Fidus Investment Corp (FDUS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation's first quarter 2015 earnings conference call. (Operator Instructions)

As a reminder, this conference may be recorded.

I would like to introduce your host for today's conference, Mr. Ed McGregor. Sir, please go ahead.

Thank you, Michelle. And good morning, everyone. Thank you for joining us for Fidus Investment Corporation's first quarter 2015 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 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's call is being recorded. A replay of today's call will 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 at 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 in the earnings release. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, future potential, operating results and cash flows of Fidus Investment Corporation.

Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, May 8th, 2015, 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 SEC. Fidus undertakes no obligation to update or revise any of these forward-looking statements.

With that, I'd like to turn the call over to Ed Ross. Ed?

Thank you, Ed. And good morning, everyone. Welcome to our first quarter 2015 earnings call.

I will start our call by highlighting our results for the first quarter, followed by a discussion of our investment activity and the performance of our investment portfolio. Then Shelby will go into more detail about our financial results and liquidity position. After that, we will open up the call for questions.

Fidus performed well during the first quarter against our stated long-term objectives of delivering stable and growing dividends, with an emphasis on capital preservations. We delivered a solid first quarter across key measures, covering our regular dividend with net investment income and ending the quarter with a solid level of liquidity to support portfolio expansion.

In addition, we maintained high credit quality metrics in our portfolio, with none of our debt investments on nonaccrual status. As of March 31st, 2015, net asset value was $244.7 million, or $15.18 per share.

Fidus generated net investment income of $6.2 million or $0.39 per share for the first quarter, while adjusted net investment income, which we define as net investment income excluding any capital gains in Tennessee attributable to realized and unrealized gains and losses, was $6.3 million or $0.39 per share.

On March 26th, 2015, we paid a regular quarterly dividend of $0.38 per share to stockholders of record on March 12th, 2015. For the second quarter of 2015, the Board of Directors has declared a regular quarterly dividend of $0.38 per share and a special dividend of $0.02 per share, both of which are payable on June 25th, 2015 to stockholders of record on June 11th, 2015. As a reminder, we have an outstanding balance of spillover income or taxable income in excess of distributions of $13.8 million at March 31st.

Since the beginning of the year, industry fundamentals in our target lower middle market remain solid, with M&A activity continuing to drive deal flow for Fidus, similar to last year, although the pace of activity during the first quarter eased up a bit compared to the second half of 2014.

We closed debt and equity investments totaling approximately $39.6 million, including investments in five new portfolio companies. Two of these deals closed late in the quarter.

Against a backdrop of stable industry fundamentals, we have stayed true to our investment strategy, investing in companies that operate in industries we know well, that generate excess free cash flow for debt service and growth, and that have positive long-term outlooks and strong yet defensible market positions.

I'll now give you a brief description of the new portfolio company investments. We invested $5 million in subordinated notes and warrants of Ice House America, a manufacturer and operator of automated ice vending machines; $8 million in subordinated notes of Six Month Smiles Holdings, a provider of short-term cosmetic, orthodontic solutions; $6.4 million in senior secured notes of Stagnito Partners, a provider of business information services to the convenience store, food, retail and pharmacy markets in the United States and Canada; $6 million in senior secured notes and preferred equity of X5 Opco, a customer-focused provider of a complete suite of telecommunications solutions to enterprise, government and wholesale clients in the Pacific Northwest; and $9.5 million in subordinated notes in common equity of USPack Logistics, a provider of same-day and last-mile courier services throughout the United States.

In addition to these new portfolio investments, we invested an additional $3.8 million in Carlson Systems Holdings in support of an add-on acquisition.

Proceeds from repayments and realizations totaled $24.7 million in the first quarter, primarily due to refinancings at two portfolio companies. First, [Evlins] -- we financed its debt and repaid our $9.6 million subordinated debt investment in full. Secondly, IOS Acquisitions' primary subsidiary was sold. As a result, we received full repayment of our $14.3 million subordinated debt investment and a $0.3 million equity distribution. We still have our equity position in IOS Acquisitions.

The IOS sale reduced our exposure to energy services sector. Now, we have only one portfolio company with meaningful exposure, roughly 5% of the total portfolio on a cost basis.

In addition, subsequent to the end of the quarter, we exited our debt and equity investments in Connect-Air International and Acentia, in connection with the sale of both companies. As a result, we realized a gain on our equity investment in Connect-Air of approximately $5.3 million, while our exit of Acentia was near cost.

We're extremely pleased with the Connect-Air outcome, which illustrates the benefits of our deliberate strategy of structuring our portfolio to provide high levels of current income from our debt investments and capital gains from our equity-related investments, giving us a balance of stability and incremental profits to generate attractive risk-adjusted returns.

As our investments in both Connect-Air and IOS Acquisitions were fairly sizeable, our assets under management as of today are roughly comparable with December 31st, 2014. Given strong industry fundamentals, solid deal flow and our track record of successfully reinvesting proceeds from payments and realizations, we believe we are well positioned to continue building our portfolio in a reasonable timeframe.

However, as a reminder, we are patient investors, focused on managing the portfolio for the long term. The number of new investments we make have and will continue to fluctuate from quarter to quarter.

Turning back to the first quarter -- the fair market value of the portfolio at March 31st, 2015 was approximately $413 million, equal to approximately 101% of costs. We ended the quarter with debt and equity investments in 47 portfolio companies, with equity positions in roughly 83% of them.

In terms of portfolio performance -- we track several quality measures on a quarterly basis to help us monitor the overall stability, quality and performance of our investment portfolio. In the first quarter, these metrics remained strong and in line with prior periods.

First, we tracked 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. As of March 31st, the weighted average investment rating for the portfolio was 2 on a fair value basis, in line with prior periods.

As many of you know, from a debt structuring perspective, we look to maintain significant cushions to our borrowers' enterprise value in support of our capital preservation and income goals. One 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's debt investments to total EBITDA. For the first quarter, this ratio was 3.1 times, compared to 3.9 times for the same quarter last year.

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. In the first quarter, this metric was 3.3 times to compare to three times for the same quarter last year.

Turning now to our thoughts about the rest of the year -- the aging of private equity portfolios, the strong liquidity position of the financial sponsor community, debt capital availability, and a willingness to pay up for quality businesses should all continue to drive M&A activity. As a result, deal flow in our target lower middle market is currently expected to remain healthy, keeping in mind that new investment activity will be lumpy by nature.

With these market conditions as a backdrop, our goal for the year is to continue to grow and further diversify our portfolio in a very deliberate manner, with an acute focus on capital preservation and the generation of attractive risk-adjusted returns. With an eye towards selectively growing and further diversifying our investment portfolio, we are focused on our competitive advantages, relationships, industry knowledge, and the ability to offer flexible capital solutions. This approach enables us to identify companies that we believe will perform well over the long term, with an emphasis on companies that operate in industries we know well that generate excess free cash flow for debt service and investment and have positive long-term outlooks.

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

Thank you, Ed. And good morning, everyone.

I'll review our first quarter results in more detail and close with comments on our liquidity position. Similar to last quarter, I will be providing comparative commentary versus the prior quarter, Q4, 2014.

Total investment income was $12.8 million for the three months ended March 31st, 2015, a decrease of approximately $0.8 million from the $13.7 million of total investment income for the fourth quarter of 2014, due to a $1 million decrease in fee income and a $0.4 million decrease in dividend income from FCA, LLC, an income-producing equity investment that was redeemed in Q4; offset by $0.6 million of incremental and interest income related to increased average assets under management.

Total expenses were $6.6 million for the first quarter, in line with Q4. Interest expense increased by $0.1 million, and base management fees increased by $0.1 million, which were offset by $0.2 million [decrease] in incentive fees. Interest expense includes the interest paid on Fidus's SBA debentures and the line of credit, as well as any commitment and unused line fees.

As of March 31st, 2015, the weighted average interest rate on our outstanding debt was 4.2%, versus 4% as of December 31st, 2014, due to higher fixed interest rates on SBA debentures that pooled in late March versus the initial interim rates.

Net investment income, or NII, for the three months ended March 31st, 2015 was $6.2 million, or $0.39 per share; versus $0.42 per share in Q4 2014. Adjusted NII was $0.39 per share in Q1, versus $0.43 per share in Q4. The quarter-over-quarter decrease was driven by a decrease in transaction fees related to investment activity in Q1 versus 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 three months ended March 31st, 2015, Fidus had no realized gains or losses, versus $12.3 million of net realized losses in Q4 related to the write-off of our investments in Avrio. In Q1, Fidus recorded a net gain on investments of approximately $0.2 million, versus a net gain of $0.7 million in Q4. Our net asset value at March 31st, 2015 was $15.18 per share, which reflects payment of the $0.38-per-share regular dividend in March.

Turning now to portfolio statistics -- as of March 31st, our total investment portfolio had a fair value of $412.6 million. Consistent with our debt-oriented investment strategy, our portfolio on a cost basis was comprised of approximately 68% subordinated debt, 21% senior secured loans, and 11% equity and warrant securities.

Our average portfolio company investment on a cost basis was $8.7 million at the end of the first quarter. We have equity investments in approximately 83% of our portfolio companies, with an average fully diluted equity ownership of 7.7%.

Weighted average effective yield on debt investments was 13.3% as of March 31st. The weighted average yield is computed using the effective interest rates for debt investments at cost, including the accretion of original-issue discount and loan origination fees, but excluding investments on nonaccrual, if any.

Repayment activity continues to impact the portfolio yield, as some higher-yielding loans have been paid off and replaced with loans priced at current market rate, which are lower than the rates on more mature loans.

Now, I'd like to briefly discuss our available liquidity. As of March 31st, our liquidity and capital resources included cash and cash equivalents of $16.4 million, unfunded SBA commitments of $46.5 million, and $39.2 million of availability on our line of credit, resulting in a total of $102.1 million. Taking into consideration subsequent events, our liquidity is now closer to $120 million.

Fidus filed a new registration statement in March 2015, as our prior registration statement expires later this year. The [agency] declared our new registration statement effective April 30th, 2015. As a result, we will incur approximately $160,000 of one-time expenses in Q2, 2015 to write off the unamortized financing costs related to the expiring registration statements. The NII impact will be approximately a penny per share.

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

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'll now turn the call back over to Michelle for Q&A. Michelle?

(Operator Instructions) Robert Dodd, Raymond James.

On the kind of the market environment you're talking about, obviously there's a couple of push-and-pulls, as I [see it]. Can you give us a bit more color on, if the [private] equity activity level is remaining or expected to build even, or remain strong -- what do you think -- and I realize this is hard to project, right -- what do you think of (inaudible) or potential repayments in the remainder of the year? Obviously, you've had a fair amount so far, given, obviously, you're departmentally involved with those same sponsors, and some of those fields might be changing hands, and you might be getting taken out. So can you give us an idea of just, obviously qualitatively, about what your feelings are there?

Absolutely. It's a great question, Robert.

I think we're hoping that this year will be a good year from an investment perspective and a very solid [vantage]. And the outlook for that, as we sit here today, is good.

But having said that, what comes with that -- and I think you know this pretty well -- is that we probably -- we have some companies that are ripe for realization in our portfolio. Last year, we had about $62 million of repayments. And I think we would expect for an increase in that number this year. I guess year to date, we've had $40 million. I don't think we expect a crazy number, but I would expect an increase over and above last year. It's hard to predict, as you well know. But that's what we would expect at this point. Probably more towards the end of the year, though.

Got it, got it. Great, thanks.

And then, also on kind of the other dynamic in that -- obviously, a lot of money potentially chased deals, et cetera, on pricing, both -- but you've seen some yield compression. What do you think the potential is to expand that a little bit on refinancing? Obviously, if a portfolio company refinances that, you don't necessarily get the equity gain. If you've got an equity position in a portfolio company, on the other hand, and they do get sold, your realized versus unrealized dynamics shift a little bit. So are you expecting that it's going to be more of the outright sale kind of activity, as you saw with Connect-Air in the second quarter? Or something more in the refinancing side, given we're seeing some of that as well?

Sure, sure.

I think it's a great question as well, and I wish I could predict it. But I would tell you I think it's primarily going to be driven by M&A activity. But we do have several, or more than a couple, companies in our portfolio that could be refinanced -- the strategy of those individual portfolio companies were to lower their cost of financings, not make acquisitions, what have you.

So I think there'll be a balance. But I think a majority of the repayments will come from M&A activity this year. Could be wrong, it's really hard to predict. But that's what I would expect at this point.

Got it, thank you.

One final one, if I can hand you, on kind of this belated issue -- you take a -- don't want to say over-conservative -- very appropriately conservative approach to the market. I think you don't chase structures. And the tone we're heard is obviously these [PE] firms are willing to pay greater and greater multiples for some of these companies. And obviously, they prefer to lever that up a pretty good deal, maybe to the point that you're not willing to do the deals. And this kind of touches on some of your comments on -- in your prepared remarks. But what's the risk there that the market, as we get -- as it gets potentially more aggressive, essentially gets away from you in terms of what you're willing to do on the risk appetite side?

It's obviously a great question, Robert.

I think, from my perspective, a couple things. One is we very much look at opportunities and look at the market on a risk-adjusted return basis. And we are not volume players, as I think you just iterated.

I think as we move forward, our primary focus is focusing on the quality of the underlying companies and the quality of those assets that we're putting on our books. And so, if a company is traded -- a truly, very high-quality company may be trading at -- whether it's seven or 10 times EBITDA, and at sustainable cash flows, we are willing to increase leverage over and above where our current portfolio is leveraged. Because we're looking at that on a risk-adjusted return basis.

Let's say we went all the way to five times, which we will do on occasion. But typically, it's when company is -- the equity value is at eight, nine, 10 times. And we see sustainability in those cash flows in very strong credit metrics.

So it really comes down to what's the quality of the underlying company. So when I think about just -- the market move away from our strategy, I don't think so. I do think we have the ability to move up and down in terms of size of company, as well as finding pockets of where we have real expertise and are willing to take risk-adjusted returns, whether it's at lower leverage points or higher leverage points.

So it doesn't concern me too much at this point.

Got it. Thank you.

Absolutely. Thank you.

Bryce Rowe, Robert Baird.

Robert covered most of the topics that I wanted to ask about. Did want to ask about the capital-raising process (inaudible) if you've got the ATM in place, and you've started to use it. So maybe you could just talk about your strategy or your preference from a capital-raising perspective as we move forward. I know you still have availability from an SBA debenture perspective, [basic] availability within the credit facility. Thanks.

That's a great question. You want to talk about what we've done to date, what we've been doing? And then I'll fill in any gaps?

Yes. I mean, from a current liquidity position, as Ed mentioned, we had some subsequent events that brought in some more cash. And so as we stand today, we don't have anything outstanding on our line of credit. So as you referred to, we do have the SBA debentures, which has kind of been the primary source of capital that we've used for investments to the extent the investments are SBIC-eligible.

As a backstop, we've got the line of credit that we have truly used as a revolver. And from an ATM perspective, we have kind of year to date in 2015 done at gross proceeds of about $1.8 million. And since we launched the program, we've done net proceeds of $4.6 million. So kind of some modest equity raises there that's kind of helped us to manage our outstanding debt.

So given where we stand now -- we're close to $120 of liquidity -- we're fairly well positioned for kind of near-term investment activity.

Another thing I would add there is just I do feel like the ATM program is something that we see as attractive. Having said that, the activity level for us has been really very modest. And I don't think we expect any major change in that as we move forward.

Okay. That's helpful. Again, most of my questions were already asked and answered. Thank you, guys. Appreciate it.

Thank you.

Chris Kotowski, Oppenheimer.

Yes, those guys covered most of what I had, too. But I may have misheard you, but did you say that your portfolio -- I thought I heard you say that the portfolio today was flat with December 31st, 2014. Did you mean March 31st?

No, we meant December.

So we've had $40 million, approximately $40 million, of new investment activity here in 2015. But with the Connect-Air realization, which was both a debt and an equity realization, we've had approximately $40 million of realizations. So --

Okay.

-- we are flat with year end as we sit here today. That's exactly right.

Okay.

And then, I'm wondering, just with the turmoil in currency markets -- and it has to have put pressure on any kind of manufacturing-based, export-oriented companies -- I'm wondering, are you seeing stress on cash flows of any companies like that in your portfolio?

It's a good question. I got to think here for a second, it's a very good question.

I will tell you, I don't think so. Most of the businesses that we invest in are obviously US-domiciled. And as I think through the portfolio here, I don't think we are experiencing anything -- any really negative momentum, if you will, or negative trends due to currency markets in our portfolio. I literally can't think of one right now. Could be wrong, but I just can't think of one.

Okay. That's --

There's pretty good stability. And I will tell you, the overall portfolio -- as it has, actually, for a while -- is continuing to be what I would call a slow-growth mode. And we feel very good about the overall quality of the portfolio, and the underlying portfolio companies for that matter.

Okay. That's it for me. Thank you.

Thank you. Appreciate it.

Vernon Plack, BB&T Capital Markets.

Ed, just one follow-up -- are you all considering any alternative investment strategies? In other words, something that will fall to get 30% nonqualified bucket?

It's a very good question. And I will tell you -- are we thinking about things and looking into them to, what I would say, a small degree? I'd say yes. But what we're doing right now -- rightly or wrongly, quite frankly -- is sticking to the strategy and what we're kind of built to do, which is to originate what I would call very high-quality debt and equity investments in lower middle market companies.

So we do look at larger companies from time to time, for sure. And I know there are a lot of strategic initiatives going on in the BDC spectrum, if you will. But right now, I wouldn't expect any major change from us anytime soon. I think we feel very good about the strategy we're executing on. And I do think we're going to maintain what I would call a very deliberate investment pace. And really, it's going to be lumpy. We're continuing to really look for what we consider to be the best companies that we can invest in, and kind of focus in on quality, rather than quantity.

Okay. So we should -- unless something changes, it should just be business as usual for you?

I think that's right. I think that's exactly right.

Okay. I'll take that as very good news, thanks.

Okay.

Thank you.

And I'm showing no further questions at this time. And I would like to turn the call back to Mr. Ed Ross for any further remarks.

Thank you, Michelle. And thank you, everyone, for joining us this morning. We look forward to speaking with you on our first quarter call. And I guess that'll be in early August.

Have a great day, and a great weekend. Thank you again.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.