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Edited Transcript of FDUS earnings conference call or presentation 2-Aug-19 1:00pm GMT

Q2 2019 Fidus Investment Corp Earnings Call

Orrington Avenue Evanston Oct 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Fidus Investment Corp earnings conference call or presentation Friday, August 2, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward H. Ross

Fidus Investment Corporation - Chairman & CEO

* Shelby E. Sherard

Fidus Investment Corporation - Secretary, Chief Compliance Officer & CFO

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Conference Call Participants

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* Christoph M. Kotowski

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Timothy Paul Hayes

B. Riley FBR, Inc., Research Division - Analyst

* Jody Burfening

Lippert/Heilshorn & Associates, Inc. - MD and Principal

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Jody Burfening. You may begin.

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Jody Burfening, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you, Katherine, and good morning, everyone. Thank you for joining us this morning for Fidus Investment Corporation's Second Quarter 2019 Earnings Conference Call. 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 issued 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.

I'd like to remind everyone that -- today that this call is being recorded. A replay of today's call can be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, an archived webcast replay will be available on the Investor Relations page of the company's website fdus.com following the conclusion of this conference call.

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, August 2, 2019, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including but not limited to, the factors set forth in the company's filings with the Securities and Exchange Commission. Fidus 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.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [3]

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Good morning, Jody, and good morning, everyone. Welcome to our second quarter 2019 earnings conference call. I'll start today's call with a high level perspective on our results, and then I'll cover our investment portfolio performance and conclude with comments regarding our view of the market and activity levels as we move into the second half of 2019. Shelby will go into more detail about the second quarter financial results and our liquidity. Once we have completed our prepared remarks, we'll be happy to take your questions.

On our call last May, I mentioned that M&A activity appeared to be picking up and this played out in the second quarter. While we remain very careful about the types of businesses we invested in, we continue to selectively build our portfolio of debt and equity investments.

Adjusted net investment income, which we define as net investment income, excluding any capital gain incentive fee attributable to realized and unrealized gains and losses, was $8.4 million or $0.34 per share compared to $8.7 million or $0.36 per share for the same period last year. While we continue to proactively manage the portfolio, the impact of a nonaccrual investment overshadowed increases from higher assets under management during the quarter.

As of June 30, 2019, our net asset value, or NAV, was $398.5 million or $16.29 per share. On June 21, 2019, Fidus paid a regular quarterly dividend of $0.39 per share. At June 30, estimated spillover income or taxable income in excess of distributions was $16.5 million or $0.67 per share. On July 29, the Board of Directors declared a regular quarterly dividend of $0.39 per share, which will be payable on September 20, 2019, to stockholders of record as of September 6, 2019.

Originations during the second quarter continued to position our portfolio to provide us with a high level of current and recurring income from debt investments in a margin of safety, along with the opportunity for incremental returns from equity investments. We invested $48 million in debt and equity securities. Nearly all of the $48 million or $42.9 million went to 4 new portfolio companies, 3 of which were M&A related.

Reflecting our ability to offer customized financing solutions that are designed to generate attractive risk-adjusted returns, second quarter investments in new portfolio companies encompassed 3 first lien and 1 second lien debt investment in addition to preferred and common equity. Let me give you a brief description of each of them.

French Transit, LLC is a developer and marketer of a portfolio of established personal care brands. We invested $8 million in first lien debt and made a $1 million revolving loan commitment with a $0.5 million funded at close. Hoonuit, LLC is an education technology platform that provides online data analytics and professional development primarily for K-12 school districts. We invested $7.4 million in first lien debt and preferred equity. Specialized Elevator Services Holdings, LLC is a provider of elevator maintenance, repair and modernization services. We invested $5.5 million in first lien debt and common equity. And finally, we invested $21.5 million in second lien debt and preferred equity in Wheels Pros, Inc. (sic) [Wheel Pros, Inc.], a leading designer, marketer and distributor of branded aftermarket wheels, performance tires and accessories. The remaining $5.1 million in originations consisted of add-on investments in 6 existing portfolio companies.

Collectively, these investments illustrate our adherence to our investment strategy of focusing on high quality companies that possess defensible market positions and proven business models that generate excess cash flow for debt service and growth and that operate in industries we know well.

In terms of repayments and realizations, we received proceeds totaling $17.9 million, which primarily came from payment in full of $9.6 million, including a $0.1 million prepayment fee on our second lien debt investment in TransGo, LLC, and payment in full of $6 million on our second lien debt investment in Trantech Radiator Products, Inc. and we realized a $0.3 million loss on our equity investment.

As reported in our second quarter press release, subsequent to quarter-end, on July 19, we exited our second lien debt investment in Pinnergy, Ltd. and received payment in full of $4 million as the company refinanced its debt in -- to lower cost of capital. On July 31, 2019, we invested $21.5 million in new subordinated debt investment of an existing portfolio company, Allied 100 Group, Inc.

Turning to our portfolio construction and metrics. The fair market value of our investment portfolio as of June 30, 2019, was $697.3 million, equal to 106.4% of cost. The breakdown of the portfolio on a fair value basis by investment type was as follows: first lien debt, 10%; second lien debt, 53%; subordinated debt, 18%; and equity, 19%. We ended the quarter with 64 active portfolio companies and 4 companies that have sold their underlying operations.

As of June 30, 2019, we had debt investments in 2 portfolio companies on nonaccrual status, US GreenFiber and Oaktree Medical Centre, doing business as Pain Management Associates. Together, these 2 investments represent 0.9% of our portfolio on a fair market value basis.

We continue to actively manage both portfolio companies. With respect to Oaktree Medical, I want to take a moment to explain the reduction in value of our investments to 0. As you may recall, on last quarter's call, I mentioned that Oaktree Medical has experienced certain unexpected exogenous events. These included an FBI raid on several of the company's locations and whistleblower lawsuits in which the U.S. Department of Justice subsequently intervened. More significantly, in Q2, the DOJ filed a new civil lawsuit alleging fraud and material violations of various federal and state laws.

As you might imagine, these types of claims can have a wide range of adverse effects on any healthcare services business such as lower patient visits, higher employee turnover, the incurrence of material professional and legal defense costs and significantly reduced payer collection rates. After evaluating the uncertainty and amount of time and cost needed to resolve the litigation and the cost that would be required to restructure the company's balance sheet, we reduced the valuation of our investments to 0 to reflect the substantial change in risk. This is an unfortunate turn of events.

Moving to portfolio performance. We track several quality measures on a quarterly basis to help us monitor the overall quality, stability and performance of our investment portfolio. First, we track the portfolio's weighted average investment rating based on our internal system. Under our methodology, a rating of 1 is outperform and a rating of 5 is an expected loss. At June 30, weighted average investment ratio for the portfolio is 1.9 on a fair value basis, in line with prior periods.

Another metric we track is the credit performance of the portfolio, which is measured by our portfolio companies' combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the second quarter, this ratio is 4.6x compared to 3.8x for the same quarter last year and compared to 4.5x for the first quarter of 2019 and the fourth quarter of 2018.

The third measure we track is the combined ratio of our portfolio companies' total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio companies have in aggregate to meet their debt service obligations to us. For the second quarter, this metric was 3.8x compared to 3.9x for the same quarter last year.

We believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our borrowers' enterprise value in support of our capital preservation and income goals.

As we move into the second half of 2019, the M&A market remains relatively healthy, which should generate new investment opportunities as well as the potential for both debt and equity realizations. Due to our underwriting discipline and focus on capital preservation, our portfolio remains healthy, well diversified and structured to preserve capital and generate attractive risk-adjusted returns. Our debt investments continue to provide us with a high level of current and recurring investment income. Our equity portfolio, valued at a little more than 2x cost, is positioned to offer opportunities to monetize mature equity investments.

In closing, we remain focused on our primary goal of delivering stable dividends and growing net asset value over time.

I'll now turn the call over to Shelby to provide some details on our financial and operating results. Shelby?

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Shelby E. Sherard, Fidus Investment Corporation - Secretary, Chief Compliance Officer & CFO [4]

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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 2019.

Total investment income was $18.1 million for the 3 months ended June 30, 2019, a $2.3 million decrease from Q1. Interest and PIK income decreased by $1.1 million, primarily due to the placement of Oaktree Medical Centre on full nonaccrual status in Q2 and the onetime positive impact from collecting past due interest in Q1 upon on the exit of our debt investments in K2 Industrial Services. PIK income as a percentage of total interest income [of roughly] 17.6% was higher than average as approximately $1.5 million of cash interest due from Accent Food Services was paid in kind in Q2.

Fee income decreased by $1.5 million in Q2, due to reduced investment activity and lower prepayment fee. Dividend income was $0.6 million, a $0.3 million increase versus Q1, primarily due to a $0.5 million dividend from our equity investment in Pinnergy.

Total expenses, including income tax provision, were $8.4 million during the second quarter, approximately $2.3 million lower than the prior quarter, primarily due to a $2.8 million decrease in incentive fee. Capital gains incentive fees decreased by $1.6 million and income incentive fees decreased by $1.2 million, both primarily related to the write-down in our investments in Oaktree Medical Centre.

Base management fees increased by $0.1 million, while interest expense increased by $0.3 million. Total G&A expenses were flat quarter-over-quarter. Interest expense includes interest as well as any commitment in unused line fees. As of June 30, 2019, the weighted average interest rate on our outstanding debt was 4.5%. As of June 30, we had $319.8 million of debt outstanding, comprised of $171.3 million of SBA debentures, $119 million of public notes and $29.5 million outstanding on the line of credit.

Our debt to equity ratio was 0.8x or 0.4x statutory leverage, excluding exempt SBA debentures. Net investment income or NII for the 3 months ended June 30, 2019, was $9.6 million or $0.39 per share, in line with Q1 2019. Adjusted NII was $0.34 per share in Q2 versus $0.41 per share in Q1. Adjusted NII is defined as net investment income, excluding any capital gains incentive fee expense or reversal attributable to realized and unrealized gains and losses on investments. A reconciliation of NII to adjusted NII can be found in our earnings press release that was issued yesterday afternoon and is also posted on the Investor Relations page of our website.

For the 3 months ended June 30, 2019, Fidus had approximately $0.1 million of net realized losses primarily related to the exit of our equity investment in Trantech Radiator Products. We incurred $0.3 million of tax expense related to estimated state tax extension payments made in Q2. Our net asset value at June 30, 2019, was $16.29 per share, which reflects payment of the $0.39 per share regular dividend in June.

Turning now to portfolio statistics. As of June 30, our total investment portfolio had a fair value of $69.3 million. Consistent with our debt-oriented investment strategy, our portfolio on a cost basis was comprised of approximately 12% first lien debt, 59% second lien debt, 19% subordinated debt and 10% equity securities. Our average portfolio company investment on a cost basis was $10.2 million at the end of the second quarter, which includes investments in 4 portfolio companies that sold their operations and are in the process of winding down.

We had equity investments in approximately 93% of our portfolio companies, with a weighted average fully diluted equity ownership of 6%. Weighted average effective yield on debt investments was 12.4% as of June 30. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issue discount and loan origination fees, but excluding investments on nonaccrual if any.

Now I'd like to briefly discuss our available liquidity. As of June 30, our liquidity and capital resources included cash of $21.9 million and $70.5 million and $7.5 million of availability on our line of credit in FMC 3 debentures respectively, resulting in total liquidity of $99.9 million. Subject to SBA regulatory requirements and approval, we have access to $167.5 million of additional SBA debentures under our third SBIC license.

Now I will turn the call back to Ed for concluding comments. Ed?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [5]

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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.

I will now turn the call over to Katherine for Q&A. Katherine?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Robert Dodd with Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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Looking at Oaktree with the -- I mean, obviously, some of the things were going on, as you said, before Q2. So without focusing on that one, which obviously now you've marked down to 0, I mean, I guess the question is, is there anything else in the portfolio where you're starting to see some unexpected events, maybe not that DOJ filing suit, but where there is any other assets in there showing some signs that maybe don't justify a big markdown today, but Oaktree didn't 2 quarters ago, either. So --

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [3]

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Sure, sure. A rather question. I personally view the Oaktree situation as being very -- I use this term exogenous and off the beaten path to a huge degree. So we hope to never experience that again. Given -- but to answer your question more specifically, I mean, given our focus on 64 lower middle market companies, we are very active with regard to all of them. What I would say is -- and this is the case always -- there is a couple of names that are underperforming relative to expectations that I'm keeping an extra close eye on.

There is always the risk of a negative turn of events or just incremental poor performance that could take place with regard to any name, whether it's performing really well now or is one that's under budget -- but in particular -- that could create a nonaccrual, clearly. But overall we feel very good about the overall health and the outlook of our portfolio and also the health and outlook for our equity portfolio. So I hope that's helpful. When you have 64 names, you always have some that are underperforming and some that are exceeding expectations, and you can be assured that we're managing the portfolio on a very tight basis, if you will.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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Yes. I appreciate that color. One of those notes -- I mean, Shelby, you said I think it was Accent Food Services. This quarter they paid their interest in PIK instead of previously in cash. Anything we should read? Any color you can give on -- and obviously, it's a private company, but any color you can give us on why they did that? Or if somebody decides to start paying in PIK instead of cash, I would, all other things being equal, suspect some level of incremental stress at that business.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [5]

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Sure. Let me -- well, as a reminder, I'll try to give you some context here. Accent Foods is a leading provider of customized refreshment and break room food and beverage services to a diverse base of over 3,500 customers in the Texas marketplace and other states as well. Their core services include vending services, micro markets and coffee services, and they're focused on the small- to medium-size business market as well as the government market.

Overall, it's a day-in, day-out, business with meaningful size which we like. Since our involvement, the company has been acquisitive and they've also invested in the infrastructure of the company to help facilitate its growth objectives. The company has had to digest a lot as a result, which has proved to be more difficult than expected. Recent results have been positive and our view of the long term is positive as well. So the situation that I would say is, the company found itself in more leverage than we all agreed to and so we had to work with all the capital structure constituents to facilitate a go-forward path. But the -- as I mentioned, the outlook is positive from our perspective.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Got it. Okay. So thank you for the color on that. Can you -- I mean, you had a lot of deployments in the quarter. Could you give us an indication of timing on those? I mean whether it was late in the quarter? Because obviously that looks like they -- if I adjust for the nonaccrual, etc., it doesn't look like the new deployments generated a lot of income this quarter. But that may be a case of timing. So anything you can give us on that front?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [7]

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Yes, I can, and that's a great question, Robert. As you remember, last quarter, when we had our call, we had no subsequent events to speak of. And so you're exactly right. The investments that we made were all second half of the quarter and some of them were very end of the quarter. So that did impact the financial results to a certain degree.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [8]

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Got it. And then just a housekeeping one. I mean was there anything reversed in the top line? I mean obviously, Oaktree, a decent chunk of that was PIK. Was any of that reversed in -- from what was accrued in the first quarter? Or was it just rather end of reversal?

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Shelby E. Sherard, Fidus Investment Corporation - Secretary, Chief Compliance Officer & CFO [9]

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No. There was a reversal as it related to Oaktree that we took in the second quarter as we only had Oaktree on PIK nonaccrual in the first quarter, so we've reversed about $449,000 of income in the second quarter.

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Operator [10]

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Our next question comes from Ryan Lynch with KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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I wanted to follow up with a question in response to Robert's question. You talked about a couple of companies that you're keeping a close eye on today. I just wanted to know what exactly does that mean. What is the recourse if you -- as you review your portfolio, if there is companies that are starting to underperform or some things aren't going exactly the way you guys had anticipated, what exactly does just keeping an eye on it mean? What is exactly your recourse that you guys could do to optimize and manage that portfolio?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [12]

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Sure. Great question, Ryan. I think first and foremost, when we say keeping an eye on it, in just, call it, 90-plus percent of our portfolio companies that we have a debt investment in, we are attending Board meetings. So we are pretty active in these situations and pretty close to them. So from a monitoring perspective, we're looking at things monthly and obviously usually visiting the company on a quarterly basis, and if there is stuff going on, whether acquisitions or underperformance, there is much more dialog. So that's how we're monitoring.

From a recourse, it really depends on the debt structure and is -- as you well know that we are doing some first lien investments. We're doing some first lien investments. We're the last-out lender. We have some second lien investments and that's the majority of our portfolio. And we have subordinated debt as well.

And so the recourse varies, right? In first lien, I think you obviously have more of ability to act and impact things. From a second lien perspective, we still have strong maintenance covenants, which is one of the beauties of our market from our perspective. So we have a seat at the table when covenants are broken. But you still got to work through whatever situation it is and obviously they vary from time to time. So it varies. But we have a seat at the table. We are very close to the companies, but what we can do and not do depends on things like are repayments subordinated or not in that structure, and that varies deal to deal. Hopefully, that's helpful.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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Yes, yes. That's helpful color. I had a question with the originations this quarter. I think you said about $48 million of originations; about $43 million were to new portfolio companies. Is that a high percentage for you historically? Is the vast majority of your originations coming from new portfolio companies versus add-on? I'm just wondering if this quarter was any different than kind of historically, percentage versus new, versus add-ons.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [14]

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I would say this quarter was a little bit higher from a new perspective. We -- over the last several years, we've had a portfolio that, quite frankly, has been pretty acquisitive. And so typically when acquisitions are being made, we are participating with new dollars in those financings. And so if I would look at this quarter, for instance, we have an existing portfolio company, Allied 100, we initially invested in that company several years, call it, 4 years ago, plus or minus. We -- the debt was repaid due to company coming -- leverage coming down and them being able to reduce their cost of debt capital. They are making a sizable acquisition or just made one this week, and we participated again in that in the form of a $21 million second lien investment. So this quarter, it will be different than that. So it really varies quarter-to-quarter, but I would say, by and large, this Q2 was a little bit more weighted towards new investments rather than just in portfolio companies.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [15]

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Okay. That's helpful. The reason I was kind of asking is, we had heard some other BDCs, maybe a little bit of a different market, a little bit larger, talk about with the competitive environment that everybody's well aware about, they are kind of leaning into some existing portfolio companies for new originations and garnering some of the benefits of incumbency. And so that was a little bit different strategy versus your, guys, end result of mostly new companies, and so just wanted to know if you had any comments on that.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [16]

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No. I think look, we do try to -- when we find good/great companies, we do try to stay involved with them. But if you think about what we're playing in the low end of the market, that's a large majority of the number of businesses. It's much more fragmented than the bigger market. And so -- then it's -- I would argue it's harder to stay involved. And so -- but we do try. For instance, we've got a couple of companies in our portfolio today that were initially originated in 2007. So it's definitely a goal when we can. But it's probably less than some of the larger BDCs.

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Operator [17]

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Our next question comes from Mickey Schleien with Ladenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [18]

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(technical difficulty)

picture, how would you gauge the performance of your borrowers to be in the current environment? I appreciate your comment on relatively healthy outlook. But I'd like to understand how is revenue trending. How are margins trending, given that we're starting to see more and more clear signs that the economy is slowing?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [19]

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Sure. Great question, Mickey. Again, as I stated before, we feel very good about the overall health and quality of the portfolio. I would characterize it as being in a slow growth mode from both a revenue and EBITDA perspective. What we have seen though is growth has slowed a little bit over the last couple of quarters. And so there is a slower growth that's in line with what we're reading about in the newspapers, obviously. And as I mentioned earlier, we have some companies that are exceeding expectations despite the slower growth and some that are underperforming or a couple that are underperforming. But that's how we think about it.

When you look at the overall portfolio, it's valued at 106% of cost. We feel very good about our debt portfolio. The average enterprise value cushion is about 50% today. And so we feel also good about the prospects of generating some capital gains in the next, call it, 60 to 90 days. Not our larger investments, just to clarify, just I don't want to set that expectation. But there is some good activity going on here in the second half of the year and I think that will result in some repayments, but also result in some equity realizations for us.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [20]

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That's helpful. Ed, given the nature of your borrowers, in other words, the sectors that they are operating in and the types of end customers they have and their balance sheets, how stimulative do you think the recent rate cut is going to be for them?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [21]

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I don't think it's that material from my perspective. It's just not enough of a change that's going to really lower their cost of borrowings, if you will, in a material way. So I mean, does it free up a little bit of cash? Yes, absolutely, which can be used on growth or other initiatives. But I don't think it's going to be overly stimulative. But again, what we're seeing in our portfolio is stability and just a little bit slower growth. We're not seeing any sectors that we're invested in, where we have major concerns about, wow, there's a slowdown happening. It's more stability, just kind of slow growth, steady as she comes kind of thing.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [22]

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Okay. And as you mentioned and as is clear from the results, you had an active quarter. Could you -- how would you characterize the deal terms that you were able to get on these new transactions relative to a very competitive market?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [23]

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I think they were -- I mean, I feel good about it. We are maintaining our highly selective stance and we view it that we're in the later stage of an economic cycle. Obviously, it's being managed very carefully by the Fed and others. So what we're doing is investing in businesses that we believe are very resilient, could handle a recession, even the recession like the one we had last time around, and then, also coupling that with structures that help protect us. And so this last quarter, 3 of the 4 investments we made -- or new investments we made were first lien investments. Those all have covenants, and we have a fair bit of control over that capital structure, as you might imagine. We also made a second lien investment as well, but that is a well-structured piece of paper, second lien, and it's also a very a larger company, actually a larger than average company for us. And so again, we feel very good about the risk-adjusted returns that we are focused on.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [24]

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All right. And my last question. FDS Avionics, could you give us an update on trends there? I see the valuation was relatively stable. What's the outlook for that business?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [25]

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Sure. Great question. I would say it's a company that we have now controlled for just shy of 2 years. So it's a situation that we're very active in. Company performance more recently has been up and so we've seen a uptick in the business and that's been a positive. But it's a work in process is what I would say. But at the same time, we feel good about the value proposition that the company delivers to its marketplace and we view this as more of a medium- to long-term type of exit. So I think it will be in our portfolio for a while. But we're working it very hard because it is the only company that we control today.

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Operator [26]

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And our next question comes from Chris Kotowski with Oppenheimer.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [27]

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I just wanted to go back to Robert, some of the things Robert touched on. I mean basically versus our models, the loan volumes look fine, but the interest income was a little light. And so basically, if I heard your answers right, your response to Robert right, I mean, it's basically a combination of the drag of the nonaccruals or reversals and then also just the fact that the new investments were all late in the quarter. That was it, right? There is nothing else on the interest income line?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [28]

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No, I think that's it.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [29]

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Okay. And then next, on the nonaccrual side, I just was looking at U.S. Green and I noticed the PIK it like carried at like $0.90 on the dollar and the 12% notes are carried at like $0.35 on the dollar or something like that, and normally I think of PIK as being subordinated. Is it senior in this case?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [30]

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I don't know if PIK is the right word. Shelby will look for that. What I would suggest is that the company went through a lot over the last couple of years. And just to remind you, it's a company that manufactures and sells cellulose insulation. It competes against traditional installation, has many attractive characteristics relative to competition, including being a green product. Just a couple of years ago or several years ago, the company consolidated 3 plants into one. The execution was poor and consolidation caused some problems in their operations and paper prices spiked which impacted its business to a certain degree. But that has normalized which is a good thing for the company.

And then the company has been plagued by some operating events, in particular in 2018. One more confidential that I want to talk about, where they had a plant burned down and they also had the tragic death of their CFO, which created some issues. They're in a difficult time. It's tough. But the company remains the market share leader in its niche. And its outlook has meaningfully improved here recently. What I would say is the situation remains fluid and the valuation reflects the risk profile of our investments as of the end of the quarter. But again, the overall situation is improving, which is a good thing. Have you -- could you find it?

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Shelby E. Sherard, Fidus Investment Corporation - Secretary, Chief Compliance Officer & CFO [31]

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Yes, no. So it's just a little bit of a nuance in that we have a couple of different loan security and it just so happens that the loan security that happens to be 0% cash pay and 16% PIK and the liquidation is higher in the capital structure.

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Christoph M. Kotowski, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [32]

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Okay. All right. And then, Shelby, you were going a little fast. How much availability did you say you had on your SBIC license?

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Shelby E. Sherard, Fidus Investment Corporation - Secretary, Chief Compliance Officer & CFO [33]

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It's a little bit of a complicated answer. So as of 6/30, we had approved $7.5 million available for us to draw immediately and we have up to an additional $167.5 million of capacity but there is a variety of SBA approvals and processes that we would need to go through. It shouldn't be an issue be normally it would require approval.

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Operator [34]

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And our next question comes from Tim Hayes with B. Riley FBR.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [35]

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My first one, just outside of Oaktree Medical, it seems you had $4 million of net unrealized appreciation. I think a large part of that might have been Pfanstiehl, and sorry if I'm butchering that name. But can you just speak to some of the positions that contributed there, including that credit I just mentioned and what the outlook is for those companies?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [36]

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Sure. We had -- you said appreciation, right? So the...

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [37]

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Yes.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [38]

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We had a number of companies that appreciated this quarter, a couple of equity only companies. And then I would say I think Simplex appreciated. Look at the list. FMI appreciated a little bit, Vanguard and New Era. So we had a number of companies that are performing well and where we had appreciation as well.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [39]

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Right, yes. So I guess back to -- again, correct me with the pronunciation. But Pfanstiehl was up I think $2 million this quarter and has grown to be a pretty large position for you guys. I know that you've mentioned in the past rotating some of out of these outsized equity positions into debt. So just wondering if you have any comments around that credit itself, your outlook for that one and if you think that's potentially one that you might target to rotate out of in a not too distant future.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [40]

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Sure, sure. Great question. So Pfanstiehl is a company that, to keep it short, that's very well positioned in its marketplace, it's a market leader and it's growing well and has a path towards much more growth. So we feel very good about the overall company and its outlook and so we obviously also like the equity investment that we have. Having said that, with regard to this name and others, we do think it makes sense -- and it's kind of a strategic initiative of ours to try to monetize or partially monetize some of our equity investments to obviously rotate them into income-producing investments. And so that is -- we're not focused on Pfanstiehl as I sit here today and trying to get a deal done. But what I would say, in the medium term, it makes good sense to lighten that load to the extent we can. And so that's something we're very focused on as a company and that's a good name that we should target also is what I would say.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [41]

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Okay. Appreciate those comments. And I guess the credit that you've largely point to in that vein is Pinnergy, and you exited the second lien investment this quarter, still have your large equity position there. Do you see an opportunity to potentially exit the equity position in near future? Can you remind us are there any third parties expressing interest in M&A there or any other means of exiting this position you're considering?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [42]

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Sure. No. We have been working through it and considering it along with the company over the past year what makes sense. So there's strategic dialog that's going on. What I would say is, the company is very well positioned when the time is right. At the same time, the oil and gas market is out of favor today. And so I think you need to look at it from a -- when does it make sense to transact, either for us or for the whole -- for the company. This is not a private equity-owned company. So it's independently controlled. And so we're not in control of that exit. Having said that, at the right time, we do think it makes sense to try to monetize either part or all of that investment. But again, it's not a favored industry as I sit here today and I make that statement relative to the beginning of the year, where there was more stability. Gas prices are down to 3- or 5-year lows at the moment. The company is performing fine and extremely resilient, and so we're pleased on that front. But I do think you got to pick your spots when you're going to try to monetize these investments.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [43]

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That makes sense. And this one is for Shelby. You've mentioned or highlighted that the incentive fees were down this quarter, pretty much non-existent. Was that because of the calculation itself or because management decided to forgo some of the incentive fee as a result of the nonaccrual in the quarter?

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Shelby E. Sherard, Fidus Investment Corporation - Secretary, Chief Compliance Officer & CFO [44]

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That was just a function of the calculation.

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Timothy Paul Hayes, B. Riley FBR, Inc., Research Division - Analyst [45]

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Okay. Got it. Calculation. Okay. And then last one for me. Just as it relates to the dividend, I know it's a Board decision and that you declared a $0.39 quarterly dividend for the third quarter. Can you just remind me how you guys approach your policy and what went into the decision to keep the dividend there after kind of seeing how our earnings power or adjusted earnings power declined with the accrual? Is it your expectation that you'll be able to cover the dividend on an annual basis? Is the dividend set just one quarter out? Any comments around that would be helpful.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [46]

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Sure. Great question. What I would say is, we at Fidus believe we've built a strong foundation for the future. We have a well-diversified portfolio that is performing well, a strong equity portfolio that can be rotated into higher yielding investments and gains are hopefully harvested, and a strong balance sheet, including a modestly leveraged one. We're optimistic about the future and believe that we're positioned to continue to perform well for our shareholders. In short, we are very comfortable with our dividend as we sit here today.

And obviously, we like having $17 million of spillover income to support any shortfalls along the way. So what I would say is, our strategy that's kind of a 90% debt, 10% equity strategy, we continue to believe that is the right strategy for a BDC, that you want the ability to offset -- have the ability to offset losses and do better than that, and we've been able and have a track record of doing that. So we're very comfortable where we are today. Obviously, we do have some work to do from a rotation of our equity portfolio. But I think we're comfortable where we are as a Board and as a company.

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Operator [47]

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Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Mr. Ed Ross for any closing comments.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [48]

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Thank you, Katherine, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our third quarter call in early November 2019. Have a great day and a great weekend.

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Operator [49]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.