Fidus Investment Corp (FDUS) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fidus Investment Corporation Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Jody Burfening. Ma'am, you may begin.

Thank you, Takia, and good morning, everyone. And thank you for joining us for Fidus Investment Corporation's Fourth Quarter and Full Year 2017 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 call.

I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information included in earnings release and on the conference call. 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, March 2, 2018, 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 those housekeeping matters out of the way, I would now like to turn the call over to Ed Ross. Good morning, Ed.

Good morning, and thank you, Jody, and good morning, everyone. Welcome to our Fourth Quarter and Full Year 2017 Earnings Call.

I will start our call by highlighting our results for the fourth quarter and full year, followed by comments about our fourth quarter investment activity and the performance of our investment portfolio, and then offer views about 2018. And then Shelby will go into more detail about our fourth quarter financial results and liquidity position. After that, we will open the call for questions.

As announced in February, Fidus completed a public offering of unsecured notes that raised total net proceeds of $48.1 million for the company. In line with our approach of managing the business for the long term, the offering strengthens and diversifies our balance sheet and provides incremental capital to be used to make investments.

Looking back at 2017, our 6th full year as a public company, it was a very good year on several levels. Our new investments of $214.7 million were well ahead of realizations. Our investment portfolio performed very well, producing a 27% increase in our net investment income, while our 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, rose 21%.

Even though we fell modestly short of covering our dividend in 2017, we realized net capital gains of $15.8 million for the year. As of December 31, 2017, our net asset value is $393.3 million or $16.05 per share, an increase of 2% from $15.76 per share at the end of the prior year. I'm pleased to say that this represents our third consecutive annual gain in our per share net asset value.

For our fourth quarter, our net investment income was $7.7 million, and our adjusted net investment income was $8.6 million. Also, we realized net capital gains of roughly $5 million in the period. On December 27, 2017, Fidus paid a special dividend of $0.04 per share and a regular quarterly dividend of $0.39 per share. For all of 2017, we paid a total of $1.60 per share in dividends, consisting of regular dividends of $1.56 per share and a special dividend of $0.04 per share.

At December 31, estimated spillover income, or taxable income in excess of distributions, was $10.4 million or $0.43 per share. For the first quarter of 2018, the Board of Directors has declared a regular quarterly dividend of $0.39 per share, which is payable on March 31, 2018, to stockholders of record on March 9, 2018.

In the fourth quarter of 2017, we invested $59.1 million in debt and equity securities, continuing the pace of investments of the past 3 quarters as M&A activity has remained at a healthy level. Of the $59.1 million we invested during the fourth quarter, $48.9 million was channeled to 4 new portfolio company investments. These investments were consistent with our strategy of focusing on companies that have positive long-term outlooks, defensive market positions, operate in industries we know well and generate excess free cash flow for debt service and funding growth.

Let me briefly recap each of the new portfolio company investments. We invested $2.5 million in second lien debt and common equity of Consolidated Infrastructure Group Holdings, LP, a premier provider of infrastructure services and solutions; $21.5 million in subordinated debt and common equity of Gurobi Optimization, LLC, a leading provider -- a leading commercial provider of optimization software for use in prescriptive analytics applications; $15.3 million in second lien debt and common equity of The Kyjen Company, LLC, doing business as Outward Hound, a manufacturer and distributor of innovative dog and cat toys, games, gear, collars and feeders; and $9.6 million in second lien debt and common equity and made a commitment for up to $4 million of additional second lien debt of Mesa Line Services, LLC, a leading provider of outsourced electrical utility infrastructure services in the Southwest United States.

From a repayments and realizations perspective, we had a somewhat less active fourth quarter. Proceeds totaled $31 million, including we exited our debt and equity investments in Brook & Whittle Limited. We received payment in full on our second lien and subordinated debt and realized a gain of approximately $1 million on our equity investments.

We realized a loss of approximately $2.4 million on our equity investments in FDS Avionics Corp. We subsequently made an approximate $750,000 investment along with certain co-investors and management, giving us a controlling interest. We exited our debt and equity investments in Malabar International. We received payment in full on our subordinated debt and realized a gain of approximately $6.8 million on our equity investment. And we received a $1.5 million partial repayment on our debt investment in SES Investors, LLC.

Regarding our investment activity thus far in 2018, we're off to a good start. As reported in our fourth quarter press release, subsequent to quarter end, on January 3, 2018, we invested $19.5 million in subordinated debt and common equity of AVC Investors, LLC, doing business as Auveco, a provider of fasteners and autobody hardware to the automotive aftermarket and general industrial markets.

On January 5, 2018, we exited our debt investment in United Biologics, LLC. We received payment in full of $8.9 million on our second lien debt. On January 8, 2018, we invested $11 million in second lien debt and common equity of SpendMend LLC, a leading provider of spend visibility and audit recovery services to the health care industry.

On January 25, 2018, we exited our debt investment in Comprehensive Logistics Co., Inc. We received payment in full of $16.4 million on our subordinated debt and received approximately $25 million in prepayment fees. And on February 27, 2018, we invested $10.5 million in second lien debt and common equity of B&B Roadway and Security Solutions, LLC, a leading manufacturer of traffic control and perimeter security solutions.

The fair market value of our investment portfolio at December 31, 2017, was approximately $596.3 million, equal to approximately 103% of cost.

We ended the year with debt and equity investments in 60 active portfolio companies, plus 3 portfolio companies that have sold their underlying operations. The breakdown on a fair value basis between debt and equity remained fairly stable, with 83% in debt and 17% in equity investment, providing us with high levels of current and recurring income from our debt investments and the continued opportunity to realize capital gains from our equity-related investments.

In terms of portfolio performance, we track several quality measures on a quarterly basis, then, of course, 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 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 December 31, the weighted average investment rating for the portfolio is 1.9 on a fair value basis, in line with prior periods.

Another metric we track is the credit performance of the portfolio, which is measured by our portfolio companies' combined ratio of total net debt through Fidus' debt investments to total EBITDA. For the fourth quarter, this ratio was 3.7x compared to 3.3x 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 company have -- portfolio companies have in aggregate to meet their debt service obligations to us. In the fourth quarter, this metric was 3.7x compared to 3.5x for the same quarter last year.

The soundness of these metrics reflects our philosophy of maintaining significant cushions to our borrowers' enterprise value in support of our capital preservation and income goals. As of December 31, 2 of our investments having an aggregate cost and fair value of $18.7 million and $7.1 million, respectively, were on nonaccrual status. Restaurant Finance Co remains on nonaccrual, and their situation remains fluid.

Also we have added Six Month Smiles Holdings, Inc., a dental products company that is undergoing a process to upgrade its technology and product offerings to address changing market conditions.

Turning to current market conditions, we are feeling pretty good about 2018 at this point. The economy is expected to enjoy another year of steady growth, and M&A activity looks to keep pace with the healthy levels seen throughout 2017.

While there are some third-party market commentators who expect that Tax Cuts and Jobs Act will negatively impact highly leveraged mezzanine and subordinated debt issuers, we have reviewed our portfolio and don't expect it to be impacted by the new tax laws in a meaningful way.

So against the backdrop of a healthy market environment, we'll stay the course in terms of our game plan for 2018, sticking with the strategies that have served us well and produced a strong track record since we've been public.

We will continue to emphasize quality over quantity and capital preservation as we seek attractive risk-adjusted return

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collectively grow our portfolio by focusing on companies that operate in industries we know well, generate strong free cash flow and have positive long-term outlooks.

In closing, I'd like to commend our entire team for the solid and steady record of growth and profitability they have produced over the past 6 years since our IPO, a track record we can be very proud of within our industry. Our strategy generates income in a variety of ways, including fee income, investment income, dividend income and capital gains, which as a whole has provided us with a differentiated level of stable income and NAV growth over time.

As we stated in the past, our portfolio is structured to provide high levels of current income from our debt investments and potential capital gains from our equity-related investments. So we expect it will be business as usual for us in 2018, and that's a good thing.

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. Please note, I will be providing comparative commentary versus the prior quarter, Q3 2017.

Total investment income was $17.1 million for the 3 months ended December 31, 2017, a $0.9 million decrease from Q3 2017. Interest in FIG income decreased by $0.6 million related both to, one, investment timing as the majority of our new investments took place late in the quarter in December, and two, placing Six Month Smiles on nonaccrual status in Q4.

Fee income decreased by $0.1 million, related to a decrease in prepayment fees, partially offset by an increase in origination fee. Dividend income in Q4 was $0.2 million versus $0.4 million in Q3, a decrease of $0.2 million, primarily related to tax character true-ups recorded in Q4 upon the receipt of 2016 K-1s for 2 portfolio companies.

Total expenses, including income tax provision, were $9.4 million for the fourth quarter, approximately $0.6 million higher than the prior quarter due to an increase in accrued capital gains incentive fees and excise tax accrued in Q4. Interest expense decreased by $0.1 million, G&A expenses increased by $0.3 million, base management and income incentive fees decreased by a total of roughly $0.1 million, and accrued capital gains incentive fees increased by $0.3 million. In addition, we accrued $0.2 million of excise tax expense in Q4.

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, 2017, the weighted average interest rate on our outstanding debt was 3.6%. As of December 31, we had $242.8 million of debt outstanding.

Net investment income, or NII, for the 3 months ended December 31, 2017, was $7.7 million or $0.31 per share versus $0.38 per share in Q3. Adjusted NII was $0.35 per share in Q4 versus $0.40 per share in Q3. 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 December 31, 2017, Fidus had $5 million of net realized gain, primarily related to a $6.8 million realized gain from the exit of our equity investment in Malabar International and a $1 million realized gain from the exit of our equity investments in Brook & Whittle Limited, offset by a $2.4 million realized loss from the write-off of our equity investments in FDS Avionics Crop. and a $0.6 million in tax expense related to realized gain on equity investments held in taxable

subsidiary.

Our net asset value at December 31, 2017, was $16.05 per share, which reflects payment of the $0.39 per share regular dividend and a $0.04 per share special dividend in December.

Turning now to portfolio statistics. As of December 31, our total investment portfolio had fair value of $596.3 million. In our year-end SEC filings, we provided a more detailed disclosure of our debt investments identifying first lien, second lien and subordinated investments, as approximately 76% of our debt investments on a cost basis have first or second lien. Consistent with our debt-oriented investment strategy, our portfolio on a cost basis was comprised of approximately 6% first lien debt, 62% second lien debt, 22% senior secured loans and 10% equity securities.

Our average portfolio company on a cost basis was $9.6 million at the end of the fourth quarter, which excludes 3 investments in portfolio companies that sold their operations and are in the process of winding down. We have equity investments in approximately 87.3% of our portfolio companies, with an average fully diluted equity ownership of 7.7%.

Weighted average effective yield on debt investments was 13% as of December 31. The weighted average yield is computed using the effective interest rate for debt investments at cost, including the accretion of original issue discounts and loan origination fees, but including investments on nonaccrual, if any.

Now I would like to briefly discuss our available liquidity. As of December 31, our liquidity and capital resources included cash of $41.6 million, unfunded SBA commitments of $27 million and $38.5 million of availability on our line of credit, resulting in total liquidity of $107.1 million. On February 2, we successfully completed our first public debt offering of approximately $43.5 million in aggregate principal of 5.875% notes due 2023, raising net proceeds of approximately $41.8 million.

With the additional $6.5 million of debt issued from the over-allotment completed on February 22, we raised total net proceeds of $48.1 million. As we previously discussed, we are in the process of winding down our first SBIC fund, Fidus Mezzanine Capital, or FMC, which was initially launched in 2007. As we receive repayments of investments in FMC, we will pay down additional SBA debentures in advance of scheduled maturity date. At the end of February, we prepaid $43.8 million of debentures, which had an average interest rate of 4.9%, higher than our weighted average cost of debt at year-end of 3.6%. As a result, we have $64.5 million of remaining debentures at FMC with maturity dates ranging from September 2020 to March 2025.

In Q1, we will incur approximately $115,000 of incremental noncash interest expense from the acceleration of unamortized fees related to the FMC debt prepayment. Subsequent to quarter end, we invested in 3 new portfolio companies and received debt repayments from 2 portfolio companies. Taking into account subsequent events, including net investment activity, our debt offerings as well as paying down our line of credit, prepaying SBA debentures and drawing $16.5 million of SBA debentures on our second SBIC fund, we currently have total liquidity of $95 million, which includes cash of $34.5 million, unfunded SBA commitments of $10.5 million on our second SBIC fund and $50 million of availability on our line of credit.

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 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 Takia for Q&A. Takia?

(Operator Instructions) Our first question comes from Robert Dodd of Raymond James.

Things seem to be going pretty well. So couple of housekeeping questions, first. Did I hear you right when you said that Comprehensive Logistics, you had a $5 million prepayment penalty? And that will be income in the first quarter?

No. It's $500,000.

Okay, okay. I was going to say, $5 million seemed excessive.

Check my statement, but I think that's what it was.

Yes. Okay. On Six Month Smiles, was there any contribution in the fourth quarter? Or was it on nonaccrual for the whole quarter, just to clarify?

It was on nonaccrual for the whole quarter.

Okay. Got it. Then just -- and then another -- on the dividend income, Shelby, you mentioned that there was some true-up, so effectively some reversals. Can you give us some more maybe quantitative color on that? Obviously, the raw numbers, the lowest dividend income in 10 quarters. But again, if -- can you tell us kind of what the underlying number was? And then what the true-up adjustment was?

The true-up adjustment was about $176,000.

Okay. Got it. And then, Ed, if you -- can give us an update on the -- obviously, your stock has, obviously, been weak, you have a buyback, you haven't gone for a while, it hasn't been used in past, I don't think you needed to use in the past. Can you give us some recap of kind of the status of that? And has there been any discussion of maybe converting that to an automate or algorithmic plan so that it doesn't get blacked out during periods ahead of earnings, et cetera?

Sure. Sure. I guess, for the whole audience, as most of you are aware, we have a $5 million share repurchase program in place that was reaffirmed at our third quarter 2017 board meeting. This topic was also further discussed extensively at our board meeting this week. We are mindful that the value of our investment portfolio may not always be properly reflected in our stock price. For that reason, we remain open to considering ways to enhance shareholder value, including buying back stock. When evaluating buying back stock, I think it's worth highlighting that we are very cognizant of the full Fidus picture, including, as we mentioned on our -- many of our calls, we remain focused on performing well over the long term for our shareholders. So using capital to buy back stock has to be evaluated in the context of that goal as well. And then we also keep an eye on our liquidity and overall capitalization of bank agreements, our leverage ratio to make sure that we're being prudent from all aspects of the equation. So lot of discussion around the topic. We do not have an automated program in place as we sit here today. And we have been in blackout since mid-December, I believe. And so that's where this share repurchase program stands at this point.

Got it. I appreciate it. And then just one last one I've got. Obviously, high level of activity, I think, in Q4, and then a pretty strong beginning to Q1 as well. Was the Q1 activity, was that spillover from Q4? Or just a continued strong kind of pipeline? And what I'm trying to get at is, have you -- do you think any of that has kind of eaten demand from maybe the back end of Q1 or maybe even Q2? Or is it just kind of a steady issue?

Sure. I'll answer one question specifically, and then I'll try to just talk about the market here for a second. I think we did close 2 investments that you could argue were spillover investments in January. So they were in the first half of January. So we did have "a little bit of spillover investing", if you will. I think from an overall market perspective, obviously the M&A market was pretty healthy in the second half of last year and really throughout 2017. What we are seeing today is very similar thing. I will tell you deal flow drops a little bit in January, and it did for us. But at the same time, with lighter deal flow, we still were seeing at least some interesting opportunities to consider. So we are busy as we sit here today, continuing to evaluate and hopefully execute on some investments. Deal flow has picked up a little bit. And it's our understanding that M&A firms are very busy with pretty large backlogs. So our view of the market is that it is going to continue to be at least healthy or operate at healthy levels. Having said that, I think we're going to be very patient for the right opportunities. For that reason, I do think that our investment pace will continue to vary quarter-to-quarter. Competition is something we, obviously, have to navigate, and we've had to navigate for a long time. We have lost a few details over the past 12 to 18 months to some secured lending funds that are creeping up the capital structure and being pretty aggressive, but we're still finding our ways to compete. So from an origination perspective, what I would say is, the timing of new investments is impossible to predict. We are busy, as I mentioned earlier, evaluating and executing several opportunities. And we're working hard with portfolio companies as well, continuing to support several of those companies that are more acquisitive. From a repayments perspective, which is a big part of the equation, as you know, Rob, repayments are just as harder to predict, especially since a large majority of them are M&A related. We do have several companies in our portfolio evaluating strategic alternatives, including executing sale processes. And we are aware of one portfolio company that is planning to refinance our debt with cheaper bank debt. So repayments will continue to be vibrant in the near term and in 2018, is what our belief system is. So overall, what I would say from a -- I would guess, new investments without a number of repayments and realizations to a modest degree in Q1, but that's a guess, obviously. Lot of things still need to happen. Looking into the future is much more difficult. But again, M&A shops are pretty good. So we're hopeful it will be an active 2018. Hopefully that's helpful.

Our next question comes from Chris Kotowski with Oppenheimer.

I wonder -- with Six Month Smiles going on nonaccrual, I wonder if you can characterize what happened there a little bit? I mean, is it economically sensitive? I can't imagine economic sensitivity. It must be some kind of idiosyncratic issue. And could you -- what could you tell us about the nature of your collateral and prospects for recovery?

Sure. I'm going to be pretty high level as I always am. I just -- we obviously have confidentiality agreements in place, and I need to respect those. But -- so Six Month Smiles is a dental products business. Its principal products are a substitute for braces and used in certain -- at least in certain circumstances. The company completed a project recently moving its operations to 100% digital, which should help the company in the long term. Having said that, the last 24 months have not gone according to plan or goals. So we're pretty active in this situation. And what I would say is the decline in the value reflects the increase in the overall risk profile of our investments.

Okay. And then just, in general, I'd say, you alluded it to in the prepared comments. But I guess, net investment or the investment income, interest income, was a little weaker than we are thinking. And I guess, it looked like, if you look at it in a year-over-year context, the investments are up 14%, but the net -- or even the gross investment income was slightly down. And it seemed like a lot of your investments did come late in the quarter. And I'm trying to suss out, I guess, how much of an impact that had? And how we should think about the implications of that for 1Q run rate?

I think you kind of hit the nail on the head. I think, obviously, SMS we did put on nonaccrual, and that was for the whole quarter. So that impacted interest income a little bit. And then I think timing did -- timing of new investments was very back-end weighted for this -- for the fourth quarter. And so that did impact investment income as well. And then I think Robert alluded to, dividend income was down a little bit for the year and also in the fourth quarter. And so I think it's just a combination of events is what I would say.

Our next question comes from Ryan Lynch of KBW.

First question, with SBIC 1 winding down in the prepayment or repayment, I guess, of about $44 million of debentures in the first quarter, I know you guys issued about $50 million of notes to kind of replace those. I just was curious, longer term, if we look at your liability structure maybe a year from now, can you just talk about how you guys see the composition of that liability structure, as the SBIC 1 starts -- continues to wind down, you guys see yourselves drawing down more on SBIC 2, issuing more notes, drawing down more credit facilities, just any sort of color you can provide on kind of the longer-term outlook of the debt liability structure?

Sure. Great question, Ryan. I think first off, from a liquidity standpoint, we have a fair bit of cash. We usually try to use cash to either feed SBIC funds or to make investments. So that would be the first stop. And then clearly we have our revolvers unfunded, and then we have some remaining debentures that we can draw on the SBIC 2, I guess. And so we -- and that's something we would obviously do as well. When I look forward down the road, we clearly have enjoyed being part of the SBA program. We've been a meaningful participant in it for a long time. And our hope would be to continue to utilize that program. So we have applied for a third SBIC license or Greenlight letter. And so subject to SBA approval, we would hope to continue to enjoy working with the SBA, and that would be part of the capital structure as well. We have other avenues that we could, obviously, raise incremental debt, whether it's bank debt or unsecured debt. But that is not in the plans at the moment, but that's clearly something that we could do. Hopefully that's helpful.

Yes, that's definitely helpful. And then maybe following back up a little bit on Robert's question about the dividend income. There was a little bit of adjustment this quarter that reduced it a little bit. But if I look at from a longer-term standpoint, about $3.7 million of dividend income in 2016, $1.9 million in 2017, and then even the most recent quarter about $200,000. So dividend income has clearly been trending lower over the last several years. I know it's difficult to predict, but I would just ask, can you provide any color on kind of your outlook for dividend income maybe in 2018 to the best of your ability, knowing that it's lumpy and very difficult to predict.

Sure, I'll take a first shot at it, and then I think Shelby can jump in. What I would say is, on a quarter in, quarter out basis, I think the quarterly dividends are in a number similar to the fourth quarter. And obviously, when you have repayments, those numbers can change as well. But what had happened obviously also in 2017, but to a much larger degree in 2016, we had some companies performing very well that chose to distribute or -- distribute dividends. And whether it was financed or not, we had several of those events, if you will. And so our hope is -- I mean, our equity portfolio is very well positioned. Our hope is, we'll continue to have some of those events as we move forward, but those are, as you know, impossible to predict. So I think Q4 is probably a decent run rate for the day in, day out type of dividends that we receive. And then, obviously, the rest are more episodic, as we think about it.

I would agree with that, Ed. As you mentioned, it's hard to predict, but in the grand scheme of things, I would expect our dividend income in 2018 to be less than it has been historically, in part due to some of the exits that we had and just given that, historically, we had a fair number of dividend recaps that created some big pops.

Okay, that's fair. And then just one last one. You guys had some nice unrealized gains in the portfolio this quarter. I was just wondering, was any bit of the gains -- unrealized gains in your equity portfolio driven by just changes in tax reform. I know we've had at least one other BDC talk about the tax reform passing actually had a favorable impact of the valuations of some of the equity companies. So did that affect the increase in valuations of your equity companies? Or was there just overall fundamental strength?

I think it was fundamental strength. I think to a negligible degree would you include the tax reform as driving the portfolio appreciation. So I think it'd be negligible, is what I would say. You agree with that, Shelby?

I agree.

Our next question comes from Mickey Schleien with Ladenburg.

Wanted to start by asking -- or actually to ask you to expand on your comment about the impact of the tax law change. I think in your prepared remarks you said, you didn't think you would have a meaningful impact on your companies. Can you give us some more background on that assessment?

Sure. Mickey, absolutely. The -- so we have analyzed the potential impact of tax reform on each of our portfolio companies. Obviously, these are our analyses, and we're still trying to get information from portfolio companies to hone the analysis. But in summary, we currently believe this is not a meaningful -- not meaningful to our existing portfolio and the positives actually could outweigh the negatives. As we stated earlier, our average leverage is only 3.7x, which is much less than the average credit fund or BDC and also positions us well on an average basis not to have a meaningful impact from the tax law changes. When analyzed on a more granular basis, our analysis suggested that less than 25% of our companies would potentially be impacted in a negative way. However, across the board, the impact appears not meaningful to the existing cash flows of those portfolio companies or to the overall credit quality of our portfolio company, as the potential negatives would largely be offset by the lower tax rate. So in short, we believe it's really not an issue for our portfolio company, but we are paying very close attention to it.

Okay. That's helpful. My next question, regards the valuation of the debt portfolio. If you look at the marks for the year, they sort of trended down every quarter, and for the year, they fell about 280 basis points. I appreciate your comments in the prepared remarks that your average rating for the quarter was unchanged versus the third quarter. But I'd like some -- if you could expand a bit on what large trends have impacted the valuation of the debt portfolio, given that 2017 was a relatively good year for the economy.

Sure. Sure. Great question. What I would say, Mickey, is that, overall, our portfolio has been growing, and it's called -- they've been in a slow growth mode, so -- both from a revenue and from an EBITDA perspective. But within a portfolio, as you would imagine, with 60 companies, you have some that are exceeding expectations and some that are underperforming. And that is what we would expect. And that's why we underwrite meaningful and very large reductions in revenue and profitability when we're underwriting our loans. Having said that, we obviously have a couple of companies now on nonaccrual. And both of those companies have represented meaningful impacts to our -- to, I guess, depreciation, if you will. So those will be the 2 primary contributors. I know there are others that are moving around, but that's what we would expect. I think, again, overall, we feel very good about the portfolio. And I don't think that -- and you suggested this, but I don't think any of the marks are really driven by the economy. These are more company-specific issues. And obviously, we've got more than a couple of companies there that have had their ups and downs for a variety of reasons, whether it's self-inflicted or competition-inflicted. But that's how I would characterize it at the higher level. It's -- hopefully that's helpful, but that's how I think about it.

That is helpful. And, if I may, a couple more questions. Can you give us a sense of your appetite to maybe monetize Pinnergy? I mean, you've done really well post restructuring of that investment, and, obviously, you probably have interest in rotating that into yield. And my last question is related to the decline in weight quarter-to-quarter, the weighted average yield. What drove that?

Sure. Sure. With regard to Pinnergy, obviously, it's an energy services company, but a -- a very strong performing one. And it weathered the cycle. Obviously, we did take a hit there during that period, but it is come back very strongly and is performing at a high level. I would say we do. We are not the majority owner of that company. So we're not in control of the timing of the exit. We are a meaningful owner in the company. And obviously, exiting that investment would make a lot of sense in the next 12 months or so, and that would be our hope. But obviously, we're not in control of that situation. So we'll have to see how that plays out, but that is -- that would be a goal, should I say. With regard to yields, the yield in the portfolio has been relatively stable for the past 3 or 4 years. This past quarter, the yields were lower on new investments, and we were more just above 11.5%, on average. And the repayments, quite frankly, were much higher. We actually were in the 14s on the repayment. So the -- I think that's the primary driver for the 30 basis point decline in yields quarter-over-quarter. If that trend were to continue, and I'm not suggesting that it will, but we are trying to really focus on very high-quality investments, as you might imagine. And sometimes that requires you being more in the 11s than the 13s. And so I think we feel like our yields are pretty stable. We could see a little bit of a decline from where we are today, for sure. If you think about yields for the whole year, our yields in 2017 on new investments were a little over 12%. And on the repayment side of things, they were more in the upper 12s. And so that would lead to a little bit of a degradation in yields, but not a huge one. And so that's how we think about it on a go-forward basis.

And on that point, the only thing I would add is, I did mention we did receive a repayment here in January from Comprehensive Logistics. And unfortunately, for us, it was one of our higher-yielding assets coming back in Q1.

That's helpful. And Shelby, could you just repeat what you said about the noncash expense comment for 1Q?

Sure. We're going to have about $115,000 of expense hit the P&L. It's going to be in the form of incremental. It's going to hit the interest expense line just due to the acceleration in fees related to the prepayment of the FMC debentures. So unamortized fees get accelerated with that repayment.

Okay, that's the SBA debentures, correct?

Correct, correct.

Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back over to Ed Ross for closing remarks.

Thank you, Takia, and thank you, everyone, for joining us this morning. We look forward to speaking with you on our first quarter call in early May of 2018. Have a great day and a great weekend.

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