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Edited Transcript of FDUS earnings conference call or presentation 3-May-19 1:00pm GMT

Q1 2019 Fidus Investment Corp Earnings Call

Orrington Avenue Evanston May 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Fidus Investment Corp earnings conference call or presentation Friday, May 3, 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 - C.F.O., Chief Compliance Officer & Secretary

* John W. Heilshorn

Lippert/Heilshorn & Associates, Inc. - Founding Partner

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Conference Call Participants

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* Owen Lau

Oppenheimer & Co. Inc., Research Division - Associate

* Mickey Max Schleien

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

* Paul Conrad Johnson

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

* Robert James Dodd

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

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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's First 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, Mr. John Heilshorn of LHA. Sir, you may begin.

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John W. Heilshorn, Lippert/Heilshorn & Associates, Inc. - Founding Partner [2]

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Thank you, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation's First 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 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 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 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, March 3, 2019 (sic) [May 3, 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 like to now 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, John, and thank you. And good morning, everyone. Welcome to our first quarter 2019 earnings conference call. I'll start today's call with a high-level perspective on our first quarter 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 ahead in 2019. Shelby will go into more detail about the first quarter financial results and liquidity. Once we have completed our prepared remarks, we'd be happy to take your questions.

Our first quarter performance was very much in line with our expectations. Originations and realizations were at high levels due in part to a holdover from the fourth quarter, as we discussed on last quarter's call. In addition to continuing to proactively manage our portfolio, we stayed focused on our investment strategy of selectively building a well-diversified portfolio of debt and, to a lesser extent, equity investments in lower middle-market businesses that have defensive characteristics and positive long-term outlooks that operate in industries we know well and that generate excess free cash flow for debt service and growth.

We continue to maintain high levels of underwriting discipline, which positions us to remain focused on our goals of preserving capital and generating attractive risk-adjusted returns. Above all, we stayed focused on our primary goals of growing net asset value per share over time and delivering stable dividends.

Adjusted net investment income, which we define as net investment income, excluding any capital gain incentive fee attributable to realized and unrealized gains and losses, increased 9.9% year-over-year to $10 million or $0.41 per share. As of March 31, 2019, our net asset value or NAV was $404.8 million or $16.55 per share.

On March 22, 2019, Fidus paid a regular quarterly dividend of $0.39 per share. At March 31, estimated spillover income or taxable income in excess of distributions were $17.9 million or $0.73 per share. On April 29, the Board of Directors declared a regular quarterly dividend of $0.39 per share, which will be payable on June 21, 2019, to stockholders of record as of June 7, 2019.

In the first quarter, we invested $80.5 million in debt and equity securities, including $62.7 million in 4 new portfolio companies. As you may remember from our call last quarter, we disclosed in our list of subsequent events debt and equity investments totaling $57.2 million in 3 new portfolio companies. We invested $28.3 million in BCM One Group Holdings, Inc., $18.4 million in BCC Group Holdings, Inc. and $10.5 million in Diversified Search, LLC.

The fourth new portfolio company, Bedford Precision Parts LLC, is a leading distributor and assembler of replacement parts, accessories and kits for the spraying equipment industry, in which we invested $5.5 million in first-lien debt and common equity. Additionally, we made add-on investments totaling $15.3 million in 6 existing portfolio companies.

Consistent with our emphasis on providing flexible and customized financing solutions, the new investments span the balance sheet, ranging from first-lien debt to common equity with approximately 96% of Q1 originations invested in debt.

We continue to position our portfolio to provide us with a high level of current and recurring income, along with the opportunity for some incremental profits in a margin of safety from equity investments. In this way, we are maintaining a well-diversified portfolio that is structured to preserve capital and generate attractive risk-adjusted returns.

From a repayments and realizations perspective, we received proceeds totaling $57.4 million. Of that amount, last quarter, we disclosed repayments in full totaling $47.2 million in our list of subsequent events, which consisted of exits of our debt investments, including Gurobi Optimization LLC, K2 Industrial Services, Inc., Fiber Materials, Inc. and Tile Redi, LLC. In Q1, we recognized an additional $7.7 million from repayments and realizations, including a partial debt repayment of $6.7 million from NGT Acquisition Holdings doing business as Techniks Industries.

Turning to our portfolio construction and metrics. The fair market value of our investment portfolio as of March 31, 2019, totaled $670.5 million, equal to 107.7% of cost. The breakdown on a fair value basis between debt and equity was 81% in debt and 19% in equity investments. We ended the quarter with 61 active portfolio companies and 4 companies that have sold their underlying operations.

As of March 31, 2019, we had debt investments in one portfolio company on nonaccrual status, US GreenFiber, and a last-out debt investment in one portfolio company, Oaktree Medical Centre, on PIK-only nonaccrual status. Together, these 2 investments represent 1.9% of our portfolio on a fair market value basis. We are actively managing both of these situations.

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 March 31, the weighted average investment ratio for the portfolio was 2 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 of companies' combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the first quarter, this ratio is 4.5x compared to 3.8x for the same quarter last year and compared to 4.5x for the fourth quarter of 2018. And like the fourth quarter, it largely reflects the average leverage of the deals we invested in over the past 12 months.

The third measure we track is the combined ratio of our portfolio of companies' total EBITDA to total cash interest expense, which is indicative of the cushion our portfolio of companies have in aggregate to meet their debt service obligations to us. For the first quarter, this metric was 3.5x compared to 3.4x for the same quarter last year. We believe the soundness of these metrics reflect our debt structuring philosophy of maintaining significant cushions to our borrower's enterprise value in support of our capital preservation and income goals.

Before discussing business conditions in our target market, I want to touch on our capital structure. Since our last earnings call, we have achieved a significant milestone with the receipt of our third SBIC license, which gives us access of up to $175 million in long-term debt capital. And we have also completed an amendment to our senior credit facility, which increases the commitment from $90 million to $100 million, expands the accordion feature to $250 million and extends the maturity date to April 2023.

Our now strengthened and elongated capital structure aligns well with our cautious and deliberate approach to investing in businesses we believe will perform well over the long term. It gives us the flexibility to continue executing our differentiated strategy of offering customized financing solutions to high-quality, middle-market companies that meet our strict underwriting standards.

In addition, on April 29, our Board approved a minimum asset coverage ratio of 150%, in line with past legislation that allows BDCs to operate with greater leverage, increasing the debt-to-equity regulatory cap from 1:1 to 2:1. Given our current asset mix, our goal remains to stay within a leverage range of 0.7 to 1x, so real no change for us -- so no real change for us.

Now turning to business conditions in our target market. M&A activity during the first quarter was relatively slow in the aftermath of the capital markets disruption in the fourth quarter. We have been active in evaluating deals, however, quality has been sporadic. Although M&A activity appears to be picking up, originations are expected to be lower in the second quarter compared to the first quarter.

While every quarter is different from an originations and realizations perspective, we continue to proactively manage the business and selectively invest for the long term, focused on delivering value to our shareholders through stable dividends and growing net asset value per share over time.

Now I'll 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 - C.F.O., Chief Compliance Officer & Secretary [4]

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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 2018.

Total investment income was $20.3 million for the 3 months ended March 31, 2019, a $1.9 million decrease from Q4 2018. Interest and PIK income increased by $0.8 million primarily due to the collection of past-due interest from K2 Industrial Services, which had been on nonaccrual status. Fee income increased by $0.1 million. Dividend income in Q1 was $0.3 million, a $2.7 million decrease versus Q4 primarily due to a $2.5 million dividend from our equity investment and synergies declared in Q4.

Total expenses, including income tax provision, were $10.7 million for the first quarter, approximately $0.4 million lower than the prior quarter. Base management and income incentive fees decreased by $0.4 million. Total G&A expenses increased by $0.4 million. Accrued excise taxes decreased by $0.7 million, offset by a slight increase in interest expense and accrued capital gains incentive fees.

Interest expense increased by $0.1 million versus the prior quarter. Interest expense includes interest as well as any commitment in unused line fees. As of March 31, 2019, the weighted average interest rate on our outstanding debt was 4.4%. As of March 31, we had $290.3 million of debt outstanding, comprised of $171.3 million of SBA debentures and $119 million of public notes. Our debt-to-equity ratio was 0.7x or 0.3x statutory leverage, excluding exempt SBA debentures.

Net investment income or NII for the 3 months ended March 31, 2019, was $9.6 million or $0.39 per share versus $0.45 per share in Q4. Adjusted NII was $0.41 per share in Q1 versus $0.46 per share in Q4. 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 March 31, 2019, Fidus had approximately $1.6 million of net realized losses primarily related to the exit of our equity investment in K2 Industrial Services and Consolidated Infrastructure Group. Our net asset value as of March 31, 2019, was $16.55 per share, which reflects payment of the $0.39 per share regular dividend in March.

Turning now to portfolio statistics. As of March 31, our total investment portfolio had a fair value of $670.5 million. Consistent with our debt-oriented investment strategy, our portfolio on a cost basis was comprised of approximately 9% first-lien debt, 61% second-lien debt, 20% subordinated debt and 10% equity securities. Our average portfolio company investment on a cost basis was $10.2 million at the end of the first quarter, which excludes investments in 4 portfolio companies that sold their operations and are in the process of winding down.

We have equity investments in approximately 94% 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 March 31. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original issued discount and loan origination fees but excluding investments on nonaccrual, if any.

Now I'd briefly like to discuss our available liquidity. As mentioned on our last earnings call, in Q1, we completed a public debt offering of $59 million in aggregate principal of 6% notes due 2024, raising net proceeds of approximately $66.5 million, including the exercise of the over-allotment option. As of March 31, our liquidity in capital resources included cash of $26.2 million and $90 million of availability on our line of credit, resulting in total liquidity of $115.2 million.

As Ed mentioned, we've been granted a third SBIC license, which provides access to up to $175 million of long-term debt capital, subject to SBA regulatory requirements and approval. Subsequent to quarter end, we upsized our credit facility from $90 million to $100 million and extended the maturity to April 2023.

Now I'll 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 Lauren for Q&A. Lauren?

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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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A few questions. First of all, on the double leverage question, Ed, I mean, why now? I mean obviously, you said you don't actually plan with your asset mix to actually change it much. But why did -- any color on why the decision was made by the Board to give that approval now rather than, say, 6 months ago?

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

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Sure. No, great question. And quite frankly, I think we've been watching the industry and listening and learning. As you know, we don't have any great need for it given the amount of SBIC debt that we have. But I think the Board and I believe very much that it's just prudent from a risk management perspective long term, and I think it's also a good thing for the shareholders long term.

And lastly, and I'm thinking very long term, if there is a need, meaning for flexibility to utilize that leverage, then we'll have the ability to do that. It's not something in our plans at the moment, especially given our current asset mix. But it's just, from our perspective, prudent risk management and good Corporate Governance.

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

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Got it, got it. Appreciate it. On kind of on that risk management thing, I mean, obviously, you gave the average attachment point, 4.5. I mean a year ago, it was 3.8. But last quarter, it was 4.5. Can you give -- do you have, I mean, like the average EBITDA for your borrower today versus where they were a year ago? Because obviously, bigger borrowers get larger attachment point. So can you give us any context just to go with that 4.5, which obviously is up year-over-year, but you've done more first liens since then? So...

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

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Sure. Let me give you a little context just on kind of how it did move up, which I think will be helpful as well. The calculation we use in average debt is average debt to average EBITDA. We had, as you're aware, and particularly in the fourth quarter, we had a large number of debt repayments last year. The average leverage of our repayments was 2.2x in Q4. So what I would say is very mature investments. We also had a big year of new investments, including $67 million in new originations in Q4 and $80 million in Q1. The average leverage of our new investments has been around 4.5x here over the past 12 months.

So we also encountered a high level of portfolio company acquisitions, which serves as a re-leveraging of our investments in some of those companies, at least most of the time, as sponsors continue to use debt when feasible. All of these facets that I just mentioned caused the ratio to change.

A couple other points I'd make. As I've mentioned on prior calls, we continue to focus on slightly larger companies from an investment perspective. And so if you were to look at our average EBITDA, I do think it's risen, but it's not up dramatically, but it's over $10 million today. And I think it was -- that's very different than it was, say, 4 years ago. As you can imagine, larger companies, safer and more durable theoretically, usually have higher leverage points as well, and that's to the point that you're asking.

We feel great about the portfolio today. I'll also add that the equity cushion for our portfolio, if you looked at it, our whole portfolio as one company, possesses an equity cushion of approximately 50%. So it provides us with what we believe a very high level -- a higher margin of safety for our debt investments. So hopefully that's helpful. But the average has definitely going up, and it's been a very, quite frankly, deliberate action by Fidus over the last several years to really focus on a little bit larger businesses in our core market.

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

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Got it, got it. That is very helpful, Ed. A couple more. On the -- I don't mean to laugh. I mean your comment that you'd expect Q2 originations to be below Q1. Any more color you could -- I mean, obviously, your Q1 originations were an all-time high for a Q1. You've done high at Q4s, but you never hit this kind of level for a Q1 before. So Q2 being lower than an all-time high for the period, I don't think is unexpected.

The question, I guess, is Q2s maybe average $30 million, $40 million. I mean is that the kind of the scale you're talking about given Q1 was so strong? Or is Q2 going to be better than average as well, but maybe not a record high like Q1 was?

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

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No, I think -- I mean let me start with kind of why and what's going on in the market. I think the M&A market, in particular, is open and healthy due to the economy. It continues to chug along, which is a great thing. Having said that, I think the disruption in the capital markets in Q4 really slowed I think M&A activity down in terms of new entrants in the market. And even January, there were still uncertainty. And so I think there's been a delay and somewhat of a natural delay in M&A activity. It is picking up as we sit here today.

The other thing that I would say is quality has been sporadic and hit or miss. And we're continuing to be very, very careful with the types of business that we invest in, with the level of risk that we're taking. And so all that is driving lower activity levels as we sit here today.

I think the numbers you mentioned are probably reasonable and pretty good ones. But as you know, sitting here today, we have not closed any new investments this quarter, and anything can happen in any deal. So it's really hard to state or really put out there, here's what I think it's going to be. But I think the range that you talked about is a fair range.

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

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Okay. Got it. A couple more, if I can. On just a couple of portfolio assets, and I know you don't like to give too much detail about these, but like, for example, FDS Avionics, it's got marked down a little bit more in this quarter, I think. And it's been on your books since '14, and I think it's been -- it's a control investment now, I think it's been a problem asset for you a couple years ago as well.

So without disclosing necessarily what you don't want to about them, are you changing -- is there anything that you're looking to do differently with an asset like that that's been, if I remember, a problem asset in the past and looks like it might be having a few issues now as well?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [9]

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Sure. Let me just touch on the situation with -- not too much, but the -- this is an aerospace parts company, it's primarily electronics. It serves the general aviation, the commercial and the military end markets, so there's some diversity there.

It's been lumpy historically. And it also was in need of a product refresh whereby customers really wanted to wait for certain new products versus buying some of the legacy products. We continue to believe in, what I'd say, the value proposition of the business. And as such, we made a control equity investment probably 20 months ago now.

And so the valuation of our investment reflects the current risk level. So we are very active in this situation and supportive of it, and think of it more in terms of medium- to longer-term exit. So we're working in building the business is what I would say.

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Operator [10]

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Our next question comes from Paul Johnson with KBW.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [11]

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I just had a few questions. I wanted to go back to, the 2:1 leverage, if we could. Obviously it's not something that you're looking to utilize at least anytime soon. But I'm curious, I mean, does your strategy change at all, especially as you get a little bit higher within that leverage range? And also, are there any sort of restrictions on the liability side that would prevent you from accessing anything above 1:1 debt to equity?

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

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Sure, Paul. Great questions. On the restrictions side, I'll probably ask Shelby to touch on that. I think from a strategy standpoint, there's no change in our strategy at all. We go to market today as a solution provider, financing lower middle-market companies that need capital of really $100 million and less, in most cases. That's a majority of our business.

And so we continue to want to have the flexibility to execute that strategy and focus on the same marketplace that we have for a long period of time. But it does not -- we aren't changing our strategy at all. We just believe this is good Corporate Governance and it's prudent risk management at the end of the day. So no change at all. From a restrictions, I think we do in our credit facility that one.

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Shelby E. Sherard, Fidus Investment Corporation - C.F.O., Chief Compliance Officer & Secretary [13]

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Sure. So as you would imagine, in our credit facility, we have a variety of financial covenants. And so one of those is an asset coverage ratio, which is currently limited to 200%. So per our credit agreement, on a regulatory basis, we are limited to 1x leverage.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [14]

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Okay. Great. Yes, and I agree with you on the Corporate Governance. I think it's definitely a good thing to have. Also on the 2:1 leverage, I'm curious, are you guys considering eventually reducing fees if you were to leverage assets above 1:1? And even if you're not really looking to access that or push leverage any higher than that today, are you considering putting it in there just simply from the standpoint that it looks good?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [15]

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Got it. At this point, we haven't addressed that. Again, our intent is not to go above 1:1. I -- so we have not addressed it from that perspective. If we make the decision long term to go above 1:1 and operate at those levels for whatever reason, again, that's not on the table at all today, then we would consider that and most likely do something is what I would say. But there's -- in our mind, there's really no need to do it at this point.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [16]

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Sure. The last thing, on the 2:1, are you guys planning on putting this to shareholder vote at all or just basically waiting it out until its effective next year?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [17]

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No. Again, there's no need for it from a timing perspective, so there's no rush. And so we just approved it at the Board level or going to use that as the way to approve it. We think it's in the best interest of the shareholders. And -- but again, we don't plan to use it, so it's just good Corporate Governance and prudent to do it, just as basically the whole industry has or a large majority has.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [18]

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Sure. And then my last question, just more of a sort of a housekeeping thing. But I'm curious, do the -- and congratulations, by the way, on the third SBIC license. Do the debentures from SBIC 1 need to be repaid before you begin drawing down on the SBIC 3 debentures?

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Shelby E. Sherard, Fidus Investment Corporation - C.F.O., Chief Compliance Officer & Secretary [19]

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They do not. So we -- as you've mentioned, we're in the process of winding down our first funds as we receive repayments in that fund. But there's no restriction on our ability to borrow under the third SBIC license that we just received.

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Operator [20]

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Our next question comes from Owen Lau with Oppenheimer.

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Owen Lau, Oppenheimer & Co. Inc., Research Division - Associate [21]

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So there were some markups in your equity position, including Fiber and Pinnergy. Given the recent comeback of public equity market you just mentioned and also some robust IPO recently, how do you see the opportunity to monetize your equity investments for the rest of this year?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [22]

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Great question. It's a lot more than just those 2 that have had some positive changes or, quite frankly, more importantly, considering some kind of strategic options that could monetize equity investments. And so I think the M&A market is open, as I've mentioned earlier. I do think more mature investment opportunities are ripe for some kind of sale in many cases, not in all, but in many. And so we do have more than a couple. So we have several portfolio companies that are evaluating strategic alternatives, which would entail selling our equity position.

So we do see an opportunity for some realizations this year. It doesn't mean it's going to be very near term, but there are more than a couple situations being worked on, and we're hopeful that some of the equity is realized. It is a strategic focus of us -- of ours. We recognize, as we sit here today, it's a nice problem to have given the equity portfolio is performing very well. But monetizing it, or to the extent we have the ability to, makes a lot of sense in certain situations. And so we plan to do what we can to help monetize some of the investments. Hopefully that's helpful. But...

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Owen Lau, Oppenheimer & Co. Inc., Research Division - Associate [23]

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That's very helpful. Another question for Oaktree Medical. So again, without getting into too much detail about the company, but is it more like an [inducing] credit event? And in relation to that, do you have an updated view of where we are in the credit cycle? Are we in the 8th innings or 12th innings or even going back to 5th innings?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [24]

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Sure. Well, I wish I had a crystal ball, but I don't. But what I would tell you is I think it's very hard to know where we are in the credit cycle. As we're sitting here today, our portfolio is continuing to show slow revenue growth and slow EBITDA growth. So I think it's a very sound environment, very stable, which is what you read about, quite frankly, in the newspapers. And so that is a good thing from our perspective.

What we are doing though is we're managing the business as if we're in the bottom of the ninth. And we have been doing that for a long time in terms of the types of assets that we are adding to the portfolio and the risk levels that we're taking. And so we're trying to invest and have been for several years, quite frankly, in companies that we believe will withstand a cycle, and a cycle as bad as the one we just saw. And that's -- as we're looking forward and making new investments, that's how we're thinking about the world.

And so secondarily and I think importantly, we're also being very proactive on the risk management side and trying to exit deals that we think they stubbed their toe. And this could get difficult in a bad environment, and we're trying to exit those if we can. Can't always exit it when you want to, but that is one of the things we have been doing for quite a while as well.

To your question on Oaktree real quickly, it's a business that has been in our portfolio for a while. It's an operator of pain -- it's a pain management business and also a toxicology testing business. The company has experienced some stress over the years due primarily to a drop in reimbursement rate risk for several services, but incrementally and more recently by certain unexpected exogenous events.

And so the company has been making some sound progress here recently. But the unexpected events that have taken place with regard to this investment has required us to be very active in this situation, and obviously the valuation reflects the current risk profile of those investments. So hopefully that's helpful.

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Operator [25]

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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 [26]

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I just have a couple more follow-up questions on financing. First, given that you're not going to put the higher leverage option on the shareholder meeting agenda, you have to wait a year for that to go into effect, is it reasonable to assume that you'll go back to the banks over the course of the next year to amend the credit facility for a higher leverage?

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [27]

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I don't think that's in our plans right now. I think down the road, it may make sense. But again, what I've said is it's not -- we don't intend to use it. And if you look at our capital structure, we have a fair bit of SBIC or SBA debt on it, and that's treated as equity for regulatory purposes. And so with that level of cushion, I don't think there's any need to do that at this point.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [28]

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Okay. And I'm not sure Shelby followed up with the question about whether the unsecured notes accommodate higher leverage. Can you just clarify that?

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Shelby E. Sherard, Fidus Investment Corporation - C.F.O., Chief Compliance Officer & Secretary [29]

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They do.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [30]

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They do?

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

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Yes.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [32]

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Okay. And lastly, Shelby, just in terms of capitalizing fund 3, I understand the equity in fund 1 is, let's say, "still trapped" until that's wound down immediately, and I believe you need SBA approval to extract that equity. So how do you intend to fund the equity in fund 3 in the meanwhile?

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

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We have the capacity at the parent company to fund, fund 3. So we have ample capacity there today. And then as you suggested, over time, as we continue to wind down the first fund, that will free up additional equity capital.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [34]

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Okay. And at what pace do you expect to capitalize fund 3?

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Shelby E. Sherard, Fidus Investment Corporation - C.F.O., Chief Compliance Officer & Secretary [35]

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It will be very modest in terms of making investments and capitalization. So initially, I'd probably expect us to put about $25 million of equity capital into the first fund and then lever that. And then once we get that to work, then we would start taking another, call it, $25 million bite of equity capital, but it will be something that will ramp up over several years.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [36]

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Okay. And will the -- do the SBA regulations allow immediate 2:1 leverage on that initial $25 million? Or does the fund need to sort of season before you're allowed to do that?

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Shelby E. Sherard, Fidus Investment Corporation - C.F.O., Chief Compliance Officer & Secretary [37]

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We'll get 1:1 leverage on the first $25 million and then ramp up from there.

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Operator [38]

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(Operator Instructions) Okay. And I'm not showing any further questions at this time. I'd now like to turn the call back to Mr. Ed Ross, CEO, for any further remarks.

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Edward H. Ross, Fidus Investment Corporation - Chairman & CEO [39]

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Thank you, Lauren. And thank you, everyone, for joining us this morning. We look forward to speaking with you on our second quarter call in early August. Have a great day and a great weekend.

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Operator [40]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.