Fidus Investment Corp (FDUS) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation's fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Jody. You have the floor, ma'am.

Thank you, Andrew, and good morning, everyone. Thank you for joining us for Fidus Investment Corporation's fourth-quarter and full-year 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 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. 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 4, 2016, 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 would now like to turn the call over to Ed. Good morning, Ed.

Good morning, Jody, and thank you, and good morning, everyone. Welcome to our fourth-quarter and full-year 2015 earnings call. I'll start our call by highlighting our results for the fourth quarter and full year, followed by comments about our fourth-quarter investment activity, the performance of our investment portfolio, and our views about 2016. Then Shelby will go into more detail about our financial results and liquidity position. After that, we will open up the call for questions.

We finished 2015 with our strongest quarter ever, marked by record investment income and net investment income. Our investment portfolio generated net investment income of $7.2 million, or $0.44 per share, while adjusted net investment income, which we define as net investment income excluding any capital gains incentive fee, attributable to realized and unrealized gains and losses, was $7.3 million or $0.45 per share. We are very pleased with both our absolute and relative performance this quarter, and believe these results clearly demonstrate both the overall quality of our portfolio, and our underwriting discipline.

As of December 31, 2015, our net asset value was $247.4 million or $15.17 per share. On December 11, 2015, Fidus paid a special dividend of $0.04 per share, and on December 18, 2015, paid a regular quarterly dividend of $0.39 per share. For all of 2015, we paid a total of $1.60 per share in dividends, consisting of regular dividends of $1.54 per share, and a total of $0.06 per share from two special dividends.

At December 31, estimated spillover income, or taxable income in excess of distributions, was $14.9 million, or $0.91 per share. For the first quarter of 2016, Board of Directors has declared a regular quarterly dividend of $0.39 per share, which is payable on March 25, 2016 to stockholders of record on March 11, 2016.

In our fourth quarter of 2015, we invested a total of $56.3 million in debt and equity securities, representing 41% of total investments made in the year. As was the case in 2014, this year proved to be somewhat back-end loaded, albeit to a lesser degree than in the prior year. Related to the variable timing of deal closings associated with M&A driven activity, the amount of capital we invested during the fourth quarter continued the trend of fluctuating levels of investments we saw over the course of 2015, and many of the investments were connected to M&A transactions, which started early in the third quarter.

To put this in perspective, we invested $39.6 million during the first quarter, $28.3 million during the second quarter, a lesser amount of $12.2 million during the third quarter, and capped the year investing $56.3 million during the fourth quarter. Of the $56.3 million we invested during the fourth quarter, $36.8 million was channeled to five new portfolio company investments, and $6.7 million of add-on investments, with the remaining $12.8 million consisting of refinancings for two existing portfolio companies. We have continued to stay 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.

Let me briefly recap four of these new portfolio Company investments. We invested $5 million in subordinated notes and royalty rights of inthinc Technology Solutions, Inc., a provider of vehicle telematics solutions to large enterprise fleet operators. $8.3 million in subordinated notes of Cavallo Bus Lines Holdings LLC, a large motor coach operator based in the Midwest, that provides charter bus services to clients, primarily in the education, athletic and tour end markets.

$8 million in subordinated notes and common equity of Steward Holdings LLC, doing business at Steward Advanced Materials, a producer of highly engineered materials and alloys for the aerospace and defense industries, and other commercial end markets. And $11.5 million in senior notes and common equity of Mirage Trailers LLC, a manufacturer of enclosed and utility trailers for the commercial and recreational end markets.

From a repayment and realizations perspective, we had an active fourth quarter. Proceeds totaled $43.2 million, including recognition of a $2.3 million gain related to our investment in ACFP Acquisition Company, Inc. Excluding the $12.8 million we invested related to refinancings, we had net proceeds of roughly $30.4 million.

The fair market value of our investment portfolio at December 31, 2015 was approximately $443 million, equal to approximately 99% of cost. We ended the year with debt and equity investments in 53 portfolio companies, and with equity positions in roughly 83% of them. The breakdown on a fair value basis between debt and equity remained fairly stable, with 88% in debt and 12% in equity investments, providing us with high levels of current income from our debt investments and the continued opportunity for capital gains from our equity related investments.

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 fourth quarter, these metrics remained strong and in line with prior periods.

First, we track a 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 at December 31, the weighted average investment rating 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 companies' combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the fourth quarter, this ratio was 3.1 times, compared to 3.2 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 fourth quarter, this metric was 4.1 times, compared to 3.7 times for the same quarter last year.

The steadiness of these metrics reflects our philosophy of maintaining significant cushions to our borrowers' enterprise value, support of our capital preservation, and income goals. As of December 31, we had our debt investments in one portfolio Company on non-accrual status, which represented approximately 1% of our investment portfolio on a cost basis.

Looking back at 2015, Fidus had another very strong year. With new investments outpacing realizations, the strength and performance of our investment portfolio produced a 13.8% increase in our net investment income, and also generated $9.5 million in net gains. In addition, our adjusted net investment income covered our annual regular distributions, as they have since our IPO in 2011.

Also worth noting, in December, SBIC legislation was passed which increased the amount of available debentures to any one manager to $350 million. To what extent and how quickly we take advantage of this potential liquidity is yet to be determined, but over time, we do believe it affords us the opportunity to increase our use of the program, creating value for our shareholders.

With regard to current market conditions, we do see cross currents. On one hand, we do believe we're in the second half of an economic cycle, although exactly where we are in that half remains to be seen. The more liquid capital markets, and more specifically the high yield and leveraged loan markets, have been weak and experiencing outflows, due to concerns about the weakening Chinese economy, and turmoil in the energy market, among others.

On the other hand, this volatility has also impacted the lower middle market, more in a positive manner, with the risk-adjusted returns improving slightly. And we do continue to see attractive opportunities for investment, with M&A continuing to be the primary driver of our new investments.

As we look forward to 2016, our relationships, industry knowledge and the ability to offer flexible capital solutions continue to differentiate Fidus in the market. We remain focused on the long term, and committed to our cautious and deliberate approach. We will continue to concentrate on cash flow generating businesses, that we believe will perform well over the long term, and that are more defensive in nature. We will continue to prioritize quality over quantity, and we will continue to focus on capital preservation, and the generation of attractive risk-adjusted returns.

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 fourth-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, Q3 2015.

Total investment income was $15.1 million for the three months ended December 31, 2015, a $1.5 million increase over Q3 2015. Interest income increased by $1.1 million related to higher average assets under management. An $800,000 increase in fee income due to more investment activity in Q4, including a prepayment fee of $400,000 was partially offset by a $0.3 million increase in dividend income, primarily related to two distributions from equity investments received in Q3.

Total expenses were $7.5 million for the fourth quarter, approximately $1 million higher than the prior quarter. Interest expense increased by $0.2 million. G&A expenses increased by $0.2 million, and base management incentive fees increased by roughly $0.6 million, which includes a $0.4 million increase in accrued capital gains fees.

Interest expense includes the interest paid on Fidus' SBA debentures and line of credit, as well as any commitment and unused line fees. As of December 31, 2015, the weighted average interest rate on our outstanding debt was 4%. In the fourth quarter, we incurred annual excise tax expense of $0.4 million, related to our estimated spillover of $14.9 million, or $0.91 per share.

Net investment income, or NII, for the three months ended December 31, 2015 was $7.2 million, or $0.44 per share, versus $0.43 per share in Q3 2015. Adjusted NII was $0.45 per share in Q4, versus $0.41 per share in Q3. The quarter-over-quarter increase in adjusted NII was driven by the increase in accrued capital gain fees 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 three months ended December 31, 2015, Fidus had $2.6 million of net realized gains, primarily related to a distribution from Anthony's, related to the sale of its operations. Net realized gains were offset by $2 million of unrealized depreciation, resulting in $0.7 million of net gain on investments. Our net asset value as of December 31, 2015 was $15.17 per share, which reflects payment of a $0.39 per share regular dividend, and a $0.04 special dividend in December.

Now turning to portfolio statistics. As of December 31, our total investment portfolio had a fair value of $443.3 million. Consistent with our debt-oriented investment strategy, our portfolio on a cost basis was comprised of approximately 69% subordinated debt, 20% senior secured loans, and 11% equity securities. Our average portfolio of Company investment on a cost basis was $9 million at the end of the fourth quarter, which excludes three investments in portfolio companies that sold their operations or are in the process of winding down.

We have equity investments in approximately 83% of our portfolio of companies, with an average fully-diluted equity ownership of 8.3%. Weighted average effective yield on debt investments was 13.3% as of December 31. 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 non-accruals, if any.

Now I'd like to briefly discuss our available liquidity. As of December 31, our liquidity and capital resources included cash and cash equivalents of $31.7 million, unfunded SBA commitments of $11.5 million, and $34.5 million of availability on our line of credit, resulting in a total of approximately $78 million. Taking into account net investment activity subsequent to year end, we currently have roughly $91 million of liquidity.

As Ed mentioned, in December 2015, the maximum statutory limit on SBA guaranteed debentures that may be issued by SBCs under common control was increased from $225 million to $350 million. Subject to SBA regulatory requirements and approvals, we may access up to $125 million of additional SBA debentures under the SBIC debenture program, and we will evaluate the use of this expanded resource over the course of this year.

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

Thanks, Shelby. As always, I'd like to thank our team and our 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 Andrew for Q&A.

(Operator Instructions)

Our first question comes from the line of Bryce Rowe from Baird. Your line is open.

Congrats on another good quarter, Ed.

Thank you.

Wanted to follow up on the comments made on the SBA, and I'm sure you were anticipating this question. We've heard from different BDCs, maybe different approaches to trying to access additional debentures. What do you think your approach will be? Will you look to find access to another $75 million on the second license, or do you think you start the approach of applying for a third license now?

That's a great question, Bryce. I think first and foremost, we think this new legislation is obviously a very good thing for us over the long term. I would say, given our liquidity position at the moment, which is in pretty good shape, we have not approached the SBA yet regarding a commitment increase to our second license.

We most likely will apply for a commitment increase in 2016, but what amount, we are not sure at this point. So without applying for a third license, the maximum increase that we could potentially apply for is $75 million, and I think it would be under probably the second license. That's the current thinking at this point.

Okay. And then maybe a follow-up to that, Ed. Obviously BDCs and externally managed BDCs have struggled from a stock price perspective, with most stock prices trading below book value. If we assume that continues, and you do get further access to SBIC or SBA debentures, is there kind of a maximum comfort level from a debt to equity perspective that you have?

It's a great question. I think from a comfort perspective, when we were private, we ran at 2 to 1 debt to equity. Given our approach, I don't think I'm scared, if you will, of increasing the leverage amount.

Having said that, I don't -- and I think we have talked about this on previous calls to some degree. I don't think we want to be a huge outlier relative to the industry. So are we okay going over 1 to 1? I think the answer to that is yes.

We're very comfortable doing that. But at some point it's probably too much of an outlier. So whether it's 1.25 or what have you, I think it's in that range, would probably be the maximum that we would move forward with.

All right. That's very helpful. Thanks, guys. Appreciate it.

Thank you. Our next question comes from the line of Robert Dodd from Raymond James. Your line is open.

Congratulations on the quarter as well. Housekeeping one first, if I can. Obviously a big chunk of fee income, the $1.1 million in the quarter, it looks to me also, there might have been maybe $750,000 in accelerated amortization in the line, as well. Is that right, or in the right kind of ballpark?

I think Shelby's trying to look at something. I do not think that is correct.

You are correct, we did get a large pre-payment fee of $400,000. We also had a pretty robust quarter from an investing perspective. And so I think those dollar amounts probably represented $600,000 or $700,000 of fee income, right?

We had slightly above $600,000 of fee income just from normal course closings, as well as Ed mentioned, the $375,000, to be precise, of prepayment fees, that we recognized in the fourth quarter, that largely make up that $1.1 million of fee income that we experienced.

Got it. On the market, the color you gave in your prepared remarks indicated risk-adjusted returns have started to move in the lower and middle market, and obviously that's a plus. On the other hand -- and that could be driven by M&A. What are you seeing so far, in terms of how those multiples are shifting in your end of the market?

We've heard some different BDCs, the tier A companies are still getting very high multiples, and activity's up there, but there's some multiple compression in other areas. What's the dynamic at play between obviously your ability to get equity, your ability for equity gains, if multiple's are compressing or vice versa.

Sure. I think we're in a market right now where, you call them tier A companies, but very high quality businesses that are trading at higher multiples, I think there's still a real desire to invest in those type of companies, whether it's strategics or private equity groups, and people are willing to pay up and use a lot of equity to make those investments. And from a debt perspective, I think people are willing to also continue to leverage those tier A companies in a meaningful way, so I don't think there are any big drops from a leverage perspective for that top tier Company.

Ones that we think are going to be very resilient, even in a recessionary environment, just a high-quality situation, if you will. I just think there's less activity when you drop down into the tier B and tier C levels. I think for us, we're trying to stay away from those types of situations, and I think quite frankly, leverage levels have dropped with regard to those situations.

I think banks, for instance, are going to want to stay very, very close to the assets, when they're lending to companies like that. So I do think there's been a little bit of a pullback from a leverage perspective for sure, on those types of situations and just overall activity. I think that's where you're seeing activity drop, if you will.

Got it. Got it. And then one conceptual question regarding the dividend. Obviously it's a good problem to have, that you've over earned that by a significant amount, $0.91 of spillover. Obviously that's a little bit more than two quarters.

Depending when you file your final taxes, et cetera, the IRS gives you a funny look, obviously, if that goes too close to -- risk of not being distributed by the tax filing, right? So can you give us a little conceptual -- I'm not asking are you going to pay a special dividend. You have a pattern of doing that. But conceptually, how are you going to manage that spillover going forward, given it's pretty high at this point?

Sure. Great question. It's one we talk about obviously a lot, at the Board level. Just to step back and you've heard me say this before, but over the long term, our goal is to perform very well in the form of stable to growing dividends.

Secondly, making periodic special distributions is something that we, as you mentioned, do have a history of, and our hope is to continue to do that from time to time. And I think thirdly, and very importantly, is we also have a goal of maintaining or growing our NAV on a per-share basis over time. And that clearly is playing into the equation here, to say the least.

So what I'd say is, we're continuing to consider our spillover position. It's a top-of-mind discussion. We're obviously proud of the seven special distributions we've made over the last 2.5 years that's accounted for $0.68.

And so I think what I can say is it's a top of mind subject, but we are continuing to manage the business, it's a high margin of safety. And so we're going to be, as you would expect, careful and thoughtful about those distributions, and the NAV piece is a significant aspect of our decision making.

Got it. Appreciate it. Congratulations again.

(Operator Instructions)

Our next question comes from the line of Chris Kotowski from Oppenheimer & Company. Your line is open.

Congratulations from me too. It was a nice surprise. Most of mine have been asked, but I'm just wondering, expand a little bit on your thought about being in the second half of the cycle. Is that just the thought that it's been seven years since 2009, or is there activity and stresses, or imbalances that you're seeing in the markets?

Well, I think just the last statement you just made in terms of imbalance, I guess I'd use the word volatility in the markets. Clearly, there are concerns out there. I think, back to the beginning of your statement, I think we're really saying it's been seven years since the last recession, and that we're long in the tooth there.

Having said that, when you just look at the portfolio on a holistic basis, I don't think -- we're continuing to see slow growth as we look at the whole portfolio. But as you know, there are pockets, whether it's energy, for sure. We don't have any direct exposure. We have some indirect exposure to steel, for instance, and steel is obviously down. So there are pockets out there.

We are obviously remaining active in the market but doing so with an eye towards -- that we are in the second half of an economic cycle, and we need to be prepared for a recession, if it does come about. But we're not seeing that in the numbers at this point.

It's more just industry niches that we do -- we participate in a lot of industry niches. Each one of those has its own little -- each Company has its own issues, if you will, that has to manage, and hopefully take advantage of, as well. But we're not seeing anything holistic at this point.

Okay. All right. That's it from me, then. Thank you.

(Operator Instructions)

Looks like we have a questioner from the line of Peter Council from BB&T Capital Markets. Your line is open.

I just had one more question on the SBA. I just wanted to know, just in terms of increasing the commitment on the second license to $150 million how you were thinking about meeting your incremental commitment in terms of, would you need the to raise equity, or would you be able to rotate part of the portfolio dropdown to the SBIC? Any color on what you would need to do on your end to access that incremental fund.

Sure, no, it's a great question, Peter and good morning. I think from a holding company, I think at the moment we have call it $113 million that we've invested in our two SBIC funds. In addition to that, we have other pent-up equity capital in those funds, that's been built up. And so, when you think about it, this goes holistically for us, is we're trying to operate the business with a high margin of safety, if you will.

The thought process would be to obviously downstream some of the remaining, if you will, holding Company capital into SBIC-2, so we can get an increase in that commitment. And that's -- quite frankly, our comments as to what degree we use it at this point, we do have a fair number of investments at the holding company today. Some of those, I think will be realized this year. We do have cash at the holding Company.

So we've got to decide how much we want to put in there. I don't think we have enough to today comfortably say we're going to max out there, and then invest more in a third license. We're managing in a prudent manner, and still trying to figure out exactly how much ultimately we want to put down there, when we apply.

Good color. Thank you.

(Operator Instructions)

That's all the questioners that we have in the queue at this time, so I would like to turn the call back over to management for closing remarks.

Thank you, Andrew, and thank you everyone for joining us this morning. We look forward to speaking with you on our first-quarter call in early May. Have a great day, and a great weekend.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program, and you may now disconnect your telephone lines at this time. Everyone, have a great day.