Shelby Sherard: In March, we issued $100 million of 5-year unsecured debt with a 6.75% coupon and received net proceeds of $96.9 million. We ended the quarter with $545.6 million of debt outstanding, comprised of $182 million of SBA debentures, $350 million of unsecured notes, and $13.6 million of secured borrowings. Our net debt-to-equity ratio as of March 31 was 0.7 times. Our statutory leverage excluding exempt SBA debentures was 0.5 times. The weighted average interest rate on our outstanding debt was 4.8% as of March 31.
Shelby Sherard: In March, we issued 100 million a 5-year unsecured debt with 6.75% coupon and received net proceeds of 96.9 million.
Shelby Sherard: We ended the quarter with 545.6 million of debt outstanding, comprised of 182 million of SBA adventures, 350 million of unsecured notes, and 13.6 million of secure barring.
Shelby Sherard: Our net debt-to-equity ratio as of March 31st was 0.7 times. Our statutory leverage, excluding exempt SBA debentures, was 0.5 times. The weighted average interest rate on our outstanding debt was 4.8% as of March 31st.
Shelby Sherard: Turning now to portfolio statistics, as of March 31, our total investment portfolio had a fair value of $1.2 billion. Our average portfolio company investment on a cost basis was $12.5 million, which excludes investments in four portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 85.4% of our portfolio companies, with an average fully diluted equity ownership of 1.9%. Weighted average effective yield on debt investments was 13.2% as of March 31, versus 13.3% at the end of Q4. The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non-accrual, if any.
Shelby Sherard: Total investment portfolio had a fair value of 1.2 billion, our average portfolio company investment on a cost basis was $12 5 million, which excludes investments in four portfolio companies. That's all their operations that are in the process of winding down.
Shelby Sherard: We have equity investments in approximately 85, 4% of our portfolio companies with an average fully diluted equity ownership of one 9%.
Shelby Sherard: Weighted average effective yield on debt investments was 13.2% as of March 31st person 13, 3% at the end of Q4.
Shelby Sherard: The weighted average yield is computed using effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on non accrual if any now I'd briefly like to discuss our available liquidity as.
Shelby Sherard: Now I'd briefly like to discuss our available liquidity. As of March 31st, our liquidity and capital resources included cash of $67.5 million, $140 million of availability on our line of credit, $24 million of available SBA debentures, resulting in total liquidity of approximately $231.5 million. As reported, later this month we plan to redeem $25 million of the notes due in January 2026.
Shelby Sherard: As of March 31st our liquidity and capital resources included cash of $67 5 million $140 million of availability on our line of credit 24 million of available SBA debentures, resulting in total liquidity of approximately $231.5 million.
Shelby Sherard: As reported later this month and plan to redeem $25 million of the notes due in January 'twenty 'twenty six now I will turn the call back to Ed for concluding comments.
Edward Ross: Now I return the call back to Ed for concluding comments. Thanks, Shelby. As always, I'd like to thank our team and the board of directors at Fidus for their dedication and hard work, and our shareholders for their continued support.
Ed Ross: Thanks Shelby.
Danielle: 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 Danielle for Q&A Danielle.
Danielle: We'll now turn the call over to Danielle for Q&A.
Danielle: Danielle? We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Danielle: If at any time a question has been addressed and you would like to withdraw your question, please press star then tap.
Speaker Change: Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
Robert Dodd: The first question comes from Robert Dodd from Raymond James. Please go ahead. Thank you for bringing up the environment, the tariff issue. I mean all the, like the vast majority, or it should be reasonably insulated. I mean is that, have you done any first versus second order effects? I mean obviously you know. have anybody based overseas. But any color you can give on, like, impacts from your companies that are importing goods versus where they're doing something in the US, but maybe their customers, some customers are overseas. I mean, any additional color you can give on what the potential exposure is there?
The first question comes from Robert Dodd from Raymond James. Please go ahead.
Speaker Change: Okay.
Speaker Change: Sorry [laughter].
Speaker Change: Good morning.
Speaker Change: Thank you.
Kind of like your environment and the tariff issue.
Speaker Change: The issue I mean, all the.
Speaker Change: The vast majority or it should be reasonably insulated I mean is that we've done really well.
Speaker Change: Second order effects I mean, obviously you know.
Speaker Change: Anybody.
Speaker Change: She spent any color you can give on like you know impact from her.
Speaker Change: Companies that are importing goods versus where they're.
Speaker Change: Doing something in the U S, but maybe that customer from some customers and overseas I mean any any additional color you can give on what the potential exposure.
Edward Ross: Sure, absolutely, and good morning, Robert. The, you know, I'm going to just talk about the portfolio for a quick sec here, but what I would say is, you know, overall we continue to be, you know, very pleased with the performance and its overall quality. As always, we have some companies that are exceeding expectations and some that aren't and are underperformed.
Speaker Change: Sure absolutely.
Speaker Change: And good morning, Robert Good morning.
Speaker Change: Yeah, you know.
Speaker Change: I'm going to just talk about portfolio for a quick SEC here, but what I would say is.
Overall, we continue to be very pleased with.
Speaker Change: The performance in its overall quality.
As always we have some companies that are exceeding expectations and some that aren't in our underperforming.
Edward Ross: um... We, as we all know, we are experiencing a heightened level of uncertainty and Tariffs have certainly entered the equation in a real way from that perspective. What I would say is Fidus' direct exposure to tariffs It's quite limited, just over 5% of our portfolio. from a direct material exposure perspective, meaning exposure to China and exposure to other high tariff entities. So pretty small percentage for sure. And I think what's more important is really based on our assessments, and we've talked and assessed really the plans that are high and medium risk. companies. you know, put in place.
Speaker Change: We as we all know we are experiencing a heightened level of uncertainty and you know.
Speaker Change: Tariffs have certainly entered the equation in a real way from that perspective.
Speaker Change:
Speaker Change: But I would say as far as direct exposure to tariffs is quite limited just over 5% of our portfolio.
Speaker Change:
Speaker Change: From a direct material exposure perspective, meaning exposure to China and exposure to other high tariff.
Speaker Change: Entities, so pretty small percentage for sure and I think what's more important is really based on our assessments and we've talked and SaaS really the plans that are high and medium risk.
Speaker Change: You know companies.
Speaker Change: <unk> put in place and you know what I would say is we feel like the situations are very manageable. The plans that are being put in place a prudent it's not going to be perfect. There is chaos out there trying to deal with the issues, but overall, we feel very good about the portfolio the plans that the man.
Edward Ross: And, you know, what I would say is we feel like the situations are very manageable. The plans that are being put in place are prudent. It's not going to be perfect. There is chaos out there trying to deal with the issues. But overall, we feel very good about the portfolio, the plans that the management teams are putting in place, and the long-term outlooks ultimately for them. So hopefully that's helpful. But I think the percentage is quite low. And then more importantly is really how are our portfolio companies dealing with the issues in tariffs in particular.
Speaker Change: Agent teams are putting in place in.
Speaker Change: The long term outlooks ultimately for those businesses. So hopefully that is helpful. But I think it's the percentage is quite low and then more importantly is really how our portfolio companies dealing with the issues.
Speaker Change: And tariffs in particular and in what I would say is very proactively in there there are risk mitigation levers out there that can be pulled that we felt good about.
Robert Dodd: And what I would say is very proactively, and there are risk mitigation levers out there that can be pulled. Great, thank you for that additional comment.
Speaker Change: Alright. Thank you. Thank you for that additional cost cutting.
Robert Dodd: Kind of tied to the thing that you described the M&A market as lackluster, which is not a surprising description, but also not surprising that it is, given all these question marks.
Speaker Change: Tied to the thing.
Speaker Change: You described the M&A market is lackluster, which is no not a surprising description, but also not surprising given all these questions.
Edward Ross: Hard question. What do you think needs to change for the M&A market to rebound? I mean, is it tariffs going away? Or is it just, for example, or is it tariff certainty? Or is it the uncertainty that's causing the land cluster market? Or is it the existence of these The great question, Robert, I, you know, my view, my view is it is that it's the uncertain. I think it is a more uncertain world today. And people are aware of that with uncertainty, spreads rise, prices go down, as we saw in the public markets, until we have a little more stability, and ultimately, I think we will.
Speaker Change: Oh the question, what do you think needs to change.
Speaker Change: All the M&A market to rebound I mean is it is it pilots going away.
Speaker Change: Or is it just.
Speaker Change: For example, if you are spending on it.
Speaker Change: Or is it tariffs.
Speaker Change: Or is it is it the uncertainty that's causing the last cluster market or is it the existence of these.
Speaker Change: Potential cause of these trade barriers at all that's that's creating more that there's a problem with that.
Robert: It's a great question Robert I.
Speaker Change: In my view my view.
Speaker Change: Is it is that it's the uncertainty.
Speaker Change: I think it is a more uncertain or certain world today.
Speaker Change: And you know people are aware of that with uncertainty spreads rise right prices go down as we saw in the public markets and until we have a little more stability.
Speaker Change: And it's you know I ultimately I think we will I don't think Jaras apt to go away. It's just stability and then a new level playing field and then I do think M&A.
Edward Ross: I don't think terrorists have to go away. It's just stability and then a new level playing field, and then I do think M&A will come back. I think the long-term fundamentals for M&A are quite strong. The current uncertain environment obviously has put a major dent in that market activity. But having said that, I'll also say in the lower middle market And we expect continued activity, just at lower levels than even the lackluster levels. But there is activity. There's add-on activity. There's plenty of companies that really aren't very impacted by tariffs. And so we expect to continue to be active, maybe not at robust levels, but we do expect to continue to be active as we move forward.
Speaker Change: We'll come back.
The long term fundamentals for M&A are quite strong the current uncertain environment. Obviously as you know put a major dent in that and that market activity, but.
Speaker Change: Having said that I'll also say in the lower middle market.
Speaker Change: We expect continued activity just at lower levels than even the lackluster levels, but there is activity there's add on activity.
Speaker Change: There's plenty of companies that really arent very impacted by Vitaros and so we you know we.
Speaker Change: We expect to continue to be active maybe not at robust levels, but.
Speaker Change: But we do expect to continue to be active as we move forward and you know there is a chance it it becomes a pretty interesting investment environment as well, meaning you know from a higher spread or higher opportunity perspective, but.
Edward Ross: And there is a chance that it becomes a pretty interesting investment environment as well, meaning from a higher spread or higher opportunity perspective. That hasn't occurred yet, but there is that chance. In previous periods of high volatility, that is what has occurred. And so we are, you know, prepared for that.
Speaker Change: That hasn't occurred yet, but there is that chance than in previous periods of high volatility that is what has occurred and so we are prepared for that is if it does.
Robert Dodd: Thank you for that, Colin. I mean, looking at one more on the, yeah, congrats on being proactive and dealing with the next, not dealing with, that's the question, right, your next year's maturity you've effectively sort of pre-funded. I mean, do you think... Do you think you need to do more? Shae, adjustments to your financing structure ahead of the maturities next year. um or do you think what you've done currently is proactive and enough that everything, you know, a year and 18 months from now is dealable? position to be dealt with already, or is there more steps you But obviously you've acted early and good timing on that.
Speaker Change: Got it got it thank you.
Speaker Change: Colin I mean, I've got one more on the yeah, congrats on being proactive in dealing with that.
Speaker Change: Next.
Speaker Change: Question about your next year's maturity.
Speaker Change: It could be sort of pre funded I mean do you think.
Speaker Change: Are you do you think you need to do more.
Speaker Change: Hmm.
Speaker Change: Shay adjustments do your financing structure ahead of the maturities next year, because you always got to.
Speaker Change: Or do you think what you've done cowardly is is is proactive and know that everything.
Speaker Change: Yeah in 18 months and that would be Liberal Eagle.
Speaker Change: Positioned to be dealt.
Speaker Change: Dealt with already or is that more steps you need to take but obviously you backed it out.
Speaker Change: Good timing on that.
Edward Ross: Sure, sure. Great question. You know, what I would say is I think we've created some flexibility with the capital raises and, you know, that was the $100 million offering Shelby spoke about. Obviously, ATM program as well raised about $20 million. And it created some real flexibility for the near and medium term. Longer term, do we need to refinance unsecured notes? I think the answer to that is yes. There's multiple ways to do that. And so and obviously we feel like, you know, the offering that we did in March was well received out there. We feel great about that.
Speaker Change: Sure sure a great question, you know what I would say.
Speaker Change: As I think we've created some flexibility with the capital raises in that you know that was the $100 million offering Shelby spoke about obviously ATM program as well raised about $20 million and it created some real flexibility.
For the near and medium term longer term do we need to refinance unsecured notes I think the answer to that is yes, theres multiple ways to do that and so and obviously we are we feel like the offering that we did.
Speaker Change: And March was well received out there we feel great about that so we're well positioned to deal with.
Shelby Sherard: So we're well positioned to deal with, you know, the markets and refinancings. But what we have done is created flexibility for the near and medium term, which was, you know, part of the I don't know if Shelby would want to add anything. No, I would just echo that. I would say ideally, I'd like to see us raise additional debt capital in the second half of this year. But if for some reason rates are particularly unattractive or markets are closed, we have other ways of dealing with the remaining $100 million coming due in January of 2020.
Speaker Change: The market's in and refinancings, but what we have done is created flexibility.
For the near and medium term, which was part of the intent.
Speaker Change: I don't know if you want to add anything.
Speaker Change: No I would just echo that I would say ideally I'd like to see us raising additional debt capital in the second half of this year, but if for some reason rates are particularly unattractive or markets are closed we have other ways of dealing with the remaining $800 million coming due in January 'twenty 'twenty six.
Robert Dodd: Got it.
Got it thanks a lot.
Robert Dodd: Thanks a lot. Absolutely. Good talking to you, Robert.
Robert: Absolutely good talking to you Robert.
Mickey Schleien: The next question comes from Mickey Schleien from Lattinburg, please go ahead. Yes, good morning, Ed and Shelby. Good morning, Mickey. Ed, you mentioned that M&A in the lower middle market, I guess, is sort of muddling along. But there's also just tremendous amount of capital being created to serve private credit. Meanwhile, we saw increased risk perception recently, leading to stability and spreads. So do you think that spread stability can hold or will the effects of all that capital reappear and drive spreads even lower?
Speaker Change: The next question comes from Mickey Schlein from Ladenburg.
Speaker Change: Yes, good morning, Ed and Shelby.
Speaker Change: Good morning Mickey.
Ed Ross: Ed you mentioned that M&A in the lower middle market.
Speaker Change: I guess, it's sort of muddling along.
Speaker Change: But there's also just a tremendous amount of capital being created to serve private credit.
Speaker Change: Meanwhile, we saw increased risk perception recently, leading to stability and spreads. So do you think that spread stability can can hold or will be you know effects of all of that capital you know reappear in drive spreads even lower.
Edward Ross: Great question, Mickey. I think, you know, yes, it is competitive. I think it's less competitive in the lower middle market. And, you know, what I see today, which is For A-plus credits and businesses, spreads are probably pretty stable in an environment like this, because there is pent-up demand to. deployed capital in high-quality situations, or very high-quality situations. real flight to quality. I also think if there are some scratches or scars on a portfolio company's armor or a potential portfolio company's armor, there may be opportunities for spread widening in a market like this. I don't think it'll be...
Mickey Schlein: It's a great question Mickey.
Speaker Change: I think.
Mickey Schlein: Yes, it is competitive.
Mickey Schlein: It's less competitive in the lower middle market.
Mickey Schlein: And you know what I see today, which is is for a plus.
Mickey Schlein: Credits and businesses.
Mickey Schlein: Spreads are probably pretty stable in an environment like this because there is pent up demand too.
Mickey Schlein: Deploy capital in high quality situations are very high quality situations and a real flight to quality I also think if there you know some scratches or scars on our portfolio companies armor or potential portfolio companies arent armor, there there may be opportune.
Mickey Schlein: Denise for spread widening and in a market like this I don't think it'll be.
Mickey Schlein: In a huge way by any stretch of imagination, but and more complex situations. If you will.
Edward Ross: I think it will remain competitive, absent further negative changes. But at the same time, the M&A market is not dead, it's just down, and there are some companies that need to wait, and there are some companies that don't. And so we are continuing to be active and busy, but just not at robust level. spreads though I don't expect big changes but I think it's really asset dependent.
Mickey Schlein: So you know I think it will remain competitive absent further negative changes.
Mickey Schlein: But at the same time.
Mickey Schlein: M&A market is it's not dead, it's just down and there are some companies that need to wait and there are some companies that don't.
Mickey Schlein: And so we are continuing.
Mickey Schlein: Continuing to be active and busy but just not at robust levels overall spreads though.
Mickey Schlein: Don't expect big changes, but I think it's really asset dependent at the end of the day.
Mickey Schleien: Thanks for that explanation, Ed.
Mickey Schlein: Okay. Thanks, Thanks for that explanation.
Mickey Schlein: Hmm.
Mickey Schleien: Looking at your portfolio, the proportion of your portfolio companies rated 1 has increased now to 12%.
Speaker Change: Looking at your portfolio the proportion of your portfolio companies rated one.
Mickey Schlein: Has increased now to 12% those are obviously your best performers.
Edward Ross: You know, those are obviously your best performers, which is great, but it leads me to ask how much prepayment risk there is amongst those companies and how much call protection do you have in the investments you've made in those companies. Sure, sure. So prepayment risk continues to be something that, everyone deals with and we clearly have to deal with, we had one mezzanine security. That was prepaid last quarter.It should have been it was very low levered and EBITDA had grown exponentially and then we we do have One company that's under contract to be sold, and so we expect that to happen.
Speaker Change: It is great but.
Speaker Change: It leads me to ask how much prepayment risk there is amongst those companies and how much call protection do you have.
Speaker Change: In the investments you've made in those companies.
Speaker Change: Sure sure.
Speaker Change: So.
Speaker Change: Prepayment risk.
Speaker Change: Continues to be something that you know.
Speaker Change: I think everyone deals with and we clearly have to deal with them, we had one mezzanine security.
Speaker Change: That was prepaid last quarter. It should have been it was very low levered and EBITDA has grown exponentially.
Speaker Change: And then we do have.
Speaker Change: One company that's.
Under contract to be sold and so we expect that to happen. So that's both a debt and equity investment.
Edward Ross: So that's both a debt and equity investment. And then we do have a couple companies in our portfolio right now that we expect to be refinanced out of. So it's both M&A and refinancings, which is a typical quarter. And I think we've got a very high caliber portfolio. So that will continue. But it's something we've dealt with, as you know, for a long, long time. And it's just part of the business. It's clearly transpiring in today's market. Okay, I understand.
Speaker Change:
Speaker Change: And Oh, and then we do have a couple of companies in our portfolio right now that we expect to be refinanced out of so it's both M&A and refinancings, which is a typical quarter.
Speaker Change: And I think we've got a very high caliber Ah portfolio. So there'll be that will continue but it's something we've dealt with as you know for a long long time, and it's just part of the business but.
Speaker Change: It's clearly transpire in todays market for sure.
Speaker Change: Okay I understand my last question relates to quest software, which has been marked at pretty distressed levels for a couple of quarters I realize this is a second lien, but I'm curious what the challenges are there and do you expect that credit to remain on accrual.
Mickey Schleien: My last question relates to Quest Software, which has been marked at pretty distressed levels for a couple of quarters.
Edward Ross: I realize this is a second lien, but I'm curious what the challenges are there, and do you expect that credit to remain on accrual? That's a great question. Mickey, you know, Quest is a is a full suite kind of provider of cybersecurity solutions. for both large and small companies and government entities. This is a, as I think you're acutely aware, this is a much larger and probably the one you know, real large business in our debt portfolio as we sit here today. You know, we believe the long-term outlook here is solid. We also think the company is over-levered in dealing with the impact of higher interest rates for a longer period of time.
Speaker Change: That's a great question.
Mickey Schlein: Mickey I you know quest is a is a full suite kind of provider of cyber security solutions.
Speaker Change: For both large and small companies and government entities.
Speaker Change: This is a as I think acutely aware this is a much larger.
Speaker Change: Probably the one.
Speaker Change: No real large business in our debt portfolio as we sit here today.
Speaker Change: We believe the long term outlook here is solid.
Speaker Change: We also think the company's over Levered and dealing with the impact of higher interest rates for a longer period of time the.
Edward Ross: The market is concerned about a potential LME event, liability management execution, which has... you know, which has really hurt the valuations of the loans in the secondary market. But, you know, as some people know, and I'm sure you know, there's been a recent uptick in LMEs in the BSL market, which is very unfortunate. However, there was a court ruling at the end of last year that really dampened the aggressiveness of such LME transactions. And so that's a good and arguably necessary thing. What I would say is the risk profile of our investment is reflected in the valuation.
Speaker Change: The market is concerned about a potential L. M <unk> event, a liability management execution.
Which has.
Speaker Change: Which is really hurt the valuations of the loans in the secondary market.
Speaker Change: But you know as some people know and I'm sure you know there's been a recent uptick.
Speaker Change: Up tick in <unk> in the BSL market, which is very unfortunate.
Speaker Change: However, there was a court ruling at the end of last year, they really dampened the aggressiveness of such <unk> transaction. So that's a good and arguably necessary thing.
Speaker Change: But I would say is the risk profile of our.
Speaker Change: Investment as reflected in the valuation.
Edward Ross: So there's risk there, but we actually have a pretty strong belief system in the long-term outlook of that business and of Hope you liked that.
Speaker Change: So there is risk there, but we actually have.
Speaker Change: Pretty strong belief system in the long term outlook.
Speaker Change: That business didn't have that investment.
Speaker Change: Hopefully that's helpful. But yes that is I appreciate that explanation those are all my questions. This morning, I Hope you have a good weekend.
Mickey Schleien: Yeah, that is, I appreciate that explanation.
Mickey Schleien: Those are all my questions this morning. I hope you have a good week. You too, Mickey. Good talking to you. As a reminder, if you have a question, please press star 1.
Speaker Change: You too, making good talking to you.
Speaker Change: As a reminder, if you have a question. Please press star one. The next question comes from Sean Paul Adams from B Riley Securities. Please go ahead.
Sean Paul Adams: The next question comes from Sean Paul Adams from B. Riley Securities. Please go ahead. Hey guys, good morning. Hey, good morning, Sean Paul. Thank you.
Speaker Change: Yeah.
Speaker Change: Hey, guys good morning.
Speaker Change: Good morning.
Speaker Change: Hey, good morning, John Polish.
Sean Paul Adams: Most of my questions were already answered, but on Quantum IR, I know it was added to the non-accrual last quarter, and you guys were last out, first lien holders, but can you provide any sort of update on this investment? I also see that there was a continued write down in Vertex in Sweden. Yes. So quantum IR, there really isn't a material update other than we are continue to have all hands on deck on that situation. And as I mentioned, I think last call there's been a series of pretty company-specific and very negative events that impacted our debt and equity investments here.
Speaker Change: [laughter]. Thank you most of my questions were already answered, but on quantum I are I know it was added to non accrual last quarter and you guys were last out first lien holders, but can you provide any sort of update on this investment I also see that there was a continued write down and vertex in Sweden connector.
Speaker Change: Yes, so quanta IR, there really isn't a material update other than we are continue to have all hands on deck on that situation.
Speaker Change: And as I mentioned I think last call there's.
Speaker Change: Been a series of pretty company specific and very negative events that impacted our debt and equity investments here.
Edward Ross: You know, what I'd say is the risk profile of our investments are reflected in the value. from, you know, the other. two names you just mentioned. I don't think there's anything, I think. Both companies are operating, obviously, and are doing decently well, but you have ups and downs from quarter to quarter, and that really is what reflected in the valuation. you know, C is a big change at the moment, but both companies are stable. We and the management teams and the other capital providers to those situations are continuing to work. work in a. Good manner to try to move things forward, but no update other than just quarter-to-quarter type performance.
Speaker Change: And you know what I'd say is the risk profile of our investments are reflected in the value of our debt and equity investments on yeah.
On our balance sheet.
Speaker Change: From the other.
Speaker Change: Two names you just mentioned I don't think Theres anything I think.
Speaker Change: Both companies are operating obviously in our are doing decently well, but you know you have ups and downs from a.
Speaker Change: Quarter to quarter and that really.
Speaker Change: Is what we reflected in the valuation nothing that we see as a big change at the moment, but both companies are stable and.
We and the management teams and other capital providers to those situations are continuing to.
Speaker Change: Working them in a good manner to try to move things forward and but no update other than.
Speaker Change: This quarter to quarter type performance issues.
Sean Paul Adams: Got it. I appreciate the color. Absolutely.
Got it I appreciate the color. Thank you.
Speaker Change: Absolutely good talking to you jump ball.
Sean Paul Adams: Good talking to you, Sean Paul.
Operator: This concludes our question and answer session.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Ed Ross for closing remarks.
Edward Ross: I would like to turn the conference back over to Ed Ross for closing remarks. Thank you, Danielle. And thank you everyone for joining us this morning.
Ed Ross: Thank you Danielle and thank you everyone for joining us. This morning, we look forward to speaking with you on our second quarter call in early August 2025.
Edward Ross: We look forward to speaking with you on our second quarter call in early August 2025. Have a great day and great weekend.
Ed Ross: Have a great day and great weekend.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Ed Ross: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Ed Ross: Yeah.